Disqus - Latest Comments for dfriedman

Re: The challenge of being Google

dfriedman — Sun, 14 Nov 2010 16:19:06 -0000

Right, understood. But one would think management would want to create faster growing small companies as opposed to slower growing large companies. Of course in many ways the latter is more riskier than the former.

Re: The challenge of being Google

dfriedman — Sun, 14 Nov 2010 14:12:50 -0000

Roger, very interesting points about growth and diversification. One thing that I never understood about Microsoft was why it spurned Justice's offer back in the mid-90s to split itself into three companies. Ignore for a moment the legal question of whether they should have been forced to or not. The end result would have been three much smaller, more competitive firms (as I recall, it would be the Windows OS, applications, and media/entertainment). But, instead, Microsoft chose to stay together. I think company managements of high-growth companies get inured to the notion that they're the biggest and the best and ignore the problems of scale that you refer to in your post. For Google to enter into a new business and have that business add meaningful value to its enterprise value requires that the new business generate billions in revenue almost immediately.

Berkshire Hathaway has the same problem. Among many other companies.

Re: How Come All My Browsers Suddenly Suck? - Science and Tech - The Atlantic

dfriedman — Fri, 03 Sep 2010 11:55:52 -0000

I use Firefox on Windows 7 64-bit and never have this issue. Now let me sit back and watch the Windows vs. Mac sniping.

How much RAM do you have? What version of your OS do you have? What other applications do you have open?

Re: The Quest for Publisher Empowerment

dfriedman — Thu, 05 Aug 2010 10:06:59 -0000

FYI, McKinsey has a report out about big data that you may be interested in: http://www.mckinseyquarterl...

Re: The Good Investor

dfriedman — Sun, 01 Aug 2010 11:52:12 -0000

Very interesting and insightful commentary. I especially like the first point.

Re: From Angel Investor to Venture Investor: A Process

dfriedman — Tue, 29 Jun 2010 09:21:15 -0000

Fascinating thoughts.

Good luck with the new venture.

Re: The Econoblogger's Dilemma - Business - The Atlantic

dfriedman — Mon, 15 Mar 2010 16:54:58 -0000

Reebok Sports Club: http://www.mpsportsclub.com...

Re: It’s time to end the FASB (and shake up the SEC)

dfriedman — Mon, 15 Mar 2010 10:45:44 -0000

Excellent points. I wish more people would acknowledge the role of government and other regulatory bodies in the financial meltdown. People respond to the rules under which they operate. If those rules say that off-balance-sheet financing is a way to remove debt from the balance sheet, and therefore improve financial ratios, most people will take advantage of that. Why so much attention is paid to the people selling subprime mortgages and so little attention is paid to the regulatory agencies and their political interests, is beyond me.

People seem to assume that government is beyond the pale. History does not bear that out.

Re: FRC's Exchange Fund: VCs are from Mars, Traders are from Venus

dfriedman — Sat, 30 Jan 2010 16:52:50 -0000

"Words like "share in the upside" and "diversification" are not words with which I am familiar when it comes to the heads of my teams."

I'll grant you that the heads of desks in Wall St. firms don't do much with diversification; nonetheless it is disingenuous for a former financier to claim that he is not familiar with the concept of diversification. As to "share in the upside": what do you think all the traders and investment bankers and portfolio managers have been doing with Greenspan's and Bernanke's easy credit policies of the past 20 years? They've been sharing in the upside of a bullish market.

Re: Vertical Integration in a Rapid World

dfriedman — Mon, 30 Nov 2009 17:41:32 -0000

Well, the easy explanation as to why companies like, say, HP, embrace both a consulting business and a computer manufacturing business is that the market in which they originally competed is only so large and only grows at a given rate, and, if they want to increase their market cap (by increasing their stock price over time, adjusted for splits) they need to find new revenue streams.

Company managements are just following the imperative that the public markets foist upon them: grow over time (top line growth is important no matter what) or activist investors will attack you for not "delivering value" to those poor, beleaguered shareholders.

So, while it's useful to look to the past to try to figure out what will happen to so-called vertically integrated companies, you also have to keep in mind that the management of a publicly traded company often has no choice but to pursue other avenues of revenue growth. Else they will lose their jobs in a LBO or other maneuver.

Re: Information Arbitrage: Rethinking The Wall Street Business Model (Part 1)

dfriedman — Sat, 21 Nov 2009 17:42:43 -0000

All very interesting thoughts.

My two cents:

(1) Financial firms need to simplify their businesses. Well, all large companies need to simplify their businesses as no large company is presently simple enough for even an educated person to fully parse.

