The Number 42

Investment Catch-Phrase Fallacy audiobook

Andrew Hyder is a hedge fund manager as well as the CEO of a publicly traded Artificial Intelligence Research and Development company. During one of the worst market crashes of our time (a 40% decline), he managed returns of 58% in ’08 and has a 3 yr average of 40%. He wrote a book describing how he does it.

He recently created an audiobook to listen to if you don’t feel like reading the PDF document.

The introduction is available on Youtube:

Both the audiobook and the PDF can be downloaded in their entirety here

<

the stark reality of the econopocalypse

The Boston Globe’s “Images from the Recession” page features pictures from around the world showing the stark reality of the econopocalypse.

Here.

Inside the world’s biggest hedge fund

I am always on the lookout for people who are making money in this market. This morning I read a great article about Ray Dalio, manager of Bridgewater Associates- a famous hedge fund that actually made money without a ponzi scheme. Hidden in the article is a great definition of what’s happening now to our economy.
a discussion about it is occurring here:

Fortune
Inside the world’s biggest hedge fund
Thursday March 19, 5:50 am ET
By Brian O’Keefe, senior editor

Is the current downturn merely a severe slump, or are we facing a second coming of the Great Depression? That’s the question everyone is asking these days. But Ray Dalio, founder of Bridgewater Associates and manager of what is now the world’s biggest hedge fund, has been preparing to answer it for eight years.
In 2001 he had his investment team build a “depression gauge” into the firm’s computer system, line by line in the code, to adjust the portfolio’s strategy and risk profile if the economy ever entered a massive deleveraging period – the kind of multiyear process that ricocheted through the world economy in the 1930s and that has eviscerated markets periodically through the ages.

On Sept. 30 of last year, just a couple of weeks after the failure of Lehman Brothers, Dalio logged into his system and saw that the computer had flipped the switch. Bridgewater’s black box is now operating on high alert.

Yet even as he is preparing his clients to hunker down for something different and more challenging than a typical recession, Dalio still expects his fund to thrive. Because his approach doesn’t depend on the direction of any particular market, he explains matter-of-factly, there is no reason that he shouldn’t continue to find as many good investment opportunities as he always has. Considering what he sees coming, that’s a pretty bold statement.

In normal times we might be writing about Ray Dalio, 59, simply because he’s one of the world’s most successful investors. Since starting Bridgewater Associates out of an extra bedroom in his Upper East Side Manhattan apartment in 1975, Dalio (pronounced Dally-o) has built the firm into a powerhouse managing some $80 billion. With a personal fortune estimated at more than $4 billion, he ranks as one of the wealthiest residents even in money-soaked Greenwich, Conn.

More impressively, for the past 18 years his flagship hedge fund, Pure Alpha, which now holds more than $38 billion, has averaged an annual return of 15% before fees – gliding through the Asian flu of the 1990s, the dotcom implosion, the terrorist attacks of Sept. 11, 2001, and the current worldwide financial crisis without ever suffering an annual loss greater than 2%. Last year, when 70% of hedge funds lost money and the average fund fell 18%, Pure Alpha generated a gross return of 14%.

But these are not normal times. And what makes Dalio compelling is not just his track record but the way he goes about making money, and the rigorous analysis he applies to understanding markets, organizations, the economy, and life.

Does Dalio think of himself as one of the world’s great investors? “No,” he says, shaking his head, visibly agitated. “First of all, I don’t know what the definition is of ‘one of the great investors.’ It’s a totally irrelevant question. I have the fear of messing up. And that fear drives me to ask, ‘Well, could this thing happen? Could that thing happen? If it happened in Japan, how do I know it won’t happen to me?’”

Dalio describes himself as a “hyperrealist,” in the sense that he is driven to understand the processes that govern the way the world really works, without bringing subjective value judgments into the equation. “I think the thing that makes him different is an intolerance for the inadequate answer,” says Bob Prince, 50, Bridgewater’s co-chief investment officer, who’s been with the firm since 1986. “He’ll just keep peeling back layer after layer to get at the essential truth.”

