Good advice for parents & students

BNET is carrying a good column by Cait Murphy (an Amherst alum by any chance?) on whether it pays economically to attend an elite university. After citing some poll data and a couple of empirical studies, she boils their findings down to:

For those who do not have a vocation for something like the ministry and are interested in earning as much as possible (be honest!) in economic terms, it probably makes sense to suck it up and go to an elite school, if you can. If you are lower income, definitely do so. ..

If the super-selective colleges don’t seem to want you for some reason, the evidence is that there is no reason, economically, to go to an expensive private one.  So financially savvy parents not averse to bribery might cut a deal along these lines:  Go to State U instead of Middling-and-Expensive Private U and we’ll throw in a car.  Or a summer in Europe.  Or both.

However the numbers are sliced and diced, though, one other thing is clear:  Character, ability, career choice and of course serendipity also matter.  Warren Buffett went to Nebraska, for example;  Steve Jobs dropped out of Reed, and Steven Spielberg went to Cal State Long Beach when the USC film school rejected him – repeatedly.

The list of (sometimes wildly) successful dropouts is much longer than this — something to keep in mind should your child decide to take a less beaten path.

Cait raises a few more good points.

First, a smart choice of school depends critically on your chosen profession. I’ll never forget a New York Times article I read a few years back about some young adults with pedigreed, six figure Master of Fine Arts degrees who were unable to afford the debt service on their student loans (yet another example of the horrible disservice we do by not providing primary financial education to all students). In the end, the price tag on an education should make sense based on well grounded expectations for future income.

Second, she writes that “in general, if you are good at math and choose a major to match, you are going to do very well indeed. The top majors in terms of high salaries, according to PayScale, are aerospace engineering, chemical engineering, computer engineering, electrical engineering, economics and physics.”

And third, ”all of these studies measure the effect of bachelor’s degrees. With more and more students going on for higher higher education, it might well turn out that the best strategy, economically, is to excel at a state university, then treat yourself to an elite law degree or MBA.”

URLs:

http://blogs.bnet.com/career-advice/?p=751&tag=col1;post-751

Carbon, Risk, & Uncertainty

Interesting guest blog at HBR by Bob Lurie on the risks and uncertainties posed by carbon taxation, and their importance to all businesses and business strategy:

While the US Government is working on the fine print of a new carbon regulatory system, one thing is clear: we are all going to face a new tax. It’s important that business leaders avoid the mistake of thinking this will be a new burden assessed on just a few, like the chemical industry and power utilities. Carbon is ubiquitous — part of every industry, and indeed, every human activity — from pharmaceuticals to farming to family field trips. This tax is inescapable, yet where and how hard it will hit is very hard to predict.

…[It is] essential that you view this new carbon economy not as a set of regulations you need to follow, but as an opportunity to separate yourself from those who don’t understand the implications of the new rules as well as you do.

This is about competitiveness, not compliance. Understanding the implications is a strategic imperative. And because the changes are going to be big, the time is now to develop your strategic intent and prepare for a new operational playbook.

…Let’s agree that the rationale for reducing carbon is critically important. But let’s also acknowledge the effects on business will produce outcomes that feel arbitrary and unfair.

There are big changes ahead. It will take a while for the new carbon rules to go into effect, and for businesses as well as regulators to figure out their full implications. But the impacts are large enough so that you should use this grace period to assess how the carbon tax will influence your strategy. If you take too long to move, you may get buried.

URLs:

http://blogs.hbr.org/leadinggreen/2009/07/carbon-taxes-unpredictable-impact.html

Grantham v Greenspan (and IT vs John Henry)

Jeremy Grantham provides the investment industry with a unique and insightful voice. While we don’t agree with him on everything, we try never to miss his quarterly missives. In his latest, he absolutely trashes former Fed Chairman Alan Greenspan, a man accustomed to more sycophantic and reverential treatment, given the 3+ laborious decades in which he used access to media and the halls of power to develop his global icon status and cult following. Using President Obama’s Nobel Peace Prize as a template for ‘rewards that do not reflect just desserts’, he wrote of the former Fed chairman:

Alan Greenspan receives the title of Maestro in the U.S. and is knighted by the Queen for thoroughly demolishing the integrity of the U.S. financial system. He overtly ignored the great threat of bubbles in asset classes and, in fact, encouraged them. He Ayn Rand-ishly facilitated the progressive dismantling of governmental restrictions on financial behavior, he deliberately kept real interest rates at zero for years, etc., etc., etc. You have heard it before. Now, remarkably, in his very old age he has become imbued with the spirit of Hyman Minsky: “Unless somebody can find a way to change human nature, we will have more crises.” Now he finally gets it. Too late! In his merely old age, he ignored or abhorred Minsky, and consistently behaved as though markets were efficient and the players were honest and sensible at all times. But for all of the egg on his face, the Maestro continues to consult with the rich and famous, considerably to his financial advantage. In the good old days, he would have been set in the village stocks, and not the kind you buy and sell. And I would have been right there, Alan, with very ripe tomatoes.