(2) Pay securities markets regulators market clearing rates so that highly qualified people are interested in these jobs. In practice this would mean paying securities markets regulators several multiples of the president's $400,000 annual salary, a concept which is currently forbidden under the rubric that no government employee ought to earn more than the president. Securities market regulators ought to be exempt from this.

(3) Value-at-risk is a stupid risk measurement tool. All risk measurement or cost of capital tools which assume a normal distribution of asset returns (hello, CAPM!) are stupid because, well, asset returns are not normally distributed (see last fall's volatility).

(4) Revisit the Basel accords and determine if we really understand how risky various forms of capital are as compared to others.

Re: Information Arbitrage: Deal With It, Mr. Einhorn

dfriedman — Sun, 08 Nov 2009 18:14:04 -0000

Let me play devil's advocate. Or, more accurately, let me pick up a point that Yves Smith made: equity markets functioned fine prior to the advent of credit default swaps. What has changed since their advent that makes them such a vital component of the financial world?

You argue that they provide a warning system for the stock market, and perhaps that is true. But, again, why did equity markets function well before CDSs came along and what has changed since then to necessitate them?

I tend to agree that outright bans of stuff, whatever it is that is being banned, generally is not a good idea.

Re: Information Arbitrage: Barking Up the Wrong Tree

dfriedman — Sun, 08 Nov 2009 18:07:56 -0000

Agreed!

Re: Information Arbitrage: Barking Up the Wrong Tree

dfriedman — Sat, 07 Nov 2009 10:08:55 -0000

"the entrails of $JPM's filings" is an interesting way to put it. I was at a luncheon yesterday hosted by the Cato Institute, during which one of the speakers touched on the notion of "systemic risk." His point was that banks have become so complicated, diffuse, and amorphous that any concept of "systemic risk" has been rendered meaningless in the popular imagination.

In other words, when banks have become so large and so complicated that no one can really understand them, the scare words "systemic risks" replaces sophisticated analysis, and all politicians have to do is utter those two words.

Re: Information Arbitrage: Fixing Wall Street? The Feds Blew It.

dfriedman — Mon, 03 Aug 2009 12:04:12 -0000

Well, idealism has its place. Else there would be neither entreprenuers nor revolutionaries. But when the trade has government bureaucrats on one side and well-compensated an -educated people on the other, government always loses.

The remedy is simple: pay government finance ministers and their staff a market-clearing rate. This is poltically unfeasible, however.

Re: Information Arbitrage: Fixing Wall Street? The Feds Blew It.

dfriedman — Mon, 03 Aug 2009 11:09:05 -0000

One of the problems is that the government is staffed with bureaucrats using taxpayer dollars, which bureaucrats don't stabs to earn a hefty bonus if their side of a trade is profitable. Or, more concisely: the government has no incentive to seek profit, even if its nominal beneficiaries, the US taxpayer, deserve to do so.

On the other side of the trade, the bank employees stand to make very large (relative to average incomes in the US, even if curbs are put in place) bonuses if their trades are profitable.

One party has no incentive to price a trade well, and the other has a lot of incentive. These misaligned incentives screw over tHe taxpayers. Until this misalignment is remedied, and I don't think it ever will be, the government will continue to subsidize the banks' profits with cheap taxpayer dollars.

Re: Information Arbitrage: Fixing Wall Street? The Feds Blew It.

dfriedman — Mon, 03 Aug 2009 07:24:00 -0000

The market is up because on net there have been more buyers than there have been sellers. Presumably, "the market" believes that, whatever the regulatory issues facing Wall St., the rest of the economy is not in a tailspin.

Of course that could be proven to be a bad assumption if another big bank implodes.

Re: Information Arbitrage: Re-designing the Wall Street Trader Compensation Model

dfriedman — Sun, 26 Jul 2009 16:06:28 -0000

Well, that's a fair question. I just looked in their 2008 annual report and don't see any mention of his name.

But, realistically, how many shareholders of Citi (or any other stock) look at the annual report or quarterly report, let alone more obscure SEC filings? My guess is very few.

In any event, I think your larger point about the sanctity of contracts is an important one. But I also agree that compensation schemes need to be rethought.

Re: Information Arbitrage: Re-designing the Wall Street Trader Compensation Model

dfriedman — Sun, 26 Jul 2009 15:47:06 -0000

I don't disagree with you about the sanctity of contracts but it is overreaching to say that Citi shareholders know about Philbro, its star trader, the size of his contract, or even that they have "benefited handsomely" from his skill.

