Continuing with the theme of my last post, below are the main web services i use on a regular basis or sites I'm a fan of. I don't have a lot of time to research and find new tools, so I hope I can get some useful suggestions from others.ToodleDo
: This is the best online task management system I've tried. It has a mobile app which syncs, supports tasks with complex recurrence patterns, and is pretty easy to use. I put all my life's tasks in here, even small ones, just to get them "out of mind."
: These are sort of no-brainers. They sync nicely with my phone and allow me to share my data with my family and classmates.Twitter
: I check these once a day and use them just for networking/contact info and keeping up with my friends. I'm really not a power user of these yet.Delicious
: Nice site for bookmarking with tagging and private bookmark capabilities. I rarely remember that I have a Delicious account when I run across something I like, but when I do, I'm happy about it. It'd be nice if it could save a snapshot of the page in case it gets taken down, but I'm sure other services out there do that.Flickr
: I've been trying to get into photography more, and I host some of my work here. I generally just upload completely raw/unedited files that I'm proud of. I have a good friend who is an inspirational photographer who puts up TONS of photos on Flickr; maybe one day I'll be as cool as him. The site is easy to use and their desktop uploading app is pretty handy. I haven't played much with the social features of Flickr.SoundCloud
: Only used this once for my own mix, but it was a breeze to set up, and browsing the site had a really nice UX.Issu
: This is a site that lets you "publish" your own high-quality, full-screen readable documents/magazines (a bit like Scribd). I've used it a couple times and enjoyed it.DropBox: I've started using this to collaborate on files
a lot since starting at UCLA. It's much more easy to use than Google Docs for files that live on my computer and across computers, like Excel and Word files that I don't want to convert to Google Docs yet.Kindle
: These are my "entertainment" sources. I've had the pleasure of reading my Kindle books across a number of devices and enjoy the page syncing across them. I've recently been trying out Audible and have been impressed by how many books I could potentially "read" in my car (especially on double speed). I only wish that one "purchase" of an Amazon book allowed me to read it (in sync) across Kindle and Audible together. I use LibraryThing to catalog the books I own and need to read and the books I want to purchase/borrow and read in the future. Netflix is what I use for movies on DVD and streaming (though I love going to the theater too). I wish on-demand films came out day-in-date with the theatrical release and feel that will eventually happen. I don't really watch TV or play games anymore, hence the lack of those on my entertainment roster.If there
are sites or services you think I'd find useful or interesting, definitely leave a comment.
To change up the topics a bit, I'm going to write a few posts about the sites and services I use on a regular basis as well as the content I read. I'm doing this for two reasons. First, some of these took me a bit of time to find and may be useful to people who read this post. Second, I feel like I'm not very knowledgeable about what lesser known services and sites are useful, and I'm hoping my readers can comment about that and share their insights.
This first post will be about the feeds in my Google Reader. Seems like a concise enough topic that I hope others can find something interesting in and hopefully contribute to. I'm not sure if there's already a mechanism to learn about what feeds a person reads online; that could be an interesting thing to use.
Below, I list the feeds I read, their RSS URL, and perhaps a comment on why. If you're a friend of mine who has a blog that I'm not following, I probably just don't know about it, so email me or leave a comment. Also, if you know of a blog that you think I'd be interested in, let me know as well. Thanks.
BankersBall (finance/investment banking)
Bootie Blog (mash-ups, DJing inspiration)
Both Sides of the Table (entrepreneur/VC in SoCal who is extremely knowledgeable and experienced)
BrandonK.com (entrepreneur friend of mine from LA)
Can Sar (CS friend of mine from Stanford)
DJ Earworm - Music Mashups (mash-ups, DJing inspiration)
dotgrex dsp (CS friend of mine from Stanford)
Dustin's newborn blog (UCLA MBA friend)
Embark Entrepreneurs (CS friend of mine from Stanford)
Eric Sornoso's Cave (LA tech/social media friend)
Feld Thoughts (entrepreneur/VC from Boulder who is a great writer and gives excellent start-up advice)
FX Week (currency trading mag)
Jim Stengel (UCLA marketing prof)
Kaizar's posterous (UCLA MBA friend)
Kukhahnyoga's Blog (one of my yoga teachers)
lalawag (LA tech scene)
Master of 500 Hats (VC)
Noah's Big Adventure (high school friend)
Private Equity Wire
Steve Blank (VC, good start-up advice)
The Gates Notes (Bill Gates)
The Good Men Project Magazine (cool mag/blog on modern manhood issues)
The Happiness Project
The MBA Insider's Blog (UCLA MBA blog)
The MBA Student Voice (UCLA MBA blog where my classmates write)
The Smooth DJ (DJ friend of mine)
xkcd.com (funny nerdy cartoons)
zero hedge (finance news/crazy conspiracy theories)
In the midst of an in-depth lecture on intellectual property and contracts with talent, my entertainment law professor went on an aside about doing business properly and ethically. It was a captivating few minutes that really rang true to me and echoed a lot of the principles that I've written about here before. Below are the suggestions of my prof; let me know what you think.
- Business success is dependent on relationships. So much of the way deals get done and people get hired is through relationships, referrals, and networking, so it's important to make meaningful connections and build a strong reputation.
