Stress, Portrait of a Killer

9 02 2013

The documentary Stress, Portrait of a Killer below is highly recommended, because it shows the enormous negative consequences of near-continuous stress on daily lives and also gives clear guidelines how to improve the situation.

My most important notes:

Stress evolved as natural and positive reaction of the body to crisis situations. It is the way the body handles challenges, whether they be life threatening, trivial or fun. Fun stress is what we call stimulation, like the good tension you feel before and during a sports match. We want to keep this kind of stress in our lives. The continuous bad stress in our current society (worrying about the mortgage, getting annoyed about traffic jams, high workload, etc.) has many negative consequences on our lives:

  • We feel worse and are less able to enjoy pleasures, like good food.
  • We are less able to learn, think and remember: “Stress makes you stupid.”
  • Stress has many negative physiological consequences: increased heart rate and blood pressure, tense muscles, more hardening of the arteries (arterosclerosis), worse development of the brain, faster decrease in the length of telemirs at the ends of chromosomes, more weight gain, especially around the waist (which is much worse than weight gain on other parts of the body).

The consequences are more discomfort, less joy, worse performance, and a less healthy and shorter life.

Stress is strongly related to social hierarchy: the lower on the hierarchy you are, the more stress you experience. Much stress is self-inflicted (multi-tasking) and society-inflicted (social hierarchy). Lack of control and predictability lead to lots of stress. Think for instance about people in a low rank at work or who live in a neighborhood with lots of criminality and violence.

What can we do to reduce stress and lead a more comfortable, longer and healthier life?:

  • Try to make sure you experience sufficient control and predictability:
    • If possible, choose a job/manager where you are appreciated, where behavior is honest en just, where you have influence on your fate.
    • If you are a manager, do the following: be positive, show appreciation, let people have their say (don’t dominate meetings, but ask questions and listen), avoid bureaucracy and micromanagement and instead delegate and decentralize, reward people for good results which are under their influence.
    • Try to live in a healthy environment, with little criminality and violence.
  • If you experience little control in your work, try to compensate this in other areas of your life, e.g. by being captain of your sports team. Also, consciously give a lower weighting to areas of your life where you experience less control (e.g. work) and a higher weighting to areas where you experience more control (e.g. your sports team).
  • Be compassionate with and care for others (“The secret to living is giving” – Tony Robbins).
  • Laugh a lot and have humor in your life.
  • Place increased value on stress-reducing activities like relaxation, sports, meditation, and fun and healing group activities like support groups.

Scientific research points the way to a stress-free utopia which has the conditions for people to thrive. A group of baboons has shown that it is possible to radically reduce the amount of stress that all members experience on a daily basis in just one generation. If baboons can do it, then sure we humans can. But do we have the courage to learn from baboons?

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Good presentation about culture at Netflix

31 01 2013




Book review: What got you here won’t get you there

15 09 2012

Book cover What got you here won't get you thereThe world owes Marshall Goldsmith a big thank you for the excellent, practical and transformative book What got you here won’t get you there.

The main premise of the book is that if you are already good and want to get better at anything in which other people are involved, the thing that is probably holding you back is some flaw in your interpersonal behavior. The behavior that you need to change is not so much good things that you should start doing, but bad things that you should stop doing. Although it is never easy to change habits, it is usually a lot easier to stop doing one bad habit than to start doing a bunch of good habits. As Goldsmith mentions in the book, it is a lot harder to become a nicer guy than it is to stop being a jerk.

Goldsmith presents an overview of the most common bad habits. We are often not aware that we exhibit this bad behavior and if we are, we probably think that it helps us, even though the opposite is true. If you look closely at the list of bad habits, you will probably come to the conclusion that you also exhibit one or more of the habits. I certainly did. This is a humbling experience and is the start of improvement. You should enlist the help of people who know you well to find out your negative behaviors, since they are very likely to have a more accurate view of you than you have yourself.

Now you are ready to choose the behaviors at which you want to improve and the author then gives you a process to achieve lasting improvement. The main steps are apologizing for your past errant behavior, advertising your intentions to change, following up, listening and thanking, and using a process called feedforward to elicit others help in improving.

The essence of the book is that you are taught how to identify where you are now (here), how to choose where you want to go (there), and how to get from here to there.

