Share buybacks: Big cos say "We don't know what to do with the cash anyway!" and why it's good for startups.

Stock buybacks are the biggest force influencing equities since 2009 — over $2 trillion have been done.

Some are probably good, but many aren't. In 2011, Warren Buffet wrote about how you can tell: (via Seeking Alpha blogger Chuck Carnevale)

Charlie and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company's intrinsic business value, conservatively calculated.

Clearly a lot of buybacks fail the 2nd criteria — but there are so many boards and management teams that are compensated by EPS that the share buybacks keep happening even when the price is not a discount. A natural result when incentive structures meet personal self-interest. One blogger points out, it's actually a form of managers looting their companies. 
By using large stock buybacks to manage the short-term objectives that trigger higher compensation for themselves. By using those stock buybacks to manipulate the share price, which allows them to use inside information to time their own stock sales. By using buybacks to funnel most of the company’s profits back to shareholders (including themselves).  They use the stock market to loot their companies.
It's a claim echoed by the Atlantic in February of this year in an article called "Stock Buybacks Are Killing the American Economy." Rather than new jobs, new factories, new products, it's straight back into the financial system.

Since the companies themselves have no specific better ideas about how to use the capital to grow in real terms (e.g. real new products that drive real new revenue) all their professional managers can do is buy shares back regardless of price. In this world, buybacks are directly related to Thiel's ideas around indeterminate optimism of the markets, where companies are encouraged to be as profitable as possible.

Who cares if you're buying back at a ridiculous price? We don't know what to do with the cash anyway. 

This is interesting because a traditional criticism of whether we're in a bubble is whether P/E ratios are high or low. The E part is Earnings Per Share, and so if managers manipulate the denominator for both P/E and EPS, they can make it seem like things are fine (and get their quarterly bonus to boot!) when functionally there's little happening. 

On the bright side, the lack of innovation in traditional incumbent businesses means that startups have a chance in more arenas than ever. If big companies have management that won't take the risk of failure, and aren't hiring teams to attack new markets, then it's wide open for new players to get capital, hire people, and make these things happen. 

If buybacks are killing the economy, then startups will save it. Pretty sweet if you ask me. 

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Chart via Factset
More reading here: ValueWalk 

How Wage Slaves vs. Entrepreneurs look at money

via ribbonfarm.com

Really amazing analysis of business, interpersonal communications, and life coming out of ribbonfarm.com.

In particular, this latest piece on capital is brilliance.

My conception of money completely changed in the years and months leading up to work Posterous. The bargain when working as an employee is completely different. Its very easy to spend money like water when times are good and you've got a steady, reliable, and more than adequate. Its a renewable resource that in the moment seems to be infinite.

But if you want to make it on your own, you can't look at each dollar as something to be spent on your own happiness. That latte won't really make you happy. The only thing that may really make you happy is to be able to reinvest the money into yourself. It is, as Venkatesh points out above, building material for your dreams.

Palantir Finance releases public demo of its powerful market analysis platform

Years ago, I left a stable job at Microsoft to join some friends working on hardcore software problems in the finance space. From the ground up, it was created to be a fresh approach to the often stale and murky waters of financial software out there. Even today, the best market analysis software falls into one of the following three buckets: barely a step up from teletype terminals, an homage to the early days of Windows 2.0 dialog box hell, or homegrown one-off software mired by hopelessly bad UI.

We set out to create a v1, new-code-from-scratch product that we built and designed from the bottom up. Yesterday, Palantir released a public and usable demo of the basic elements of their advanced financial platform. You can play with it on your computer today for free.

Click here to get started or you can read more about it below.

Disclaimer: While no longer affiliated with the company, I am a shareholder. And a fan.

Starting from scratch, the most basic building block of the platform was the Chart Tool. Existing charting tools made it incredibly hard to zoom in and out, and view and compare time series all on one page.

We wanted something that could be easily added to and compared. Why was it that before this chart tool, you had to plot time series on your own in Excel in order to adjust and correct data? You couldn't look at a graph of 10 years of data at the minute-by-minute resolution. You could only zoom in and out by fixed orders of magnitude (one year, 3 years, etc). So the Chart tool was designed to be able to show all time series of any asset class over any resolution and any time period. With finance, it's all time series anyway, right? Value x at time t. Every time series should be a first-class comparable object.

From there, we realized the financial markets were so complex that there was actually a huge data exploration problem. Traders had to memorize hundreds if not thousands of ticker symbols. Isn't that what computers are for? Being able to instantly search millions of time series became a priority, so we built this -- an extremely simple instrument selector that let you search and find all financial time series of any asset class all in one time series selector.

Being programmers, we added a dot-notation concept that became really handy when trying to understand what was going on. For instance, most time series movement can be attributed to macro factors -- e.g. the whole of tech is going up or down. What if we just wanted to know when Google became anti-correlated with XLK, the Tech SPDR index. Easy. We just type GOOG.correl(XLK, 30) to get the 30 day correlation between the two time series. We could do the same for MSFT too and see it all on one subplot.

From there, it's a hop skip away from extracting time periods in which GOOG was highly correlated vs. not highly correlated. With time periods, you could start doing backtests on trading strategies. We used to joke that there should be a "Make Money" button. With tools like this, it's not that far off.

That was just a super abbreviated tour of just one or two of the hundreds of powerful features that make Palantir Finance the essential next wave in understanding the markets. Hundreds of thousands of man hours were poured into this tool, and it's awesome to see it functioning on my own computer once again -- though I'm certain only a rare few lines of my early prototype code are still in there. ;-)

For a much much more complete tour of the basics of the software, see also the Joyride Tour/Tutorial. If you have any interest in economics, finance, or what the markets are doing, you should check it out while it's online.