Two concrete actions my prof recommends towards this end are being nice to your staff and placing your own calls. Your staff and colleagues are the ones who spread information about you and affect how you are perceived, so it's important to keep them happy (among many reasons for doing so). And when people don't place their own calls and instead rely on third parties like assistants, it creates an unnecessary distance, inefficiency, and sense of haughtiness that eventually harms the relationship.
- It's not a negotiation unless you’re willing to walk and have a legitimate Plan B. Otherwise, it's just a robbery. It's critical to have other options and a reasonable BATNA (best alternative to a negotiated agreement) so that the discussion can be a real negotiation and compromise rather than one party clearly taking advantage of the other.
- Don’t do business with lunatics or those who have any reasonable chance of going bankrupt. It's clear that both of these situations cannot perfectly be avoided or are in one's total control, but whatever one can do to prepare through checks and research (due diligence, references, UCC-1 filings, liens, etc.) can save a lot of trouble later. Lunatics can cause immeasurable headaches and immensely expensive lawsuits, and bankruptcy can completely destroy any value through canceling executory contracts.
- Always prefer short, clear, simple, and complete contracts. I wrote about this before, but my professor reiterated the point again. So many problems can be avoided by having clear, direct, and short contracts that avoid misunderstandings and lengthy court proceedings. Don't be afraid to tell your lawyer to cut the agreement in half and remove extra sections, even if they argue they're "standard." In contracts as in speeches and life (and blog posts--though I have trouble following my own advice here), brevity is king.
- The image of your work is critical. Perception is a reality, and every detail affects your reputation. Fix typos, and learn to punctuate correctly. Don't be lazy. (I've written about this before and suggested some good books on grammar and punctuation.)
- Cultivate the bond of trust through thoroughness and taking your time. My professor gave us the example of a client calling and asking for something "tomorrow" when in fact the work would require 2 days. While most people would cave and deliver suboptimal work tomorrow or just be late on their promise (and maybe try to hide from them), the right way to go is to tell them you need a week and deliver excellent work a couple days early.
As a recipient of the "wrong" approach before, I know how annoying this is. I definitely prefer people who set expectations realistically and deliver great results as promised, even if it's slightly slower than I'd want.
In failing a client with the wrong approach, you break the bond of trust that can never be restored (or with great difficulty).
In addition, many people err by saying what they think (with 90% certainty) is the answer rather than expressing uncertainty and expressing a need to research. The right approach is to say that you'll do the research and get back to them and most importantly do as you've promised.
- Happiness is the freedom to leave whatever you're doing or wherever you are and to do what you want. This was sort of a counterintuitive thing to hear, but it made sense after some consideration. If you are in a place where you can leave and say good-bye to your firm or your boss, it means you have a true power and inner freedom to do what you want, and that brings happiness. My professor loves his firm and his work, and hearing him say this sort of message affirmed this in a new way.
If everyone stood behind a set of principles or advice like this, I think business would operate a lot more smoothly.
In this penultimate week of my finance class, we had a guest venture capitalist come to do a case study with us. The class aimed to highlight the basics of venture capital in comparison with private equity (which we studied previously). Below are the top ten takeaways from the class, which was really engaging and interesting.
- The most important factors VCs consider in a company are market size, management, and competitive advantage/product. The fastest way to understand market size is through calling customers; a few phone calls (primary research) will go much further than looking up aggregated, often useless stats in a database.To understand competitive advantage, look at technology and financial statements. In terms of financial statements, premium gross margins (45%+ as opposed to typical 20%) can often point to competitive advantage.
- The actual product and technology are more important than past financial statements. Past financials, in the VC/early stage world, are irrelevant and almost always not predictive of the future. VCs care about growth and future profitability, not past financial results. Past business development/growth/management goal-attainment results are another story, though; those matter a lot. VCs invest in uncertain businesses where the future will not be like the past; private equity (PE) invests in firms where financial statement analysis is critical because businesses are more stable.
- Time can be an advantage for the investor when it eliminates competition for the deal. If a VC has a small window of opportunity to see a deal first and have some exclusivity to it, this is a rare opportunity that he or she will try to take advantage of. On the flip side, many VCs like to invest together (social proof), so this has its risks as well.
Often times, VCs can use tight deal timing and uncertain financial statement reliability to their advantage. If the company is in a rush to close a deal and/or has financials that are not really reliable, this can help in negotiating a better price for the VC. In VC, the outcome is more important than the decision-making procedure because time is of the essence for capturing opportunity. The guest also told us that he typically knows within 15 minutes of meeting an entrepreneur whether he wants to make the deal.
In terms of price in such circumstances, it only needs to be justifiable to the board (and the VC fund) and show reasonable analysis; it is not the result of some careful projections or analysis. Prices are determined by gut and then vetted out through some bounds analysis and taking a look at comparables. Therefore, VCs aim to negotiate for the lowest possible price that is justifiable somehow by comps and rough projections.
- Venture capital is about being a home run hitter. It's all about hitting home runs once in a while and losing on most other deals. You won’t be fired for taking risks, but you will be fired for missing opportunities.
