If the portfolio increases in value and moves above the desired minimum floor value, the hedge is reduced, allowing the portfolio to enjoy a greater fraction of the market gain. If the portfolio declines in value, the hedge is increased, so that finally, if the portfolio value falls will below the floor price, the portfolio is completely hedged. Thus the portfolio is hedged when it needs it and is free to take market exposure when there is a buffer between its value and the floor value.

The hedging method of portfolio insurance is based on the Black-Scholes formula. Based on the equation, large firms set up programming trading against it. Under normal market situation, it DOES work very well. Unfortunately, it miserably failed on black Monday when based on Friday’s market data, portfolio insurance firms sold nearly half a billion dollars of S&P futures before the stock market opened. As the futures traders reacted to the market and the cash-futures arbitrage traders transmitted that activity to the NYSE floor, the flow hit a wall. Equity investors were not glued to their screens, ready to react en mass. Worse, because price dropped so violently that many potential buyers started to wonder what was happening and backed off completely, which made price plummet further. In turn, it triggered portfolio insurance programs to spit more sell orders. In the last 75 minutes of the day, the Dow dropped by 300 points.

His explanation of the Internet burst is also worth reading:

The end of the Internet bubble arrived when the period of restrictions on trading IPO holdings passed and the float expanded beyond the point of the demands of the extreme Internet optimists. Up to October 1999, the amount of IPO issuance that had become unlocked amounted to less than $40 billion. Then, in the last quarter of 1999, the IPO unlock exploded, with more than $50 billion worth released in December alone. In January 2000, another $65 billion worth of IPO shares were unlocked and came into the market, and nearly $100 billion worth was released in the following three months. There was now more stock looking for buyers than there were super-optimists ready to buy. The marginal share had to find a buyer who was not all that hyped up about Internet prospects, and the downward spiral began.

These two landmark stories characterize what the author has experienced in Wall Street. This 297-page book contains a lot more financial crises happened between these two major events that are worth reading. Readers can make the decision whether it is worth reading or not.

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As the founder of Investor’s Business Daily, William O’Neil really understands the stock market inside out. He points out that the stock market is largely controlled by institutions. When institutions are interested in a stock, the stock will go up and vice versa. There are certain conditions for institutions to pick up stocks. Thus, it is very important to buy quality stocks. The quality could be measured by fundamentals, such as the company’s past earning reports, or technical indicators, such as relative price strength.

In the book, William further discloses the buy indicators and sell indicators of stocks, and the top and bottom of stock market as general. If people read the book before the Internet burst in 2000, they could’ve easily escaped the market’s downfall. Unfortunately, the book was published in late 2000. Given its cheap price, it is the investment book having the best of investment!

In deed, William’s methods are so successful that a lot of people have largely benefited from IBD.

He (an old man) told the audience (in an IBD seminar) he had attended a seminar back in the mid-1980s when we mentioned Home Depot. At that point, and after doing his homework, he purchased 1,000 shares of Home Depot. This time he was back to ask me what he should do with his Home Depot. (It has only split eight times!) I (William O’Neil) told him to go buy himself a Cadillac and enjoy it.

Here are the 24 essential lessons from the book:

1. What every investor should know going in
2. Getting started: there’s no time like the present!
3. Follow a system rather than your emotion
4. Fundamental analysis or technical analysis?
5. First among fundamentals: earnings and sales
6. Relative price strength: a key technical tool
7. Know a stock by the company it keeps
8. The importance of volume and sponsorship
9. How to buy at just the right moment
10. How chart patterns lead to big profits
11. How to read stock charts like a pro
12. How to gauge the stock market’s health
13. How to spot when the market hits a top
14. How to spot when the market bottoms
15. Putting the stock-picking puzzle together
16. How to find new investment ideas in Investor’s Business Daily
17. Growth vs. value investing
18. Don’t try to be a jack-of-all-trades
19. What’s the right mix for your portfolio?
20. Sell rules every investor should master
21. More sell rules investor should master
22. How to make a million with mutuals
23. Too busy? How to use Investor’s Business Daily in twenty minutes
24. How to make the most of Investor’s Business Daily, Investors.com, and other online resouces

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The title of Dr. Posner’s presentation showed two sides of the same coin: What people want from their leaders or why would anyone follow you? He continued with a citation from Charles Darwin: “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change,” followed by another one from Edward Demming: “Change is not required … because survival is not mandatory.”

