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deep thoughts – jstrauss

May next year be your best year ever!

Almost exactly 10 years ago, I threw myself off the cliff of starting a company. I did it because: a) of where Ian helped me realize I was on the risk/experience curve (i.e., more risk tolerant than inexperienced); and b) I was optimizing for minimal regret. In other words, I was very privileged to have had a lot more to gain than I had to lose.

10 years later, I’ve been extremely fortunate to have gained a lot–though not necessarily what I set out to. Most importantly, I now have an incredible wife and 2 amazing healthy kids. Gratitude has become central to my worldview, but being truly grateful also means acknowledging what you have to lose.

I used to never question that every new day could be better than the last if I made it so. But I’m now grappling with the reality that time doesn’t just give indefinitely. At some point, it starts to take too. Yes, some things will hopefully continue to get better: every day our kids get older brings new joys; and I’m excited for what lies ahead in my career. But I’ve also reached the point where my obliviousness to mortality is being steadily chipped away: the older family members or friends’ parents or even friends we lose continue to move from rarity to reality with each passing year. It’s a tautology to say that our time becomes more precious as we get older, but it’s still a hell of a thing to experience for yourself.

I’ve found it challenging to reconcile 30+ years of ambition and competitiveness with the fear of missing out on time with my wife and kids. I used to primarily define my success by achievement, but I now find enjoyment increasingly important. I guess I’m still using a regret minimization framework, it’s just what I don’t want to regret that’s changed.

I’m hopeful that 2019 will be my best year ever just as 2018 has been. But I’m aware that one day–hopefully many years from now–will be as good as it ever gets for me, and I likely won’t realize it until long after the fact. We cannot freeze time to savor those perfect moments. So what can we do other than what the beautiful Ted Rheingold made it his mission to teach us: #EnjoyEveryDay?

Wishing you and your family your best year ever!

Maybe this is the reality we need.

Imagine a reality in which the first female president succeeded the first African-American president. Imagine a reality with taco trucks on every corner, without an administration pushing every legal and ethical boundary, without our global standing diminished, without the mass undoing of years of progress in criminal justice reform, financial regulation, and protecting the environment, without ICE agents ripping apart families, without White Supremacists emboldened enough to march by the thousands in Charlottesville. That sounds like a much better world to me.

But that world probably is also missing the incredible counter-protest that happened in Boston yesterday, the beautiful response from the community of Charlottesville, multiple Presidential Commissions resigning en masse, GoDaddy, Google, Zoho, Cloudflare, and Namecheap banning the Daily Stormer from their respective services, James Damore having the chutzpah to write that memo prompting a much needed acknowledgement of discriminatory beliefs within the tech community. In that reality, people speaking out against hate would probably still be derided as “Social Justice Warriors” and those of us who weren’t direct objects of discrimination could still plausibly deny how widespread it continues to be.

That reality may sound better, but this is the one we needed to truly make progress as a society and a nation.

With the benefit of current events, it’s impossible to ignore that hate and prejudice are deeply rooted in a much larger percentage of our fellow citizens than many of us (by virtue of our privilege to not be discriminated against) believed just a few months ago. As President Obama said recently of his election in 2008:

“I think some, you know, white voters, who sincerely were glad to see that the country had made this breakthrough, there was also made an unrealistic notion that somehow, ‘Okay, that means discrimination’s over.’”

But the truth is the discrimination, both systemic and individual, has always been there. And as long as we were having a debate about whether or not it was still an issue, we couldn’t have the much more pressing debate about how to truly irradicate it. As long as we wanted to believe that every case of police killing people of color, of sexual discrimination or assault, of homo- or transphobic rhetoric or legislation were isolated incidents and not part of a broader pattern, we were delegitimizing the lived experience of every one of our fellow citizens not born into our same privilege. We were also giving cover to the metastasis of “the Alt Right,” “Ethno Nationalism,” or whatever other normalizing euphemisms we’ve allowed White Supremacists to rebrand themselves as.

Everything horrible and regressive that has come from Trump’s election, which includes preventable deaths and other irreparable harm that cannot be trivialized, can be the foundation of much more meaningful progress if we answer the call. Hatred and prejudice derive their power from silence and fear in the rest of us, from the myth that they are the “silent majority.” And while it saddens me to now have proof that 1/3 of our country are actively or tacitly racist, I’m pretty good at math and that means there are still twice as many of the rest of us than there are of them.

Let us continue to raise our voices to show them to be the vocal minority they really are and to drown out their message of hate with our embrace of love, equality, and justice.