In this way, it's all about maximizing the likelihood you get lucky by investing in companies that have any hope of getting huge. VC thus is an art that is about seeing big ideas and getting on the deals with the highest potential. PE is much more of a science than VC because there the companies are typically more established and will likely continue in the same way as they have in the past.
- Venture capital is about relationships. The guest spoke of investing in a company as analogous to being married to the entrepreneur. The way that VC firms differentiate from others is through their connections and networks.
Our professor chimed in to add that from whom you get the money is more important than getting the money and on what terms.
- During acquisitions, you need to always consider what will happen if you don’t acquire a company that will be sold to someone anyways. Often times, just by thinking about the alternative, it's clear that making an acquisition is the correct strategic decision for a company. An example is a car dealership that can buy a nearby location; it would clearly prefer to have that location rather than be hurt by additional nearby new competition.
- The number of VC deals is roughly stable over time; what changes given market conditions are price and terms. We looked at graphs of deal flow over time, including number of deals, capital deployed, and average deal size. There were clearly swings over the past 10 years, but looking at a longer time horizon, the trend is stable.
Our guest explained that the number one determinant of whether our economy will grow at 3%+ per year (to sustain job growth, etc.) is the number of $1 billion+ revenue businesses started per year. Based on this and the above, he assured us that good ideas and people will always find capital available.
- Great entrepreneurs will find attractive markets; trust the person more than the specific market. Smart people can adapt to changes in the market and are required to execute on business ideas, even ideas that are inherently poor or at a disadvantage. On the flip side, a great idea can easily be mis-executed or an opportunity missed by a suboptimal entrepreneur. Our guest believed that the biggest reason for failure among the deals that failed on him was management (the team not working well and not hiring fast and well enough).
- Structuring a VC deal portfolio involves many trade-offs. When we asked about investing in one narrow space or industry versus achieving diversification, our guest explained that there is a trade-off between diversification and specialization in the field you know. You want to invest where you're experienced and familiar, but you also don't want to put all your eggs in one basket. However, if a particular market niche is really big, you want diversification within that and can have as many bets in play as possible. For example, many of the most successful investors in social networks early on invested in all of them instead of trying to predict which would succeed. As long as Facebook was in that portfolio, it couldn't be a loser in the end.
- Evaluating exit offers is about weighing the risk of future execution versus the potential of huge outcome. We talked about the acquisition offers our guest's portfolio companies had received over time and the way they decided which to accept or not. It all boiled down to how big of an opportunity they thought they could capture; in many instances, one bird in the hand (accepting the acquisition) was turned down for two in the bush (potential huge growth) based on the traction and momentum of the business at the time and the projections of the size of the opportunity. This is obviously a guessing game, and one just needs to trust one's gut in making the decision.
I thoroughly enjoyed the class, even though the basic concepts weren't new to me. It was nice to just hear about the guest's stories and perspective that tied together many strategic concepts about VC investing that I had learned about before.
One of my favorite classes this quarter is real estate investment. It's taught by a professor who runs real estate investment funds and is quite active in the industry. His enthusiasm and real-world anecdotes make the class really interesting and insightful.I've tried to capture the biggest lessons I've learned in the
class so far below.
- The 5 P's of real estate analysis: This is a great framework through which any deal can be analyzed.
People: Who is involved in the deal and what are their motivations? This obviously includes the buyer, seller, brokers, syndicate participants, mortgage financiers, developers, managers, and many other parties. Often, the people involved and their motivations are more important and influential than the project and its economics.
Process: How was the property found, built, developed, negotiated, analyzed, researched, etc.? The class taught me that, due to many factors including the gross inefficiencies in the real estate market, primary research is what drives competitive advantage in real estate investing. Primary research includes thorough property visits, mystery shopping the comps (or comparable properties nearby), speaking to tenants and managers directly, pulling public records at city hall, and not relying on secondary materials (especially from brokers) for anything important. With brokers specifically, there could be many conflicts of interest in dual agency relationships in states that permit them (like CA), where the broker represents both sides and is unlikely to do all the due diligence you really need to make a wise decision.
Project: What is the property involved (location, size, asset class, etc.)? This is a micro-market view of the investment.
Panorama: What is the overall broader market doing where this property is located (demographics, unemployment, interest rates, credit availability, etc.)? This is a macro-market view of the investment.
Projections: Here is where the numbers play in, and the class was very focused on making adequate, thorough projections of an investment's economic performance (specifically, NOI, or net operating income, equivalent to cash from operations). Useful analyses included sources and uses of capital, return on investment, and most importantly, sensitivity analysis of the projections to the largest drivers of value (rental rates, occupancy, cap rate, discount rate, etc.).
- Real estate is all about negotiation: Very little in a real estate deal is efficient or governed by some pre-defined marketplace or law. It's all about what you can negotiate from the various parties involved and how you play the game. I was shocked to hear about the prevalence of re-trading, or renegotiating deals after they were somewhat agreed upon, and the importance of calling people's bluffs (like brokers') when they try to take advantage of you. The professor explained how the identity of the first drafter of a contract often determines who has the bargaining power (sort of like the concept of psychological anchoring), and this is something I'll keep in mind when analyzing future negotiations situations.
