"Many shall be restored who are now fallen, and many shall fall who are now in honor." -Horace

Feb 8, 2016

Allocating Blame

(0)

“All things are full of weariness; a man cannot utter it; the eye is not satisfied with seeing, nor the ear filled with hearing. What has been is what will be, and what has been done is what will be done, and there is nothing new under the sun… In much wisdom there is much vexation, and he who increases knowledge increases sorrow. ” – Ecclesiastes 1:8

Last week Matt Levine at Bloomberg View delivered an insightful critique of how Congress is handling the public’s outrage over prescription drug pricing:

“The system for pricing prescription drugs in the U.S. is a bit of a disaster. Our reliance on medical insurance means that pricing is not based on consumer demand or ability to pay. Nor is it exactly based on negotiations with insurers: “Medicare, one of the biggest buyers of prescription drugs, is prohibited from negotiating drug prices with pharmaceutical companies.” The “expensive and time-consuming process of getting F.D.A. approval” to sell generic drugs deters competition and allows approved manufacturers to charge whatever prices they want. These are systemic problems, which were created by legislation and regulation, and which demand legislative solutions. So yesterday a House committee convened a hearing to consider these problems and try to come up with a comprehensive solution.

Of course I am kidding; they convened a hearing so they could ask Martin Shkreli about his Wu-Tang album and watch him smirk. He gave good smirk! Everything is fixed now. It turns out that those big drug-pricing problems weren’t systemic problems after all: The real problem was a smirky 32-year-old, and we solved it by yelling at him. Good work everyone.

To be fair, it’s not just Shkreli. Howard Schiller of Valeant Pharmaceuticals was at the hearing too (here’s his statement), as was a beleaguered Food and Drug Administration official. At one point this happened:

Howard Schiller gives names of individuals who made the decision to raise the price of Isuprel. He says he and CEO Michael Pearson were among the individuals who made the decision. Mr. Schiller says he can’t recall how the final decision to raise the prices were made. He says he’ll try to send along a list of individuals who made the decision to increase prices.

Can you imagine? Here is a problem that can actually be dealt with through government action, a problem of systems and rules that were set by Congress and that can be changed by Congress. And here Congresspeople were, talking about the problem. Except that they weren’t. They were yelling at a drug-company executive to give them the names of his employees so they can yell at them too. It’s pure theatrics, but it’s a theater of demonstrating that Congress doesn’t care about fixing the problem. There’s not even a pretense of wanting to help people; it’s just finding someone to yell at, and then yelling at them. At a hearing in a legislature! You’re legislators! Do your jobs! Come on.

There is a more general lesson here. Many bad things are caused by bad systems, not identifiably evil individuals. If you are in charge of the system, you should make it better. But finding an identifiably evil individual — you can identify him by his smirk! — and blaming him for everything is much more emotionally satisfying, and probably a better electoral strategy.”

Famed investor Howard Marks often refers to the necessity of using “Second-level thinking” to be a successful investor. Second-level thinking, for Marks, means being able to look deeper than the surface – to perceive the consequences of consequences. The issue of pharmaceutical pricing and Martin Shkreli provide an example of how the media serves the public what I would call First-level thinking in the form of anecdotes, often about individuals or small groups of people.

In my admittedly overly simplified model of the world, there are four levels of thinking about this and in some sense, almost any issue:

1st level thinking: People of dubious morality (like Martin Shrkeli) exploit a the system, often to make themselves rich and therefore, bad people are to blame.

2nd level thinking: The system for prescription drug pricing is broken and needs to be fixed by Congress and therefore, Congress is to blame.

3rd level thinking: We the people have elected an ineffective congress, the political system is broken; and therefore some (insert malevolent constituency) of people are to blame.

4th level thinking: We (everyone) create the political system and it is broken, and therefore we are all to blame.

The majority of people never get past First-level thinking, and the media doesn’t do much to help them get there. This is partly because there is a primal appeal to blaming individuals or small groups of people for what is wrong with the world. Blaming individuals or small groups serves our profound longing for simplicity; we yearn to live in a world where merely identifying the wrongdoers will fix what’s broken. Unfortunately the world is more complex, and the blame is often both more diffused and closer to home than we would care to admit.

 

FULL POST
Jan 27, 2016

Don’t Get Hornswoggled by Leveraged ETF’s

(0)

The article below is an excerpt from WhiteTree’s Q4 market commentary. If you would would like to receive our quarterly commentary, please email us at info@whitetree.net.

FULL POST
Jan 19, 2016

Scott Adams on Priorities

(0)

From How to Fail at Almost Everything and Still Win Big: It’s useful to think of your priorities in terms of concentric circles, like an archery target. In the center is your highest priority: you. If you ruin yourself, you want be able to work on any other priorities. So taking care of your own […]

FULL POST
Dec 23, 2015

How Did The Fed Raise Rates?

(0)

If you want to do something fun and kind of mean this holiday season, find your local financial know-it-all, and ask them to explain how the Federal Reserve raised interest rates this year. In all likelihood you will see a distant look come across their face, perhaps a slight flush in the cheeks followed with […]

FULL POST
Dec 7, 2015

The Way Back Machine – Peter Lynch, Carl Ichan & T. Boone Pickens – Videos

(0)

Though not literally from The Way Back Machine, these videos of Peter Lynch (1994) and Carl Icahn with T. Boone Pickens are a trip down memory lane. A confession seems in order, I’ve never read a Peter Lynch book but this video makes me want to pick one up.   Carl Ichan and T. Boone […]

FULL POST
Sep 30, 2015

Links

(0)

Here is a thought provoking article from Gavyn Davies over at the FT. The Fed faces a difficult situation. They want to normalize rates but if they do and are wrong, they may face an even more unpleasant set of choices. (Link) And from Matt Levine at Bloomberg, a great line about Carl Icahn and Donald Trump: […]

FULL POST
Sep 16, 2015

Credit Risk Assessment VS Distressed Debt Analysis

(0)

From Distressed Debt Analysis: Credit risk analysis and distressed debt analysis are similar exercises; it is just a question of when they are performed. By analogy, credit risk is like standing on a dock under tranquil skies and calmly discussing the risk that a boat carrying gold might capsize should an unexpected storm arise; distressed […]

FULL POST
Sep 4, 2015

Labor Day Weekend Reading

(0)

After reading quite a few articles making bad arguments against “risk parity” strategies, I wanted to write a post that elucidated my understanding of the thought process behind risk parity, while also pointing out the flaws in the arguments of some critics. I started writing something but it never came together quite the way I […]

FULL POST
Jul 30, 2015

What’s Conservative Got To Do With It?

(0)

Below is a section from the most recent WhiteTree quarterly client letter. Excerpt:   What’s Conservative Got To Do With It? Echoing the famous poll in which 80 percent of people rated themselves above average drivers, most investors consider themselves more conservative than their peers. Unfortunately the term “conservative” has little descriptive power in context […]

FULL POST
Jul 21, 2015

Carl Ichan – Telling (his) Truth to Power

(0)

You don’t often get to see titans of industry wriggle in their chairs like this. Carl Icahn has a gift for both investing and making people in high places squirm.

FULL POST
to-top