The Zero-Sum Worldview

President Trump has just announced the United States will withdraw from the Paris climate accords against the advice of the entire global scientific community, much of the American business community, and even many of his own advisors. There has been no shortage of ink spilled analyzing why 63M Americans – mostly white, less educated, and non-urban – voted for Trump, and the (somewhat patronizing) consensus of the left is some combination of outright racism, fear/anger, and deception. But what about the Trump supporters and enablers who haven’t been hoodwinked, who have no reason to be blinded by rage, and who likely know firsthand much worse behavior than we have observed from the outside?

What motivates the Republican politicians that endorsed (and now shield) Trump and the large conservative donors that continue to tacitly if not explicitly condone his actions? These are largely educated, wealthy, urban elites – exactly the same type of people they have mobilized millions of Americans to despise. What explains this schism among the “elites” who, unlike most of the country, share both a clear-eyed understanding of the consequences of Trump’s actions and huge financial incentives to support them? If the most fundamental human motivators are fear and greed, why do identical circumstances inspire greed in conservative elites and fear in liberal elites?

It’s not that the liberal elites have embraced and benefited from free-market capitalism any less – Warren Buffett, Michael Bloomberg, George SorosTom Steyer, Chris Sacca, Mark Cuban, Reed Hastings, and Reid Hoffman among many many others opposing regressive conservative policies are some of the most ambitious and successful businesspeople of our time. And it’s not that the conservative elites have less to lose from potential longterm environmental and/or social catastrophe – the Koch brothers and Robert Mercer have children and grandchildren that will long outlive them, as must many of the 700 donors that contribute >$100k per year to the Koch’s conservative political organization.

I believe the answer lies in a key passage of the Trump administration’s recent WSJ editorial:

The president embarked on his first foreign trip with a clear-eyed outlook that the world is not a “global community” but an arena where nations, nongovernmental actors, and businesses engage and compete for advantage.

This is an unambiguous statement of their zero-sum worldview – in order for us to win, someone else has to lose. In the Internet age, this is widely considered to be an archaic approach to business that opens incumbents to disruption from startups seeking to “grow the pie” rather than fight a war of attrition. It is also at the heart of the divide between conservative and progressive mindsets. By definition, conservatives believe this is as good as it gets (or, worse, that our best days are behind us) and we must defend the status quo against the future (or attempt to reclaim the past). Whereas progressives inherently believe the future should be better than the past, that innovation can empower us to create a tomorrow superior to today.

So is the difference between the conservative and liberal elites that for some reason one group is driven by greed and the other is more altruistic? No, both are greedy otherwise they wouldn’t be millionaires and billionaires. But, to borrow a distinction first made by Gus Levy when he was head of Goldman Sachs (of all places), conservative elites are “short-term greedy” while liberal elites are “long-term greedy.” Those who are happy to pay more taxes than the direct government benefits they receive are rejecting the zero-sum worldview and embracing the progressive mindset that their investment in public goods* can deliver a better future for themselves than they could achieve just by hoarding their wealth.

This enlightened self-interest is fundamental to the American experiment, as observed by Alexis de Tocqueville nearly two centuries ago. And if we let our country become one governed by the zero-sum worldview, we will lose everything that has made it great.

* A common conservative objection to investment in public goods is that government is inefficient and free-market solutions are superior. This is a disingenuous argument, because the free-market will never provide for many public goods necessary to a well-functioning society (even Hayek agrees). So yes, government is inefficient and can be greatly improved but that does not obviate our need for it.

Fight Back against the #ParisAttacks: Spread Tolerance

I am fighting back against the horrible attacks in Paris by spreading a message of tolerance for all religions, including Islam.

I don’t discuss politics on the Internet. This is different. This is my small strike back against the evil that manifested in Paris last night.

I’m generally dismissive of social media activism for often over-simplifying discussions of complex issues into us vs. them shouting matches. This is different. This is very much an us vs. them shouting match, in which we are members of a multi-cultural global civil society and they are zealots who want to start an “apocalyptic ‘war of civilizations.'”

I share the belief that the goal of the Paris attacks is to eliminate the “grayzone” of Moderate Islam by triggering Islamophobic backlash in the non-Islamic world. It is the same goal of the other recent atrocities attributed to the self-proclaimed Islamic State: the bombings in Beirut; the downing of the Russian airliner; the bombings in Ankara. These terrorists believe in a black and white conflict between Radical Islam and the entire rest of the world, and these attacks are their way to make that vision a reality.