- Taxes are critical to any real estate deal: There are many levels of taxes that operate on an investment (property taxes, ordinary income taxes, capital gains taxes, depreciation recapture, etc.). Deductions for mortgage interest and depreciation are some of the most important drivers of value in a deal. In many investment contexts outside of real estate, taxes can be a second level of analysis, but in real estate, they need to be in the model from the start.
- Unsexy property segments can be good deals: Many people overlook deals in industrial properties and certain hotels and commercial properties because they aren't in the best areas or aren't nice looking buildings or operations. Sometimes those unmaintained and mis-operated properties are the best opportunities for turnarounds, capital improvements, and rent increases that can create large value which many might not look to do. One thing to check on though for such properties (and all in general) are environmental issues (through specialized studies and inspections) that could create large costs down the line if unattended to.
- Deals with hair require more intricate modeling and more acceptance of risk: Few deals are straightforward and with minimal quirk; more often are deals with lots of "hair," or complications, like market dislocations, leasing issues, strange vacancy situations, and generally unstabilized cash flows. Having one large tenant as opposed to many tenants is an example of a non-standard situation that creates additional risk. Each of these quirks needs to be understood and analyzed and stabilized in some way to be able to value a property with hair.
- Syndications offer the opportunity for average investors to enter the real estate market: By pooling together several participants' money, a real estate syndicate can make a larger overall investment and purchase a property that may not be available to any one investor. If this is done carefully and with a clear plan, it can often create a lot of value and provide a positive educational opportunity for people looking to learn about real estate investing firsthand.
- Cost segregation is an important tool for tax efficiency: When buying a property, the buyer has some flexibility in allocating the purchase price between personal property, building, and land. There are clear definitions for each category, but many times people do not optimize this allocation. Personal property has the best tax treatment for depreciation, so increasing its allocation to the maximum extent reasonable can save a lot of taxes. There are specialized consultants who help real estate investors do just that.
- When pensions invest, they are following a herd mentality: Usually, pensions are late to the game in most investment opportunities (based on research we looked at), so when they invest, it might actually be a good contrarian indicator (time to get out). In terms of what pensions could invest in, they are tax-free investors and would prefer investments that match the duration of their pension obligations and are generally diversified and conservative with a focus on cash flows over capital appreciation. Land and hotels are the most risky asset classes and probably least suitable for pensions.
- Constant improvement is essential to maintaining and enhancing a property's position in the market: When owning a building, many managers or owners think their job is just collecting rents; a lot more value can be obtained by working to constantly improve the amenities and looks of the property, finding new ways to meet tenants' needs and ways to attract more demand to the property from prospective lessees. We went over a lot of neat, non-intuitive little services that a building can offer which don't cost a lot but can make a big difference in people's perceptions. A guest speaker taught us to never rent the same apartment twice; always find ways to make capital improvements in between tenants so that the building is constantly getting better.
- Management company relations need to be handled with care: It's best to manage a property yourself or have people you really trust doing it. As with any principal-agent situation, management is often not incentivized to care about the bottom line and may even hurt the bottom line just to maximize gross revenues or whatever base it is compensated on. Generally, management companies aim to minimize their own work as much as possible and only by doing surprise visits and careful tracking can an owner know how they're really performing. Since management companies are also in charge of leasing often, they rarely realize how much of that leasing function is actually marketing and basic sales techniques; in most places, leasing practices are extremely suboptimal, which presents opportunities for those who want to do it right.
- Utilities are not a fixed cost: This came as a surprise to me and a lot of the class, and it was very interesting to learn about several techniques that can cut utilities costs, whether through technological improvements or through legal inefficiencies and local programs where costs can be renegotiated or restructured with the city. Utilities can be a large line item which is normally taken as a given but which actually can be in your control.
- Real estate deals are structured to create value and maximize other people's money: Often, employing clever structures with multiple classes of investors can allocate profit splits differently and allow access to alternative sources of capital that have different risk/reward requirements. By having several classes of debt and equity, different participants can get slightly different risk/reward profiles that match what they're looking for. In this way, the investment sponsor can maximize the use of other people's money and positively leverage the returns of the deal. In doing so, though, it's important that key members of the sponsor and of each important property stakeholder have sufficient skin in the game (or money at risk) so they care about the outcome of the venture.
- Building up equity is a myth: Investing in real estate is not a guaranteed ticket to growing your savings and making money in the long run (especially as evidenced by the last few years). The key with this myth is that it ignores the opportunity cost of money (that one can't earn the same return elsewhere). With mortgage rates so low now, we should be able to earn more than this low interest rate through other investments (such as in our own businesses or professions). Yes, mortgage interest deductions (as long as they last in the future) do help make owning real estate more attractive, but just building equity in a property is not sufficient reason to make the investment.
Though my personal experience with real estate investing is extremely limited, I look forward to learning more about the asset class in the future and maybe even making my own investments sometime down the line.
As I mentioned in prior posts, I had a great time at an Anderson event last month where Tony Hsieh, CEO of Zappos, spoke to us as part of his Delivering Happiness
book tour. I wondered why a big blue bus ("blue's the new yellow") was parked in front of UCLA, and I quickly learned about Hsieh's Happiness Tour during his talk.He had written his book as a way to teach about Zappos' culture and mission of generally delivering happiness. It sounds hokey, and he acknowledged it, but his passion and belief in the importance of corporate culture was infectious (infectious enough to make me buy a signed copy of his book that night which I can't wait to read).