In every activity in his life – from managing his firm to stalking a wart hog on a bow-hunting trip – Dalio believes in applying a carefully thought-out process to get the results he wants. That’s especially true in making investment decisions. “I’m very big on having clarified principles,” he says. “I don’t believe in being reactive. You can’t do that in the markets effectively. I can’t. I need perspective. I need a game plan.” To develop one, he stress-tests strategies through computer simulation across time and around the world to make sure that they’re “timeless and universal.” It’s all about cautious – and highly educated – wagering on probabilities.

During the long boom, many hedge fund managers earned billions on big leveraged bets that stocks would rise; later, a handful made fortunes by anticipating the bust. That not Dalio’s style. (In fact, he hates being called a hedge fund manager.) For one thing, he doesn’t magnify his bets with a lot of borrowed money – his leverage ratio is about 4 to 1, far less than other investors have used.

Like fellow quant-minded managers D.E. Shaw or Jim Simons of Renaissance Technologies, Dalio translates his insights into algorithms and then has a powerful computer system scour dozens of markets around the world looking for mispriced assets and other opportunities. Rather than focusing only on stocks and searching for Peter Lynch’s proverbial “10-bagger,” Dalio and his computers concentrate heavily on the currency and fixed-income markets, grinding out consistent singles, doubles, and occasional triples. That approach, as we’ve seen, can be very rewarding.

Understanding the ‘D-process’

Bridgewater’s main office is an unobtrusive, three-story stone and glass building that sits on 22 acres of heavily wooded land in Westport, Conn., some 20 miles up the coast from Greenwich. The firm has added space in three other buildings around the area as the explosive growth in its assets under management – averaging more than 40% annually for the past 10 years – has necessitated a similar investment in new employees and technological capacity. Since 2000 its headcount has grown from just under 100 to about 800, with more than 100 people in its client services division alone.

Unlike a typical hedge fund, Bridgewater does not manage money for wealthy individuals. Rather, it works only with large institutions like pension funds and sovereign wealth funds. Right now the firm has 270 clients, about half in the U.S. and half overseas. Like a standard hedge fund, it charges a management fee of 2% of assets and 20% of profits.

But its relationship with its investors consists of much more than taking a cut of their money. Bridgewater’s army of analysts provides clients with a stream of research. “I love their daily economic report,” says Loews Corp. CEO Jim Tisch. “For me it’s a must-read.” And the analysts are always on call to perform custom jobs or offer a portfolio critique – even of allocations to other hedge funds. “I view them more as a partner than a vendor,” says John Lane, the director of Eastman Kodak’s $7.5 billion pension portfolio, which has had money with the firm since the late 1980s. “We don’t make a major change here in strategy without calling Bridgewater to get their view.”

The money-management industry has been battered by scandal and failures lately, but Lane has complete confidence in Bridgewater. “Of all the investment firms we work with,” he says, “they’re the most trusted.” Asked head-on about the trust issue, Dalio points out that outside custodians hold customers’ money and that his institutional clients aggressively audit Bridgewater’s operations.

Dalio, a sturdy six-footer who favors open-collar cotton shirts and corduroys when he’s not meeting with clients, works out of an unostentatious office brimming with photos of his wife and four children and has a view of the Saugatuck River, which flows through the property. The rustic feel of his surroundings pleases him. A member of the board of the National Fish and Wildlife Foundation, he’s an avid fisherman and bow hunter who has gone after everything from Cape buffaloes to wild boars. He says that his attraction to outdoor activities – he also enjoys snowboarding – is primarily a manifestation of his appreciation for the beauty and sophistication of nature. By comparison, he says, “anything that man sees or does is overly simplistic.”

To maintain his mental energy and creativity, Dalio meditates about five times a week for 20 minutes, a practice he says he adopted when “the Beatles started doing it in 1968.” He is also a rabid music fan with omnivorous tastes. He keeps a box at the opera in New York City, makes an annual trek to New Orleans for Jazzfest, regularly goes salsa dancing with his wife, and has a passion for the blues.

Like many billionaire money managers, Dalio has his own charitable foundation. For the past three years, he’s funded newspaper and radio ads supporting a campaign called “Let’s Redefine Christmas,” which challenged people to give donations to charities as gifts instead of indulging in the holiday ritual of conspicuous consumption.