If there were a Nobel Prize for irreverence, Grantham would deserve to win it, hands down. What we most appreciate is that his firm, GMO, is a well known institutional money management shop, yet he is willing to invest some of its hard earned capital in ’speaking truth to power’.

 —

P.S. By the way…determining the origins of the phrase ’speak truth to power’ provides a wonderful opportunity to witness the promise and perils of information technology. IT is just as adept, if not more so, at disseminating misinformation as it is at disseminating factual information. Just take a look at the variety of responses to the question, “Who actually coined the phrase, ’speaking truth to power’?” at this website: http://www.faqs.org/qa/qa-6697.html. Contrast that site with this academic paper, or this blog post. In both of those cases, the authors did their homework before making any definitive claims, which is the (desired) complement to talking out of one’s rear end – which unfortunately we human beings are rather prone to, especially in today’s busy world. The academic paper provides the richest understanding of the phrase’s history and likely origins, but it obviously required a good deal of work.

So clearly, it takes more than just plentiful information to expand the depth and breadth of human knowledge (in fact, more plentiful information by itself might have a negative effect on human knowledge due to the increased presence of misinformation). It still requires good old fashioned labor. What IT offers then is an analogue to earlier forms of physical capital. For example, sticks, then shovels, then backhoes have made human labor far more productive, able to dig the same number of holes in much less time than it would take with bare hands (digging technologies have also greatly expanded the types of holes that humans are able to dig).

Likewise, information technology allows scholars, investigators, reporters, etc to develop insights in less time than it would otherwise take, as data and evidence can be gathered and shared far more efficiently (it also allows them to perform data integration and analysis that would have been impossible for their predecessors). And just as some people are better with a shovel than others, there are differing skill levels among those who use information to study real world problems (there’s also wide variation in motives, which are not always apparent or fully disclosed).

So what’s the relevance of all this? Essentially, it means that while there’s no guarantee that IT makes life any better, there’s no doubt that it makes it different. And as with any major technological innovation, human beings have to learn how to cope with the results, and that involves trial, error, triumphs, and tragedies, with little assurance that the pain and the pleasure will be shared equitably. Put in general terms, change requires adjustment, and the costs (and benefits) of adjustment are borne (and enjoyed) in differing measures. For example, backhoes displaced plenty of capable shovel wielders, much as steam technology did in the steel drivers’  ballad “John Henry”, but the overall efficiency gains conferred by steam and later combustion power cannot be denied. But the tradeoffs shouldn’t be ignored either.***

With IT, the sudden surplus of information requires adjustments and new practices from all of us. And in a more general sense, if the pace of technological innovation continues as it has for the past several centuries, those adjustments will keep coming fast and furious, and coping effectively will require significant and ongoing adaptations by everyone. Fortunately, that’s something human beings are pretty adept at.

***In fact, the possibility that large scale dislocation has occurred as prevailing forms of capital favor certain skills over others shouldn’t be dismissed. For example, the increasing importance in the U.S. economy of intellectual capital (reflected in industries like law, medicine, technology, finance, etc) relative to physical capital (reflected in industries like agriculture, construction, manufacturing, etc) seems likely to increasingly favor the well educated over the less educated — something that census data certainly seems to bear out. And while educational initiatives around our “knowledge economy” are wonderful, most of the people being squeezed by these trends are well out of school.

URLs:

http://www.gmo.com/websitecontent/JGLetter_ALL_3Q09.pdf

http://www.faqs.org/qa/qa-6697.html

http://www.quaker.org/sttp.html

http://www.docstoc.com/docs/12869206/%E2%80%9CQuakers-Speak-Truth-to-Power-Bayard-Rustin-Race-and-Sexuality

http://eddriscoll.com/archives/010217.php

http://www.assoc-amazon.com/e/ir?t=symmetrycapit-20&l=as2&o=1&a=0300025815

PLEASE NOTE: Symmetry Capital Management, LLC is a state registered investment advisor. The foregoing information is for informational, educational, or entertainment purposes only. It does not constitute an offer to buy nor a solicitation to sell any security, or to engage in any investment strategy. Symmetry Capital Management, LLC is an Amazon.com associate, and may earn a percentage of any sales generated by clicking through to the Amazon.com website from links on our website.