Tony's basic message was that corporate culture is everything
in determining a company's success, not just a side element that's relegated to the HR department and which determines how much people like working there. He claimed that companies that have superior, more intact, and concretely defined cultures will almost always outperform those without. He explained that they hire and fire putting culture at an equal level as skill and work ethic and will fire talented employees if they don't fit into the culture.
He also encouraged the audience to request a free copy of Zappos' culture book, which is an annual collection of their employees' testaments to and personal experiences of the corporate culture. In addition, he offered us a free download of the audiobook Tribal Leadership
, which backs up many of the lessons Tony was teaching that night with research studies.I greatly enjoyed listening to the audio book over the last few weeks in my car (way more productive than listening to music, though I did intersperse some music here and there -- the radio is so much better if not listened to every day). I liked how the authors of the book compared companies at different stages of "tribal leadership" or corporate culture and showed through many vivid examples how companies can move from one stage to another.The authors described 5 core stages of tribal leadership, where a tribe is a group of 2 to 120 people (but could grow beyond that) who
align around some common goal or interest:
(I sort of had to fudge the percentages above because I didn't remember them exactly, but those are approximately what the authors claimed from having researched thousands of companies.) I really liked this frame of mind, and I could see myself squarely as a Stage 3 operator most of the time (like most type A/overachieving personalities). I've felt what Stage 4 feels like at times, and I want to be involved in
- Stage 1: "Life sucks." People are pessimistic about life overall and see no way out of their misery. They are prone to crime and stealing and stop caring about any higher values. This represents about 3% of companies.
- Stage 2: "My life sucks, but their lives don't." People think their lives suck but see others whose lives suck less than theirs. They may play tricks or be envious of others and generally do not have a lot of fun, but they do see a ray of light that they can at least try to work towards (in between feeling self-pity and remorse). This represents about 15% of companies.
- Stage 3: "I'm great, but they're not." People work to improve themselves, see their talents, and aim to get ahead of others. This is the culture taught by schools and almost all business self-help books, teaching skills and aids and trying to help you become better than the person you are today so that you can get ahead and reach your goals (which others therefore can't reach). It is by definition a competitive culture, and one that focuses on individualistic results. It is made up of dyads, or two-person relationships, where two people can work together but contrast their skills and aim get ahead of each other. This represents about 70% of companies.
- Stage 4: "We're great, but they're not." People work to fulfill a common, jointly agreed upon goal, and focus on group success rather than individual contribution. Olympic teams, top-performing team athletes, companies like Zappos and Amgen which are defined by their collegial corporate culture are examples. Here, the group aligns behind a common goal and a common enemy or competition. People work in tryads, networking between dyads and creating webs of support and insight that fuel growth much faster than simple dyads or individual contributors. This represents about 10% of companies.
- Stage 5: "Life is great." People are happily working on goals that they believe in jointly without reference to other companies or competitors and simply because of their belief and optimism. This stage is often achieved fleetingly, held onto for short periods of time before coming back into Stage 4. Here, the growth rate is the fastest, with the most synergies, openness between people, and general positive attitude and happiness. This represents about 2% of companies.
teams that can be operating at Stage 4 more often.
The book also describes the "epiphany" that brings one from Stage 3 to Stage 4: realizing that meaningful results cannot be achieved alone or through micro-management, and it is through teamwork and leveraging other people that large impact can be made.I'd love to speak to people firsthand (other than Tony and Tribal Leadership's authors) about
personal experiences of the different stages and what worked for them and their group in transitioning from one to the other. This seems like the crucial thing to understand and probably a skill gained more through experience than simply reading about it.
A few weeks ago, I attended quite a unique talk at Anderson called, "East Meets West: What is Moral Capitalism?" It was by Dr. Hiroshi Tasaka, a distinguished business philosopher, prolific author, and founder of SophiaBank, a think tank that supports social entrepreneurs in Japan
. He had flown in from Japan and spoke to a room of about 20 students over sushi (I didn't try the sushi though).
I just found online that he gave a similar talk at TEDxTokyo, which is the video embedded above.The subject of the talk was the invisible or moral values that are absent in a capitalistic culture that only focuses on economic or monetary values. These moral values are things like caring for each other, peace in the community, trust, and happiness of workers. He explained how the verb "to work" in Japanese means "to help my neighbor" (I'll see if that's true next quarter when I hopefully take a Japanese class).He taught these lessons
through a philosophic fable he wrote which poked fun at how modern governments are trying to solve the current financial crises. His thesis was that by refocusing society and capitalism on a notion of invisible values, like culture, peace, and happiness, necessarily without quantifying them, we could achieve more stable and positive long-term results.The way he spoke about the moral values
appealed to me and is a reason for my recent growing interest in social entrepreneurship. It was also neat to hear Tony Hsieh, the CEO of Zappos, talk to us the next day about culture at Zappos and how their core values are many of the invisible values Dr. Tasaka was preaching. I'll blog more about Tony's talk soon (which was riveting), and it was a nice coincidence to hear several speakers give their unique perspectives on a common topic.An economics professor in the audience
of Dr. Tasaka's talk mentioned that there are several research studies in progress aiming to come up with a modified sense of GDP that takes into account society's contentment, peace, etc. Dr. Tasaka thought these efforts were well-intentioned but cautioned that the invisible values by definition cannot be measured or quantified. It sounded like something where you knew it when you saw it.I had also recently come across a proposal to build a social stock exchange
where Social Benefit Enterprises (SBEs), or companies that are for-profit but create social good along the way, could trade and be combined into a diversified portfolio by investors who wanted to support their operations.I think al
l of these speakers and recent research show a growing trend towards socially responsible business, where the social good is not just a side effect but a major driver of value. It will be interesting to see how this develops in the coming years and to hopefully contribute to it as well.