Although Dalio says he is not a particularly big reader, these days his desk is piled high with some 20-odd books on economic debacles, such as “Essays on the Great Depression” by Ben Bernanke and “The Great Crash of 1929″ by John Kenneth Galbraith. Inside each are Post-it notes and hand-scribbled thoughts in the margins. He also keeps close at hand a binder he’s put together with detailed, 100-page timelines of the four major deleveraging episodes of the past century – the hyperinflation of the Weimar Republic in the 1920s, the worldwide crash during the Great Depression in the 1930s, the Latin American debt crisis of the 1980s, and Japan’s lost decade of the 1990s. He says the timelines provide “a virtual experience of what it would be like to trade through each scenario.”

Out of those four historical examples, Dalio says that our current situation most closely resembles the Great Depression because of the global breadth of the problems. But he doesn’t like to use the term “depression.” He thinks it’s too scary, evoking as it does images of hobos and Hoovervilles, and distracts people from focusing on the mechanics of what is going on. He prefers to use a term he coined: “D-process.”

Most people, says Dalio, think that a depression is simply a really, really bad recession. But in reality, the two are distinct, naturally occurring events. A recession is a contraction in real GDP brought on by a central bank tightening monetary policy, usually to control inflation, and ends when the central bank eases. But a D-process occurs when an economy has an unsustainably high debt burden and monetary policy ceases to be effective, usually because interest rates are close to zero, and the central bank has no way to stimulate the economy. To compensate, the value of debt must be written down (risking deflation) or the central bank must print money (a trigger of inflation), or some combination of both.

In recent years the level of debt as a percentage of GDP in the U.S. has skyrocketed past previous highs last seen in the early 1930s. And the Federal Reserve’s benchmark rate is now hovering just above zero. To Dalio, therefore, it’s clear that a D-process is under way. “It seems very likely that stocks will get materially cheaper,” he says. “We have to go through an important debt restructuring process, and a lot of assets are going to be for sale, huge numbers of assets. And there’s going to be a shortage of buyers.”

Even investors in most hedge funds won’t be immune. According to research by Bridgewater, the hedge fund industry in aggregate is 75% correlated to the S&P 500, an issue on which Dalio has been sounding an alarm for a couple of years now. “Too many people have a systematic bias toward positive economic growth,” he says. “I think that what we’re going to probably have is an economy that’s going to get worse, with most people positioned for it to be better.” By the end of the D-process, he expects that the reverse may well be the case.

Alpha returns

Dalio grew up in suburban Long Island, N.Y., the only child of a jazz musician and a homemaker. Unlike his father, who played clarinet, piccolo, flute, and sax, Dalio never had the patience to learn an instrument. As a boy in the early 1960s, he caddied at a nearby golf course. The stock market was booming at the time and, at age 12, Dalio heard enough hot tips that he decided he wanted to get in on the action, so he went to see his father’s broker. When his first purchase, Northeast Airlines, took off, he was hooked.

After attending Long Island University, he got an MBA at Harvard, spent a year as the director of commodities trading at brokerage Dominick & Dominick, and ended up working under Sandy Weill at CBWL Hayden Stone, where his job was to help businesses hedge their market risks using futures. After a year he struck out on his own as a consultant, helping companies hedge interest rate and currency risk. On the side, he invested his own money and began to accumulate trading “decision rules” – at first jotted down on notebooks, later stored on computers – that could be back-tested to see whether they worked in different eras and markets. In the mid-1980s, he parlayed his reputation for quality research into a chance to manage $5 million of fixed-income money for the World Bank, and produced spectacular returns. He launched his hedge fund portfolio in 1990 with money from Loews Corp. and Kodak.

It’s no accident that Bridgewater’s flagship fund is called Pure Alpha. The name reflects Dalio’s commitment to an approach to investing – “portable alpha,” or the separation of so-called alpha and beta – that was innovative when he started but is commonplace today in the wonkier corridors of Wall Street. “Ray Dalio recognized that the traditional model of portfolio construction was too constrained,” says Angelo Calvello, a former executive at State Street Global Advisers and Man Investments and the author of a number of publications on portable alpha. “He really changed the way that people thought about investing and allocating risk.”

