145 posts categorized "stocks"
My friend Howard Lindzon sent me this great piece by Carl Richards. It is now hanging in my home office right behind my desk:
I believe we are on the upswing in the web investing space right now. There could well be a fair bit more to go. But we will get to the valley at some point. If you still own whatever you bought on the upswing, don't sell it there. Hold on until the next upswing.
Markets come and go. Good businesses don't. Thanks Howard for my daily reminder of that.
Most of what I've been saying recently about valuations here at AVC has been negative. I think we are in a "focus on the upside" phase in the web investing sector and I've been pretty liberal with my thoughts on that.
But when friends have privately asked me whether they should take some of the Facebook shares their Goldman representative has offered them, I mostly tell them I think they should. I don't think anyone should bet their net worth on Facebook at $50bn, but I think it is a pretty good bet that Facebook will one day be worth more than $50bn. Is it today? Hard to say. I don't have access to Facebook's P&L, cash flows, and balance sheet. But from what I have heard Facebook should do between $1bn and $2bn of EBITDA in 2011 and possibly more. 25x to 50x EBITDA for one of, if not the premier Internet company in the world is not crazy. And if you just think how much market power (i'm talking driving traffic, audience, brand, attention, value) Facebook has relative to the other Internet services which are valued well north of $50bn, I think it is pretty obvious that there is more value to be created in Facebook stock.
My friend John Battelle has similar thoughts on his blog in a post everyone interested in the second coming of the Internet IPO should read.
How do I reconcile these conflicting thoughts, that the web sector has gotten overheated and that the coming Internet IPOs might in fact be good buys? Well, to be honest, I haven't completely reconciled those thoughts. First of all, we don't know how these deals will be priced. Will Facebook shares be offered to the public at $75bn, $100bn, even higher? We just don't know. And how will Groupon, Demand Media, LinkedIn, Skype, and other offerings be priced? Don't know yet.
But it is very possible that some or all of these deals will be good buys even in the face of an overheated valuation environment. The public Internet names, most of which went public eight to ten years ago (or more), are mostly carrying full but not crazy valuations. If this new crop is priced off of those comps, then they could be worth buying and owning. And, as John points out in his post, if these companies contiue to grow rapidly and throw off ever larger amounts of cash, then they could easily be worth well north of what they are worth today.
In the spirit of complete transparency, I do not plan to purchase any of these offerings. I have plenty of personal exposure to the web sector right now and am adding to it every day via our firm and other private deals and funds I am part of. I don't particuarly like to buy and own public stocks unless we are in a really down market and I see unbelievable values. So I am not going to be calling the banks and asking for allocations. But that doesn't mean you shouldn't. But whatever you do, make sure to do your work and understand what the price is and that it makes sense. Blindly buying something just because it is "hot" is never a good idea.
Peter Thiel, entrepreneur, VC, angel, Facebook board member, and hedge fund manager, penned a long and thoughtful piece about the possibility of an impending apocalypse and how that might lead to financial bubbles. It was written in 2008 but I only came across it yesterday (on Hacker News). He calls it The Optimistic Thought Experiment. I you are an investor and haven't seen it before, I suggest you go read it in its entirety.
For those who would rather have the cliff notes, Peter's argument goes like this (Peter's words are in italics, mine are not):
1) if the truth were to be told, our slumber is not as peaceful as it once was. Beginning with the Great War in 1914, and accelerating after 1945, there has re-emerged an apocalyptic dimension to the modern world. In a strange way, however, this apocalyptic dimension has arisen from the very place that was meant to liberate us from antediluvian fears.
Peter argues that science in all of its form (nuclear weapons, biological catastrophes, etc) has vastly increased the probability of some form of apocalypse.
2) A mutual fund manager might not benefit from reflecting about the danger of thermonuclear war, since in that future world there would be no mutual funds and no mutual fund managers left. Because it is not profitable to think about one ’s death, it is more useful to act as though one will live forever.
Peter argues that betting on the apocalypse makes no sense so rational investors don't do it.
3) Globalization may end by accident or by terrible miscalculation: It may end by world war. Because there would be no winners in a new world war, every path away from globalization will end in catastrophe. Thus, in spite of the many uncertainties surrounding the costs and benefits of a more globally integrated world, investors have no choice but to bet on globalization. There are no good investments in a twenty-first century where globalization fails.
