Four Lessons from Y-Combinator’s Fresh Approach to Innovation
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Tight windows enable “good enough” design. Most Y Combinator–funded companies are expected to release a version of their idea in less than 3 months. That tight time frame forces entrepreneurs to introduce “good enough” software packages that can then iterate in market. This approach contrasts to efforts by many companies to endlessly perfect ideas in a laboratory, only to fail the real test of being exposed to real market conditions.
Business plans are nice, not necessary. Y Combinator doesn’t obsess over whether entrepreneurs have detailed business plans. Again, the focus is getting something out in the market to drive iteration and learning. After all, if you are trying to create a market, most of the material in a business plan is assumption-based anyway.
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Y-combinator is very interesting. I have posted about them several times: Find Joy and Success in Business, Build Your Business Slowly and Without Huge Cash Requirements. Investors can learn a great deal about how to grow businesses from their model. Brains, effort, customer focus, the ability to learn and business savvy can do huge things with little cash in information technology. The opportunities are available today. Y-combinator’s support of the businesses with knowledgeable resources and education (startup school) are far more important than the money they provide.
Related: Small Business Profit and Cash Flow – Innovation Strategy – Some Good IT Business Ideas – Google and Paul Graham’s Latest Essay – MIT Launches Initiatives in Innovation and India
John Bogle was the founder of Vanguard Group and a well respected investment mind. He has written several good books including: The Little Book of Common Sense Investing, Common Sense on Mutual Funds and Bogle on Mutual Funds. This interview from 2006 discusses the state of the retirement system, before the credit crisis.
Frontline: How do they get away with that? Don’t they have to fund them?
John Bogle: No, they don’t, because a lot of it is based on assumptions. Our corporations are now assuming that future returns in their pension plan will be about 8.5 percent per year, and that’s not going to happen. The future returns in the bond market will be about 4.5 percent, and maybe if we’re lucky 7.5 percent on stocks. Call it a 6 percent return — before you deduct the cost of investing all that money, the turnover cost, the management fees. So maybe a 5 percent return is going to be possible, in my judgment, and they are estimating 8.5 percent.
Why? Because when they do it that way, corporation earnings become greatly overstated, and all the executives get nice, big bonuses. They are using pension plan assumptions as a way to manage corporate earnings and meet the expectations of Wall Street.
Frontline: So if a company overstates the value of its pension plan assets, it makes the company look better to Wall Street, so there’s an incentive to kind of exaggerate, if not cheat.
John Bogle: That is precisely correct. And let me clear on the cheating: It’s legal cheating; it’s not illegal cheating. In other words, you can change any reasonable set of numbers — and corporations have done this, have raised the pension assumption from 7 percent to 8.5 percent — and all of a sudden that corporation will report an earnings gain for the year rather than an earnings loss that they would otherwise have. Simple, legal.
The entire PBS series (from 2006) on 401(k)s (including interviews with Elizabeth Warren, David Wray and Alicia Munnell) is worth reading.
In February of 2009 he spoke to the House of Representatives committee exploring retirement security.
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Welcome to the second edition of our investing and economics carnival.
- How Does the Current Crisis Compare to the Great Depression? by Price Fishback – “How does this compare to the Great Depression? We won’t know the final outcome of this recession for a while, but I can safely say that the current situation is nowhere near as bad as the situation during the 1930’s.”
- US GDP and imports by Matt Nolan – “Now, this doesn’t actually make sense as a measure to look at. Why? Well when we measure GDP we are interested in ‘domestic production’…”
- 100th Entrepreneur Loan by John Hunter – “Participating with Kiva is a great antidote to reading about the unethical ‘leaders’ taking huge sums to run their companies into the ground (or even just taking obscene sums to maintain their company). The opportunity to give real capitalists an chance at a better life is wonderful.”
- The Best 15 Financial iPhone Apps by David Weliver – “More than a dozen great financial apps for the iPhone make tracking and managing your personal finances on the go as easy as texting. Want to enlist your iPhone to help you get richer?”
- Bolster Your Emergency Fund In A Prolonged Crisis – “To prepare for the worst, we should picture an unemployed scenario and get serious about bulking up our emergency fund to meet at least six to eight months of expenses.”