Steve Wynn and U.S. Debt

Steve Wynn, chairman and CEO of Wynn Resorts Ltd., repeated a common argument to a CNBC reporter today — that the U.S. government, like any individual, could not continue to spend more money than it makes. While this is how most of us learn to think about consumer and other household debt, it’s worth a closer look.

First, a quick accounting primer. Assets, liabilities, and net worth (the balance sheet) are distinct from revenues and expenditures (the income statement). When expenditures exceed revenues over some period of time, a business (or a government or a household) runs a deficit. Deficits can be absorbed by assets such as savings (net assets are assets minus liabilities). If liabilities exceed an entity’s assets, then it is leveraged, or said to be in a ’negative asset position’. While this sounds bad, it simply means that if a sufficient number of the entity’s creditors demanded repayment of its obligations, it would be wiped out (this is essentially what happens in a bank run).  If that were to happen, then the entity must either raise capital or fold. It can raise capital by finding new lenders to loan it additional funds (creditors who are willing to assume the risk that future debt service will occur), or by finding investors who are willing to provide capital in exchange for an ownership stake (equity owners who are willing to put capital at risk in exchange for a claim on future profits). However, if creditors do not suddenly demand repayment in full, and the entity is able to service its debts from its operations, then it can survive and even do quite well. 

How does this apply to public finances? First, it tells us that public deficits are a pressing concern only if they threaten a society’s overall net wealth (net wealth being the assets left over if all debt were suddenly repaid). To determine that, we have to compare the level of debt to the level of assets. Estimating the underlying assets that a government has access to is difficult, but as a quick and dirty rule of thumb, we can multiply the government’s share of GDP by the net underlying assets in the economy. This gives us a rough idea of the level of discounted future output over which the U.S. Government has some (indirect) control. Unfortunately, as John Rutledge has pointed out, this is not an easy number to estimate, because federal economic statistics tend to focus on flows (like GDP) rather than assets. However, using recent Federal Reserve Flow of Funds data, we can conservatively estimate that the net asset position of the U.S. is somewhere north of $71 trillion (we’ve left out the net assets of governments, farms, and retirement funds).

Assuming that the federal government’s share of GDP is 20% and that this corresponds to its degree of control over economic assets, the U.S. government has access to roughly $14.2 trillion in assets. At 30% of GDP (a level which we believe could unfold in the coming decade), that number increases to $21.3 trillion. At an estimated $12.9 trillion in 2009, the gross U.S. national debt stands at 61% to 91% of net assets. And again, those asset figures are conservative. If they were more accurate, the debt percentage would almost certainly be lower.

Contrast this to the company that Wynn heads. It has a net asset position, ex-intangible and other assets and deferred charges, of roughly $1.37 billion, and long term debt of $4.29 billion. Its debt is over 300% of net assets, which is some three to five times more levered than the federal government, according to our back of the envelope numbers (though both pale in comparison to the leverage ratios taken on by the financial industry in this decade). There are other important contrasts as well. Wynn Resorts will never have a cost of capital as low as the U.S. Treasury; it has to compete intensely for revenues, and its profitability is subject to many factors that are well beyond its control. The U.S. government has few if any competitors, and its revenues come about via legally enforceable obligations imposed upon the private sector.

I don’t mean to put forth the argument that the U.S. government should lever up to the level of a corporation like Wynn, or that it couldn’t quickly push itself into a more precarious financial position***. To be sure, like any other entity, it needs to service its debt from cash flows rather than assets whenever possible. And long term entitlement commitments are indeed an eight hundred pound gorilla. I’m simply pointing out that as things stand today, gross U.S. debt is hardly at an unmanageable level. Thus, widely agreeable public investments and expenditures should not be held hostage to hyperbole or anxiety over government deficits.  This should be kept in mind when thinking about what Treasury Secretary Geithner has called the “central economic choice of our time”. 

***OMB forecasts gross public debt of $18.35 trillion by 2018, a compound annual growth rate of almost 7.5%. This will surely surpass normalized annual GDP growth over the same period. But note that it’s well below the growth rate of household and some other types of debt in the 2004-2008 period, and still represents a reasonable proportion of today’s net economic assets.

