Star Trek (Next Gen): Jean-Luc Picard
A growing number of folks are becoming aware that the performance of most mutual fund managers over an extended period does not exceed that of benchmark indexes such as the S&P 500. More specifically, 99.6% of all mutual fund managers failed to beat (i.e., only 71 funds out of 17,785 matched or beat) the performance of the S&P, net of fees, over a ten year period according to data compiled from the Mutual Fund Screener of The Wall Street Journal. Please reference the entire article titled “Wall Street Is a Rentier Rip-Off: Index Funds Beat 99.6% of Managers Over Ten Years
” at the blog Of Two Minds
Talented investors are often not managing formal, traditional funds but rather managing one’s own accounts or a small number of accounts (e.g., friends and family). These individuals are more likely to fit the mold of idiosyncratic entrepreneurs or founders of technology start-ups.
Nevertheless, one of several takeaways is “don’t judge a book by its cover.” In other words, just because a money manager is nicely dressed, displays stereotypical good credentials, and has friends in high places (partly enables said manager to either procure capital or secure the fund management role), shouldn’t imply an above average talent for investing. One can present a similar case against most (not all, of course) hedge fund and venture capital fund managers, as highlighted in two Zero Hedge
articles titled “Most Hedge Funds Underperforming The S&P 500 For Fifth Year In A Row - Full YTD Performance
” and “Venture C(r)apital: Myth And Reality
1886 Bank Run: "The War of Wealth"
SecondMarket provides a timeline of trades
in Facebook (FB)'s common stock since April 2008. If one applies a discount (let’s use 30% for example purposes) to account for a limited supply of shares available via SecondMarket versus a larger supply of shares otherwise available in a publicly traded market, then one could derive a "fair" value of FB in a public market (note 1).
Further, SecondMarket data from 2012 along with a January 2012 tiny venture capital round
(only $9.6 million at about $31 per share) seem to have been used and publicized to anchor in a price and valuation to justify the targeted IPO price range. Accordingly, it would be reasonable to consider this data as less reliable and an outlier.
So, using data from the last half or last quarter of 2011 would provide a reasonable benchmark share price in which to apply a discount (or a discount range). A back-of-the-envelope calculation indicates a share price on SecondMarket that averaged about $32. Applying a conservative 30% discount indicates a “fair” share price of roughly $22 if supply were not as constrained as it was on SecondMarket. Given this assessment, the investment bankers apparently earned their commission since they priced the IPO at a 72% premium to the adjusted share price calculated using SecondMarket data.
Our opinion is even at $22 per share, which implies a market capitalization of $60 billion (note 2), FB is considerably “overvalued," especially in light of the most highly valued companies depicted in the chart below and highlighted on InvestmentNews by Mark Bruno
Regardless, to incorporate a downside valuation range, one might want to further consider the picture highlighted in the upper left above from a ZeroHedge blog title "PeakBook?
" that compares search volume between Facebook and Myspace. Or, read a post at Forbes by Mark Evans titled "Warning: Stay Away From The Facebook IPO.
(1) Securities and Exchange Commission. 424(b)(4) Prospectus
filing dated 17 May 2012. . Total Class A and Class B shares being offered
in the IPO is 421,233,615 or about 20% of actual common shares outstanding as of 31 March 2012 of 2,138,085,037 and 15% of adjusted common shares outstanding after the IPO of 2,741,527,754.
(2) Total Class A and Class B common stock to be outstanding after initial public offering: 2,741,527,754 multiplied by the calculated common stock price per share of $22.
Eclecticism in Architecture
Below are links of an eclectic variety. Woolly Mammoth to Be Cloned
– Discovery News
Within five years, a woolly mammoth will likely be cloned, according to scientists who have just recovered well-preserved bone marrow in a mammoth thigh bone. Japan's Kyodo News
first reported the find. A Government Censors a Blog
Be thankful for your liberties and freedoms, as some governments secretly censor information (in this case, a blog) without apparent due process.Expose an Alleged Financial Crook and be Fined Millions
– Seattle Weekly
Apparently bloggers need to be careful writing about crooks and ponzi schemes. The unintended consequences of the Court's actions will likely be more anonymous, offshore blogging. Aunt Midge Not Dying in Hospice Reveals $14B Market
When private equity firms salivate about for-profit hospice investments, what is the probability that Medicare (i.e., taxpayers) is being pillaged and plundered? Stephen Hawking on Time Travel
- Letters of Note
This one is short and comical.
Kish Oil Bourse (Aug 2011)
Please reference “Iran's Kish Oil Bourse Begins Oil Transactions in Euro and Dirham
” dated 19 August 2011 from Hamsayeh.net.
Having an oil exchange that trades in multiple currencies, including a basket of global currencies, provides an alternative in the marketplace for those who don’t want to rely on any specific fiat currency (a currency not supported and backed by some tangible commodity).
Depiction of the Devil via Codex Gigas
The allegedly intentional misdirection of language in an employees’ stock options agreement demonstrates the lengths that some firms and managers might go to apparently mislead or gain an advantage over other people, clients, or employees.
For further reading about two perspectives regarding aforementioned behavior, then reference some of the links below by Felix Salmon at Reuters and Steven Davidoff at the New York Times .