- How to make money without a job and why you should – “There are two more advantages to alternative income besides diversification of income sources. First of all is the expansion of skills… You are learning something new, and making it that much more likely that you’ll be able to add further income streams…
- Five Low-Risk Stocks For Gen Y – “There are much better alternatives for the ultra-conservative Gen Y investors than money market accounts, Treasuries and CDs. A conservative strategy focusing on high quality, low risk dividend stocks should significantly out-perform the above investments, with very little incremental long-term risk.”
- 5 easy ways to save money and the environment – “Bottled water is a huge drain on our resources and are grossly overpriced. Reusable water bottles use fewer resources, save you money… Compact fluorescent light bulbs use 25% of the energy of standard incandescent bulbs and usually last 5 years or more…”
- Text Messaging is the Biggest Scam of the 21st Century – “The cost per GB of cable internet is $0.75… the cost per GB of cell phone data $6.00… the cost per GB of text messaging data is $800…”
I decided to add this investing and economics carnival after running the Curious Cat Management Management Improvement Carnival for several years. If you like these posts you may also be interested in the Invest Reddit where a community of those interested in investing submit and rate articles and blog posts.
The 2000–2002 bear market had three, with average gains of 21 per cent in the Dow Jones Industrials over 45 days.
The granddaddy of all bear markets, 1929 –1932, had six false alarms with an average gain of 47 per cent. And Japan’s ongoing bear saw the Nikkei rise by at least a third four times in its first four years with 10 more false dawns since then.
Bear markets typically end with a whimper rather than a bang, casting doubt on the latest recovery according to Hussman Econometrics, which analysed numerous US market bottoms and bear market rallies. With the exception of the 1987 crash, the month before the lowest point of a downturn saw a gradual descent.
I don’t put much money on the line trying to time the stock market. I thought the decline was overdone and I have found some things to buy. I am not convinced the current assent of the USA market especially means the bear market is over. If I had to sell stocks, I would be much happier to do it now than 3 months ago. That said, I am not selling anything or reducing my planned buying (401k buying).
Related: Financial Markets Continue Panicky Behavior (Oct 2008) – Trying to Beat the Market – Add to Your 401(k) and IRA – see my investing portfolio results
Each year Warren Buffett and Charlie Munger answer questions in front of crowds of tens of thousands of Berkshire Hathaway shareholders in Omaha, Nebraska. The question and answer sessions provide great wisdom on economics, investing and management. Here are some of the highlights I have found from the meeting yesterday.
Buffett, Munger praise Google’s ‘moat’
Berkshire’s Buffett Calls Wells Fargo ‘Fabulous’ Bank
The stock closed at $19.61 yesterday after falling below $9 in March. Buffett said he was speaking to a class the day the shares dropped that low and told students that, at that price, “If I had to put all of my net worth into stock, that would be the stock.”
Buffett, who has said he values lenders partly on their ability to acquire funds from depositors, told shareholders today that he’d “love” to buy the entire bank and is unable to do so because Berkshire wouldn’t get permission from regulators.
But he warned that efforts such as the Treasury’s $700 billion Troubled Asset Relief Program and the $787 billion fiscal stimulus plan passed this year by Congress will have to be paid for, one way or another. And with political leaders showing little inclination to raise taxes, one sure way to pay for excess spending is to inflate the value of the currency, Buffett said. The biggest losers in a surge of inflation, he added, would include holders of bonds and other fixed-income assets.
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“Government does need to step in,” Buffett said, referring to the 6% contraction of the U.S. economy in the fourth quarter of 2008 and the first quarter of 2009.
That’s not to say he is pleased with the earmarks Congress has attached to some of the rescue legislation. Inevitably, Buffett said, when big organizations turn massive resources on a problem, “there’s a fair amount of slop.”
Related: Berkshire Hathaway Annual Meeting 2008 – Warren Buffett’s Letter to Shareholders 2009 – Great Advice from Warren Buffett – Warren Buffett’s 2004 Annual Report
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Jim Jubak’s articles not only provide specific stock picks but also offer a good view on how to analyze stocks. Reading his columns is something I would recommend for anyone interested in investing in individual stocks (in addition to reading excellent books on investing). His latest column is 5 tech stocks full of promise
Then you’d probably spend some time looking at the price trends in the market. If you did, you’d notice that technology stocks were showing relative strength by hanging above their January highs (in contrast to sectors that are fighting to get back to January highs). You’d also see from your study of the charts that Cisco shares were near resistance levels set by their 200-day moving average and their April high of about $18.50.