I'll keep this post short, as the message is pretty simple (but hard to implement in real life).
We had a guest speaker in my finance class who was a private equity manager. Of all things, he chose to focus his talk on incentive alignment. As a private equity firm buys an existing company, they need to incentivize either the current or replacement management to achieve the company turnaround or growth goals that are planned from the beginning.
He taught us that the status of incentive alignment explains performance. No matter what, people will be driven by the incentives placed before them and work to optimize the incentive formula, not necessarily the company's long-term value.
He also pointed out that incentives may be good per individual but bad when mixed together. For example, sales people may get commissions on sales; marketing may get bonuses based on brand surveys; the CEO may get bonuses based on stock price. When looking at each individually, it seems like the incentive makes sense based on the individual's role and department. However, when combined into one organization, the incentives can often be at odds with each other and not have a lot of cohesion. Tying everyone to one incentive system also doesn't work that well because of different people's limited control over parts of the business that are not their own and the problem of free-riding, where some may benefit at the hard work of others.
Finally, our guest taught us why it's hard to align incentives for the long term: things are changing all the time for a company, and it's hard to constantly revise incentive plans accordingly. Because incentive plans are forward-looking by nature (whereas company plans are drawn up based on past performance and the present outlook), there is always a lag in responding to a changing market environment when updating incentive systems. In addition, there's a sense of stickiness to incentives once put in place; if people got hired with a specific incentive scheme promised to them, it may be hard to renegotiate this. However, it's probably the right thing to do in the long run, and many companies probably are better off anyways without people who focus on incentives and compensation over learning and producing results.
I've always been interested in the subject of incentives and compensation and am simultaneously frustrated and curious about the issues at play because there is clearly no right answer or optimal solution. I hope to learn more about this topic next quarter in my Pay & Rewards class.
The last month or so has been particularly tough for my family. About 5 weeks ago, my last grandfather passed away, and yesterday, the second dog I ever had passed away. I've unfortunately had a lot of opportunity to think about life and mortality and struggle with the meaning of loss.
The subject of loss I've heard is written about extensively, but luckily I have never really had a large need or motivation to study it. I find myself wondering now what others feel like, what I should feel like, and methods for coping. How quickly should one go on with one's life? Is it fair to be happy when someone else cannot?
I've come to realize that I'm curious about the process of mourning and want to learn more about it. I'm also curious about how to best deal with loss and what it means to people as a community. I've seen that loss can bring people together and bring them closer, and it is sad that it sometimes requires loss to do that. But perhaps that is something good that the lost soul leaves to those who outlive him or her.
I've also realized that dealing with loss is really personal. Though I'm curious how others feel and what they do, I'm happy with myself and the feelings I've had. I try to live my life in a way where if I or someone I love is gone the next day, I have minimal regrets. Therefore, I speak to every single person that's important in my life every day and see everyone in my family at least weekly. This might be my cultural upbringing and family norms, and I know it can seem strange to people raised differently than I was (or whose families live far away). But for me it feels natural and normal, and I'm happy about that.
In addition to being close to the people I love when they're alive, when they're sick, I try to pray for them. And when they leave my life, I've tried to think about them in a positive light, to imagine they're in a better place, and most importantly to remember them for how happy they made me feel.
To that end, I wanted to make a small tribute in this blog post to the memory of my grandfather and my dog. Below is a small description of each, including a brief glimpse into what they were all about, to both help me remember them in the future and to honor them in some small way.
My grandfather Izyaslav (leftmost in the photo) was born in Chernivtsi, a small town in Ukraine. When he was a young boy, World War II broke out, and he was separated from his family for several years. He had to completely fend for himself as he journeyed alone and worked to reunite with his family. He was an engineer by training and handy with hands, working on cars and in industrial settings throughout his life. He was very proud of his son (my dad in the middle of the photo) for becoming a doctor and being first in his class, and always stressed the importance of hard work and being a good example to others. He always told me stories and explicitly tried to impart his wisdom on me whenever we were together, but he was also always curious about my life and wanted to hear everything about it. His dream was to dance at my wedding one day, and his dream came true just over one year before he passed away.Favorite things in life
Lessons he taught me
- Knight Rider: When I was growing up, my grandparents picked me up from school everyday and fed me (my parents were often working late in the hospital as residents). I watched the Knight Rider TV show with my grandfather almost everyday, and we both enjoyed the smart talking car and the action (who doesn't love Hasselhoff?). I really think the Knight Rider show was formative of my love of computers, AI, and science.
