4th October 2012: David Einhorn @ Value Investing Congress

David Einhorn (ValueWalk)

 

Reformed Broker Josh Brown has notes posted from David Einhorn‘s speech to the Value Investing Congress.

 

ValueWalk also has an analysis of Einhorn’s speech and observes that sell-side analysts now follow the hedge fund manager’s thinking.

 

I’ve followed Einhorn since his book Fooling Some of the People All of the Time revealed his analytical research approach to value investing.

 

Einhorn’s list of long and short stocks is an interesting read. You sense Greenlight Capital‘s research and valuation processes: the significant factors (management view, company, industry, market, macroeconomic and causal) that shape companies, and the Bayesian inferential view of investor beliefs about them; how this analysis then translates to a market forecast; and how Einhorn intends to capitalise on these dynamics. The estimate assessment of multivariate factors shape investor beliefs and decisions. The market action which occurs from this creates opportunities using behavioural finance and market microstructure models (with a nod to technical analysis and high-frequency data analysis of transaction flows and volatility). It’s like reading Michael Mauboussin about how to think about investment ideas; or Peter Schwartz about trend forecasts and scenarios; or Robert Jervis and Gregory Treverton on strategic intelligence.

10th June 2012: Prometheus

Prometheus

 

I have a special affinity for Ridley Scott’s Alien universe. At 5, my step-mother accidentally gave me Richard J. Anobile’s Alien photo-novel. The ‘chestburster’ death of Kane (John Hurt), the discovery that Ash (Ian Holm was a robot; and the deaths of Parker (Yaphet Kotto) and Lambert (Veronica Cartwright) impacted me. I saw the film poster but didn’t see Alien until years later. In undergraduate college I attended a seminar by feminist film academic Barbara Creed who interpreted Kane’s death as a fear of male birth. Later, I wrote about the Swiss conceptual artist H.R. Giger and psychologist Stanislav Groff for the Disinformation website. For an unused Disinformation site category called Dark Renaissance, I envisioned the kind of darker culture seen in the Alien films, and in the Dark Knight, Matrix, and Underworld film franchises.

 

In Alien the USS Nostromo mining refinery intercepts a distress call from the planet LV-426. The crew discover a derelict space craft and a chamber with a dead crew member dubbed the ‘Space Jockey’. Scott’s prequel Prometheus is a ‘first contact’ story between humans and the ‘Space Jockey’ race: engineers who terra-form planets and develop biomechanoid weapons. As with the early Dark Horse comic series Prometheus opens up the Alien universe beyond the narrow confines of later films like Alien v Predator: Requiem.

 

Prometheus opens with an Erich von Daniken-style prologue in which an Engineer ingests an alien spore, dies, and seeds Earth with life. In 2089, archaeologists Elizabeth Shaw (Noomi Rapace) and Charlie Holloway (Logan Marshall-Green) discover 30,000 year-old star maps on the Isle of Skye. The star maps correspond to star maps in six other ancient civilisations that Shaw and Holloway have found. They convince Peter Weyland (Guy Pearce) to fund a trillion dollar scientific expedition to the planet LV-223 in order to “meet our makers”.

 

On 21st December 2093 the spacecraft Prometheus arrives at LV-223. The android David (Michael Fassbender) awakens the crew which includes Shaw, Holloway, and Weyland representative Meredith Vickers (Charlize Theron). Weyland briefs the team in a scene reminiscent of Hari Seldon in Isaac Asimov’s Foundation trilogy (1951-53). The first third of Prometheus echoes Alien: interiors that anticipate the USS Nostromo; similar landing procedures; the discovery and investigation of a hollow pyramid-like structure; similar shots of dead alien lifeforms; and crew battles over possible contamination. David opens the door to an egg-like chamber just like Kane discovers one in the derelict spacecraft. The audience at the second screening I saw kept looking at the cylindar-like eggs and the crew, in anticipation.

 

Alien is in some ways about Frank Knight‘s distinction between foreseeable, observable risks and unforeseeable uncertainties. The Nostromo crew struggle to contain the alien lifeform that they think is a risk and that evolves through its lifecycle into an uncertainty. Their improvised actions fail because they are dealing with a Black Swan risk: a low-probability, high-impact event. Ripley (Sigourney Weaver) and Ash’s revelation about Weyland-Yutani’s Special Order 937 reveals that the crew are part of a deeper game about biomechanoid weapons acquisition. The crew are expendable.

