Paul Wallbank – Brilliant Communications

Category: Investment

Dealing with the digital investor
Telstra’s Digital Investor report released earlier this week looked at the generational changes for the financial planning industry and the effects of technology on delivering advice and services.

At the core of the report is the projection that by 2030, 70 per cent of Australia’s financial assets will be held by the digitally savvy Generations X and Y and the advice industry is doing little to cater for this group”s media and reading habits.

This is barely surprising, financial planners are one of these fields subject to arcane rules and regulations which make practitioners extremely conservative about innovation or changing work habits, even when the new tools don’t breach any laws.

One of the nagging questions though with the report is the underlying assumptions on wealth generation over the next twenty years. Will it really follow the same pattern as we’ve seen for the last few decades?

As the Stanford Graduate School of Management notes in its dissection of the Forbes richest 400 Americans, the path to wealth is changing.

“Three of the 10 wealthiest people in the United States – Bill Gates, Larry Ellison, and Michael Bloomberg – built their fortunes on information technology that barely existed in the 1980s,” says the author Joshua Rauth.

It may well be that the financial planning industry’s core assumptions, of a large, stable middle class workforce steadily squirreling away a nest egg is going to be challenged in an economy undergoing massive change.

Another generational aspect in the Digital Investor report is the handing down of family owned enterprises. The paper quotes social analyst Mark McCrindle saying “Succession planning is already a key issue (for SMEs) – yet by 2020 40% (145, 786) of today’s managers in family and small businesses will have reached retirement age. We are heading towards the biggest leadership succession ever.”

As this blog has described before, many of the current generation of small business owners will never pass their operation on. Their barber shops, car dealerships and factories will retire or die with the proprietor as Gen X and Y entrepreneurs can’t afford to buy the business and the owner can’t afford to retire.

The investment climate of the next quarter century will be very different from the last fifty years as will the business models and the paths to wealth. It’s something that shouldn’t be understated when considering how Generation X and Y will manage their finances.

Despite the weaknesses, the Telstra Digital Investor report is an interesting insight into how one industry is failing to identify and act upon the fundamental changes that are happening in its marketplace.

The financial planning industry isn’t the only sector challenged though and that makes the report good reading for any business trying to understand how marketplaces are changing.

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August 1, 2013
What happened to the not so nifty fifty?
One of the must read investment blogs is John Mauldin’s weekly Thoughts From the Frontline. This week’s post is a particularly compelling guest post from tech investor Andy Kessler.

Kessler’s post is the forward to George Gilder’s book Knowledge and Power and in describing his investment journey Kessler mentions the 1970s Wall Street view of investing in Nifty Fifty, the fifty biggest stocks on the US market which – because they were perceived as safe investments – traded on substantial price equity ratios.

Trading cost 75 cents a share, but who cares, there were only 50 stocks that mattered, the Nifty Fifty, and you just bought ’em, never sold.

Towards the end of 1972, Xerox traded for 49 times earnings, Avon for 65 times earnings, Polaroid for 91 times earnings.

Numbers like that were unsustainable and those days of safe investing couldn’t last. So what happened to The Nifty Fifty?

It’s hard to track down today’s figures but an academic paper from 2002 looked at how those stocks performed over the following thirty years. It isn’t pretty.

Few of the Nifty Fifty performed well over the subsequent thirty years, which should give pause for those just buying the top stocks like the Dow-Jones, FTSE 100 or ASX 20 – just because they are big doesn’t mean they are safe.

In fact names like Eastman-Kodak, Polaroid and Digital Equipment Corporation on the Nifty Fifty shows just how risky such assumptions are.

Kessler also has a good point about today’s index huggers who are the modern equivalent of the 1970s buyers of the Nifty Fifty.

An index is the market. It’s a carrier, a channel, as defined mathematically by Shannon at Bell Labs in his seminal work on Information Theory. An index can only yield the predictable market return, mostly devoid of the profits of creativity and innovation, which largely come from new companies outside the index.

Like the Nifty Fifty today’s index funds are safe and predictable – until they’re not – while at the margins, the next great businesses and industries are being built far from the attention of the funds managers.

For Australians there’s a particular sting in the tail from Kessler’s post as the bulk of compulsory superannuation goes into the local market’s stop stocks. It wouldn’t be too unfair to describe the modern Aussie funds manager’s motto as being “buy the ASX Eight and have lunch with your mate.”

Forty years ago, an investment in Eastman Kodak would have looked pretty nifty. Today Kodak has gone. We should remember that when we’re looking for ‘safe’ places to put our money.

Bull Market image by Myles through SXC.HU

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July 6, 2013
Venture capital’s false jackpot
When a business run by a 22 year old raises 25 million dollars it certainly gets attention and Crinkle’s successful seed funding has provoked plenty of commentary.