In investing terms, beta is the passive return that a portfolio might get from the ups and downs of a benchmark such as the S&P 500 stock index. Alpha is the measure of a manager’s return, with the same risk, in excess of the beta. For his own fund, Dalio devised an “alpha overlay” approach that allowed him to allocate a certain amount of capital to replicate an investor’s chosen benchmark and then roam free among other asset classes looking for the best possible “alpha streams,” or return opportunities. It was the perfect way to employ the trading formulas he had been accumulating over the years.

Then, Dalio says without irony, he discovered the holy grail of investing, “by which I mean that if you find this thing you will be rich and successful in investing.” This grail is not, unfortunately, a talisman that a regular person might stumble on, but a formula: 15 or more uncorrelated return streams, either betas or alphas. According to Dalio, such a portfolio reduces risk by 80%.

The tricky part, of course, is finding a large number of reliable, uncorrelated, moneymaking sources of alpha in the first place. (If it were easy, everyone would do it). And it requires venturing far beyond the bounds of equities. Today, Bridgewater’s computers scan the world for opportunities in roughly 100 different categories, ranging from directional bets on the price of industrial metals to relative bets on pairs of emerging market countries’ interest rates. Having the fund so widely diversified reduces the risk of a major blowup – and it limits the impact that Pure Alpha can have on any one market.

Bridgewater’s confidence in the Pure Alpha system is so great that a couple of years ago Dalio did something rare on Wall Street – turn away money. By the end of 2005, Dalio and his team felt that they were reaching the limits of their investment capacity. They decided it was time to stop taking new accounts and focus exclusively on their best strategy. Much of the money they were managing was segregated into portfolios for, say, global bond exposure using a more traditional approach, rather than Pure Alpha. So they gave their clients the opportunity to either transfer their money to Pure Alpha or withdraw it, if the portable alpha approach didn’t fit their institutional mandate.

In the end Bridgewater did lose a few clients but created room to add more money from its existing ones. These days, in addition to the $38.6 billion in the Pure Alpha fund, Bridgewater has $17.9 billion in a portfolio called All-Weather, which Dalio originally created for his family trust. All-Weather is a “passive” fund designed to provide a long-term return comparable to that of a 60/40 mix of stocks and bonds, but with less risk (last year it was down 20%). For investors willing to take more risk, there is also a Pure Alpha II fund that makes the exact same bets as the flagship but with half again as much volatility.

‘Either a cult… or the happiest place on earth’

A couple of years ago, Dalio surveyed his rapidly growing firm and decided that he needed to codify his value system so that there would be a model for working and managing the Bridgewater way. So he sat down to write an outline of his principles. The result is an extraordinary 62-page document that every employee is required to study. (Sample tidbit: “At Bridgewater people have to value getting at the truth so badly that they are willing to humiliate themselves to get it.”)

“If you took five organizational psychologists, locked them in a room, and told them to create the perfect blueprint for a corporate culture, this is about what they would come up with,” says Bob Eichinger, a retired consultant who has spent five decades working with companies on how to manage talent and now works part-time for Bridgewater. “He’s trying to design a culture in which people with talent have the freedom to perform.”

The result of that design feels pretty radical compared with the typical corporate environment. In keeping with his identity as a hyperrealist, Dalio is committed to total transparency. So, for instance, every meeting is taped and kept on file. Blunt and frequent feedback is required, including “drill-down” sessions that probe into why employees failed at tasks. Managers aren’t allowed to evaluate an employee’s performance unless he or she is present. Because Dalio believes mistakes are valuable learning tools, every time something goes wrong employees are required to file a memo in the so-called Issues Log. And because Dalio is passionate about the meritocracy of ideas, subordinates are encouraged to argue with their superiors – and the superiors are required to encourage it. “We hate egos,” he says.