Although Goldsmith mainly targets people who are already successful with this book, it is for anybody who deals with people (who doesn’t?) and wants to improve. The principles mentioned are applicable in any area of your life. They will help you to improve your relations with others and become more successful as a result at work, at home and everywhere else.

Do yourself a favor: Buy this book now. Study it carefully. Internalize it. Take action. Enjoy success. Spread the word.

Below is a video of a nice presentation by Marshall Goldsmith in which some principles mentioned in the book are discussed.





Excellent article: Why Blacksmiths are Better at Startups than You

19 08 2012

Josh Kaufman of the Personal MBA attended his subscribers to the following excellent article titled ‘Why Blacksmiths are Better at Startups than You’.

The article talks about start-ups and learning a difficult craft in general, and the necessary emotional intelligence which is necessary. The moral of the article: It is very difficult and scary to start a company, but if you are prepared to develop the necessary knowledge and skills, the world is at your feet. Emotional intelligence (perseverance, patience, dealing with setbacks and critique, discipline to do what is necessary and important, and not what you like to do at that moment, learning to follow advice of experts, etc.) is absolutely essential for success.

The importance of emotional intelligence in this area is comparable to investing. The necessary knowledge is easy and almost all the knowledge for successful long-term investing can be summarized in two simple steps:

  1. Define a suitable portfolio allocation (which percentage of the portfolio will be invested in stocks, bonds, real-estate, etc.) according to your time horizon and maximum volatility  requirements;
  2. Buy one or more widely diversified and cheap index funds according to your portfolio allocation which you rebalance once per year and NEVER EVER deviate from this strategy, no matter what.

The difficulty in investing is almost 100% in the emotional component: Do you have the faith that the chosen strategy will work in the long run? Do you have the fortitude to stick with your strategy, even in challenging times? Do you have the determination to stick with your strategy even when everyone around you is telling your you’re wrong? Do you have the patience to wait for the strategy to work? Do you have the discipline do nothing when you would like to be active?

The lack of basic knowledge and especially the lack of emotional intelligence of many investors, from time to time produces enormous opportunities for long-term investors to beat the market.

Many modern people lack the necessary emotional intelligence to learn difficult crafts. We want something for nothing and we want it now (instant gratification). This, of course, is nothing new, but what is new, is that we are ‘abstracted people living abstracted lives’. Because many of us have lost touch with nature, we have lost touch with nature’s laws. A farmer knows that he cannot reap before he sows, and that he can’t wait until September to start sowing. But students may think that they can get good grades in school without studying or with waiting until the last moment before a test to start studying. Buyers don’t seem to think it is a bad thing to buy stuff on massive amounts of credit.

Business is a reality engine:

Don’t work on the basics every day? You’ll fail.

Don’t market constantly? You’ll fail.

Don’t solve your customer’s pains? You’ll fail.

Don’t ship? Ha!

There you go: business in four sentences.

When modern people get confronted with a reality where results are the only thing that matters and where nature’s laws rule, our ego doesn’t know how to handle this, just like a spoiled child, with all kind of bad behavior as a result. However, once we accept and internalize this fact, life becomes a lot easier (both for us and our teachers), and we can actually achieve something.

Mastering a craft, is ‘incredibly fucking hard’. You’d better be sure you what is awaiting you, so you can decide for yourself in advance if you are prepared to make the necessary sacrifices:

If you’re not in it for the long haul, though, don’t bother. If you’re too special to practice the basics, don’t bother. If you’d rather feel validated than achieve a result, don’t bother. If you’d rather defend the status quo than grow, give up now.

On the other hand, if you know what is awaiting you, that may prevent your from starting…

We need to make difficult decisions:

Do you just want to splash about in the kiddie pool and rebel at the first sign of seriousness…

Or do you want to craft a real business and a real life, with reality as your favorite ally? Do you want to surprise yourself with how much you can achieve?





Some notes on Contrarian Investment Strategies by David Dreman

2 06 2012

Contrarian Investment Strategies (book cover)Just finished reading Contrarian Investment Strategies: The Classic Edition by David Dreman.

My impression of Dreman before reading the book wasn’t very good: I saw some of his TV interviews and was very unimpressed. Also I remember some of his fund’s holdings coming into the financial crisis absolutely got killed.

