Wednesday, May 26, 2010

Week 21: Charter Schools

Distribution Source: iTunesU
Content Source: Stanford University
Format: Audio
Length: 1 hour, 14 minutes, 20 seconds

This Saturday, I was fortunate enough to share drinks with a group of friends including a young woman who teaches at a charter school. The simple description she gave of her job immediately caught my attention: "I teach underprivileged fifth graders in New York City, I expect all of my students to go to college, and I can be fired at any time if I am not helping them reach that goal." This was NOT what you'd expect to hear from most inner city elementary school teachers. My experience with charter schools prior to Saturday night had been peripheral at best - I know donating to charter schools is in vogue for hedge fund managers and investment bankers. And I know that a group of my fellow jurors vehemently opposed charter schools during a lunchtime discussion a few months ago. Anytime I see such passion on both ends of the spectrum of a debate, my kneejerk reaction is twofold: 1) I want to learn more and 2) the underlying reality probably lies somewhere in between those parameters.

First, what are charter schools and why should anyone care? The why to me is fairly obvious - I believe education represents the single best chance at human progress. As such, our educational system is worthy of intense scrutiny and discussion. For all practical purposes, primary and secondary education in the United States has historically been public - a monopoly. (Yes, of course private schools exist, but a cursory search suggests they make up only about 10% of total students in the US.) As a student of economics, I despise monopolies. They inhibit competition, provide end users with poor choices, and are terribly inefficient. By definition, monopolies are institutions with "sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it." Without getting too political, let's just say that the government is not the institution I'd like defining the terms on which our future minds have access to education. As for charter schools, they are publicly funded schools that are free from many of the onerous regulations on other public schools. In exchange for this freedom, they are expected to perform. The metrics by which performance is measured are outlined in a given school's charter, or mandate. In other words, while they have to meet all state curriculum requirements, charter schools often have an additional specialty or focus (e.g., music or languages). Private funds are often raised in conjunction with public funding (which for charter schools is identical to other public schools), giving charters more freedom to increase teacher pay or fund teaching tools.

Charter schools are intellectually interesting to me for two key, related reasons. The first is the many levels of accountability within most of these schools... accountability at the organizational level in the sense that the schools must live up to their specific charters... accountability at the teacher level in the sense that charter school teachers are not given guaranteed tenure after a few short years, and can be fired if they are objectively bad at what they do... and accountability at the student level in the sense that children are expected to complete their work, finish school and go to college. Because of this accountability at different levels, which some claim is "cruel" to teachers who they say should not have to worry about job safety, students may have marginally fewer uninspiring teachers and more inspiring teachers. I despise the fact that the "compassionate" political push for teacher job safety in many cases creates a system that has no mechanism for eliminating bad apples. And the losers are, uniformly, the children. The second and related part that I appreciate is the schools' intense focus on the kids. Everything revolves around the students. The schools exist because the current system doesn't work well. It is classic creative destruction, which I believe creates innovation and progress. I'm not saying there are no phenomenal teachers or administrators outside of charter schools. It also is not a blanket support for charter school personnel. My point is that if an organization is created with an intense, transparent and pervasive focus on the core issue - student education and success - that framework will over time foster better learning, better teaching and better management than the alternative.

The flipside is that research on charter schools has been mixed. For one, there are very different rules regarding charter schools depending on what state you're in. Furthermore, charter schools are not really bound together by a common thread, other than that they are all nominally charter schools. So there is nothing that ensures a charter school will be a GOOD charter school. According to Wikipedia, 12.5% of the roughly 5,000 charter schools in the United States have closed due to problems (financial, managerial, etc.). To me, this number seems way too low for a system that hopes to challenge the education monopoly. It seems that this is indicative of the still nascent movement - the hope that comes with opening a new school is powerful. But like everything new, it quickly becomes not new. And once something is not new but rather systemic, the associated inertia keeps it in place for longer than it should be (regardless of its initial intent).