Their strategy is sickeningly straightforward:

  1. Commit atrocities in the name of Islam against the non-Islamic world;
  2. The non-Islamic world will turn against *all* Muslims;
  3. Moderate Muslims will be forced to give up Islam entirely OR join the Islamic State.

There’s a big weak spot in this strategy: it depends on us to behave like them.

This is our opportunity to fight back! Do not allow the perpetrators of these attacks to be proved right by our words and deeds, nor our inaction against the words and deeds of others, in response to their horrible acts of evil. This is a time when spreading messages of tolerance and love on social media actually can have an impact.

I stand with the majority of Muslims in the world, who are equally devastated by these attacks, to show the enemies of civilization that it is *all of us together* versus them.

By no means is this alone a panacea. These events have made clear that the threat from the self-proclaimed Islamic State is much bigger and closer than most of us had hoped. Unfortunately, the hard work and sacrifice required of government officials, diplomats, armed forces, and first responders all over the world may be far from over. But this is also a propaganda war being fought on our home turf, and those of us not in a position to take direct action IRL can make a difference with our voices online.

Replacing Oneself as CEO

I am very happy to announce that Fred McIntyre has joined awe.sm, the company I founded and have led for the last 4 years, as CEO (read more about it on TechCrunch). My new role is Head of Product Development in which I will continue to lead product, strategy, and engineering.

This is at once one of the hardest and best things I’ve ever done.

There’s a lot of great writing out there on hiring non-founder CEOs from a business perspective: if you don’t want to have to do it, do these things (I definitely didn’t do enough of them); if you think you might need to do it, think about these things; and if you’re going to do it, try to do it like this. So what I really want to talk about is the personal side of this process from my perspective as the founding CEO.

I wish I could say this was my idea, but frankly I wasn’t self-aware enough to come up with it. To be an entrepreneur I believe one must have a somewhat irrational belief in your own capabilities, otherwise you’d never be dumb enough to start a company. Regardless of any perceived glamor, most entrepreneurs I know will tell you that starting and running a company is fucking hard and there’s often more misery than joy. But there’s just something broken in us that makes the prospect of doing anything else seem even worse. For those of us with this particular defect, I think the Peace Corps slogan sums it up: entrepreneurship is “the toughest job you’ll ever love.” The thing in me that drove me to quit my job, move in with my parents, and start awe.sm is the same thing that kept me going through incredible stress and the lowest of lows to make it to our Series A and it’s the same thing that kept me from asking for the help it was clear to everyone around me that I needed.

I put hiring a CEO in the same category as taking an acqui-hire or just closing up shop and moving on — things I would think about at 4am in the office on those darkest nights when I’d have a bout of sobriety about the insanity I’d turned my life into. And ultimately, things that represented the one unacceptable option motivating me to push even further beyond my limits I’d long surpassed: failure. In the early days, the only way for me to keep awe.sm from failing was to tie my fate with the company’s. If awe.sm failed, I failed. But as we switched from lean startup to growth company, I didn’t fully realize how making my ego a shareholder went from being necessary for survival to being a limitation on what we could achieve.

Fortunately, I have an amazing Board that cares about me as a person as well as an investment. Mark, Ian, and Ryan took the time to help me see why something needed to change, and, to their great credit, gave me the decision of what to do. I will never forget the emotional tornado (roller-coaster doesn’t do it justice) of that day. After 3 and a half years of fusing my self-worth with the success of the company in the crucible of startup survival, it was impossible to tear them apart without pain. But while my first reaction was disappointment and failure, it was almost immediately washed away by a wave of relief. I knew everything they were saying was true, arguably better than they did, and I knew change was inevitable, but I had no idea how stressful and exhausting maintaining my internal reality distortion field had been until they gave me permission to turn it off.

The basic choice we had in front of us was to sell the company or hire a CEO. We had plenty of money in the bank, a great engineering team in an impossible hiring market, and real valuable hard-to-build technology, so we were in a better position for a sale than many acqui-hires. Personally, I still owned 30% of the company outright and selling would have kept me from having to give up the CEO role. On the flip-side, we would be starting from scratch on the CEO search and it would ultimately mean signing up for a Series B (i.e. more dilution) and several more years of awe.sm. The Board said they would support either decision, but only I could make it. Talk about a gut-check!