- Mephisto and Salamander shoes: My grandpa had trouble walking later in life, and he was always passionate about shoes that were comfortable. These were his favorite brands, and though he rarely got out to stores or bought himself new shoes, he was always a fan of these brands and comfortable walking shoes in general.
- Massages and "kavali": My grandfather's touch was always therapeutic, and he was always into hugging and giving massages whenever he could. It was good exercise for his hands (which trembled due to his experiences during the war), and he would use the opportunity to say a blessing of his own that he made up called "kavali" (which means "heels" in Russian), wherein he blessed my heels and wished me luck. This always seemed like a silly childish thing, but now I realize it was a unique way to show how he cared and to create a loving bond. He often told me about how he was raised in a very large family where people would constantly joke around and laugh together, and because our family in the US was small, he took it upon himself to add in the closeness and joy whenever he could.
I miss him very much, and
- Be wary of others, especially in business: That is a mild way of putting it; my grandpa often told me that business is all lying. This is probably the way he was raised and a result of his experiences in the war, but in some ways it is still relevant today. Though a lot more businesses (especially socially entrepreneurial ones) create value without lying and without taking something from others, many businesses still derive all their value from taking advantage of others and using one's unique position or information to profit. Is this really lying? I guess that's just a matter of perspective.
- Fend for yourself: My grandfather always taught me to trust others but to check their work and fend for myself. I understand where that attitude may have come from, and I think it's a valuable perspective to have. It's obviously a matter of calibration in every different circumstance in order to figure out how much trust is appropriate.
- Be honorable: For my grandfather, this meant doing the best work one can do and gaining respect in the community. He was very proud of my dad for his performance in school and professionally, and he was also proud of me. He never really pushed anyone to work hard; in fact, he always said he knew that the outcome would be as good as it was. I guess his pride was quite motivational.
he is in my thoughts everyday. I know that he is no longer suffering and sick, and I know he watches over me always.
We rescued my dog Marcello when I was in college, right after my first dog Mario died. These are the only two dogs I've ever had, and my family has always rescued Neapolitan Mastiffs. We love the breed, and I've been lucky to read about their unique history in several Italian and English books that I've collected over the years. Marcello was sick throughout his life with many mild/topical issues, and he began life very anxious around people and somewhat aggressive. However, the love our family gave him quickly brought him peace of heart, and he became an extremely loyal, protective, and loving member of our family. To me, he was like a brother or a friend; we always loved to play together outside and go for walks, and I missed him dearly when I moved out and could only visit him once a week to brush his teeth. Favorite things in life
Lessons he taught me
- Sunbathing: The first thing Marcello would do when outside on the grass (after peeing) would be to topple his 130-pound body onto the grass and roll around like a pig. He loved to soak in the Vitamin D from the sun and to chase me as I played and instigated him to run. He also loved to grab a huge tennis ball that was bigger than the size of his mouth and to play tug-of-war with me using several rope toys that he had.
- Greenies: These were his favorite treat, and he would eat them with delight whenever he could. He obviously needed to eat the large/giant size, and he would usually finish one in about two minutes. I could see from the saliva he generated that he was enjoying himself, and though he liked other treats quite a lot, I knew Greenies were his favorite (especially by the look in his eye right before he got them).
- Sitting on couches: We tried to make this illegal at first, but he was so convinced of being a human being that we could not resist him much longer. He would always be polite and wait until we gave him some space on the couch or were off the couch before he would mount and lie down. Perhaps it was to feel human, perhaps it was just to be closer to us; in any case, Marcello was not a just-lie-on-the-floor kind of guy.
I miss Marcello very much, and
- Always be happy when you see those you love: No matter what was going on or how sick he was, Marcello would always wag his tail, jump up on his hind legs, and push his body against my legs whenever I saw him. Dogs are just like this: they are always excited when they see you, as if there is nothing more important in the world to them and there is nothing they could've been doing that would have kept their attention or stopped them from saying hi. I often find myself and those around me so wrapped up in "work" and "life" that we can't snap out of it when we see someone for the first time in the day or after a break. This is an important trick that we "old dogs" should learn from real dogs. As Charles de Gaulle said, "The better I get to know men, the more I find myself loving dogs."
- Never give up: Marcello kept a good attitude and took care of himself up until the end. He never cried or winced or made life more difficult because of him, and he was always happy with whatever we needed him to do. I know he was in a lot of pain at the end, and I respect how strong he was and how he never gave up.
- Be loyal: Marcello would always bark like crazy whenever there were people near the house and would spend hours on end by my side or by my mom's side when we were at home. When we went for walks, he would sniff around, but he was never interested in other people or other dogs; he always stayed close to us and would only get aggressive or anxious when he thought we were threatened. This is pretty typical dog behavior, but it's still remarkable in my opinion, and I respect him for his innate, instinctual loyalty.
he is in my thoughts everyday. I know that he is no longer suffering and sick, and I know he is sunbathing and playing with Mario in a better place as well.
I've had a very busy and exciting couple of weeks. Two weeks ago was probably the most diverse week of activities I've had in a while, filled with a handful of world-renowned speakers. I hope to get through my backlog of blog posts as soon as I can (I don't remember the last time I had a backlog -- usually I'm struggling with some writer's block).This post covers some accounting-related lessons I learned in my finance and entertainment classes (strangely enough). The outlook is somewhat pessimistic but boils down to ethical principles of honesty in company accounting and valuation.
