September 18, 2003

Rubik's Cube Solution, Pattern Recognition

Here is something I could only ever publish on a blog...where space is not a premium. I'm linking to it because of something I saw in San Francisco and passed on to the conference goers there in August. I was standing in line at a fish stand at Oakland's Stadium. I was there for an A's-Red Sox game (the Red Son won in extra innnings after Manny Ramirez homered to tie the game in the 9th). While the kids behind the counter made my fish sandwich, a guy walked up on my right. All the kids behind the counter got excited and one of them fished out a Rubik's cube and set it on the counter. I was intrigued. The guy then began solving the cube while the kids behind the counter traded cash. I couldn't resist and asked him what he was doing. It had only been about 20 seconds, but he'd already solved one complete side. He said he'd told the kids he could solve the cube in less than three minutes and that they didn't believe him. He was going to prove it to them. He looked me in the eyes the whole time, but his hands kept working the cube. I asked him, "When did you start doing this?" "When I was about 10." "What's your secret?" "There's no secret really. I just realized there are about 10 or 15 patterns. You just have to figure out what they are and then work them in the right order. After that, it's easy." I asked him a few more questions. He kept working the cube, but looking at me. And sure enough, two minutes later, the thing was solved. He put it on the counter and waved goodbye to the teenagers working the fish stand (who were jumping up and down and smiling). So the key to solving the cube is pattern recognition. There's no real artistry in it, where you have an amazing insight or breakthrough. You have to work it the right way or you won't solve it. Of course, you COULD do it accidentally. But then it would be awfully hard to repeat. You wouldn't know what it was you did right. The parallels are obvious for investors. There's nothing new under the sun on Wall Street. But the world changes every day. Interest rates. Rhodes Scholar former generals running for President. Hurricanes smacking the East Coast and the price of plywood. And all these events affect investment values. You may not be able to determine with scientific exactitude how much any one given event is affecting the broad market. But you can look for relationships...patterns...and trends. Is there a pattern or explanation that takes into account all of the variables and tells you what you should do? In other words, can this kind of "strategic intelligence gathering" be predictive? Maybe. Maybe not. But you'll only know if you're looking...if you accept that the best investment decision comes from getting as big a picture as possible (financial data, economic numbers, political events) and then hunting for the probabilities. Far too many investors are content with riding a trend (rising stock prices) without questioning what the premise of that trend is, and if that premise is false. All of which is to say...the rally in stocks is real...but based on a false trend...that trend being that stock values can be supported indefinitely by easy money...until the economy grows out of its enormous debt. Wicked, tricksey, false, as Gollum might say. The big consequence of the Fed-generated rally is that it creates an even larger divergence between Wall Street's financial economy and America's real economy. And with each dollar of debt hollows out the American currency...and hastens the day when the American financial economy falls apart. Not a cheery note, of course. But it is one you can prepare for. For one, we've seen it in the past before (pattern recognition). And we know that the world doesn't end when financial economies collapse (Argentina, Russia, John Law France). But it DOES change, especially if most of your wealth is tied up in the currency of the financial economy that happens to be collapsing. Which reminds me...I need to get back to the October issue of Strategic....


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