Guess which one I picked :-). It was far from an easy decision, I agonized over it for weeks and got advice from a lot of smart and experienced people (thanks everyone!). I made the choice and told the Board; they asked me if I was sure and I told them I was; I had second thoughts and talked about it with a bunch more people; the Board asked me again if I was sure, I said I wasn’t but I was committed. And all this was before we even started recruiting a CEO! I ran the search process, screened all the candidates, and ultimately had the final say on who we hired.

I chose not to sell because I believe the opportunity for awe.sm is too big to ignore, and I chose Fred because he shares that belief. When Fred accepted his offer, Mark Suster said that he thought this would be the best year of my career. I hope he’s right, but I’m at least certain it will be the best year of my life since starting the company.

You’re more than the Fucking Janitor: Thoughts on Startup Leadership

Last month, I had the honor of participating in the inaugural Foundry Group portfolio CEO summit where we had an enlightening discussion on leadership. To kick-off the conversation, one of the other CEOs volunteered the story of a time he felt he failed as a leader: he had a disagreement with some of the engineers on his team about the complexity of a given feature; and when their conversations reached an impasse, he took matters into his own hands and coded the feature himself.

I found the most interesting part of the ensuing discussion to be the disagreement over whether this CEO’s act of digging in and coding the feature himself was a leadership success or failure. We didn’t do a formal survey, but the group appeared to be divided into two camps: one that felt he should have focused on solving the communication and process (and possibly staffing) issues that prevented his team from executing as he desired; and the other that saw value in the example he set by showing he was capable of and prepared to do what he asked of others.

Earlier this week I read Zach Bruhnke’s excellent post You’re not the CEO – you’re the Fucking Janitor, and it took my mind back to that discussion about what good leadership looks like in a startup. My answer: it depends. It seemed to me that the folks at the summit who felt this CEO failed by doing instead of managing were leaders of more mature companies, while the ones who admired his leadership by example tended to be running earlier stage startups. As someone running a company that had recently raised our Series A and was growing from a team of 5 in January to 14 today, I found myself agreeing with both sides of the debate.

For a boot-strapped or even seed-funded startup, I think Zach’s post is spot on. The “CEO” in Zach’s story is a total douche, and my business cards say “Co-founder” precisely because calling myself the Chief Executive over 4 of my friends made me think of Yertle the Turtle. My dad always told me “the fish stinks from the head”, which is just his graphic way of saying great leaders lead by example. In my relatively short leadership career thus far, I’ve taken this to heart and always jump at the opportunity to do things myself.

In addition to the mutual respect and motivation Zach mentions in his post, one of the greatest advantages I’ve found in this approach is the intimate understanding a leader attains of how things are done within their team. Across the many failures of leadership I’ve observed (I was at Yahoo! for 4 years 😉 ), there’s a recurring theme of the leader being too removed from the actual doing. Especially in the technology world, the means of production can be just as important as the output. I can’t tell you the number of product and business leaders I’ve dealt with who treat engineering like a commodity instead of a potential competitive advantage. You only need to look to the world’s most valuable company to see what great supply chain management (i.e. caring how the sausage gets made) can do for your business. And when you’re a software company, every architectural decision your team makes has a bearing on essential business considerations like performance, reliability, time-to-market, and agility in responding to new threats and opportunities. That’s why awe.sm is, above all else, an engineering-driven organization (and looking for even more great engineers 🙂 ).

But in a later stage company, the leadership challenge is greater because you need to figure out more scalable ways of achieving these same goals. There was one particular line of Zach’s post that stuck out for me in this regard:

If you want to be a CEO in the sense that you dream of then you should remember to be the Fucking Janitor too.

A couple months after raising our Series A, I was washing dishes in the office and caught myself feeling self-satisfied because here I was, CEO of a company that had just raised millions of dollars, doing the dishes. I thought about my dad’s smelly fish saying and how he’d be proud of me. Then I thought about our investors and what they’d think of this…and it struck me they’d be pissed. Here I was, CEO of a company in which they’d just invested millions of dollars, doing the dishes instead of the dozens of other things only I could be doing to make their investment successful.

In the few months since then, my leadership focus has shifted. I still do the dishes when it’s my turn; when AWS shits the bed at some inhuman hour, I’m in our IRC room doing what little I can to help; and I always want to understand the gory details about why we made one architectural decision over another even if I wouldn’t know how to implement either of them myself. I am proud to continue to be a colleague to my team above all else. But leadership in a larger organization requires more than that. Our goal is to achieve on a scale bigger than what one person can achieve alone, and that means the leader needs to lead not just do. Doing is good, but when it turns you into a micro-manager or takes you away from leading, it can be counter-productive.