Peter argues that globalization is the anti-apocalypse bet.
4) Even the most preposterous bubbles of recent decades — Japan in the late 1980s and high-end real estate today — would have been far more restrained, had they not been stoked much further by the narrative of globalization.
He goes on to connect financial bubbles with bets on globalization. This is the most fascinating part of the essay to me. I've gone back and read it a few times now.
5) the pace and amplitude of these booms has accelerated tremendously, in complete contradiction to the widespread notion that markets are becoming more smooth and efficient over time. During the last quarter century, the world has seen more asset booms or bubbles than in all previous times put together: Japan; Asia (ex-Japan and ex-China) pre- 1997; the internet; real estate; China since 1997; Web 2.0; emerging markets more generally; private equity; and hedge funds, to name a few.
And then Peter explains that the recent slate of financial bubbles, which he calls unprecedented in history, are related to the growing sense of impending doom.
And here is the money quote:
But because we do not know how our story of globalization will end, we do not yet know which it is. Let us return to our thought experiment. Let us assume that, in the event of successful globalization, a given business would be worth $ 100/share, but that there is only an intermediate chance (say 1:10) of successful globalization. The other case is too terrible to consider. Theoretically, the share should be worth $ 10, but in every world where investors survive, it will be worth $100. Would it make sense to pay more than $10, and indeed any price up to $100? Whether in hope or desperation, the perceived lack of alternatives may push valuations to much greater extremes than in nonapocalyptic times.
It's a fascinating argument. I can't say whether I buy it or not. But it's in my head now and as a result it will be part of the way I look at the world, investing, and valuations. How much it will be a part of that remains to be seen.
At the end of the essay, Peter talks about China, Web 2.0, and hedge funds in the context of this "optimistic thought experiment". I've been thinking a lot about all three having most of my eggs in the middle basket and having taken a lot of eggs out of the latter basket and thinking about putting some eggs in the first basket. It was a good time for me to come across this essay.
When you want to look up information on publicly traded companies, it helps to know the ticker symbol. Microsft's ticker is MSFT, Google's ticker is GOOG, Apple's ticker is AAPL. Every publicly traded company has a ticker.
But private companies don't have tickers. And as more and more private companies are attaining status and drawing the attention of mainstream media and the investment community, it is time for that to change.
Yesterday Stocktwits and Second Market proposed a set of tickers for popular privately held companies. The proposed list of tickers is here.
I'd like to see services like Tracked.com (a portfolio company of ours: $TRACK), Google Finance, Yahoo Finance, Crunchbase, Wikinvest, and their competitors adopt these tickers. If everyone supported the TWIT symbol for Twitter, the FBOOK symbol for Facebook, and the SKYPE symbol for Skype it would make it a lot easier to aggregate financial and other information on these companies.
I have been an investor and on the board of a company called Alacra for over ten years. We made the investment in the Flatiron partnership. One of Alacra's most successful services is called Concordance. They manage symbology for large enterprises with large datasets. It is a critical service for large banks, brokers, accountants, consultants, law firms, and other knowledge driven industries.
Unique identifiers are so helpful when you are trying to make sense of large amounts of data. It is particularly helpful in the case of company specific information and it is also expected in the investment community.
So I hope this effort by Stocktwits and Second Market gains traction with the other web services that aggregate information on private and public companies. I'll do my part by tweeting with these tickers (using the $ticker standard set by Stocktwits) when I talk about private companies on Twitter. I hope others will do the same.
And Stocktwits and Second Market can make my life easier by making sure that companies like Alacra and Wikinvest that don't have private company symbols get them asap. I wonder if they should open up this database in some way so that companies can issue themselves tickers. It seems like trying to manage this as a closed system won't scale very well and some kind of open system will work better. I'm curious what others think.
The Gotham Gal and I have our assets spread across a number of asset classes and money managers and our allocations and managers have changed a fair bit over the years. We’ve seen a bunch of managers in action up close and personal.