Nevertheless, there are a couple of lessons that may help to mitigate perpetuation of unethical behavior, perceived or otherwise, by certain parties and individuals:
Lesson 1: The Devil is in the Details (ideally have an attorney vet one’s important agreements, or read thoroughly and ask questions)
Lesson 2: Asynchronous communication: unethical behavior that becomes transparent to more ethical employees, potential employees, and limited partners (public pension fund managers, foundations, etc.) generally ultimately wields a high cost to the alleged perpetrators (e.g., Enron, Lehman, Allied Capital, et al.).
.............................................................................Davidoff, Steven M. "A Clash Between Venture Capital and Private Equity - NYTimes.com." Mergers, Acquisitions, Venture Capital, Hedge Funds - DealBook. 06 July 2011. Web. 07 July 2011. <http://dealbook.nytimes.com/2011/07/05/in-silicon-valley-a-culture-clash-sullies-a-romance/>.
Salmon, Felix. "Downgrading Skype and Silver Lake to ‘Evil’ " Wired.com. 25 June 2011. Web. 07 July 2011. <http://www.wired.com/epicenter/2011/06/skype-silver-lake-evil/>.
Salmon, Felix. "Skype’s Options Plan and Silicon Valley Norms | Felix Salmon." Analysis & Opinion | Reuters. 07 July 2011. Web. 07 July 2011. <http://blogs.reuters.com/felix-salmon/2011/07/07/skypes-options-plan-and-silicon-valley-norms/>.
Cerberus by William Blake (1757-1827)
According to Coller Capital, and highlighted by Jason Kelly at Bloomberg
, investors’ newfound selectivity will help eliminate 20% of private equity firms. Just one of many reasons is alluded to by the June 13, 2011 bankruptcy filing by Perkins
and Marie Callender's restaurant, a portfolio company of Castle Harlan, which will lose all of its $245 million investment.
This isn't new information or surprising to many deal-by-deal practitioners such as Coventry League, as we witness the level of talent (or lack thereof) on a continual basis (in public and private equity investing) and wrote about the upcoming debt overhang at over-levered portfolio companies (De-leveraged Buyouts; Nov. 2009
). Nevertheless, more transparency about these zombie-like private equity firms is positive for the industry since many of these below average firms and professionals tend to overbid and under-perform from a post-acquisition operating perspective.
Unfortunately, the investment and M&A industry is not like, say, professional sports. In sports, athletes are continually evaluated mostly on an objective basis and are displaced by those who demonstrate better prospects and abilities. Exceptions, to an extent, are made for legacy athletes (e.g., Brett Favre) – sometimes. In investing, especially at firms that don’t charge fees based on performance (think wealth management-type firms and mutual funds), many professionals exist not necessarily by their objective abilities and performance but rather mostly by subjective reasons that often include cosmetic aspects of one’s background, personal connections and whatnot.
Additionally, the industry perpetuates a myth that it is practically impossible to consistently outperform market indices (read: collection of companies selected by preset screens) using similar risk (typically defined using price fluctuations with time horizons less than a year).
Why apparently sophisticated investors, including high net-worth individuals and institutional investors continue to deploy capital irresponsibly is puzzling. This is best addressed in a separate blog; however, we'll leave you with this: InkStop. It was a retail chain outlet focused on selling ink cartridges for printers. The business model was terrible (high fixed costs; low-priced products; market trend of low-cost, quick-delivery Internet options; etc.). Yet, several "sophisticated" investors found this business model attractive enough to actually request an investment memorandum and subsequently invest in the company. After the company's prompt fall to bankruptcy, some of these same investors amazingly cried foul
. Moral of the story: Stupid is as stupid does.
New York Stock Exchange; 1882
Below is an extract of a cease and desist letter mailed
to TPM Media LLC (dba TPMMuckracker) regarding its writing about the NYSE and using a photo depicting the exchange. A full summary can be read on Reuter’s blog, Felix Salmon: A slice of lime in the soda
or at Wired.com
. NYSE has common law and Federal trademark rights in and to NYSE’s name and images of the Trading Floor… Moreover, NYSE owns Federal Trademark rights in one depiction of the Trading Floor and common law rights in the Trading Floor viewed from virtually any angle (collectively, “Trademarks”). Accordingly, NYSE has the right to prevent unauthorized use of its Trademarks and reference to NYSE by others.
Apparently some ignoramus is using NYSE letterhead and signing Chief Counsel Kendra Goldenberg’s name to stupid letters.
Mulberry St., New York, N.Y., 1900
We wrote about the deflation versus inflation debate
last year, and provided a couple of perspectives regarding how to frame, or define, the terms: namely, changes in money supply versus changes in nominal prices.
Today, Stoneleigh at The Automatic Earth provides a better and more detailed explanation in her post titled "Inflation for the Innocent, Hyperinflation for the Clueless." “It is not reality that drives markets, but perception, which is emotionally-driven rather than rational. If we assume markets will behave rationally, we will be wrong-footed every time.”
She also addresses the recent surge in commodities prices and acknowledges speculation, which is also described in this Bloomberg video about cotton hoarding in China
The Storming of the Bastille, 1789
The Guardian presented a concise infographic titled "Arab youth: the tipping point
" regarding key factors indicating potential youth uprisings. Two criteria are (a) percent of population comprised of youths and (b) their respective unemployment rates. The latter are stated values. It is likely those rates are understated, as they are in the U.S.
Based on the data, some of the ingredients exist for further youth uprisings in Northern Africa and the Middle East. One factor not included is population density, which seems to act as a catalyst, as witnessed in the densely populated Egypt (primarily Cairo region).
So, who is most likely to be next after the revolution in Egypt