Where does this leave us? The goal of the charter school movement is, of course, to promote its students and their education. But the broader goal is to show that by presenting an element of choice and competition to public schooling, a tipping point of sorts will be realized whereby the old, entrenched modus operandi becomes unacceptable. I love the idea, and I love many of the anecdotes the fifth grade teacher gave me about her school. She even invited me to speak to her class next year about finance and possible careers in business. Of course I readily accepted. The charter school movement has clearly gained significant traction in the United States. It is now entering a new phase in which it has to prove itself and justify its existence and its growth going forward. This can only happen over time and by measuring results and strict accountability for those results. Needless to say, I'll be tuned in to the action. For the record, I will be rooting for charter schools and for any other innovative system that attempts to breakdown bureaucracy and any other barriers to what is such a critical issue in a globalized world: giving young people the tools and the opportunity to succeed in life.

Sunday, May 16, 2010

Week 20: What makes Apple so great?

Distribution Source: TED.com
Content Source: Simon Sinek
Format: Video
Length: 18 minutes, 5 seconds
Link: Simon Sinek on TED.com

What makes Apple so great?

I'm sure many of you are rolling your eyes, especially given that I've already posted indirectly about the company once before.

I'm sorry, I can't help myself - I believe strongly that companies like Apple are our only hope for getting out of the current mess. But really, even if you hate the company, either for its success, its products, or its fanatic followers, the question still stands: how has one company managed to become so synonymous with what hundreds of companies strive for - innovation?

For me, Apple has always been intuitive. Not necessarily their products - although you can make that argument as well - but their ethos. Marketing words like "sleek" or "revolutionary" are projected onto the company's products, but its success is rooted in something deeper - a connection with people who innately desire what its products provide. The iPhone of course has had resounding commercial success, but at it's core it came from a fundamental belief: given the technological capacity that exists in the world today, there is no reason we should not have a device that seamlessly combines a phone with a music player with a gaming platform with an email server. And the tireless efforts to realize and perfect the product of this belief have revolutionized the world.

But this post is about more than Apple. It is about the way in which leaders, at an individual and an institutional level, inspire and mold our lives. I use Apple as an example because it is something we can all relate to, a case study in successful institutional leadership. This week's video really struck a chord. It describes why very different leaders are able to be so successful - to resonate with us.

Simply, the argument made by Simon Sinek is that people don't buy what you do, they buy why you do it. He says - and I agree - that the true innovators are those whose message comes from the inside-out, not the outside-in. Yes, I admit this sounds hokey, but his framework for explaining this makes a lot of sense. He starts by drawing concentric circles, with the outermost circle saying "what", followed by "how", and finally the bulls-eye, "why." Everyone knows what he or she is selling, from the Girls Scout who is hawking those delicious thin mints to the beer vendor at a baseball game. Fewer people know how their product or concept creates value or meaning. How in this case refers to both the mechanics and the actual value proposition of a concept or product. And fewer still have the answer to the elusive question of why...

In this case "why" is not something obvious; the answer is not "to make money." The why is much more about the core of an idea. The why is ultimately why you subscribe to an idea or buy a product. As much as we'd like to believe otherwise, this is not based exclusively on rigorous, rational analysis. How many times have you heard a completely logical argument for purchasing something, and then decided not to because it didn't "feel" right? Conversely, how many times have you seen someone buy into something - an idea, product, whatever - based purely on "intuition"?

It turns out there is some cognitive science underlying all of this. The brain's neocortex is what controls rational thoughts (ie, "what"), while the lymbic brain is focused on the feelings ("how"/"why"), and also on the decision making - with no capacity for language. When we communicate from the outside-in people can understand the words and the logic but it does not drive behavior. But when we communicate from the inside out it speaks directly to this part of the brain and allows people to then rationalize the message using the neocortex.

To bring it back to Apple using Sinek's example, if Apple were like everyone else, their marketing might sound like this: "We make great computers, they’re beautifully designed, and they’re easy to use… want to buy one?” This is how most people operate - they say what we want and expect some behavior. But guess what? This approach is neither inspiring nor successful. What if instead Apple starts with the why: "In everything we do we believe in challenging the status quo… we believe in thinking differently.. the way we challenge the status quo is by making our products beautiful and simply designed. They just so happen to be great computers. Want to buy one?" Anyone who has seen the Apple iPhone or iPad commercials will recognize the company's approach as the latter as opposed to the former.

