Author Archive

What comes next?

November 26, 2008

I’ll go out on a limb and say that common sense should have steered the (reputable) likes of Citi, AIG and Merrill down a different path of less exposure to defaulting assets. Same for Standard and Poor’s, Moody’s, and Fitch, whose ratings models declared packaged tranches of toxic sub-prime mortgages to be practically risk free. To understand what a tremendous gaff this was, consider that Standard and Poor’s default models didn’t have parameters to model declining house prices. They modeled scenarios of only flat or increasing prices, which is idiotic for a risk model. Wall Street isn’t stupid, but they were socialized to make stupid assessments of default risk for sub-prime mortgages.

The first conclusion is TRUST NO ONE. Or at least trust very selectively. Given the dangers of herd behavior, the premium on independent thinking seems drastically higher today than it did six months ago. In fact, showing a track record for independent thinking may be a way to become “trusted selectively.”

The second conclusion is a question: what comes next? The public ownership structure that dominates our economy depends on trust: trust between big corporations, owners of those corporations, and the investment bankers that often broker the relationships between the two. But what happens (besides the market crash) when that trust evaporates?

I predict a stronger role for private capital. One manifestation of this role may be smaller privately held companies. Another possibility is the rise of enormous funds of the likes of Berkshire Hathaway that will either buy companies outright or control large chunks of them and steer management. The managers of these funds will be people to be “trusted selectively” (e.g. Buffet).

This is not the end of public ownership. But it is a strong blow. Are there other ways that private capital can sneak in play a stronger role?

Google hedge fund?

November 13, 2008

Google has announced it’s support in the fight against the flu. The premise is that it can use it’s database of user searches for “flu” or “flu symptoms” to predict outbreaks 7-10 days ahead of time, giving public health officials time to react.

However tracking the flu is just one of many valuable applications for Google’s rich databases. In fact Google provides a portal for users to download data on searched keywords through Google Trends. I recommend spending some time at this site. Here are two of many interesting graphs I found:

googletrends1

It’s interesting that Google has released this data, which likely has proprietary value. Rather than forecasting flu outbreaks or enabling my election analysis, Google could forecast consumer trends and trade stocks based on the findings, hoping to profit when the flu hits. Consider Google’s initiative to predict flu outbreaks 7-10 days ahead of time; what if Google kept their data secret and traded drug companies based on the findings. Before you shoot down this investment idea, consider that there are hundreds of similar ideas lurking in the Google data – some are certainly viable as investment theses.

Alternatively, if Google didn’t want to run a hedge fund, they could probably sell their search engine data to those who do. I’m guessing it’s worth a lot of money, even on the scale of their ~$5B in yearly earnings.

So why does Google give up this info for free? It may be because using it for proprietary profit would incite public outcry and contradict Google’s credo of free information. It also may be that Google does plan to use it – they’re just waiting for the right time. They control the terms on which they release the data and could control the most valuable and timely nuggets for themselves.

No matter the case, this is a gray frontier for Google between their fiduciary profit motive and their avowed sense of public good. Sound familiar?

Business lessons from Obama

October 30, 2008

Conservative NYT columnist David Brooks has nice analysis about Obama’s debate style:

When Bob Schieffer asked him tough questions during the debate Wednesday night, he would step back and describe the broader situation. When John McCain would hit him with some critique — even about fetuses being left to die on a table — he would smile in amusement at the political game they were playing. At every challenging moment, his instinct was to self-remove and establish an observer’s perspective.

Given all Obama has faced from Clinton and McCain, defensiveness could have poisoned his presidential chances. In response to McCain’s attacking debate style, Obama could have produced anger or indignace, simultaeniously lowering his stature and obscuring his core messages. Instead, detatchment, serenity, and presidential stature.

In business, defensiveness can be similarly toxic. In a recent internal meeting, I was presenting analysis on the size of the restaurant industry. My boss wasn’t convinced. “The numbers look low,” he said. But I had reasons for my numbers. I had analysis. I countered: “it surprises me that you think they are low.”

I responded defensively. All of a sudden, the focus of the conversation shifted from constructively understanding opportunities in the industry to defending my numbers as bulletproof.

There are several correct responses to my boss’s comment. “Why” would have sufficed. If I had stepped back from the situation and suppressed the defensive instinct, I could have steered the conversation in a productive direction.

The bottom line: if Obama can detatch – to his advantage – from the mudslinging and personal attacks, we can rise above the much milder criticism we face on a daily basis. Passion can be useful to inspire, but keeping cool is the right response in 99% of situations.