But I realized that the impression a person makes in the media need not have any relation to his knowledge and skill, and I read some positive reviews on his books in multiple places, so I decided to give it a try. The desire to read the book was also strengthened by my interest in quantitative investment strategies.

Having read the book, I must say I’m quite impressed. Dreman really knows what he’s talking about, having invested himself for many decades, and also having performed good scientific research.

I had expected that the book would be mostly about quantitative investing, but it discusses many more subjects. For instance it explains clearly what is wrong with technical investing and the Efficient Market Hypothesis (EMH). It also has a whole section on behavioral investing, which is quite good, and also goes into the subject of how to define risk and what would be the main risk investor face today. (I skipped many of the sections on technical investing and EMH, because nobody has to convince me what’s wrong with them.)

The best part of the book are the sections on quantitative investing. Most important conclusions of this part:

  • Buying a basket of low P/E, low P/CF, low P/B or high dividend yield, results in very significant market beating returns over time: something in the order of 3% per year. “What investors really get paid for, is holding dogs.”
  • You don’t have to turn over the portfolio a lot: if you buy a basket of low P/E stocks for instance and hold them for multiple years, let’s say up to 8 years, then your return doesn’t decay much with respect to rebalancing the portfolio every year. This saves a lot of transaction costs (transaction fees and bid-ask spreads) and taxes.

(Note: the last point conflicts with some other results I’ve seen, see for instance the website Validea and StockScreen123, which show that higher rebalancing frequencies lead to higher annualized returns before taxes and transaction costs.)

A critique of the book, especially for an investor who already knows a lot about value investing, is that the book is long (it has 450 pages). A person only interested in quantitative value investing could find 90% of the information in Dreman’s book in the excellent article What has worked in investing by Tweedy, Browne Company.

Many good articles on quantitative value investing can be found on the blogs Greenbackd, Fat Pitch Financials and Magic Diligence. And of course, you should read  The little book that still beats the market and The big secret for the small investor (see my summary here). Both book are very good and short reads, and both have been written by legendary investor Joel Greenblatt. But I digress…

Back to Dreman’s book. As said, the book is quite long, but many subjects are covered in depth, and I learned some things that I didn’t know before, and also got some good ideas. Some of the main points:

  • A good sell discipline is one of the hardest things to develop.
  • Contrarian stocks can move substantially higher in price and still be good holdings.
  • When companies keep their dividend high during a crisis, it is an important indicator that management think the company is not in big trouble, or else they would have reduced the dividend or cut it completely.
    Note: Of course management could also abuse this signal, keeping dividends high to give the impression that the company is allright, even though they know it is in deep trouble, and at the same exacerbating the trouble by not reducing the dividend.
  • You can apply a contrarian approach within industries. Instead of just buying the very cheapest stocks you can find, you can buy the cheapest stocks in each industry. Why would you do this? It prevents industry concentration, leading to lower risk and making investing less psychologically taxing.
  • If you buy good companies who are temporarily in trouble, you can get a double whammy: multiples increases on earnings per share which also increase.
  • If you don’t rely on a purely mechanical strategy, then how long should you hold a stock that has not worked out? Six years, according to John Templeton.
  • Patience is a crucial but rare investment commodity.
  • The symptoms of all manias are remarkably similar.
  • If a good company’s stock falls sharply due to a negative surprise making it undervalued, should you buy immediately or should you wait a little bit? It’s a tough call, but it seems it is a good idea to let the dust clear. “Don’t be a hero and charge into the initial panic. If you like a stock blown out by disappointing news, it pays to sit on the sidelines for a while. In all probability, you will get plenty of chances to buy it cheaper in the next 90 days.
    […]
    When there is a negative surprise, the poorer results, even for first-rate companies, are likely to continue for a while. It takes time to ride through an unanticipated rough stretch. As a result, the initial sock is often followed by later, if lesser shocks, which continue to put pressure on the price.”
    Note: If Dreman is right on this, then this quote alone is more than worth the time to read the whole book, since value investor are almost always way too early.
  • The investor overreaction hypothesis: investors overreact to events in a predictable fashion: they consistently overvalue to prospects of “best” investments and undervalue those of the “worst”.
  • Extremely few companies have been able to show a high rate of uninterrupted growth for long periods of time. This leads to Rule 27: The push toward an average rate of return is a fundamental principle of competitive markets (reversion to the mean). Warren Buffett may be right that you should look for companies that have a moat, but it is very rare that these moats are sustainable over large periods of time. Also, for many investors whose name is not Warren Buffett, it is difficult to assess whether there is really a moat and even more whether the moat is sustainable. As Dreman writes: “It is true, of course, that there are excellent companies that will continue to chalk up above-average growth for years or decades to come, and there are especially talented investors who will find them at reasonable prices. But for most of us, whether individual or expert, the odds of winning at this game are pretty slim.”
  • In crisis, most people do not make objective evaluations.
  • Investing during crises is psychologically taxing, even for the very best investors. Mentally you know that this is a great time to sow the seeds of great future returns by buying when prices are low, but at that moment the future looks so bleak and you start to doubt whether this time may actually be different. Quantitative investing is simple but not easy. None of us can escape the anxiety and doubt that permeates a crisis.
  • Some people, e.g. airline and combat pilots, are taught how to cope with crisis, because crises can be deadly if not handled properly. It would be an excellent idea to train investors how to deal with crises, for instance by using simulations.
  • Banks have been a low P/E industry for years. Pharmaceuticals are normally a high multiple industry.
  • “If you get a combination of a panicky market and an industry or sector panic, such as occurred with financial stocks, the potential rewards are that much higher.”
  • Between 1802 and 1996, stocks increased on average by 7% annually after inflation, but before taxes.
  • Risk is definitely not the same as volatility. It is not even the possibility of loss of principal, but it is possibility of the loss of purchasing power. While it is very hard to define risk accurately, if you have a diversified basket of stocks, then the price-to-value (P/E, P/B, etc.) can be a very good proxy of the risk: the lower this ratio, the lower to risk.
  • Investing in small-cap companies has some drawbacks, even for investors with relatively low assets, like sometimes much higher spreads, sometimes exceptionally low liquidity, and a larger risk of accounting gimmickry. “With the smaller issues, you must be prepared to buy them and hold them or the turnover costs will eat you up.”
  • Also, small cap investing tends to be much more volatile and small caps can have a disconnect to the market for a number of years. But, when small caps click, gains can be enormous.
  • History shows that group madness is not necessarily short-lived.
  • All the market anomalies have one common denominator: investor psychology.
  • Investing can be a probability game with the odds on your side.

Conclusion

If you are a relatively inexperienced investor and want to know whether you should do technical investing, index investing, value or growth investing, focused or diversified investing, fundamental or quantitative investing, small cap vs. large cap investing, portfolio management, and many other subjects, read this book cover to cover! You will also get a very good summary of behavioral investing at the same time.

If you are mainly interested in quantitative investing, then first read the article by Tweedy, Browne Company and the two books by Joel Greenblatt I mentioned. Then, if you still want more, you can read this book. You may may want to skip some sections and skim some other sections, though. Still, there is a lot of valuable information in this book. David Dreman did a great job, and I’m happy to have read the book.

If you are more interested in the Warren Buffett style of focused investing in great companies at good prices, this is not the right book for you.





Book summary: ‘The big secret for the small investor’ by Joel Greenblatt

30 10 2011

Chapter 1: How to beat the market

The Efficient Market Hypothesis (EMH) which says that markets are efficient, and therefore it is not possible to beat the market, other than by luck, is false. Still, beating the market can be very difficult, even for highly intelligent, hard working people who have attended top business schools. The secret to beating the market is in learning just a few simple concepts that almost anyone can master, and that serve as a road map. Even though the concepts needed to be a successful stock market investor are simple and most people can do it, it’s just that most people won’t.

Chapter 2: The secret to succesful investing

The secret to successful investing is to figure out the value of something and then pay a lot less. The ‘a lot less’-part is called the margin of safety. The value of a business comes from how much that business can earn over its entire lifetime (20-30 years). (Actually it is better to use cash flow instead of earning, but in the book it is assumed that earnings are a good approximation for cash received.) The earnings need to be discounted to the present, which is called a Discounted Cash flow analysis (DCF) to get the Present Value (PV). The problem with a DCF is that 1) it is almost impossible to predict earnings for the next 30 years and 2) small changes in growth rates and discount rates end up making a huge difference in the present value.