 

In contrast, Prometheus is more about the adverse effects of religious beliefs as decision/psychological frames and the conditions under which Bayesian inference can fail. Shaw is motivated by her father’s death from Ebola and Christian, Creationist-like beliefs about gods. Holloway is motivated by scientific adventure and the opportunity to answer existential, philosophical questions. Both are “true believers” notes Vickers and this gives them a kind of naivete which affects their judgments. Weyland is “superstitious” according to Vickers and fears death. All three are driven by their beliefs and unable like Bayesians to update them on the basis of new information.

 

But unlike Nostromo the Prometheus crew is aware of risks: geologist Fifield (Sean Harris) and biologist Milburn (Rafe Spall) leave the main crew because they are scared; Shaw warns crew members not to touch the cylindars and also decides to leave; and Vickers kills Holloway when he is infected and endangers the spacecraft. Vickers even cites risk management principles as the crew prepare to land on LV-223. “I like to minimise risk,” she explains. The crew correctly diagnose risks throughout Prometheus but lack the decision-making processes to act in a timely and efficient manner.

 

Weyland, Shaw and Holloway’s religious beliefs mismatch LV-223’s actual conditions and the Engineers’ agenda. The mistakes are also due to cognitive biases and decisions under uncertainty or misjudgments that have interested behavioural economists. “This is a scientific expedition: no weapons,” Shaw tells the crew, in a misjudgment about the likely use of force. Shaw accidentally leaves an Engineer head outside the spacecraft and injures crew during a storm; Fifield and Spall ignore the precautionary principle and investigate the cylindars’ black liquid; David acts on Weyland’s demand to “try harder” and infects Holloway; and captain Janek (Idries Elba) dispatches crew to meet a mutated Fiefield who then kills them. Shaw also survives a medical procedure that is as clinical and grotesque as Kane’s ‘chest-burster’ death. Slate‘s Dana Stevens observes that the Prometheus crew are “not smart” but this is in part a failure of situational awareness. More deeply it is a failure to engage with the Unknown.

 

Prometheus‘s final act echoes Alien in a series of escalating crises. Janek speculates that LV-223 was the staging ground for biomechanoid weapons that turned against the Engineers. Weyland’s awakening directly recalls the aging David Bowman (Keir Dullea) in Stanley Kubrick’s 2001: A Space Odyssey (1968).  “A king has his reign, and then he dies,” Vickers tells Weyland, in a line that echoes anthropologist James Frazier. “That’s the natural order of things.” Weyland, Shaw and the remaining crew then decide to meet the last living Engineer. Shaw seeks to understand why the Engineers targeted Earth whilst Weyland desires apotheosis into immortality. The encounter could have been more provocative but ends abruptly in violence which includes David’s decapitation that echoes Ash’s death. Vickers leaves Prometheus in a scene reminiscent of Ripley’s escape in the Narcissus shuttle craft, as Janek decides to crash the Prometheus into the Engineer’s craft. Shaw’s return to the craft to battle the Engineer and the alien recalls Ripley’s final battle with the xenomorph, as do Shaw and Ripley’s different, final messages. Prometheus is almost like an Alien remake. Shaw’s Christian beliefs give her an evolutionary advantage: a survival instinct and psychological resilience. David and Shaw end Prometheus with greater creative horizons.

 

The first screening of Prometheus that I saw made an impact on me. Giger’s biomechanoid vision, the costumes, art design and production design were all evocative. The second screening had less of an impact. Unlike other reviewers, I was not that concerned by the film’s philosophical musings (which didn’t go far enough for me), the intertextual references to other films, the crew’s mistakes, or the third act (which closely echoes Alien in structure). Instead, I found that Marc Streitenfeld’s music, Dariusz Wolski’s cinematography, and Pietro Scalia’s film editing all signposted the shocks and set pieces. The contact meeting with the last living Engineer fails because there is no real opportunity for communication. I trace these problems back to Jon Spaights’ original script; Damon Lindelhof’s tendency for oblique symbolism; and Ridley Scott’s navigation of studio pressures to deliver an Avatar-like blockbuster.

 

Scott often talked about an Alien 5 that would return to the Engineers’ home planet. Spaights and Lindelhof might do better to look at the homeworld scenario in the Dark Horse comic Aliens: Outbreak (1988) and the role of religious cults and scientific researchers in bringing the xenomorphs to Earth. Alternatively, they could spin-off a story on the Weyland-Yutani merger with the interception of Shaw’s final message and the origins of Alien‘s Special Order 937 as a narrative arc. Get Final Draft ready for your spec script. I can supply the nightmares.