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None of that tells you whether the stock is reasonably priced. To figure that out, you might look at the average P/E ratio of the past five years. Because the average was 21.6, you could conclude that Cisco, at 14.1, was undervalued, since the price in the future will climb until Cisco trades again at something like 21.6 times earnings. Or you could conclude that the lower P/E ratio was a logical reaction by investors to the company’s falling earnings. Wall Street analysts now think Cisco’s earnings will fall 23.2% in fiscal 2009 and 6.3% in fiscal 2010.
Setting a target price isn’t a science. Where your target winds up is a result of the assumptions you make going in. I like to check the range of price targets for a stock and compare that with its current price. For Cisco, the range for a 12-month target price now seems to fall between $16 and $31 a share. At a recent $18.50 or so, Cisco has been trading above the most pessimistic target, but not by a great deal. Depending on your read for the market as a whole, that means Cisco is toward the cheap end of reasonable but not a compelling buy if you think, as I do, that this rally will yield to a correction in the next month or six weeks.
Related: 12 Stocks for 10 Years (March 2009 Update) – 10 Stocks for Income Investors – Dollar Cost Averaging – Does a Declining Stock Market Worry You?
Life Insurers Profit as Retirees Fear Outliving Cash by Alexis Leondis
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Payouts among insurers vary significantly, said Weatherford of NAVA. Monthly payments range from $629 to $745 for a $100,000 investment by a 65-year-old male, according to a survey of six issuers by Hueler Companies, a Minneapolis-based data research firm and provider of an independent annuity platform.
An annuity is a comforting in that you cannot outlive your annuity payment. However, there are drawbacks also. Having a portion of retirement financing based on annuity payments does help planning. Social security payments are effectively an annuity (that also increases each year, to counter inflation). While living off social security payments alone is not an enticing prospect, as a portion of a retirement plan those payments can be valuable. If you have a pension that can also serve as an annuity.
It can make sense to put a portion of retirement assets into an annuity however I would limit the amount, myself. And the annuity payout is partially determined by current interest rates, which are very low, and those now the payout rates are low. If interest rates stay low, then you lose nothing but if interest rates increase substantially in the next several year (which is certainly possible) the payout for annuities would likely increase.
Choosing to purchase an annuity is something that should be done after careful study and only once you understand the investment options available to you. Also you need to have saved up substantial retirement saving to take advantage of the option to buy enough monthly income to contribute substantially to your retirement (so don’t forget to do that while you are working).
Related: Many Retirees Face Prospect of Outliving Savings – Spending Guidelines in Retirement – Retirement Tips from TIAA CREF – Social Security Trust Fund
William Black wrote The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L. I think he a bit off on the “owning one,” being the best way to loot. The looters are not owners, they are executives that loot from owners, taxpayers, customers… And those looters pay politicians a great deal of money to help them. He appeared on Bill Moneys Journal discussing the huge mess we know are in and how little is being done to hold those responsible for the enormous crisis created by them.
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The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn’t let that happen. So what goes wrong? After 9/11, the attacks, the Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents. So even today, again, as you say, this crisis is 1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis. There are one-fifth as many FBI agents as worked the Savings and Loan crisis.
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Well, certainly in the financial sphere, I am. I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they’re refusing to obey the law.
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In the Savings and Loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the Savings and Loan crisis, didn’t matter which party was in power, the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, “You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead you’re covering up the bank losses, because you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn’t work. You will cause your recession to continue and continue.”
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And their ideologies, which swept away regulation. So, in the example, regulation means that cheaters don’t prosper. So, instead of being bad for capitalism, it’s what saves capitalism. “Honest purveyors prosper” is what we want. And you need regulation and law enforcement to be able to do this. The tragedy of this crisis is it didn’t need to happen at all.