Chapter 3: Other valuation methods

Besides a DCF, there are also other ways to determine the value of something. For instance, you can use a relative value, acquisition value or liquidation value analysis. For larger companies with multiple divisions, you can use a different analysis for each division, and then combine the values of the divisions to get a sum-of-the-parts value. But each of these valuation methods has its own drawbacks and difficulties. So the main point is that it is not so easy to figure out the value of a company. And if we can’t determine the value of a company, we can’t determine an amount that we’d be willing to pay where we’d have a margin of safety.

Chapter 4: Capital allocation

An important part of investing is capital allocation: you compare different investment possibilities to find that ones that are most attractive, that is which you think will provide the best risk-adjusted returns. The first hurdle an investment in a stock must pass, is an investment in a 10-year US government bond, for which we assume the interest is at least 6%. The interest rate on a 10-year US government bond, we call the risk-free rate. If the earnings yield (earnings/price) of a stock is much higher than the risk-free rate, then it might be a good investment depending on how certain we are of our estimates of future earnings of the company. If the first hurdle is passed, we can compare the attractiveness of investing on stock A to different stocks. If we can’t make an estimate of future earnings of a company, we just skip that investment.

Chapter 5: Ways in which individual investors can beat the market

If you’d want to beat Tiger Woods, it would be best to choose a different game than golf. If you’d want to beat professional money managers in investing, it is better to choose a style of investing where they can’t or won’t compete with you. Some possibilities are investing in small capitalization companies (small caps), focused investing (where you analyze and invest in just a few companies where you have a special insight or some deeper knowledge) and special situations investing (spinoffs, bankrupties, restructurings, etc.) The drawbacks of investing in special situations, is that they still require a reasonable amount of work and you still need to have some valuation skills.

Chapter 6: Mutual funds

If you don’t want to do your investing yourself, you can invest in mutual funds. Mutual funds come in two flavors: active and passive. In an active mutual fund an manager tries to invest in a basket of stocks that will beat the market. In a passive mutual fund (also called an index fund) the approach is to try to replicate the returns of an index such as the S&P 500 by buying all or most of the stocks in that index. This chapter focuses on active mutual funds. Managers of mutual funds earn money through the fees paid by investors: the more money they manage, the more they generally earn. So managers of mutual funds try to get investors to invest as much money as possible with them, but this effectively excludes them from investing in small caps (especially focused investing in small caps). Focused investing in large caps is still possible, and though this has the chance to outperform the benchmark, it also has the chance to underperform the benchmark for long periods of time. And since investors in mutual funds usually don’t have a lot of patience, they flee the mutual fund before it has the chance to outperform. Since this is not what the managers want, they will generally not invest in a focused way. Investing in special situation is also no option for mutual funds due to a variety of reasons.

Conclusion: some of the most effective ways to beat the market (as explained in chapter 5), can’t or won’t be used by mutual fund managers. Therefore, most mutual funds don’t beat the market, and because of fees, they don’t even match the market. Although there are some superstar managers who manage to beat the market over longer periods of time, 1) it is difficult to finds these managers ahead of time and 2) most investors time their investments in the fund poorly: they come in after the fund has performed well and they leave after the fund has performed poorly, thereby realizing a much worse return than if they had stayed with the fund for a long period of time.

Chapter 7: Index funds

As we’ve seen above, it’s almost impossible for most investors to value companies on their own, and hiring experts (active mutual fund managers) also doesn’t work because most funds underperform the market and it’s very difficult to find that funds that will outperform the market ahead of time. A good alternative is to buy an index fund, like a fund which tracks the S&P 500 index. The advantage is that can be implemented very cost-effectively and efficiently. The problem is that investing this way is fundamentally flawed: since the index is market-cap weighted (the larger the market capitalization of a company, the larger the part of that company in the index), the more overvalued a company is the more overweighted it becomes (and vice-versa). So you end up systematically owning too much of the companies that are overvalued and systematically too little of the companies that are undervalued.

A better alternative to market-cap weighted indexes are equally weighted indexes in which each company has the same weighting. This adds on average 1-2% of return per year over market-cap weighted indexes. The problem with equal weighting is that these indexes can’t handle too much money due to the smaller constituents in the index. Another alternative is fundamentally weighted indexes, where the weighting of a company in an index is determined on the basis of one or more fundamentals like earnings, sales, dividends, book value, etc. This also adds on average 1-2% of return per year, and –unlike equal weighted indexes– it can handle large amounts of money, since larger cap companies are still overweight in the index, and also requires much less trading within the fund. So fundamentally based indexes are a better way to replace market cap weighted indexes than are equally weighted indexes.