- Channel stuffing: This refers to a practice of giving inventory to distributors/retailers and counting the transfer as "sales" even though the inventory has not yet been sold to end-consumers and not paid for by the retailers. It can inflate a company's sales by making them seem to come earlier and more regularly, but it does not present an accurate picture of a company's financial condition.
There are a number of reasons that a company would do this, intentionally/fraudulently and unintentionally. An "unintentional"/ethically-sound reason would be if they had no way to accurately track sales in the field. However, in the modern era with many sophisticated inventory-tracking systems, I see no excuse for companies not to track sales carefully and exactly.
- Window dressing: This refers to a practice of displaying financials that make the company look good but which mask underlying problems. The issue stems from the fact that balance sheets are just a snapshot of one day in time, so a company can just make that one day's ending balances look like it wants and proceed to have a completely different looking balance sheet the rest of the month/quarter/year that no one's looking. Banks and regulated institutions have been known to do this when they face specific requirements that are discretely timed rather than continuous in nature (such as having quarter-end balances of cash be some specific minimum, etc.). This is why it's important to inquire about average daily balances and look into overall activity to better ascertain a company's true financial condition. The only real way to regulate this correctly would be to have all requirements be continuous in nature and for all bank and brokerage accounts to be directly monitored by the SEC rather than self-reported and audited.
- The Five Main Accounting Games: Because there is no concrete law about how accounting should be done and only IRS and GAAP rules that are often vague, there are many common games people play. My entertainment law/finance professor taught us the five most popular games that studios use to trick film investors out of all their "net profits," but the lessons apply to all other types of companies as well; it was eye opening to learn these tricks and understand how to spot them and protect against them. The reason people play these games in public companies is to appeal to what analysts look for: short term profits and a debt ratio. It is sad that longer-term profits are not the focus and are often destroyed through some of these games and resulting transactions.
A. Acceleration: This refers to booking the present value of future earnings now, even if they will be earned over time in the future (and even if they are uncertain). For example, selling property for a note to pay it later (which is never paid) or loaning out money which is immediately repaid (as cash from operations). This will increase gross income, even if at a long-term loss, which makes analysts happy. The film industry even has specific accounting rules and accommodations that make accelerating future licensing payments to present value as if earned "now" completely acceptable. This is really concerning.
B. Capitalization: This refers to spreading out an expense over time (as a capital asset) in order to increase current income and increase the assets on the balance sheet (and lower the debt ratio). Because companies can keep totally separate books for tax purposes, they can capitalize expenses to show high income and expense the same items to lower their tax liabilities. This strikes me as so unfair and manipulative but apparently is completely kosher.
C. Deferring write-downs on assets: Film companies and banks hate to mark to market bad loans or bad films, so why do it at all? If they just keep them at cost on the balance sheet, they can keep their assets and income high.
D. Extraordinary loss: If they're forced to write down losses, they can just do it as extraordinary losses that don't hit the income statement and just affect the balance sheet. Though there may be legitimate reasons to use extraordinary losses, this category can clearly be manipulated and overused.
E. Consolidation: Companies can consolidate into their financials the financials of subsidiaries they own, but they can do this selectively based on which subsidiaries have the performance they're looking for. Because the rules behind consolidation are loose and involve having control of a subsidiary, the parent company can quickly change the subsidiary's control and ownership structure to achieve the consolidation it wants based on the subsidiary's performance.
- Problems with the current system of auditors: Because of the above problems with accounting statements, it would seem like the solution would be to have auditors find and publicize these manipulations. However, companies currently choose and pay for their own auditors, which clearly presents deep conflicts of interest and problems of adverse selection. Though I have heard from auditors that "shopping for opinions" is rare, I have learned that it does happen, and because auditors want to keep their clients happy, they are likely to accommodate their clients, especially in the gray areas of accounting. I'm not even mentioning the problems inherent with owning your own accounting and auditing firm, like Madoff did.
My professor suggested that a solution to this would be mandatory, regular, random cycling of auditors that is regulated and managed by the SEC so that companies cannot choose or sway their auditors. This seems like an ideal solution to me but one that would be hard to implement as it would need SEC, company, and auditor buy-in, two of which would likely be heavily against it.
- Valuing at dividends: Because of the problems inherent with financial statements and the myopic view of Wall Street analysts, how can investors value companies? One of my professors explained that in the "olden days," people would do this purely on what they could see and feel with their own senses, meaning cash dividends. If we valued companies purely on the dividends they actually paid (instead of "expected" to pay), we could quickly derive some minimal value for the firm. Though discounted cash flow analysis is the standard method used to value a company, it is flawed because it depends on using a company's financial statements and modeling what dividends it may one day pay in the future. The valuation of only dividends may cause companies that never pay dividends (such as some growing tech companies) to be considered worthless (which may fundamentally be the case, since the only reason to invest in them is the "greater fool theory" of buying the stock cheap and selling it later more expensively). This may appear problematic, but there is something inherently appealing to me of a simple, direct, no-nonsense and skeptical method of valuing a company by its paid dividends.