Delegation is hard. I’m finding delegating well to be much more challenging than doing things myself. Leading purely by example just requires effort and a willingness to do things that aren’t fun or glamorous, and as the leader you’re usually the most incentivized to get those things done. But effective delegation requires much more than mere will, it is a skill set developed with patience and learning and painful trial and error. It requires finding great people, training them in the skills you need them to have, motivating them to share your goals, empowering them with the resources and information to be successful, trusting them to do their jobs, and then giving them feedback on how to improve. I have come to believe my primary job as a leader is to enable the members of our team to deliver what the company needs from them, and that’s a lot harder and even less glamorous than being the Fucking Janitor.

Vote against #SOPA with your pocketbooks: Boycott the Box Office

That money in politics you’re always complaining about, it’s yours. Take it back!

Our government is way broken. As citizens, we need to fix it fundamentally. And until then, the Internet industry needs to get better at playing by today’s broken rules. But in the case of SOPA/PIPA (also see this great infographic), there isn’t time to fight lobbying fire with lobbying fire, and the notion that emailing and Tweeting at Congress is our best shot of battling entrenched special interests is naive IMHO.

Yesterday we saw a great example of how grassroots online organization can focus our collective economic leverage into influence and results. But before we all go patting ourselves on our collective backs, let’s be honest: this was a gimme — an Internet business dumb enough to thumb their nose at their core customers, and who could ultimately be swayed by a chorus of angry digerati. I applaud the spirit of the GoDaddy boycott, and even participated, but I want us to parlay this small win into something much more meaningful. Let’s not stop at the pawns, let’s strike at the root of support for SOPA/PIPA: the entertainment industry.

More specifically, we need to kneecap the MPAA. Once you understand the motivations of the players involved, the logic of how we can put an end to this nonsense is relatively straightforward. The MPAA is a trade group that represents and is funded by the 6 major film studios (Disney, Warner Brothers, Universal, Fox, Sony, and Paramount). It has an annual budget, determined by its members, that has been shrinking since 2009. The recently appointed new head of the MPAA, former Senator Chris Dodd, is pulling down more than $2 million a year to turn the organization around, which means convincing the studios that they should increase its funding. Not to be overly-cynical here, but it doesn’t seem like too much of a stretch that a former Senator being paid a ton of money in the private sector might seize on Congressional legislation highly favorable to the industry he now represents as the quickest way to prove his (and his organization’s) worth.

I am convinced that the management of the studios don’t really care that much about SOPA/PIPA. If they thought anti-piracy legislation was important, they wouldn’t have been slashing the budget of their lobbying organization over the last several years: in 2007 the MPAA’s overall annual budget was $93 million, in 2009 it was down to $64 million; and within the MPAA itself, the money spent on lobbying went from $2.7 million in 2008 to $1.7 million in 2010. This legislation is even worse than what everyone thinks — it’s not being driven by the needs of a single industry, it’s being driven by the needs of a single industry *trade group*. The studios support it because they’ve been told it will be good for them (even though anyone who knows anything about technology knows it will do little to actually stop piracy) and because there’s no additional cost to them other than what they’ve already sunk into the MPAA’s annual budget. Let’s change that!

If we can show the studios that this ineffective legislation that only succeeds in being hostile to their customers is going to cost them money, I believe they’ll rein in Dodd and the MPAA right quick and that would be the end for SOPA/PIPA. The good news is we have a clear path for demonstrating that cost because, even though these guys may not read the bills they’re paying to have written, they watch their weekend box office receipts like hawks. The bad news is I don’t think the usual online activist base will be enough — in order for this to work, we need to get real people to take real action by changing their offline behavior (i.e. it only works if people who normally go to theaters don’t go when we ask them).

So, here’s what I propose:

  1. We pick a weekend far enough from now that we have time to adequately mobilize mass support
  2. We educate our non-geek family and friends (aka muggles 😉 ) about how SOPA/PIPA will impact the Internet in ways they care about (e.g. censoring YouTube and Facebook)
  3. *Then* we start making noise online to get as many people as possible to join the boycott on the appointed weekend and to make clear to the studios that the dip in revenue they’re going to see that weekend is a direct result of their support of SOPA/PIPA

That’s my idea. I think it can work, but only if enough other people think it makes sense and want to help. I’m open to suggestions on how to move forward and happy to help however I can in making this a reality. You can reach me at jonathan [at] jonathanhstrauss.com and @jhstrauss on Twitter.