IMPORTANT DISCLOSURES and DISCLAIMER: Symmetry Capital Management, LLC is a state registered investment advisor. Neither the firm, its principals, its employees, or its clients own securities of any companies mentioned. The foregoing information is for educational and entertainment purposes only. It does not constitute an offer to buy or sell any securities, or a recommendation of any investment strategy.

URLs:

http://en.wikipedia.org/wiki/Modigliani-Miller_theorem

http://www.reuters.com/article/GCA-Economy/idUSTRE59L4SQ20091022

 http://www.cid.harvard.edu/cidpublications/darkmatter_051130.pdf

http://www.federalreserve.gov/releases/z1/Current/z1r-5.pdf

http://rutledgecapital.com/2009/05/24/total-assets-of-the-us-economy-188-trillion-134xgdp/

http://www.whitehouse.gov/omb/budget/fy2010/assets/hist.pdf

http://finance.yahoo.com/q/bs?s=WYNN&annual

Wall Street Stuff

Barron’s cover story this weekend urges Fed Chairman Ben Bernanke to stop punishing savers and raise the Fed’s target overnight interest rate. To support their case, they use an array of market indicators, including the US Dollar index and the USD price of gold, arguing that “big investors have come to see the dollar, commodities and stocks as one-way bets.” A dramatically titled sidebar of charts (‘The Perils of Easy Money’) is provided, but beyond the rising price of gold, there’s nothing in them that offers primae facie evidence of either easy money or impending inflation.  Yes, the USD has declined almost 15% from its peak, but at current levels it is simply back to where it was at the end of 2007 and beginning of 2008. And while the S&P 500 has had a breath taking run off of its March 09 lows, it’s still roughly 20% below its peak.

What’s more, there’s little about the real U.S. economy that argues for higher nominal interest rates, and inflation (and deflation) can only arise from a misalignment of the financial system with the real economy. There’s still a considerable amount of private sector debt to be worked out in the coming years and decades; excessive household consumption has run its course; and U.S. demographics do not imply a high or rising ‘natural‘ rate of interest in the decade ahead. In fact, based on that latter point, we can sympathize (out of context) with Milton Friedman’s 1965 claim that “we are all Keynesians now”, as research into population demographics and their effects on economic output and asset pricing has produced some powerful (if tentative) insights. At the present time, the U.S. is simply not at a point where, demographically speaking or policy-wise, a low nominal rate of interest on overnight reserves is likely to produce rising asset prices or “excess demand” for goods and services in the same way that it did in the late 1970s. And for that reason, increasing investment in public goods, as many of today’s policymakers advocate, might be a good idea. It might even be inevitable, judging by the experience of Japan, a country ten years ahead of us on the demographic curve. At the very least, we can hope it will be done well (Art Laffer penned a supply side refutation back in May but did not address his underlying assumptions of perfect competition for — and full employment of — real resources).

The real problem with a low Fed Funds target, as we have pointed out previously, is that the USD is still the world’s primary reserve currency. Thus, while a low Funds rate might be appropriate for the U.S. economy, it can have inflationary consequences in parts of the world that have higher expected growth rates (the reverse can also happen, as it did in the 1990s – while a high funds rate and a strong dollar seemed appropriate for the U.S. economy, they wreaked deflationary havoc on much of the world). Rising prices for goods that are globally traded, and thus subject to the Law of One Price, will feed back into domestic U.S. price levels, providing a noticeable whiff of stagflation, much as gold, precious metals, and other commodities are doing now.  The global pressures caused by an easy Fed are also going to cause plenty of political consternation and some financial dislocation abroad, as recent salvos from global trading partners over the USD attest to. But we don’t expect broader inflationary pressures to unfold in the U.S. for quite some time, nor do we expect Congress to even entertain the possibility of revisiting Humphrey Hawkins; which means, in our view, that the Fed will remain easy for some time, probably well into 2010. In the meantime, should the USD continue its current trajectory, we might see some coordinated global interventions, as we did with the Plaza and Louvre Accords in the mid-1980s. But in those episodes, national treasury departments played the lead roles, not central banks.