Interesting business model

October 22, 2008

The World Confederation of Business (WORLDCOB) presents The Bizz Award to leading businesses worldwide for various categories of global business excellence. The award looks sexy and accepting entails “walking down the red carpet” to receive a statue that is uncannily similar to an Oscar.  How curious though that…

  1. A comprehensive list of recipients of the award is guarded on WORLDCOB’s website for “members only”
  2. WORLDCOB discloses no information regarding their sources of revenue
  3. WORLDCOB also offers “Corporate Image Advising”

A friend who runs a medium-sized business in Costa Rica was contacted and offered “nomination” for the Bizz Award. He turned it down because he didn’t know who they were, why they were contacting him, or by what criteria he was nominated. He also guessed that accepting would eventually require paying a big chunk of change and was probably in essence an (ineffectual) publicity stunt more than a legitimate award.

A couple of lessons:

  1. If you’re offered an award, be careful about who is giving it and what it means
  2. If you’re in a position to offer an award, consider the benefits of offering it and how to make it most meaningful for recipients

p.s. CFO Magazine named Andy Fastow “CFO of the year” just before the Enron debacle. Fastow is now in prison for stealing from shareholders. This just proves that even legitimate magazines can misttep with awards

Bathroom entrepreneurship

August 30, 2008

Low hanging fruit in the bathroom:

  1. Toilet paper holders (the metal kind with spring inside) should be designed not come apart in if mishandled (they should be all one piece)
  2. Flush petals would make more sense than handles, especially considering the activity immediately preceding flush
  3. Event venues should design larger bathroom space for women than men given typical lines
  4. And of course, all urinals should have a target, for diversion and cleanliness!

Marketing – myths of origin

August 25, 2008

If they brought it from elsewhere, it must be good. Consider:

  1. Häagen-Dazs is owned by General Mills and the name was made up to make Americans think it was Scandinavian
  2. London Consulting Group is a firm based in Monterrey, Mexico, with operations all over Latin America – but an English motto (“Get more from your business!”)
  3. Bavaria is a Costa Rican beer distributed in Costa Rica
  4. Cerveza Polar is a Venezuelan beer distributed in Venezuela – with a Polar Bear printed on the label
  5. Fiji water… well okay, that actually comes from Fiji islands, but they have H2O in delicious form in Vermont for God sakes; also in less glamorous locations like… Minnesota

I agree with Phil that the local food craze is a bit screwy, but it’s not more irrational than many other powerful marketing influences – such as the foreign food craze.

Chicken please

August 10, 2008

My liberal Boston high school used to hold an annual Oxfam “hunger banquet” to raise money and awareness for world hunger. Everyone in the school would draw a ticket to determine which meal they got:

  1. 15% get a normal cafeteria meal
  2. 35% get rice with a bit of gravy or beans
  3. 50% get a small portion of rice

Perhaps it’s time for Oxfam to change the game to reflect a changing world. Today’s middle class constitutes 30% of the world population, and that figure will rise to 52% by 2020 (see FP article). The growth will come in large part from developing countries (China, India).

This is great news for poor people, but also means increases in commodity prices (fixed supply on earth, rising demand). In addition, I can think of several big-picture economic implications:

  1. American hegemony will slowly recede as populations in other countries have increased access to education and military resources
  2. The new economic winners will no longer be those who use technology developed in rich nations to exploit natural resources or labor in poor nations (as during colonization, oil exploration, banana plantations, etc)
  3. The new economic winners will invent or apply technologies allowing fixed natural resources to meet growing consumer demand or otherwise increasing efficiency in peoples’ lives

The last of these suggests we should pay more attention to the Hand’s tech expert (here here here).

LinkedOut

July 27, 2008

While Phil thinks Google beats Facebook (and I agree), I think Facebook beats LinkedIn.

It’s worth giving voice to the LinkedIn believers. They argue that Facebook’s distractions (photos, relationship status, wall comments, etc) make it unsuitable for business networking. The stripped down LinkedIn, then, offers more value in a business setting.

However they are thinking about on-line networking as if it were classified advertising: I want a 1998 Toyota Corolla priced near $10,000; or I want a 12-month lease on a two bedroom in the East Village of Manhattan; or I want a contact in JPM Sales and Trading who knows one of my friends. No frills needed, just show me the info.

No! Internet social networking should not focus on allowing people to “map out” webs of unknown people, like classifieds allow people to map out buyers and sellers. This is not a valuable service.

Internet social networking should focus on content about friends’ or acquaintances’ lives, such as photos, geographical location, current personal and professional activities, associations with groups, etc. Facebook provides these tools to allow people to stay in touch. It is entertaining because you are learning more about your friends’ lives. It is valuable because it facilitates quality real world interactions (and real world introductions too!).

Phil thinks that you will eventually be able to use the web to identify new people to meet in the real world(here and here). However with the exception of on-line dating, I have my doubts. The internet a much stronger tool for staying in touch. Leave meeting new people to the real world.

Tocumen International Airport, terminal 2

July 23, 2008

Tocumen International in Panama City is a hub for travel between Central and South America. I had the pleasure of spending several hours there on a lay-over with hundreds of fellow passengers.