So, in this changing world, what is the simplest definition of a leader? With more than 20 years of research, Dr. Posner kept surveying people from different classes and different locations and countries. Surprisingly, the top 4 most wanted leadership characteristics always are

1. Honest
2. Competent
3. Inspiring
4. Forward-Looking

Credibility is the foundation of leadership. As Coopers & Lyband have pointed out: “Higher degree of management trust is the number one characteristic of innovative companies.”

Leadership is a relationship. Dr. Posner provided the following 7 lessons for leaders:

1. Character counts
2. Know your self
3. Grow big ears
4. Develop capacity
5. Make something happen
6. Keep hope alive
7. Show them, don’t tell them

The 4th edition of the book will be out soon, with 389 pages of lessons and ideas for leaders now and of the future. I have one with Dr. Posner’s signature. The combination of both the book and the presentation helps me identify true leaders that I have encountered through my career. They are role models, who inspire people even when they are not around.

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China is an exceedingly complex, and sometimes internally contradictory, society that is difficult for outsiders to decipher. Indeed, there is no single “China” any more than there is a single “United States of America”; sharply different views exist within that country on most topics as the leadership struggles with immense challenges both at home and as an emerging power on the world scene.

The book lists some interesting facts or statistics of China:

• Throughout the 1990s, China was the fastest growing export market for U.S. firms — a trend that actually accelerated from 2000-2005, as exports of U.S. firms to China rose by 160 percent while exports to the rest of the world rose only 10 percent.
• China graduates more than 800,000 students a year in engineering and sciences. While China’s numbers of engineering graduates are impressive, the average quality is less so. Recent studies by the McKinsey Global Institute estimated that only one-tenth of China’s engineering and IT graduates are capable of competing in the global outsourcing environment.
• By the mid-1990s, China’s adult literacy rate was just over 80 percent, compared to just over 50 percent in India — but China’s female literacy rate was 73 percent, compared to 38 percent in India. This gave China a crucial advantage in attracting foreign investment in manufacturing.
• Over the past few years China has become increasingly dependent on increases in investment to drive economic growth, suggesting that China’s financial system allocate capital inefficiently. As a result, by 2004 the share of investment in GDP had reached about 40 percent. Although China has received large amounts of foreign direct investment, these funds in recent years have financed only 5 percent of capital formation. Moreover, domestic savings have been more than sufficient to finance the high level of capital formation that has characterized the last three decades of economic growth.
• China’s unusually strong growth performance has been the sectoral transformation of its labor force. The share of the labor force employed in agriculture has declined from 70 percent at the outset of reform to about 50 percent today. China’s extreme shortage of arable land means that agricultural productivity is extremely low. Thus, as workers leave agriculture and are absorbed in either manufacturing or services, major productivity gains ensure.
• The earlier examples of Japan, Korea, and Taiwan show that severe resource constraints are not necessarily an impediment to rapid, sustained economic growth. As long as the global economy remains open, the raw materials and resources necessary for rapid economic growth can be imported. Indeed, China’s bill for its net imports of energy and other primary products in 2004 was only 4 percent of its GDP — less than the 5 percent level that prevailed in Japan and Taiwan at the beginning of their high growth in the mid-1960s, and less than half the levels these countries hit by the late 1970s, when energy prices had soared. On the other hand, compared to 1978, by 2004 China produced three and a half times as much output for each ton of standard coal equivalent of energy consumed.
• China, however, faces the additional problem that its rapidly rising demand for basic energy and mineral resources stems not only from rapid growth but, more importantly, from inefficient resource use. For example, China’s energy consumption per unit of China’s GDP in 2005 was only one-seventh that of the United States, its consumption of primary energy was slightly more than half of the U.S. level.
• Direct taxes on households are relatively small. In 2004, for example, combined government tax revenue from the personal income tax, levied on income of employees in the modern sector, and the agricultural tax, levied on peasant income, was only 1 percent of GDP.
• According to the United Nation’s projections, China’s working-age population will soon begin to shrink after peaking around 2015. Labor shortages have already begun to surface in some parts of China, such as in Guangdong Province.
• Increases in private consumption expenditure will depend to an unusual degree on a reduction in the savings rate of households, which has been running at about 25 percent of disposable income since 2000. By contrast in the United States in 2005 households spent more than their disposable in come, i.e., the savings rate was slightly negative!
• China’s economy at present apparently pays little price for corruption. The economic losses corruption causes are astonishing — as high as an estimated $84.4 billion or 5 percent of GDP in 2004. But foreign direct investment has not fallen as a result and China’s economy continues to outperform most of the rest of the world.
• No one claims that China is today a rule of law country. Nevertheless, most would acknowledge that China has moved a long way from the primarily “rule of man” governance approach of traditional China, and is taking steps beyond the instrumental “rule by law” approach characteristic of legal reform in recent years, toward a legal system that increasingly seeks to restrain the arbitrary exercise of state and private power and does provide the promise, if not the guarantee, to assert rights and interests in reliance on law.