There are also a couple of Investment News articles that illuminate some of the beefs we have with our industry. The first one is on a Morningstar study that found that over half of all mutual fund managers have no money in their own funds. There are some legitimate reasons why a percentage of mutual fund managers would not own shares of their own fund — but that percentage should be waaaaay below 51%. That’s bad enough, but what really stuck in our craw was the speculation that some fund managers might have their money in separately managed accounts that follow a similar strategy as their mutual fund, as they tend to offer lower expenses (they also offer greater transparency, potential tax advantages, and opportunities for customization). If we ran our Opportunistic Portfolio as a mutual fund, our firm’s principals and employees would own it as a mutual fund, period. As it is, we only offer it as a separately managed account, because that is a more advantageous approach for most investors, and because technology has made it possible for us to offer separate accounts to all of our clients (it’s also a heck of a lot cheaper than forming a mutual fund). I know this stuff goes right over most of our clients’ heads when we try to explain it. Suffice to say, we’re trying to do right by them, and by our industry, on each and every day, and we appreciate stories like this one as they lend support to a key piece of our competitive strategy.

The second article is somewhat innocuous, but offers a glimpse into the prevalence of momentum trading in our business, and the general fascination with market momentum. It quotes a large cap manager at ING as saying that ”There does seem to be something unorthodox about [current equity market behavior], but you ignore it at your own peril.” That’s not an objectionable statement, but the article’s headline was a bit stronger: “Market rebound may be illogical, but ‘ignore it at your own peril,’ manage of $1.7B warns”. Surely a similar thought occurred to each of the 20,000 bison shepherded off of Vore over the eons:

[The site hosting that image is pretty neat - you can read a history of bison and horses on the Great Plains while authentic cowboy/saloon music plays in the background.]

Our beef with momentum investing is that it rationalizes away everything but herd direction. If a manager buys momentum because the underlying investment thesis makes sense, there’s nothing wrong with that. But buying momentum for its own sake is the height of glamor boy laziness and stupidity. There’s too much of it in our business, and it contributes precious little to the economies and societies we operate in.

[The 'glamor boy' link will be nostalgic for anyone who was watching MTV in the late 1980s. While it's hard to take Corey Glover's claims of ferocity seriously while he's wearing a spandex suit and a marching band jacket, it's still a great song.]

URLs:

http://online.barrons.com/article/SB125573856421291217.html?mod=rss_barrons_this_week_magazine

http://s.wsj.net/public/resources/documents/BA-EasyMoney091019.pdf

http://www.frbsf.org/publications/economics/letter/2003/el2003-32.html

http://www.time.com/time/printout/0,8816,842353,00.html

http://economics.uwo.ca/econref/WorkingPapers/researchreports/wp2009/wp2009_2.pdf

http://frank.mtsu.edu/~berc/tnbiz/stimulus/laffer.pdf

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20091019/FREE/910199975/1094/INDaily01

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20091019/FREE/910199982/1094/INDaily01

http://www.wyomingtalesandtrails.com/buffalojump.jpg

http://www.youtube.com/watch?v=7XRpuhc9dgU

http://www.wyomingtalesandtrails.com/bison.html

Crowded Trades – A Video Analogue

Claustrophobic tendencies inform a key tenet of our investment philosophy — avoidance of overly crowded trades. We found a perfect video analogue of what a crowded trade looks like:

Thankfully, it’s not quite perfect. If it were, it would also show the train running off the rails.

Dog Kisses, Wolf Vomit, and Investing

Our quote of the day is taken from a Time article about cutting edge research into canine cognition and behavior:

“If we happened to spit up whatever we just ate, I don’t think our dogs would be upset at all.”

The gist of the quote is found in the following passage:

The first rule for scientists studying dogs is, Don’t trust your hunches. Just because a dog looks as if it can count or understand words doesn’t mean it can. “We say to owners, Look, you may have intuitions about your dog that are valuable,” says Hauser. “But they might be wrong.”

Take for instance the kiss a dog gives you when you come home. It looks like love, but it could also be hunger. Wolves also lick one another’s mouths, particularly when one wolf returns to the pack. They can use their sense of taste and smell to see if the returnee has caught some prey on its journey. If it did, the licking often prompts it to vomit up some of that kill for the other members of the pack to share. The kiss dogs give us probably evolved from this inspection.

Believe it or not, this example is relevant to investing, finance, economics, politics, and pretty much every other human endeavor, as it nicely illustrates the gaps that can exist between beliefs, perceptions, and reality. When we interact with a dog, we can’t prevent ourselves from thinking human thoughts, thoughts that are also deeply embedded in our biological and cultural backgrounds. That means that for most of us, when another person kisses us excitedly about the face and mouth, they are demonstrating the affection they feel for us (though sometimes it’s other emotions, as Fredo Corleone could attest). And in most cases, that’s probably what the other person is thinking too. But apparently that might not have any resemblance to what a dog is thinking when it “kisses” you. Nonetheless, we tend to believe it is a “kiss”, primarily because receiving affection, real or perceived, makes us feel good. But it’s an interpretation that is probably not well grounded in reality.