Some statistics:

  1. Number of gates: 28
  2. Percentage of passengers speaking Spanish: >90%
  3. Percentage of attractive women wearing tight clothing: just right
  4. Percentage of unattractive women wearing tight clothing: too much for comfort but enough to make it interesting
  5. Number of electronics stores: 5, all mobbed
  6. Number of stores selling alcohol and perfume: 4
  7. Number of extremely lucrative Lacoste stores: 1
  8. Number of news stands and book stores: 0 (can’t explain this one: may have to do with exclusivity deals signed by other airport retailers)

Tocumen International is one environment to see Latin America’s wealthy interact.

What makes a city grow?

July 19, 2008

The city

  1. The city, of 1.2 million people, is on the coast and has ports
  2. The city’s rich colonial history, distinct local culture, and Caribbean climate are ideal for tourism
  3. The city is 70 miles from another key industrial city

The country

  1. The country suffers a reputation for killings and kidnappings due to many years of violent drug wars and guerrilla insurgencies
  2. In the recent past, traveling between major cities at night was dangerous, causing a reliance on planes for travel and transport
  3. Recently, the country has become much safer and the guerrillas are nearly defeated

The world

  1. The price of oil is sky high, favoring land and sea transport over air transport
  2. A real estate crisis and shaking equity markets in the United States and Europe are pushing capital into new markets
  3. Economic power is shifting from first to third world

As this country’s reputation catches up to advances in its security, tourism in this city will boom. International investors are already driving up real estate, and the trend will continue. The city’s ports will swell and require expansion. New local wealth will find local consumption and investment opportunities.

The city is Cartagena, Colombia, which is taking off. You can feel energy in the air. Question: if you foresee this growth, how can you invest?

Why will there be blood?

July 10, 2008

There Will Be Blood, an expose of the early 20th century American oil industry, follows an oil entrepreneur who learns drilling technology and travels the country, buying land from local communities to harvest oil. One theme in the movie is the inevitability of violence, caused both by the unsafe drilling operations and the increasingly hostile relationship between the savvy driller and the rural community in California.

I’m not an American historian, but I can believe that violence was an integral part of early American oil exploration. There are plenty of historical and semi-fictional examples of violence surrounding oil, such as: recent history of Iraq, Syriana, Blood Diamond (diamonds and oil are similar), and lesser publicized events such as conflict amongst Ecuadorian Indians.

So it is intuitive that There Will Be Blood. But Why Will There Be Blood?

What does the econ 101 model say? Everyone should be better off with the discovery of oil: the community gains and controls a valuable resource; the entrepreneur has another application for his technology. Win win.

Here are some reasons for the violence (I think all of these boil down to each side believing they should get a larger portion of the pie):

  1. Asymmetrical information: the driller knows much more than the local community about how much a field may be worth, how much environmental damage drilling will cause, how to write contracts to avoid responsibility, etc
  2. Asymmetrical power: the driller has much more technology, worldliness, and prowess than the local community, and can exercise that power to its advantage in a way that often results in violence; see Guns Germs and Steel; see Spanish General Pizarro meets Inca ruler Atahualpa
  3. Uncertainty: in environments of uncertainty (specifically, how much oil, how much environmental damage, who profits) it is always easier to justify your own actions (I took on risk!) or claim you have been cheated (they promised me something and didn’t deliver); violence ensues

In addition to these reasons, conflict can also arise when the government controls the land and doesn’t represent the people who live on it.

Are there other reasons for the violence surrounding oil? Why does the media paint an ugly picture of oilmen (e.g. Syriana) but a more friendly one, say, of wealthy tech gurus, or even (gasp) hedge fund managers?

Buddhist consulting

June 30, 2008

“In the beginner’s mind there are many possibilities, but in the expert’s there are few.”

Beginner’s mind is a concept in Buddhism representing openness or lack of preconception. Simplifying the mental state allows for a clearer picture of reality. In many disciplines, we try to “advance” to higher and higher levels of learning, ability, or complexity. In Buddhism, beginner’s mind is a reminder to focus on the basics. The equivalent in a mathematics class would be to meditate on 1+1=2. Forget the Pythagorean theorem or differentials: do you really know 1+1?

The best consultants channel the power of beginner’s mind because they choose:

  • Capacity to learn over veneer of expertise
  • “Basic” experience of the client over “advanced” modelling
  • Simple solutions over complicated engineering

Most importantly, beginner’s mind reminds us to stay humble. Consultants can do great things only by listening and harnessing latent power of their clients. The smartest analysis is useless if it stays on PowerPoint slides, disconnected from execution.

I suspect that successful people in every field draw advantages from spiritual practices. More examples?