If young employees – and loads of recent Ivy League grads with 99th-percentile SAT scores roam the halls – need a reminder of the potential opportunity afforded by that meritocracy, they need look no further than Greg Jensen, 34, the head of research and the third voice, along with Dalio and Prince, in the firm’s weekly investment strategy meetings. Jensen started at Bridgewater as an intern directly out of Dartmouth and rose quickly through the ranks. “I love that your contribution here gets evaluated on a logical, principled basis rather than through the prism of a power base,” he says.

Not surprisingly, the intense culture is not for everybody. “It’s either a cult with mind control or the happiest place on earth, depending on whether you buy into it,” says one former employee. Even some happy current employees say that there was an initial adjustment period and admitted that aggressively candid feedback wasn’t always fun. But several spoke of how empowering such an open approach can be, and a few even offered testimonials for how embracing a policy of radical clarity had improved their personal lives.

More to the point, perhaps, is the fact that Dalio’s system gives him the results he’s looking for. He says he is perfectly comfortable having his assertions challenged at all times. In fact, he craves it. “I draw my conclusions,” he says, “and I say, ‘Please shoot holes in this. Tell me where I’m wrong.’ People tend to think that my success, or whatever you want to call it, has been because I’m a really good decision-maker. I think it is actually because I’m less confident in making decisions. So in other words, I never know anything really. Everything is a probability.”

And that’s what keeps him alert to ever-changing conditions. “If I had to make lots of long-term bets, my track record would be much worse than it is,” he says. “The beauty of my position is that I have the ability to change my mind tomorrow.”

REPORTER ASSOCIATE Doris Burke contributed to this article.

<

The American Economy: What the Jobs, Housing Numbers Really Mean

Posted Mar 09, 2009 12:52pm EDT by Aaron Task

We all know the economy is bad and it’s a terrible time for workers and homeowners, with a direct connection between the two.

There’s a lot of talk about the being the worst job market since the early 1980s, and worst housing market since the Great Depression. But what does that really mean?

Diane Garnick, investment strategist at Invesco, offers some perspective on the current downturn, based on the numbers:
11.6 million Americans are officially unemployed, or roughly the population of Ohio.
651,000 Americans lost their jobs in February, or more than the total number of policemen currently employed in this country.
With a population of 300 million and an average family size of 3.19 people, the U.S. has approximately 93.65 million “family units.” Assuming each of those families can afford a house and only one house (both big assumptions), that leaves 32 million excess homes on the market.

The really bad news on the real estate front? The average family size is increasing as aging parents come to live with their children, and older adults are forced to move back in with their parents because of grim economic circumstances. The rising number of “multi-generational” households means there’s an even larger number of “excess” homes on the market, and few buyers are willing or able to step in and sop up the supply.
These and other factors explain why Garnick doesn’t believe President Obama’s mortgage plan will really fix the housing crisis, and why she says there’s a long way to go before the economy or stock market bottom.

Rules for the New Reality

by Ron Lieber, NYT

Thursday, February 26, 2009

Back in September, before we were all inured to the tottering nature of so many financial giants, investors were looking for someone to blame. More from NYT.com: • How About a Stimulus for Financial Advice? • Coaches for a Game of Money • Readers Weigh in With Tips on Jobs and Money So when Prince & Associates, a market research firm in Redding, Conn., polled people with more than $1 million in investable assets, it wasn’t any great surprise that 81 percent intended to take money out of the hands of their financial advisers. Nearly half planned to tell peers to avoid them, while 86 percent were going to recommend steering clear of their firms. In January, Prince took another poll of people with similar assets, and only a percentage in the teens had engaged in trash-talking. Just under half of the investors had taken money away from their advisers. All of the bad feelings, however, raised a simple question that’s even more essential when we’ve all been so severely tested. What, exactly, does your wealth manager owe you? And what can you never reasonably expect? Some of the answers are basic. Your financial advisers should have impeccable credentials. They should be free of black marks on their regulatory or disciplinary records. They should agree, on Day 1, to act solely in your best interest, not theirs or those of any company that might toss them a commission.