In the investing world, decisions and behaviors are not always grounded in a solid assessment of reality either. For example, while it might have felt better to sell risky assets in February or March of this year and be done with it, the reality is that it would have imposed a severe performance cost (to this point, anyways). Likewise, it feels good to own assets that are in popular demand, like homes from 2003-2006, tech stocks from 1998-2000, and so on. The overwhelming use of “momentum” indicators in the investing business indicates that the majority of professional investors are prone to the same kinds of mistakes. While the continuing prevalence of herding behavior in financial markets might be comforting to individual members of the herd at most times, it’s almost certain to cause episodes of significant harm.

Studies of successful investors and traders have found that while they experience the same emotions and discomfort as every other person dealing with risk and uncertainty, they have developed skills that allow them to manage emotions with reason and discipline. Specifically, they have a firm grasp of the fact that they are involved in a probabilistic endeavor that may not turn out well in every case, and they apply consistent decision making processes, even when it would feel better to run the other way. While you may never need to develop the ice water veins of a successful trader, or the steely nerves of a contrarian investor,  there are a couple of old adages that, because they are well grounded in reality, should help all investors avoid excessive reliance on emotion when making financial decisions:

What goes up must (eventually) come down.

Don’t put all your eggs in one basket.

Of course, in the world of human-canine relations, it probably won’t cause any harm to believe that a dog kiss is, well, just a kiss. It sure beats the alternative!

URLs:

http://www.time.com/time/magazine/article/0,9171,1921614,00.html?xid=yahoo-feat

http://www.youtube.com/watch?v=FcFlp6kl508&feature=player_embedded

DISCLAIMER: Symmetry Capital Management, LLC is a Pennsylvania registered investment advisor. The foregoing is not a solicitation to buy or sell any security, or a recommendation to engage in any particular investment strategy.

The first rule for scientists studying dogs is, Don’t trust your hunches. Just because a dog looks as if it can count or understand words doesn’t mean it can. “We say to owners, Look, you may have intuitions about your dog that are valuable,” says Hauser. “But they might be wrong.” See TIME’s video “The New Frugality: Doggie Day Care.”

Take for instance the kiss a dog gives you when you come home. It looks like love, but it could also be hunger. Wolves also lick one another’s mouths, particularly when one wolf returns to the pack. They can use their sense of taste and smell to see if the returnee has caught some prey on its journey. If it did, the licking often prompts it to vomit up some of that kill for the other members of the pack to share. The kiss dogs give us probably evolved from this inspection. “If we happened to spit up whatever we just ate,” says Horowitz, “I don’t think our dogs would be upset at all.”The first rule for scientists studying dogs is, Don’t trust your hunches. Just because a dog looks as if it can count or understand words doesn’t mean it can. “We say to owners, Look, you may have intuitions about your dog that are valuable,” says Hauser. “But they might be wrong.” See TIME’s video “The New Frugality: Doggie Day Care.”

Take for instance the kiss a dog gives you when you come home. It looks like love, but it could also be hunger. Wolves also lick one another’s mouths, particularly when one wolf returns to the pack. They can use their sense of taste and smell to see if the returnee has caught some prey on its journey. If it did, the licking often prompts it to vomit up some of that kill for the other members of the pack to share. The kiss dogs give us probably evolved from this inspection. “If we happened to spit up whatever we just ate,” says Horowitz, “I don’t think our dogs would be upset at all.”The first rule for scientists studying dogs is, Don’t trust your hunches. Just because a dog looks as if it can count or understand words doesn’t mean it can. “We say to owners, Look, you may have intuitions about your dog that are valuable,” says Hauser. “But they might be wrong.” See TIME’s video “The New Frugality: Doggie Day Care.”

Take for instance the kiss a dog gives you when you come home. It looks like love, but it could also be hunger. Wolves also lick one another’s mouths, particularly when one wolf returns to the pack. They can use their sense of taste and smell to see if the returnee has caught some prey on its journey. If it did, the licking often prompts it to vomit up some of that kill for the other members of the pack to share. The kiss dogs give us probably evolved from this inspection. “If we happened to spit up whatever we just ate,” says Horowitz, “I don’t think our dogs would be upset at all.”