Chapter 8: Value-weighted index funds

An attempt to improve upon fundamentally based indexes, is to use the value effect: companies that appear cheap relative to earnings, book value, etc. have been shown to beat the major market indexes by as much as 2-3% per year over long periods of time. So we could design a value-weighted index in which the cheaper a company appears, the larger its weight in the index. And while we are at it, why don’t we add the philosophy of Warren Buffett and Charles Munger to the mix, and look for companies that are not just cheap, but cheap and also good. Trailing earnings yield (the earnings yields based on last fiscal year’s financial data) can be used as a proxy for cheapness and trailing return on capital as a proxy for quality (see ‘The little book that still beats the market’, also by Joel Greenblatt). Had you done this over the last 20 years, you would have beaten the S&P 500 by about 6% annualized (trading costs and market impact modeled, but fund fees not included). When you use a value-weighted index, you not only remove the systematic error that is present in a market-cap weighted index, but you also add to the performance by buying more of stocks when they are available at bargain prices.

Chapter 9: Staying the course

The first part of the big secret for the small investor, is to have the right strategy, which is to invest in companies that are both cheap and good. The second part is that we need to stick to the strategy over long periods of time. This is very difficult for many investors to do, because –as research on the subject of behavioral finance has shown– most investors are practically hardwired from birth to be lousy investors: among other things they are impatient, loss-averse, have a herd mentality, are focused on recent events and are overconfident. As we have already seen above, value investing strategies can underperform the market for periods of multiple years. For very good investors this is a blessing in disguise: if a strategy would work every week, every month and every year, everyone would be a value investor and eventually the strategy would stop working, because in that case the market would be truly efficient. For all other investors, long periods of underperformance are a curse, because they will be tempted to abandon their strategy much too soo and probably at precisely the wrong time.

To help us deal with our human flaws in the area of investing, we need a policy in which we first define what part of our portfolio should be allocated to equities, and then how much that part may vary over time. After we have done that, we need to stick to our policy.

When we combine the strategy and the policy, we have The big secret for the small investor: a new route to long-term investment success.





In memoriam: Daan Korstanje

17 02 2011

Een groot mens met een groot hart en een nog grotere glimlach is niet meer onder ons.

Daan Korstanje

Op 10 februari 2011 is Daan Korstanje geheel onverwacht overleden aan een hartaanval. Hij was nog maar 18 jaren jong en is 12 seizoenen lid geweest van basketbalvereniging The Jugglers.

Ik heb Daan 3 seizoenen lang met veel plezier en voldoening training gegeven en gecoacht. In die 3 seizoenen heb ik een sterke band met hem opgebouwd. Een band van wederzijds respect, vertrouwen, waardering en begrip.

Daan kon goed met iedereen opschieten en iedereen kon goed met Daan opschieten. Hij was altijd heel prettig in de omgang, een rustig en sympathiek persoon. Bij hem voelde je je volledig op je gemak, alsof je thuis was.

Daan was een vrolijk, vriendelijk en enthousiast persoon met altijd die karakteristieke grote glimlach op zijn gezicht, een levensgenieter, prachtig. Een sprankelende ziel, een lichtpunt in je dag. Vol passie en een bron van inspiratie.

Daan was open, eerlijk, betrouwbaar en had een sterk verantwoordelijkheidsgevoel.

Als basketballer was Daan bloedfanatiek, een strijder, een voorbeeldige teamspeler, een rots in de branding. Een uitdaging was het enige dat hij nodig had om gemotiveerd te zijn, en geen enkele uitdaging was voor hem te groot.

Daan is een rolmodel voor onze samenleving. Zoals hij was, zo zouden meer mensen moeten zijn. Het feit dat hij er niet meer is, maakt de wereld een mindere plek.

Daan, ik ben trots en dankbaar dat ik mensen zoals jij mag en mocht coachen; dat beschouw ik als een grote eer. Ik mis je onvoorstelbaar en zal je nooit vergeten; je hebt voor eeuwig een plekje in mijn hart. Rust zacht jongen.