I consider myself incredibly lucky to have been there for the birth of this software, and I can't wait to see where the Palantir guys take it next.

Mint.com is like Nielsen / Comscore for consumer spending

via techcrunch.com

Originally built as a Quicken-competitor, Mint.com just became a lot more interesting. It's a case study in having aggressive terms of service that declare company ownership over data. When you own data, you can do a lot more than just provide a service to a web consumer.

Like make aggregate graphs like the above. Mint has direct access to the realtime spending habits of all their users. As such, they are able to forecast consumer spending *AND* revenues of large public companies sooner than everyone else. It's almost like insider trading. They will have information nobody else has access to. If you see Mint CEO Aaron Patzer making a killing on the stock market, I wonder if the SEC will come calling.

Mint proves that when it comes to making money with user-generated / user-provided content, opportunities can come in unexpected ways.

Washington DC needs to give Silicon Valley a break already. VC's are systemic risk? Oh hell no.

First, Sarbanes-Oxley mandated byzantine corporate bureaucracy to 'protect' investors. Then, the SEC damaged the Silicon Valley economy by forcing companies to count stock options twice, both as dilution and as expense. As a result, Silicon Valley, for decades the bright spot of the American economy, produced only one [initial public offering] in all of 2008. Now, Geithner wants to regulate venture capital firms to protect us some more. It's like watching children deface an economic work of art.

--TJ Rodgers, CEO of Cypress Semi via online.wsj.com

OK, lets get this straight.

Enron and Worldcom destroy trust in corporations and line their pockets along the way, and tech pays the price. Sarbanes-Oxley took cash directly out of the pockets of almost every tech entrepreneur out there, burned most of it, and gave the rest to accounting firm and auditors.

High flying masters of the universe on Wall Street use their quant models to yet again fleece the American public, and now tech is going to suffer yet more heavy handed regulation when DC puts a choke-hold on access to life-giving venture capital?

I was never a libertarian, but I'm certainly coming around.

Get an MBA and acquire the healthy level of narcissism that is necessary to become a leader

What do you get from an MBA? One recent study found that MBAs acquire an enormous amount of self-confidence during their graduate education. They learn to believe that they are the best and the brightest.

This narcissism has a real career impact. Psychologists at Ohio State University studied the behavior of 153 MBA students, who were put in groups of four and asked to orchestrate a large financial transaction on behalf of an imaginary company. The psychologists observed that the students who had the strongest narcissistic traits were most likely to emerge as leaders.

According to Amy Brunell, the lead author, the results of the study had large implications for real-world settings, because “narcissistic leaders tend to have volatile and risky decision- making performance and can be ineffective and potentially destructive leaders.”

via bloomberg.com

Brutal commentary coming out of Bloomberg, considering a good chunk of their readership has come out of an MBA program at some point.

The study does validate something I've seen-- that it DOES take a level of gumption/ego/reality distortion field to rise to lead/manage within an organization or have the guts to go out and do things that change the world. Whether that change is for good or for evil probably depends on the person's motivations and the levels of unhealthy narcissism, though.

I've heard that you can trace the downturn of industry sectors by the percentage of exiting MBA grads surveyed who say they want to go into that field post-graduation. Is it a wonder that finance is suffering now after being the career of choice for decades? By the time people find out what the next hot thing is, that thing has peaked.

Another big 'most-wanted' company by MBA grads these days? Google.

Shane Battier, basketball, statistics and unselfishness in NY Times Magazine

via nytimes.com

A must-read article by Michael Lewis for anyone interested in any of those 4 things. I'm interested in the last 3, personally. It's hard to be that interested in Shane Battier, to be honest... but that was before I read this article. Turns out he's a total badass.

I'm a total sucker for articles about moneyball, especially when it comes to basketball... and especially when it is written by the actual author of Moneyball.

EDIT: A particularly cool quote from Hacker News regarding this article just caught my eye:

I think over the next decade we're in for a huge shortage of analysts and statisticians in almost all fields of life. Availability of data is ever increasing. The benefits from using it more effectively than competitors are immense. In almost all of the startup businesses in our portfolio (venture capital firm), we've now hired number-crunching guys who do nothing but metrics and we're seeing the results.

Statistics + computers + smart people = beat your opponent, whether it's Kobe Bryant or the startup next door.

This American Life explains why the house is burning down. Er, the economy, anyway.


This American Life. Thank you Ira Glass. Wow, talk about boiling down tough material into something digestible. Otherwise incredibly dry stuff without the specter of Great Depression looming about, this 1 hour NPR audio show very prescient and well done overview of what the heck is really happening with the economy. Why are people freaking out about commercial paper? What happened on September 17th that made Wall Street go nuts? What are credit default swaps and why do they threaten to destroy the banking system?

And finally, they explain how tricky the terms of the bailout that passed really were, and how that's a good thing for us as taxpayers.

Check it out here.

Why so serious? Nate Silver of 538.com points out we're not doing so bad after all.

Housing prices are significantly off their peaks, for instance, but have still increased by roughly 20 percent since January 2000, after adjustment for inflation. And we remain wealthier now than we were at almost any other point in the past (per capita disposable income is about 18 percent higher than it was a decade ago). If the good times are never as good as they seem, neither, perhaps, are the bad ones so bad.
via esquire.com

Chill out people! Maybe the world isn't coming to an end. If anything, we are falling for recency bias, which is what got us in this ridiculous quagmire in the first place.