My conclusion out of the book is that China will keep playing its role as “the world factory” for at least another decade as far as its workforce is growing. Higher energy cost can be easily absorbed by higher energy efficiency. Anyway, it is definitely a book worthing reading with a lot of details packed in about 200 pages.

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In the book “Chasing Cool — Standing Out in Today’s Cluttered Marketplace“, the authors tried to answer the question. Here are some interesting points:

• Give the people what they want. People don’t always know what they want. Give the people something you’re certain they’ll want because you’re certain they’re ready for it. Or as it’s more commonly phrased: trust your gut.
• Group-think: Assign too many chefs to cook up a vision, and the product will taste like something reheated. Michael Francis, head of marketing at Target, discussed this idea of consensus. “When it comes to defining creative and strategy, committee work is lethal. It bogs you down and you second-guess — and we don’t tolerate that at Target.”
• Aesthetic: This is something beyond simply designing something pretty, but rather a holistic aesthetic — the look, the feel, and the soul that when perfectly fused create a genuine point of difference.
• Grow the pond: Move forward with a genuine understanding of how to authentically speak to a market, empowered by a real passion to nurture that market.
• The greatest risk is not taking one. The botto line is that you need to be willing to take substantial risk — and face the possibility of real failure — in order to open yourself up for real success.
• The power of a little less. The key to staying on top involves many things, but beyond knowing when to shift directions or reinvent, one needs to know how to keep that sense of mystique and surprise. Overexposure is the death of longevity.

The book contains stories from Barneys, Target, Courvoisier, Quiksilver, MTV, Mercedes, and Yahoo! Music. It is worth reading!

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They started with pointing out pitfalls and common mistakes behind the fact that nine out of ten new products fail:

• Incoming: Ideas are coming from everywhere. Often, ideas from the top are implemented without proper evaluation.
• Brainstorming: The common approach is lots of people, no bad ideas, go for quantity over quality, etc., etc. It doesn’t work.
• Focus Groups: Consumers do not make buying decisions while discussing that decision with a room full of strangers.
• Gee Whiz! Too often, new products move from research labs to market without finding out if anyone wants to buy them.
• Rip-off: Rip-off means to be a copycat. It works well under certain situations. But companies whose new ideas strategy is built around theft end up a “me too,” not market leaders. When economy turns around, they could be easily wiped out.

They went ahead with ten reasons why ideas fail:

1. Trying to sell things people don’t want to buy
2. The ideas don’t make financial sense
3. Giving up too soon on good ideas
4. Pushing bad ideas too long
5. No separation of good ideas from bad
6. Thinking small
7. Delegating idea development to junior people
8. No specialized talent for developing ideas
9. No process, or a poor process to develop ideas
10. No real, important difference versus competition

Finally, they concluded the presentation with a solid process:

1. Learn
2. Develop Working Theories
3. Develop Ideas and Concepts from the Working Theories
4. Conduct Financial Due Diligence
5. Talk to Consumers: not in Groups, But One Person at a Time
6. Iterate the Concepts by Listening to Consumers
7. Take the Best Concepts Coming Out of the Interviews and “Monetize” Them

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The place that I have visited the most is amazon.com, obviously, which is full of reviews. I also like to enjoy reading books in a good atmosphere, such as in a bookstore, or a library. Fortunately, there are good places near where I live:

• Borders at Sunnyvale: 9-11 everyday.
• Borders at Santana Row: 9-11 everyday, except Friday (9-12).
• Barnes & Noble at Steven Creek: 9-11 everyday.
• DigitalGuru at Lawrence: It is a 6000 sq ft technical bookstore.
• Sunnyvale Library: It has a good collection of business and photography magazines.

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