And in the meantime, I’ll be that guy annoying his girlfriend’s family about the evils of Internet censorship at Christmas dinner 😀 .

Politics is getting depressing again…

I’ve been quite absorbed with my startup the last couple months, but it’s been hard to escape the derailment of the Obama administration’s political agenda — in the form of the current healthcare “debate” — less than a year after sweeping to office with a seemingly overwhelming mandate. As much as I’ve pushed these concerns to the back of my mind, I can’t help but at least subconsciously find the reemergence of the politics of fear depressing.

The right-wing extremists we united to vanquish only 10 months ago haven’t disappeared; they just went underground long enough for us to lose focus and for them to prepare their insurgency. This political battle is Afghanistan, not Iraq (or more accurately, what Iraq was supposed to be) — it’s not quick or sexy and the minute we let up, the enemy will take advantage with sneak attacks.

With enough stability regained that the everyone no longer feels we’re in crisis mode and Obama in office long enough for people to realize he’s not some kind of miracle worker and that the solutions to the problems we face are going to take meaningful time and effort, the right-wing has turned up the intensity of their guerilla war by reengaging in the politics of fear. Healthcare is obviously the most conspicuous theater (‘death panels’, really?!), but Glenn Beck’s unabashed claims that Obama is a racist, the “outrage” over Obama’s back-to-school speech, and now the forced resignation of Van Jones are all part of a pattern we cannot afford to ignore.

This post was prompted by one from Carl Pope, Executive Director of the Sierra Club, on the Van Jones debacle entitled “We All Blew It“. I couldn’t agree more, and it made me realize this is a problem that is only going to escalate if we don’t do something to stop it. We progressive Americans, who were only finally galvanized by our reaction to 8 years of Bush/Cheney coupled with the bright promise of the change Obama could bring, have reverted back not just to complacency, but worse to underestimation.

Just because *we* are immune to the politics of fear, does not mean they have lost their power — no matter how absurd the claims in question (whether it be ‘death panels’, Obama’s racism, or Van Jones’s “extremist views and coarse rhetoric”). Remember how much we underestimated George W. Bush in the 2000 election (regardless of whether he legitimately won, none of us thought it would ever even be close)? We have to stop assuming people fact check outrageous claims and recognize that inflammatory propaganda must be stopped in it’s tracks and those who perpetuate it must have their credibility undermined so they can’t continue to do so much damage. Say something enough times (especially on tv) and too many people will start to think it’s true. The more unsubstantiated and/or downright false claims we allow the Glenn Becks of the world to shout from the rooftops, the further they will push the boundaries. We cannot afford to let these extremists define the terms of engagement — if you have to answer questions on ‘death panels’, you’ve already lost.

The politics of hope are a challenge of patience and understanding, while politics of fear pander to our desire for quick fixes and to blame others. Getting people to think beyond sound-bites and seek substance is no easy task, but we have proven it can be done. Let’s not let all that hard work be squandered by neglecting to follow through.

I won’t lie, I’ve found the continued emails from the White House and Equality California (the No on Prop 8 folks) annoying. But I realize now that’s because they remind me I can and *should* be doing more. I’m going to start by phone banking for Equality California this week, because if I don’t participate then I don’t have a right to complain.

What are you going to do?

Where’s the Bottom?

Like many investors right now, I’m spending a lot of time trying to figure out whether the stock market has actually hit a stable ‘bottom’ or whether it still has further to fall. My dad and I had a long discussion last night about different methodologies for calculating what  equity prices *should* be based on historical market behavior and the dynamics of the current situation. The two main factors that have driven the slide from the heights of October 2007 (DJIA @ 14,279.96 and S&P 500 @ 1,576.09) are the sudden de-leveraging of the financial markets (i.e. some major investors being forced to liquidate >75% of their positions) and the macroeconomic effects of a recessionary cycle (i.e. higher unemployment, lower consumer spending, deflation).

While theoretically possible, I believe modeling the impact of these two factors is a practical impossibility because they are so intertwined — de-leveraging sparked the recession and the recession is driving further de-leveraging. You could also do a technical analysis where you try to match current market behavior to past patterns and extrapolate what happens next based on what happened before. But that method requires making a bet on which past patterns to match against, i.e. is our current situation more similar to the Great Depression or all the recessions since. And that’s a big bet.