Picking Top-Quality Hedge Funds

From Yahoo Finance

Picking Top-Quality Hedge Funds
Arturo Neto
Tuesday February 17, 2009, 6:32 pm EST
Yahoo! Buzz Print

With so many hedge funds in the investment universe, it is important that investors know what they are looking for in order to streamline the due diligence process and make timely and appropriate decisions. Search guidelines can be used as performance metrics to determine hedge fund consistency over time and to evaluate the guidelines themselves to determine whether the guidelines remain valid across different economic environments. Finally, guidelines can help third parties to better assist an investor in his or her search process.

Types of Guidelines
When looking for a high-quality hedge fund, it is important for an investor to define the metrics that are important to him or her and the results required for each. These guidelines can be based on absolute values, such as returns that exceed 20% per year over the previous five years, or they can be relative, such as the top five highest-performing funds in a particular category.

Absolute Performance Guidelines
The first guideline an investor should set when selecting a fund is annualized rate of return. Let’s say that we want to find funds with a five-year annualized return that exceeds the return on the Lehman Brothers World Government Bond Index (LBWGBI) by 1%. This filter would eliminate all funds that underperform the index over long time periods, and it could be adjusted based on the performance of the index over time.

This guideline will also reveal funds with much higher expected returns, such as global macro funds, long-biased long-short funds, and several others. But if these aren’t the types of funds the investor is looking for, then he or she must also establish a guideline for standard deviation. Once again, we will use the LBWGBI to calculate the standard deviation for the index over the previous five years. Let’s assume we add 1% to this result and establish that value as the guideline for standard deviation. Funds with a standard deviation greater than the guideline can also be eliminated from further consideration.

Unfortunately, high returns do not necessarily help to identify an attractive fund. In some cases, a hedge fund may have employed a strategy that was in favor, which drove performance to be higher than normal for its category. Therefore, once certain funds have been identified as high-return performers, it is important to identify the fund’s strategy and compare its returns to other funds in the same category. To do this, an investor can establish guidelines by first generating a peer analysis of similar funds. For example, one might establish the 50th percentile as the guideline for filtering funds.

Now an investor has two guidelines that all funds need to meet for further consideration. However, applying these two guidelines still leaves too many funds to evaluate in a reasonable amount of time. Additional guidelines need to be established, but the additional guidelines will not necessarily apply across the remaining universe of funds. For example, the guidelines for a merger arbitrage fund will differ from those for a long-short market-neutral fund.

Relative Performance Guidelines
To facilitate the investor’s search for high-quality funds that not only meet the initial return and risk guidelines but also meet strategy-specific guidelines, the next step is to establish a set of relative guidelines. Relative performance metrics should always be based on specific categories or strategies. For example, it would not be fair to compare a leveraged global macro fund with a market-neutral, long-short equity fund.

To establish guidelines for a specific strategy, an investor can use an analytical software package (such as PerTrac, Morningstar or Zephyr) to first identify a universe of funds using similar strategies. Then, a peer analysis will reveal many statistics, broken down into quartiles or deciles, for that universe.

The threshold for each guideline may be the result for each metric that meets or exceeds the 50th percentile. An investor can loosen the guidelines by using the 60th percentile or tighten the guideline by using the 40th percentile. Using the 50th percentile across all the metrics usually filters out all but a few hedge funds for additional consideration. In addition, establishing the guidelines this way allows for flexibility to adjust the guidelines as the economic environment may impact the absolute returns for some strategies.

Putting It All Together
Here is a sound list of primary metrics to use for setting guidelines:
Five-year annualized returns
Standard deviation
Rolling standard deviation
Months to recovery/maximum drawdown
Downside deviation
These guidelines will help eliminate many of the funds in the universe and identify a workable number of funds for further analysis. An investor may also want to consider other guidelines that can either further reduce the number of funds to analyze or to identify funds that meet additional criteria that may be important to the investor. Some examples of additional guidelines include:
Fund size/firm size – The guideline for size may be a minimum or maximum depending on the investor’s preference. For example, institutional investors often invest such large amounts that a fund/firm must have a minimum size to accommodate a large investment. For other investors, a fund that is too big may face future challenges using the same strategy to match past success. Such might be the case for hedge funds that invest in the small-cap equity space.

Track record – If an investor wants a fund to have a minimum track record of 24 months or 36 months this guideline will eliminate any new funds. However, sometimes a fund manager will leave to start his or her own fund and although the fund is new, the manager’s performance can be tracked for a much longer time period.