You give shareholders of companies too much credit when you assume that they have this much knowledge about their investment's internal operations. I can tell you from having worked at Citi that there are employees who have worked there for 20 years who have never heard of Philbro.

Re: Information Arbitrage: Why I'm Not Blogging

dfriedman — Mon, 15 Jun 2009 11:15:04 -0000

Sorry to hear that you're not blogging much anymore. I've always enjoyed your posts. I feel the same way, though: it's a lot of work to come up with a meaningful blog post.

Re: Information Arbitrage: Twitter is our id, Facebook is our Ego

dfriedman — Wed, 20 May 2009 09:04:50 -0000

Given that Freud's entire corpus has been discredited, and that id is only useful as a somewhat obscure Scrabble word, I don't buy it. It's too coincidental and superficial a connection. There are many people who have Facebook accounts but do little to establish an identity there. Are you really claiming that those people are without ego?

A more accurate distinction between the two is this: Twitter demands concision and Facebook allows, but does not require, flippancy, sarcasm and joie de vivre.

Re: Information Arbitrage: Twitter = Discovery

dfriedman — Mon, 18 May 2009 20:45:42 -0000

You make some interesting points about how important it is to find interesting things on Twitter.

My intuition is that Twitter is a valuable tool, because many people who I think are smart, think it is valuable.

(This is a pretty useful heuristic to apply in all areas of your life: if people you think are smart look favorably upon something, it is likely worth your time to investigate it.)

The problem I've had with Twitter thus far, and why I haven't really used it much, is along the lines of what you outline here: I understand that it is useful but I don't know how to make it work for me. Presumably that is what you are referring to by apps running on top of Twitter.

Re: The Illiquidity Premium

dfriedman — Fri, 08 May 2009 07:47:12 -0000

"It is very hard to wrap your head around what illiquidity really means until you experience it first hand. Then you know its a very undesirable feature for an investor."

This doesn't make sense to me; most people are familiar with real estate and its illiquid nature. In fact, your entire post is a great example of why most people should NOT buy real estate (or invest in venture capital funds). It is interesting that, on the one hand, in the case of real estate, the government provides a set of perverse incentives for people to enter into an illiquid investment, and, on the other hand, in the case of venture capital funds, the government doesn't provide any incentive for people to invest.

Re: What Keeps Me Awake At Night: Economy Edition

dfriedman — Fri, 08 May 2009 07:29:11 -0000

Personally, and I know I risk the ire of many by even mentioning this, but I sort of look forward to this uncertainty and fear. It can only mean one thing for Manhattan real estate prices: significant long term reductions in price.

Many "investors" in Manhattan real estate will find, if they have not done so already, that they have acquired illiquid and leveraged "assets" at highly inflated prices and will find no way to dispose of them easily. Hmmm? What else does this sound like?

But then I have been predicting for years that government's idiot incentives to encourage people to buy real estate, be it a multi-million dollar co-op on Fifth Avenue or a tract home in Dubuque, is a recipe for disaster. Distorted markets and incentives and all that.

So, yes, in a perverse way, I do welcome the seeds of uncertainty and fear that Obama and his team of incompetents have sown. Just desserts and all for a citizenry choking on its own debt.

Re: On a Crash Course With the Rule of Law

dfriedman — Mon, 04 May 2009 02:25:52 -0000

The reason that the carmakers have been treated worse than the banks by the Federal government is that there are more wealthier people on Park Avenue, Greenwich and Silicon Valley than there are in Grosse Pointe, and many of those wealthy people are big donors to politicians and need their capital markets to function well, in order that they can continue to be wealthy.

Continued wealth is a boon for politicians who rake in the grateful cash.

Employees of the car companies, whether management or hourly, are not as sympathetic to politicians outside the industrial midwest because, though many of them are middle class, they are not wealthy enough to have sufficient pull with politicians. Further, there is a large contingent of Democrats who are hostile to the auto industry (environmentalists, etc.)

Say what you want about the financiers, and a lot can be said, but, frankly, they bring far more to the (political) table than do the automakers and their recalcitrant unions and incompetent management. (Insert obvious snark here about recalcitrant bankers and incompetent management; from the perspective of politicians, bankers are still more sympathetic than autoworkers.)

As I have commented here many times before, politicians will do that which gives them the greatest shot at being re-elected (see Arlen Specter's recent conversion to Democrat.)

So, even if we argue until we're blue in the face that the bankers should have been screwed over as greatly as the auto workers have (it's not entirely clear to me that's the case), arguing such is all for naught: government money flows to those who have the power and influence to continue politicians' careers.