So, I propose a different (and much simpler) approach: assume a realistically sustainable growth rate over a long enough period and figure out where we would be if the market had grown at that pace. I picked 20 years as the period and charted the monthly percent change of the Dow Jones Industrial Average (DJIA) from 2,342.32 at the end of January 1989 to 8,131.33 at Friday’s close. The actual percent change is the blue line, and I plotted 3 other lines against it: 10% annualized growth in green; 6% annualized growth in orange; and 2% annualized growth in red.

Here’s what that period looks like in annual percent change for the DJIA and S&P 500:

And here’s the annualized rate of return for both the S&P 500 and the DJIA since 1989:

Over the course of this 20 year period, there were only 6 years in which the market declined *at all* (one of which, 2005, was basically break-even) and there were 10 years in which the market gained *more than 10%* and in 7 of those it gained *more than 20%*. Even after the tech bubble “burst” taking the market from 11,497.12 at the end of 1999 to 8,341.63 at the end of 2002 (a 27.4% decline in 3 years), the market would still have delivered a *10.1%* annualized rate of return over the prior 12 years. From where we sit today, it’s no wonder the DJIA declined 33.85% in 2008 (taking us to a still very respectable annualized rate of return since 1989 of 7.24%). But that doesn’t answer the question of how much further down it needs to go before we can consider the value of the equity markets stable. 

That’s where the annual growth rate analysis comes in. It is still highly subjective — depending on what one believes to be a representative sample period and sustainable annualized growth over that period. But I like it because it helps me think about the broader market in terms I feel more comfortable making assumptions about, like what do I think is a reasonable rate of value creation for the economy as a whole over a given period. In the case of the 20 years since 1989, do I believe there’s a reason that the equity markets should have averaged ~10% annual growth while our Real GNP achieved only 2.76% annual growth over the same period? No, and obviously neither does the market at this point.

So, what is a reasonable expectation for a bottom? Your guess on the underlying assumptions is as good as mine. But if one believes technical advancements over the last 20 year period enabled us to double efficiency (i.e. extract twice as much profit from the same revenues), then the markets *should* have grown at around twice the rate of Real GNP. In that case, we would be expecting 5.51% annualized growth in the markets since 1989 as of the end of 2008. Starting from 1989 closing prices of 2,753 on the DJIA and 353.4 on the S&P 500, 19 years of organic equity growth pegged at 2x GNP growth should have closed 2008 at 7,634.38 and 979.95, respectively (actuals were 8,766.39 and 903.25).

Update: Dad accurately points out that GNP is a trailing indicator and equity prices are leading indicators. So, this analysis shouldn’t be considered anything other than directional. I find it helpful as one factor in my overall assessment of the current situation, but as Howard reminds us no one really has all the answers.

This final chart shows the actual level of the DJIA (blue) compared to what it would be if it was pegged at 1x GNP Growth (red), 2x GNP Growth (orange), and 3x GNP Growth (green). It is essentially the same as the chart at the top but now instead of arbitrarily picking annual growth rates, we have pegged them as multiples of Real GNP (i.e. ratios of business efficiency). As you can see, for most of the last 20 years the markets were assuming >300% improvements in business efficiency.

All the above charts and underlying analysis can be found in this spreadsheet.

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WTF is an (un)class? or On Diversified Living

I first heard the idea for (un)classes a little under 13 days ago when Rahmin pitched it to Todd, John, and me at the Lair on Presidents’ Day. So, what’s an (un)class? It’s exactly what it sounds like: a way to explore your interests without the formal structures of an educational organization; or what we have come to call casual learning. From the brand new (un)classes blog:

(Un)classes are to continuing education what BarCamps are to conferences — a lightweight, low-pressure, and most of all fun way to explore topics that interest you without having to make a big up-front commitment. 

Rahmin is one of those guys with a million ideas, and there’s something to almost all of them, but this one struck a chord with me. It was a product *I* really wanted, which is always a good sign. So, I started to think about why I wanted it and I came up with two fundamental themes that I think are resonant with a growing number of people.

Diversified Living

When I left Yahoo! a little over a year ago, I had spent nearly 4 years as close to singularly focused on work as humanly possible. Over those four years, I invested all of my life capital (i.e. time) in my career, which I thought was a sure-fire investment that would have a much higher rate of return than conventional instruments like hobbies and relationships — those only paid incremental quotidian returns, this could pay exponential life-changing ones. But then I was hit by a Black Swan in the form of Yahoo!’s well-documented struggles. And all of a sudden, a good portion of the capital I had accrued from my investment was in the form of influence within a company at which I was no longer interested in working.