Right now, my favorite money manager is an optical surgeon named Robert Freedland. Robert is 56 years old, he’s been managing his own investments for 42 years, and he’s been blogging and podcasting about stocks for the past seven years. I invest with Robert on Covestor (which in the spirit of full disclosure is a portfolio company of Union Square Ventures).
About a year ago, we put a modest but non-trivial amount of cash into a Covestor account. We only invest with model managers in risk tiers 1 and 2 to keep our capital at lower risk. There were about five or six model managers in those tiers at that time so I put the minimum on all of them. I would check each month and slowly I left most of the managers. But I kept putting more money with Robert. And he kept performing. Now we have close to half of our Covestor portfolio with Robert and I am thinking of giving him even more.We are up about 11% on the money we’ve had with Robert in the past year. Since some of those funds went in a year ago, but most went in more recently, I suspect our annualized returns are closer to the 17% return he’s annualized since he started on Covestor.
I like that Robert has delivered excellent performance with an emphasis on value investing in highly liquid stocks. I like that he doesn’t short stocks and doesn’t own anything I don’t understand or recognize. I like the fact that he has a strategy and he sticks with it. And most of all, I like that he is investing his own capital as well as mine.
If you want to invest with Robert, you can. He has a $5,000 minimum and you’ll need to open a Covestor account to do it. This is not a recommendation to invest with Robert, but it is an acknowledgement that there are great investors out there who don’t work on Wall Street and that thanks to the Internet they can manage your money as well as their own money and that is a very good thing.
RIM, the company that makes Blackberries, announced a weak quarter yesterday, and then announced they were initiating a stock buyback. I don't like stock buybacks and I figured this was an opportunity to explain why.
A decade ago, I was Chairman of the Board of a public company called TheStreet.com. It is still a public company but I have not been involved with the company for eight or nine years.
The company raised a huge amount of money in its IPO in 1999 and then after the market broke in early 2000, the stock was trading below its cash value. We talked about this at the board and decided to do a stock buyback.
For those who don't know what a stock buyback is, it is when a public company announces that they will be going into the market and start purchasing their own stock. When they purchase their stock, they typically retire it so that the number of shares outstanding goes down.
Stock buybacks are very popular with some investors as a way for a company to transfer value from the company back to the shareholders. It is like a dividend, except it is taxed as a capital gain, not ordinary income.
I don't remember the exact details of the buyback at TheStreet.com but we started buying the stock and it kept going down. We kept buying it. But we were losing money on each buyback because we were overpaying for our own stock as it kept going down.
I didn't understand what was going on. We had more cash than it would take to buy back every share in the company and yet the stock kept going down. We eventually reduced the number of shares outstanding by a pretty significant number. I don't remember what it was but it could have been as high as 25% of all the shares that were outstanding before we started the buyback.
Eventually the market came back and the stock rose. And the company started making money and its reported earnings per share were higher as a result.
But I don't view that stock buyback as successful. It didn't fundamentally change the company in any way. We just gave back a lot of cash to the investors.
This was all happening in 2000 and 2001. If I think about what we could have done with $25mm or more of cash in 2000 and 2001 to transform that company, there are so many obvious ideas in hindsight. We could have invested in new lines of business. We could have bought a bunch of companies. We could have made a number of moves that would have fundamentally changed the company. And we had a lot more cash than $25mm. But we let the cash sit in the bank and worse we gave a lot of it back to investors in a manner that did not do much for the company.
So if you go back to the reason that the stock kept going down as we were buying it back, I think I understand why now. With our stock buyback we were signaling to the market that we had no good ideas about how to spend that cash. We were signaling that we didn't see much of a future in our business. And smart investors bet against those kinds of companies, managements, and boards.
So when I saw the headline this morning that RIM was doing a buyback, I was saddened. I've been a Blackberry user since 1997 or 1998. RIM has been a great company that has driven so much innovation in the past fifteen years that has made my life better and the lives of many others better. I have to believe that if they got aggressive, they could find uses for all of that cash they are sitting on. I wish they would do that instead of buying back their stock.
A lot of wealthy people I talk to are building up sizable gold assets in their portfolios. They look at the long term fundamentals of the US economy and don't like what they see. So they are accumulating gold as both a hedge and to some extent a capital gains play. Here's a price chart of gold over the past five years:
You can see that those who have owned gold for the past five years have made three times their money. And I've heard gold bulls say that $3000/ounce is their price target. So that's 2.5x where it is now.