Particularly notable are stories like the gush piece from the New Yorker magazine calling the fund raising “a $25 million jackpot.” Reading those, those, you’d think Crinkle’s Lucas Duplan had won the lottery.

The truth is, getting a fat cheque from investors is only the beginning of the business journey; the real work starts when you have a board and shareholders to answer to.

Where the real jackpot lies is in selling the business to a greater fool and the story of Bebo founder Michael Birch is a good example.

Bebo was bought by AOL, probably the greatest greater idiot buyer of all, in 2008 for $850 million. Five yearrs later Birch has bought it back for one million and promises to ‘reinvent” the social media service.

While Birch didn’t get all the $850 million AOL spent on Bebo, he and his investors did hit the jackpot. Whether Lucas Duplan and the backers of Crinkle do is for history to tell us.

Image courtesy of sgman through sxc.hu

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July 3, 2013
When Venture Capital meets its own disruption
Tech industry veteran Paul Graham always offers challenging thoughts about the Silicon Valley business environment on his Y Combinator blog.

Last month’s post looks at investment trends and how the venture capital industry itself is being disrupted as startups become cheaper to fund. He also touches on a profound change in the modern business environment.

Graham’s point is Venture Capital firms are finding their equity stakes eroding as it becomes easier and cheaper for founders to fund their business, as a result VC terms are steadily becoming less demanding.

An interesting observation from Graham is how the attitude of graduates towards starting up businesses has changed.

When I graduated from college in 1986, there were essentially two options: get a job or go to grad school. Now there’s a third: start your own company. That’s a big change. In principle it was possible to start your own company in 1986 too, but it didn’t seem like a real possibility. It seemed possible to start a consulting company, or a niche product company, but it didn’t seem possible to start a company that would become big.

That isn’t true – people like Michael Dell, Bill Gates and Steve Jobs were creating companies that were already successes by 1986 – the difference was that startup companies in the 1980s were founded by college dropouts, not graduates of Cornell or Harvard.

In the current dot com mania, it’s now acceptable for graduates of mainstream universities to look at starting up business. For this we can probably thank Sergey Brin and Larry Page for showing how graduates can create a massive success with Google.

One wonders though how long this will last, for many of the twenty and early thirty somethings taking a punt on some start ups the option of going back to work for a consulting firm is always there. Get in your late 30s or early 40s and suddenly options start running out if you haven’t hit that big home run and found a greater fool.

There’s also the risk that the current startup mania will run out of steam, right now it’s sexy but stories like 25 million dollar investments in businesses that are barely past their concept phase do indicate the current dot com boom is approaching its peak, if it isn’t there already.

Where Graham is spot on though is that the 19th and 20th Century methods of industrial organisation are evolving into something else as technology breaks down silos and conglomerates. This is something that current executives, and those at university hoping to be the next generation of managers, should keep in mind.

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July 2, 2013
Staging a sales blitzkreig to win the market battle
Part of the Silicon Valley greater fool model requires ramping whatever metrics are necessary — page views, unique visitors, revenue or profit to attract prospective buyers to acquire the business.

Elizabeth Knight in the Sydney Morning Herald looks at the cracks appearing in online retailer The Iconic where revenues of thirty million dollars were subsidised by forty-four million in losses in the e-commerce operator’s first year of trading.

The Iconic has all the hallmarks of a classic ‘buy me’ Silicon Valley operation — big marketing spend, high customer acquisition costs and fat operating losses in an effort to build market share.

Getting market share is one of the key aspects of the greater fool model, being the leader in a segment almost guarantees a buyer, usually the one of the shellshocked incumbents.

Knight quotes emails from one of The Iconic’s founders, Oliver Samwar, on the importance of being number one in their sector.

‘‘The only thing is that the time of the Blitzkrieg must be chosen wisely so that each country tells me with blood when it is time. I am ready – anytime!’’ one said.

‘‘We must be number one latest in the last month of next season. Full month, not a discount sales month

‘‘Why? Because only number one can raise unbelievable money at unbelievable valuations. I cannot raise money for number 2 etc and I have seen it how easy (sic) it is for me in Brazil and how difficult in Russia because our team f….d up.’’

As we’ve seen with companies like Groupon, being number one can impress gullible corporations but when that market position has been bought by investor’s money subsidising operations, the business is rarely sustainable.

Whether investors are prepared to continue subsidising The Iconic’s losses or if the business can attract a buyer will depend upon the business maintaining momentum on its key metrics.

Probably the most important thing for companies like The Iconic though is the availability of easy credit and accessible funds.

As we saw in the original dot com boom, when that easy money evaporates so to do most of the businesses.

For the incumbent businesses threatened by well funded upstarts, some might find the best hope for survival is to hope challengers run out of money.

In the meantime though, they may have to survive a market blitzkrieg.

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June 29, 2013