Minimum investment – This criterion is very important for smaller investors as many funds have minimums that can make it difficult to diversify properly. The fund’s minimum investment can also give an indication of the types of investors in the fund. Larger minimums may indicate a higher proportion of institutional investors, while low minimums may indicate of a larger number of individual investors.

Redemption terms – These terms have implications for liquidity and become very important when an overall portfolio is highly illiquid. Longer lock-up periods are more difficult to incorporate into a portfolio and redemption periods longer than a month can present some challenges during the portfolio-management process. A guideline may be implemented to eliminate funds that have lockups when a portfolio is already illiquid, while this guideline may be relaxed when a portfolio has adequate liquidity.

The danger of focussing on ‘What’s Wrong’

The danger of focussing on ‘What’s Wrong’

(posted at the crash course forum found here)

I’m a believer in talking about what works, and I learned some important lessons about that in the past 3 years. I have been working in the financial service field for the past 14 years and was given the opportunity to attend an intensive institute on the west coast for counseling affluent people about interpersonal problems. What I learned was simultaneously a masive blow to my ego, and the best thing that ever happened to me.

I learned that I had a tendency, reinforced by my profession, to declare my value (to clients, bosses, etc) based on my ability to see and talk about what was wrong. If you ever turn on CNBC you will see this skill polished to an art form, and I was a master artist. What I learned was that finding what was wrong about something may be technically ‘accurate’ but it wasn’t helpful. Focussing on ‘what’s wrong’ is fundamentally a left-brain deductive cognitive behavior that only generates a list of things ‘not to do’. We are hard wired to believe that a conclusion we come to deductively is correct, and so we declare it with confidence.

What I learned was that focussing on what’s right is a much more difficult thing to do. It is a fundamentally inductive cognitive behavior that generates many possible correct outcomes. Because it generates many possible outcomes instead of just one, we don’t feel as confident about them, and don’t declare them with the same strength.

This relates to interpersonal relationships because I learned that many very successsful people practice the art of ‘what’s wrong’ with everyone in their daily communication. These people almost always have interpersonal relationship problems, especially with those who are closest to them, like spouses and children.

Think about a time you were around an authority figure who related to you in terms of ‘what was wrong’. I know I can. I remember that feeling very well. It also helped teach me to do it to others- which wasn’t very productive.

Here’s what works:

1. Understand how your mind works. There are many metaphors that are helpful: R-brain, L-brain, primitive and higher, etc. Some react to uncertainty with fear and withdrawal, other parts can connect with others and find commonality and presence. Once you see it around you, it is easier to see how you affect others.

2. Learn about charisma: “People feel good about themselves when they are in your presence.” Seems like some people are just born with this- but it is actually pretty simple: Recognize strengths in others. Two things happen when you do this: you become charismatic, and people attribute to you the strengths you recognized in them. Think about someone who authentically recognized one of your strengths as a child. How did that make you feel? I remember it made feel pretty good.

Here’s the thing I learned that crushed my ego: the opposite happens when you recognize weaknesses in others. When I found things that were wrong with people’s portfolios, their finances, or anything else in their world…they felt bad about themselves in my presence. Ouch. Worse yet? They attributed these weaknesses to me as well. Charisma is your magic wand in any relationship- friend or foe. Start recognizing the strengths in others that you see as helpful to these trying times. Stop recognizing their weaknesses for not knowing what you know. Relationships will literally transform before your eyes.

3. Understand that people are not their past, and they are only briefly their present. Everyone learns from their own experiences and the experiences of others. You can’t expect someone who hasn’t had the same experiences you have had to think the same way you do. You CAN expect that as they acquire new experiences or watch you modify your behavior in positive ways (working towards something, not against it) that they will also learn and develop new behaviors. So what if you ‘got it’ 2 years before they did? If you love them, you goal should be that they ‘get it’. Be patient and realize that when their life changes in a meaningful way, they will learn quickly.

In case this was too wordy- I’ll summarize:

Get your Zen on, and become an insane beacon of hope.

Best,

42