We've had a number of conversations about gold in the comments to this blog, but I've never posted about my thoughts on the subject. So I thought I should.
I'm not a fan of gold. It does not produce any income. It is not a productive asset. It does have value in many commercial uses but that is not what drives its fundamental value.
Gold is valuable because it always has been. It has been used many times over the years as a backstop for currencies under a monetary system called the Gold Standard. The theory is that when investors lose confidence in a government's currency, they can exchange the bills for gold.
So investors have been trained that in times of crisis, you want to own gold. And if you look at that five year gold chart, it sure looks like more and more investors want to own gold right now.
I'm not sold on gold. I don't really know what I'd do with a bunch of gold. On the other hand, I do understand the need to have a portion of your net worth in tangible assets that you can touch, control, and physically own.
I prefer real assets like commercial real estate and land. These assets can be scarce, you can own them outright, you can touch and feel them, and most importantly you can generate income with them.
Let's say you had $1 million of cash in the bank that you wanted to use as a hedge against a major financial disaster. You could purchase gold bullion and take delivery of it and put it in a safe at a bank. Or you could purchase a building with a number of apartments for rent with it. The gold will sit safely in the bank earning you nothing. A building purchased for $1mm could produce something like $100,000 per year in rental income if you buy it right.
If the financial disaster was really terrible, your building might go down in value, but as long as you own it outright and don't have a mortgage on it, there is no reason that you'd have to sell it. You could continue to generate the $100k per year of income assuming rental rates hold up. And generally speaking, real estate will maintain its value over the long haul.
The same logic applies to productive land (ie farmland). If you buy it right and don't borrow against it, land will produce income regularly and should retain its long term value.
So that's my case against gold and in favor of real assets. I think it is very smart to have a percentage of your net worth in non-financial assets (stocks, bonds) and non-cash assets. We all saw what can happen with the financial system has a meltdown. And it could have been a lot worse had the government not stepped in.
So if you have a nest egg that you want to protect, think about putting some non-financial assets into the mix. But I'm just not sure that gold is the best way to do that.
I'm no expert in the stock market but I read a bunch of experts blogs. I liked this from Steve Place:
High Frequency Trading broke, then saved the market
This will probably be the most controversial thing I’ll say. Quant firms have been keeping the market in a fairly low volatility state as they seek mean reversion and arbitrage strategies. By doing this they provide liquidity in the market for institutional players and funds. Their risk models are based on statistical distributions, behavioral finance, and other voodoo. When these models go out of wack, they can exacerbate the situation– that did occur in 2008 when liquidity dropped out of the system.However, I feel that program trading (eventually) provided the liquidity for the snapback of this rally. If it weren’t for quants betting on extreme mean reversion, we would have held a much deeper selloff comparable to 1987. What evidence do I have of this? The sheer snapback of the price in such a short amount of time. It certainly wasn’t fundamental traders who all of a sudden found “value” in the market with a trailing P/E. The only sort of quick analysis that provides that kind of price action are done by non-humans at quantitative firms, and they saved the market from something much, much worse.What Steve is saying is that computer driven trading drove the plunge and then drove the rebound. It was not human trading stocks that caused the price action. It was machines that had been programmed by humans.
There's a lot of talk about machine to machine interaction coming into our lives. Yesterday afternoon at 2:45pm, we saw what that looks like. For the people who make their living trading in these markets, it was a sick feeling in their stomaches. For the rest of us, I don't think this is too much of a big deal.
However, there are some big issues in the capital markets right now. From the bottom last April to the top a few weeks ago, the S&P 500 was up about 70% in a year. It was close to getting back to its pre meltdown high. Maybe the markets came back to far too fast. Its not like we are past all of our problems.
Money is cheap, too cheap. You can't get a yield anywhere. As my friend Howard points out, junk bonds trade at 8%. Money is going to get more expensive soon. And that will not be good for the stock markets.
And then there's the coming regulation of banks and brokers, which will likely put pressure on the stock markets.
So what does matter to the world of entrepreneurs and startups is that stock markets may not have much more room to go up. I've been thinking that we are in for a long period of low public equity returns. I have no idea when that will happen but the macro environment just doesn't look that great to me.