Again, why harp on Apple? To me, it's obvious: where others have had the same opportunity with as many or more resources, they have fallen short. As Sinek points out, Gateway made a flat screen computer and nobody bought it. Dell made mp3 players and PDAs and I challenge any of you to find someone who owns one. Why would you buy an mp3 player or PDA from a computer manufacturer? It doesn't make sense... But in Apple's case, it does. From Apple, people are more than willing to buy a music player, or a phone, or a computer. Apple's genius has been its ability to be defined by its ingenuity and not by a product category.

Of course the underlying message goes beyond Apple. Consider Sinek's examples of the Wright Brothers, or Martin Luther King Jr. MLK had no internet or mass media through which he could invite people to hear his speech at the Lincoln Memorial. So why did 250,000 people come? Instead of talking about what was needed to change America, Dr. King had made a name for himself speaking about what he believed - the "why." People who heard his beliefs and believed in his beliefs told others... and others... and people showed up. A lot of them. They showed up not for him, but for themselves, in the same way that the buyers of Apple's products do so for themselves and not for the company's profit margins.

It is the capacity to create something so instinctively purposeful that also happens to make the company one of the most profitable on the planet. There is a fantastic lesson here for individual leaders: the difference between Apple and other companies is the difference between leaders and those who lead. To paraphrase Sinek, leaders have a position of power or authority, while those who lead - those who start with "why" - are the ones who inspire us. We follow those who lead because we have to and because we want to. Those who truly lead help us by reflecting a piece of ourselves back to us. This reflexivity develops our self-awareness, fosters our growth, and hopefully over time builds in us the capacity to lead others.

Sunday, May 9, 2010

Week 19: Eyjafjallajökull

Distribution Source: Multiple
Content Source: Multiple
Format: Audio & Video
Length: 1 hour +

Last week I promised another write-up on Warren Buffett and his annual shareholder conference. But with the unpronounceable Icelandic volcano Eyjafjallajökull blowing smoke again, I decided to move on to a more explosive topic. For those of you who haven't heard, Eyjafjallajökull's first eruption since 1821 single-handedly shut down European air traffic in mid-April, costing airlines over $3 billion. In addition to forcing the cancellation of thousands of flights, the relatively small volcano prevented President Obama from attending the Polish President's funeral, forced FC Barcelona to take a 14 hour coach bus ride to their Champions League semi-final match in Milan, and most tragically prevented Miley Cyrus from attending her European film premiere.

As you may have noticed from my post on grizzlies, the more I learn about nature the more I respect and fear its power. Volcanoes - or the "pimples of the earth" as my girlfriend calls them - are a perfect example of this awesome power. And Iceland, a country of just over 300,000 people, has plenty of them (35 active volcanoes, to be exact). But this particular volcano has literally wreaked havoc on millions of travelers. Seismically, the eruption is quite small, but it has produced an unusually large amount of fine ash. Apparently the chemical interaction between cold fluid (ice) and hot fluid (magma) produces more explosions, which in turn fragment the material being spewed out of the volcano. The more fragmented the material, the lighter it is and the easier it can be carried with the wind, in this case thousands of miles away to continental Europe and over international aviation corridors.

Why does volcanic ash cause problems for big, sturdy airplanes? The ash clogs important sensors and can prevent pneumatics from working well, but most dangerous is the detrimental effect on turbine blades in the engine. The hottest part of a jet engine is 1,500 degrees Fahrenheit, while volcanic ash melts at about 1,000 degrees. When the ash melts, it turns into molten glass, which coats itself onto the engine blades. These blades are made with extreme precision, so even a slight change in their physics will likely shut down the engine. The only way to fix this is to actually turn off the engine, allow for cold air to shoot into it (thereby blowing off the glass coating), and then re-start the engine. Even for Captain Sully this is a dangerous mid-flight proposition. This actually happened in 1982 when a British Airways flight had all four of its engines shut down simultaneously after flying through volcanic ash spewed from Mount Galunggung in Indonesia. Remarkably, the crew was able to re-start all engines and nobody was hurt.