So when I left, I vowed not to make that mistake again. I was not going to put all my capital into one life investment vehicle that could unexpectedly lose its value, I was going to diversify. I realized that life experience (i.e. travel, hobbies, etc) may not have a sexy upside, but it’s safe and pays a solid dividend. Whatever was to come next career-wise would never be a singular focus at the absolute expense of life experience.

However, I’m more than a little OCD (in the annoying perfectionist way, not the need to lock the door 7 times and spin around way) and I throw myself fully into what I do because I don’t know any other way. So, this new goal of life diversification would have to take forms that didn’t require an abundance of free time. But, there aren’t too many meaningful things you can do with a relatively small amount of sporadic spare time beyond read a novel or paint. You definitely can’t learn a new skill or study a subject that interests you, at least not through any conventional educational offerings of which I’m aware. And that’s where (un)classes fills a market void for me, it’s micro-education (Rahmin’s term) — a learning format with smaller basic units that fit my crazy lifestyle.

Weaponization of Hobbies

(First of all, credit to Raza for the term.) If micro-education is a format, then casual learning is a category within that format. What sets casual learning apart from other potential categories of micro-education is the inherent lack of competition, which appeals to my desire for my extra-curricular activities to be enjoyable and stress-free.

Don’t get me wrong, I’m a competitive guy. But, I think it’s somewhat ridiculous that you can go pro and/or compete in pretty much anything nowadays. Stuff that was meant to be fun has now been turned competitive at the highest levels, and I would argue that has trickled down to permeate every level of a given hobby to some degree. There is a certain expectation that by taking classes you are (at least in theory) fully committed to one day becoming an expert in that subject. And by not pursuing the next level once you get there, you are quitting. This implicit expectation can be very daunting for novices or dabblers and serves to keep people from even trying. What if I just care enough to only ever be a beginner?

And then there are the other students. Haven’t we all been there in the beginners’ sailing class with the guy who brought his own life-vest and keeps trying to complete the instructor’s sentences or in the introductory rock-climbing class with the guy who keeps volunteering how he’s only trying to get back in the swing of things after taking a few years off? I don’t want to spend my precious free time dealing with these people! Like I said, I’m competitive. So even if I’m not there to compete, I’ll end up taking it seriously just to shut that douchebag up.

Casual Learning FTW!

I believe both these themes, diversified living and a rebellion against the weaponization of hobbies, appeal to a lot of people who may not even know it yet or are just beginning to realize it.

The current recession has made diversified living not just something the growing ranks of the white-collar unemployed may see as a silver-lining until they find their next job, but a core value that will stay with them for the rest of their lives. The macro-economic Black Swan of the credit crisis is trickling down to become millions of personal Black Swans just like mine. Our generation that was trained to sacrifice everything short-term for our careers and the long-term benefits of professional success is seeing the foundational assumptions of that philosophy spectacularly undermined before our eyes. If all of a sudden I don’t reasonably believe that I’ll be able to make $10M by the age of 40, is the way I’ve been living my life worth the opportunity costs?

As for the weaponization of hobbies, everyone hates douchebags. ‘Nuff said. 🙂

Casual learning is unique in that it is purely learning for fun. By its very nature it can’t help you with professional training or becoming an expert at anything. And so, you end up with a self-selecting group of participants who are all there for the same reasons. What makes casual learning special is the community of intellectually curious individuals who want to pursue the joy of learning without having to make a substantive commitment to do so. (Un)classes fill the gap between nothing and full commitment to a subject matter and do so within a supportive and non-competitive group of like-minded individuals. 


We’re trying to launch the first version of (un)classes.com in time for LaidOffCamp this Tuesday. Rahmin and I are working on product and marketing, Marcus is helping out with design, the fantastic guys at Cloudspace — CoreyMichael, and Tim (who also happen to be the guys behind awe.sm) — are doing the development heavy lifting, and Todd has even offered to chip in on some CSS work. It’s a side-project for everyone involved that basically kicked off Thursday night, and it will be nothing short of a miracle if we pull it off (and I promise to write about the process if we do). But we’re all really passionate about the possibilities of the idea and the community it can create, and we want to start using this product ourselves. 😀

If you made it this far, there’s a high likelihood you’re digging on the idea of (un)classes as much as we are, and you’re wishing there was a way to get involved right now. Well, today is your lucky day! Even though the site isn’t up yet, Rahmin setup a way for you to submit ideas for things you wanna learn and things you wanna teach. When the site goes live, your submissions will be the first classes in there and you will get an email with your account info. Of course, you can also follow (un)classes on Twitter and/or subscribe to the (un)classes blog.

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