That doesn't mean that you can't make money with your startup and it doesn't mean that you can't make money in venture capital. The returns in startup land come mostly from taking nothing and turning it into something. If you take hard work, sweat equity, and a few million bucks of startup capital and turn that into a business producing $5mm a year of cash flow, then that is value creation of the old fashioned kind and it will work in any market environment.
But it also means to me that we should not be banking our business on the IPO exit. The public markets are a fickle thing. And it looks like machines are running that show now. I'm more optimistic about institutions turning to the private markets where capital is still traded by humans. I believe the secondary market where institutional private capital comes into the cap tables of startups and provides liquidity to founders, angels, and early stage investors is the next big thing for liquidity in the startup business and I am pleased to see that market continue to develop nicely.
So I don't think the "crash of 2:45pm" as our friends from StockTwits are calling it matters much to those of us working in the world of startups, but it may be indicative of things to come (as markets tend to be) and it is worth figuring that part out.
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Yesterday's WSJ had an interesting piece about Alacra's new Pulse Pro offering. For those that don't know, I invested in Alacra in 1999 via Flatiron Partners and have been on its board ever since.
Alacra has been developing and selling information services to the banking, brokerage, accounting, and consulting businesses for almost 15 years. They use the web, sophisticated data aggregation, filtering, and packaging approaches to deliver powerful information products to the most demanding knowledge professionals in the world.
And so their take on social media is worth looking at. Their Pulse product starts with media available on the open web, from blogs to news articles, and then applies a set of filters to produce useful insights. As they explained to the WSJ:
Alacra's PulsePro tries to tackle the issue in several ways. First, it only looks at blogs the company deems credible. The blogs are combined with articles from traditional media companies for a total of about 3,000 sources. Rather than trying to codify all the text within each source, it focuses on specific items such as quotes from well-reputed Street analysts and C-level executives. Sentiment ratings are assigned based on the language used.
What's interesting is this data set apparently is producing enough signal that wall street traders are using it to predict stock price movements. More from the WSJ:
Through backtesting, Alacra has found the ratings generated by its product can lead movements in stock prices by about one to three weeks for large-capitalization stocks. In turn, hedge funds and proprietary traders are interested in the feed despite that it won't work anywhere near the lightning-fast speeds they've been achieving for much of their other computer-based trading.
Alacra Pulse is available as a feed for those who want to run it through proprietary algorithms. It's also available as web service for us mortals. And its available as a free 30 day trial for everyone. So check it out and see if you can use it to find signal from what we all know is a noisy world out there.
I posted about our portfolio company Tracked.com a few weeks ago. In that post, I said:
Tracked.com is social. Users have a profile in the service and can send messages to each other in the service (and via twitter and facebook very shortly). Objects in the service (news, quotes, charts, public filings, companies, people) can be sent around like links in twitter and facebook.
That "very shortly" is now. Tracked released a bunch of social features last night which are live on the website.
Here are the ones I think are important to talk about:
All news items have a share link on them now. Here's the comScore recent news list. Note the share icons on the far right.
When you share a story in the service, you have the option to share it only inside Tracked or with Twitter (and Facebook soon). Here's the UI for that. Send to Twitter is not checked by default and you need to connect to twitter via ouath in the Tracked settings to get this functionality.
I used this feature this morning to share a story about our portfolio company Zynga. Here's the tweet:
You'll note that there are two bit.ly links in that tweet. The first is to the Business Week story I tweeted out. The second is to the conversation page in Tracked about the share which looks like this:
And of course, all of this activity shows up in your Tracked news feed:
One additional neat feature is you can send a tweet to @tracked that will get posted to your Tracked profile messages. I did that just now and it works great.
So that's the gist of how this stuff works. I'd love everyone who is interested in this stuff to give it a spin and let me know what you think.
And to remind all of you about Tracked and what it is all about, I've put up a new widget on the upper right sidebar. This Tracked widget shows the companies and people I am tracking and if there are any new stories on them. You can click on the company or person's name and stay in the widget or you can click on the number of stories and be taken to Tracked.com in a new browser tab. I'd also like to know what you think of the widget.
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