Given all the risks, the European travel authorities erred on the side of safety in April, effectively shutting down transatlantic and European travel for days. As bad as this was, there is absolutely no reason to believe that the worst is behind us. Most volcanoes erupt for only a day or two, but some take weeks, months or even years to become dormant. Unfortunately, the last time Eyjafjallajökull erupted in 1821, it did not stop until 1823. While this week's ongoing ash-spewing has not grounded as many flights as in late April, a simple shift of the fickle trans-Atlantic winds could change that. What if Eyjafjallajökull goes for another year? There is literally no backup plan. All the incredible aviation technology and innovation of the past decades will not be enough to overcome a large cloud of volcanic ash.

More ominous is the prospect of Katla, the much bigger sister-volcano to Eyjafjallajökull, erupting. Every documented eruption of Eyjafjallajökull has occurred in tandem with a Katla eruption. And Katla has historically blown every 40-80 years; its last eruption was in 1918, making it well overdue. It has been showing sings of unrest since 1999. And Katla is scary. Ten times more powerful than Eyjafjallajökull, it is the volcano most feared by the locals. Iceland's president, Olafur Grimsson, recently said: "If Katla blows up, the current eruption will resemble a small rehearsal." It is estimated that the amount of water that could flood Iceland per second if Katla erupted would be six times the water in the entire Amazon river! The last eruption extended the coast by 5 km due to lahoric flood deposits. The volcano's current repose is its longest on record. It is simply a matter of time before it erupts...

While this may seem like a gloomy post, it isn't intended to be. I chose to research and write about the Icelandic volcanoes because of the perspective they give, on many levels. For one, it dates the extremely recent advent of commercial aviation. The last major Icelandic eruptions were not that long ago (not even 100 years), yet they preceded most human air travel. The story also highlights the extremely fragile systems we often take for granted. Just like it was a given that your stock-trading platform would function properly until last Thursday's market fiasco, it was expected that you could easily find a flight from New York to London. But this April not even the President of the most powerful country in the world could make the trip, and all because of that pesky, unpronounceable Icelandic volcano.

Saturday, May 1, 2010

Week 18: Buffett's Gold Standard Reiterated in Omaha

At 7 AM this morning, I walked into a crowded indoor stadium in Omaha, Nebraska with 40,000 others. Our goal was the same: to listen to the musings of two 80 year-old men sitting at a very tiny table at the center of a very large stage. The two men are well known, particularly to the investment community: Warren Buffett, Chairman & CEO of Berkshire Hathaway and his partner Charlie Munger, Vice-Chairman of Berkshire Hathaway. For years, my Dad and I toyed with the idea of attending the annual shareholder's conference, and for my 25th birthday, we decided to finally make the hike to Omaha. Boy, am I glad we did.

The perspective, wisdom, and elegantly simplistic words and ideas I heard expressed today have inspired me. In some ways, the message is exactly what I - and perhaps we - need. We are at a crossroads. The economy is still in limbo, politics are divisive, and a widespread and legitimate uncertainty underscores our collective sentiment. Personally, I needed to believe again. I needed to hear that the principles of capitalism remain sound, and its byproducts virtuous. The cacophony of Wall Street and Washington has to some degree hijacked our discourse. Instead of focusing on what has to be the way out of our economic mess - the ingenuity, leadership, and integrity of our people - we have been focused on passing (and in some cases avoiding) the blame.

Which brings me to today's content. I will be focusing next week's post on a few of the meaningful topics discussed by Buffett and Munger. But today, I will give highlights and end with some of the incredible (and funny) quotes from the day. I'll start with this: these two guys should really have a television show. Not only did the two octogenarians (for accuracy's sake, Buffett isn't 80 until August 30) play off each other well, they showed incredible stamina. The two in good spirits answered roughly 40 questions over five hours, and had no inkling of the topics beforehand. However it was the first question on which they spent almost 30 minutes. The topic was Goldman Sachs.