Good old boys in good old (Latin) America

June 25, 2008

Here’s another reason you know you’re in Central America: good old boys. I suspect that American business was dominated thirty years ago by “good old boys.” George Bush is the perfect example. He joined clubs like Andover and Yale and Skull and Bones because his father did. He enjoyed immediate business prominence (if not success) because of his connections and swagger, not because of analytical ability.

A quick glance at an incoming McKinsey class reveals that times have changed, with Bush’s elite cool exchanged for a distinctly middle-class (but not for long!) ambitiousness. Impeccably prepared and overwhelmingly dorky, the new American super-successes are represented by Bill Gates and Mark Zuckerburg, not new generations of Rockefeller. No Bush will be president from our generation.

Meanwhile Zuckerburg still flounders in Latin America. His brain needs more brawn; he needs connections and a BMW when he turns eighteen; he needs to know the right people and have the cool to get them to join his website; he needs social value and it’s not going to come from anticipating trends in global social networking.

Fifty years down the road, expect to see some convergence to a more technocratic business environment. But for now, good old boys dominate in good old (Latin) America.

Economy (mis)meaured

June 18, 2008

I must admit that I myself fell into the trap several months ago, on my way to Nicaragua: “I’m visiting the poorest country in Latin America.” By GDP per capita, my statement was true (excluding Haiti from Latin America): Nicaragua has just $1,004 per capita GDP, or just $2.70 per person, per day! In comparison, the lucky bastards in Honduras ($4.54) or Guatemala ($7.26) are rolling in dough. Who knows what the Guatemalans do with the extra $4.51.

My belief in Nicaragua’s poverty was easily reassured when I arrived at my new office in Costa Rica, where everyone seems to know that Nicaragua is the poorest country in Central America. My coworkers spend all day researching Central American economies, and they would certainly know.

So naturally I was surprised to find that by many standards of “development,” Nicaragua ranks ahead of Honduras and Guatemala. Nicaragua has higher life expectancy at birth and lower under-five mortality rates. It also beats Guatemala in literacy by 8 percentage points. The UN’s composite Human Development Index ranks Nicaragua ahead of both Guatemala and Honduras in overall development.

But what about $2.70 vs. $7.26?! It’s amazing how much we can read into these little numbers and create incredible stories around them as if they summed up countries. Poorest country in Latin America. We may say that without any regard for income distribution, food availability, education standards, social mobility, and a number of other characteristics that determine people’s opportunity in life.

In fact, GDP completely misses one of the most important characteristics of the economy, specifically how well a country focuses its resources and productive activity to benefit its people. A quick example: the United States spent $5,711 (per capita) on health care in 2003 compared to $2,317 for Great Brittain. These figures are essentially per capita GDP in health care. Should we celebrate our high health care GDP? No! The object of health care is good health, not high bills. Our health care system is broken, and the high cost is a reflection.

So spread the good news (or bad if you live in Guatemala): By many measures, Nicaragua is not as screwed.

How do you know you’re in Central America?

June 2, 2008

I’m settling in to a new life in Costa Rica (accounting for, but not excusing my blogging neglect). Costa Rica and Nicaragua are very different countries, and yet my life in each is strikingly similar:

  1. Daily life doesn’t feel “underdeveloped”
  2. It is not a world away from “everything else”
  3. It feels eerily similar to my prior life in yuppie NYC

How is this possible? It is because the world is grooved.

Let me give you more details. I work in a fancy office with advanced temperature control and classy art. I don’t live in a shack but a nice house with roommates. The “locals” I work with speak very faintly accented English and most have at least one family name (out of two) that sounds American, German, Eastern European, Italian, or otherwise not Spanish. The office is international and overwhelmingly white. My new friends and colleagues are fun, educated, generous, and considerate: I like these people. Everyone is well traveled and lists traveling as an “interest” on Facebook. Everyone watches Youtube while they pretend to work.

So how do I know I’m not in New York? I see it in subtle differences.

Bottles at the club cost a lot less than at Crowbar. No one does dishes – at home, in the office, anywhere. Someone else does that. The one guy with all Spanish family names lets you in on a secret: he is a direct descendant of Juan Vázquez de Coronado. No one walks – you’re almost not allowed, and the public bus… hahaha that’s funny. There are no sidewalks, which seems natural because no one you know walks. When you’re driving you try not to hit the people walking on the street but you’re not sure who these people are because they don’t look like the people you know (whom you’ve never seen walking).

Most of these differences (but not all of them) point to a more stratified society, which Central America certainly is. What I found interesting was the ease with which I could (with my new friends) sit atop that stratification and live fairly similar to a young, liberal American in New York, looking down at the other stratas (e.g. developing countries) yet being insulated in a much smaller world.

4,000 miles from all I knew in New York, the world feels close. When I see those people walking on the street, I’m sometimes reminded of great distances, glimpses lasting for one brief second.