Related: Fed Continues Wall Street Welfare – Credit Crisis the Result of Planned Looting of the World Economy – Lobbyists Keep Tax Off Billion Dollar Private Equities Deals – Poll: 60% say Depression Likely – Canadian Banks Avoid Failures Common Elsewhere – Too Big to Fail – Why Pay Taxes or be Honest
One problem with investing in mutual funds is potential tax bills. If the fund has invested well and say bought Google at $150 and then Google was at $700 (a few years ago) there is the potential tax liability of the $550 gain per share. So if funds have been successful (which is one reason you may want to invest in them) they often have had a large potential tax liability.
With an open end mutual fund the price is calculated each day based on the net asset value, which is fair but really the true value if there is a large potential tax liability is less than if there was none. So in reality you had to believe the management would outperform enough to make up for the extra taxes that would be owed.
Well, the drastic stock market decline over the last few years has turned this upside down and many mutual funds actual have tax losses that they have realized (which can be used to offset future capital gains). Say the fund had realized capital losses of $30,000,000 last year. Then if they have capital gains of $20,000,000 next year they can use the losses from last year and will not report any taxable capital gains. And the next year the first $10,000,000 in capital gains would be not table either. Business Week, had an article on this recently – Big Losers Can Be Big Tax Shelters
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Yet it is Miller’s newer charge, Legg Mason Opportunity, which holds stocks of all sizes and can take short positions, that will prove to be the real tax haven. Morningstar pegs its losses at 285% of its $1.2 billion in assets.
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There are other funds with returns so ugly and losses so large that it may not matter what their trading style is for many years: Fidelity Select Electronics (FSELX), -539%; MFS Core Equity A, -369%; Janus Worldwide (JAWWX), -304%; Vanguard U.S. Growth (VWUSX), -227%.
How does a fund have over 100% tax losses? The way I can think of is if they have a great deal of redemptions. If the fund shrinks in size from a $3 billion fund to a $300 million fund they could have a 50% realized capital loss (down to $750 million) but then another $450 million in redemptions). Now the $300 million has a $750 million capital loss or 250%.
Related: Shorting Using Inverse Funds – Lazy Portfolio Results – Does a Declining Stock Market Worry You? – Asset Allocations Make A Big Difference
I have been running the Curious Cat Management Management Improvement Carnival for several years and decided to start one on the investing and economics theme. I hope you enjoy the inaugural edition. If you like these posts you may also be interested in the Invest Reddit where a community of those interested in investing submit and rate articles and blog posts.
- Case-Shiller: Is it Really THAT Bad? by Stan Humphries – “Unfortunately, in combining both foreclosures and non-foreclosures into a single metric, you’re not really getting a good insight into either market. In the current climate, you’re underestimating the decline in value of foreclosed homes and overestimating the decline in value of non-foreclosure homes.”
- This is unquestionably the worst global economic crisis since the 1930s by Brad Setser – “Both the IMF and World Bank are now forecasting an outright fall in global output in 2009… Anything below 2% [growth] is generally considered a global recession.”
- Value Added Tax (VAT): The Pros and Cons by Eric Stinson – “The VAT is also a consumption tax, so there is incentive for you to limit your spending. Like the Fair Tax, if you spend less than you make, you’ll pay less in taxes (all else equal).”
- Face To Face With The Deficit by Scott Bittle – “The public simply will not permit Washington to raise their taxes, change their health insurance, or cut programs without their consent. Nor should they. But the public should understand the rules, too. It’s not enough to complain about red ink and then reject any possible solution.”
- Confusing price discrimination – “Any way I think about it, the discount should either be to all consumers or to students for the entire day. Why would it be only to students in the afternoon?”
- Leave Your Money in Your Retirement Accounts by Patrick – “At this point, the best thing you can do is stick to your retirement savings and investment plans. Continue contributing to your retirement accounts, make sure your asset allocation is set at your desired level, and don’t withdraw your retirement savings.”
- Invisible Hands Explain Nothing: a response to a critic by Gavin Kennedy – “Indeed, Smith gives over 60 instances in Books I and II of Wealth Of Nations where the actions of individuals for their own ‘gain’ have less than beneficial consequences on those around them”
A couple of my posts have appeared in other carnivals recently: California Unemployment Rate Climbs to 10.5 Percent in the Money Hacks Carnival and Add to Your 401(k) and IRA in the Carnival of Personal Finance.
Related: Money Hacks Carnival #50 – Curious Cat Investing and Economics Search