For readers not coming from a finance background, Warren Buffett made a $5 Billion investment in Goldman Sachs during the height of the financial crisis. This both strengthened Goldman's capital reserves in a period of severe illiquidity and extended Buffett's venerable seal of approval to the bank at a time when market confidence was crucial to any financial institution's survival. As many of you know, Goldman Sachs and its executives spent a full day this week testifying before Congress. The bank was recently charged with fraud by the SEC. Rumors of criminal charges by federal prosecutors have been swirling as well. While I will save pontificating on this particular situation for another date, suffice it to say Goldman did not have a pleasant time in front of Congress this week.

Perhaps ironically, Warren Buffett had a similar situation to Lloyd Blankfein (the CEO of Goldman Sachs) almost 20 years ago. Buffett became the Chairman of Salomon Brothers in the midst of a trading scandal, and was called to testify to Congress as a result. His words resonate in a way that cannot be recreated - I urge you to follow this link to a two minute clip and hear what he has to say. The climactic quote underscores the seriousness with which Buffett approached the ethical issues of the firm: "Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless." Since giving this testimony in 1991, Buffett has played this clip at the beginning of each and every Berkshire Hathaway shareholder's meeting. But this year it resonated. His candid, unequivocal approach to challenging issues is what we need today.

In my judgment, unfortunately, the Goldman executives fell short. I say unfortunately because there is a very solid response for some of the issues facing Goldman. Most striking today was Buffett's strong support for the firm. When asked who he would want to replace Lloyd Blankfein, Buffett responded: "Lloyd's twin." Quite an endorsement from the Oracle from Omaha. Much of the problem with the Goldman situation, in Buffett's opinion, relates to the media and its inability (or unwillingness) to accurately represent the nature of the transaction in question. Without getting into the details, I will say that Buffett made a wonderful comparison between his own approach to the bond insurance business and that of some customers of Goldman's CDO underwriting and sales business. Importantly, he said that he stands by Goldman because nothing has been proven to be wrong and the facts as he sees them do not suggest any illegality. Equally important was his statement that if the facts did lead to a breach of law he would revoke his support. It is this kind of unbending critical but fair approach that we need more of.

It's easy to be negative about the future - capitalism needs a hero, we all need a hero. Warren Buffett and trusty sidekick Charlie Munger provided that today. Their unique but consistent approach is to be admired, their unparalleled investment track record lauded, and their honesty and transparency emulated. Below are some of the quotes that stuck out to me from today's session. It was a wonderful birthday gift (along with meeting Bill Gates, Peter Buffett, Ralph Nader, Andrew Ross Sorkin, and others), and I look forward to writing more about this next week.

Warren Buffett:

"If you want to give away 100% of your estate, it's a wonderful tax dodge."

"I want to hear about problems."

"We won't trade reputation for money."

"There's a point at which adding 100 pages... obfuscates, rather than illuminates, information."

"(Newspapers) were the only game in town. Now they're not the only game in town. And boy does that make a difference when you're trying to sell something."

"If the best reason you're doing something is 'the other person' is doing it, well that's not good enough."

"People will be living a lot better in India in 20 years, as in China, as in the US."

"In the end what counts is buying a good business at a reasonable price and forgetting about it for a very long time."

"I like the idea of being judged by my own words rather than others writing a few paragraphs."

"You don't have to be brilliant, you just have to avoid the dumb things."

Charlie Munger:

"We celebrate wealth only when it's fairly won and wisely used."

"I developed courage when I realized I could endure hardship. Maybe you should get your feet wet and try failure more often."

"Take the high road, it's far less crowded."

(Quoting Ben Franklin) "It's hard for an empty sack to stand up straight."

"(Ratings agencies) drifted with the stupidity of their times in a way that is regrettable... But I've also yet to hear a single apology from business academia for its significant contribution to the current problems."

"If a small group of people with lots of influence feel very strongly about something and everyone else is indifferent, that small group will get what they want."

"Warren never looks twice at anybody who isn't a little eccentric... all you have to do is look at me."