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 ).

Never trust a "startup" CEO who doesn't know how their product is built.

— J-Strizzle (@jstrauss) March 10, 2012

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.

• Seth’s Blog: Don’t Shave That Yak! – A thing that I do, which I shouldn't.
• SnapABug visual customer support – Another live support feature for your website, but this one includes screen capture to help troubleshooting.
• 13 Useful JavaScript Solutions for Charts and Graphs | Resources –
• Buzzzy – A Search Engine for Buzz. – Google Buzz search with an API.
• New Facebook Statistics Show Big Increase in Content Sharing, Local Business Pages – Facebook historical statistics as of February 2010 based on previous updates to their public statistics page.
• Lost Moon Radio: Live Band Karaoke With The Moon Units – Live band karaoke in LA. Available for parties and private events. Very fun!
• Fixed to Flexible – The Ebook – A free 37 page eBook on high-level microeconomic business theory with solid practical examples. The primary focus is on margin, specifically the pricing and cost strategies that go into that equation. It's a very quick read, concisely and clearly written with very illustrative (if somewhat over-simplified) examples.

  For me, the most interesting ideas were on 'constructing value' for a previously unknown product. First, you need to have a compelling free offering so there is minimal risk to customers trying your new product. Secondly, you should take the lead in setting the perceived value of your new product by using an 'anchor' of premium pricing even if you end up selling at a discount to it.

• The Twitter Engineering Blog: Introducing the Open Source Twitter Text libraries – Twitter releases libraries for parsing tweets.
• Great Lake, a Chicago Pizza Shop, Enjoys Being Small – Question – NYTimes.com – A very interesting story about a small artisan pizza shop in Chicago that was reviewed in GQ as one of the best pizza shops in America and how they are (or rather aren't) dealing with their newfound success.

  "We really enjoy the work that we’re doing and we don’t want to cheapen it. Consciously or unconsciously — probably both — we’re trying to create a manageable way to earn a living and still maintain our sanity. We value time as much, if not more so, than money."

• Give-A-Fuck-O-Meter – Saving this to send to people in the future when they tell me something I could care less about.
• The Conservative Case for Gay Marriage – Conservative attorney Ted Olson, a member of the legal team challenging the federal constitutionality of California's Proposition 8 banning same-sex marriage, explains his rationale for participating in the case as a conservative American who wishes to preserve and forward the fundamental principles on which this country was founded:
  "Conservatives and liberals alike need to come together on principles that surely unite us. Certainly, we can agree on the value of strong families, lasting domestic relationships, and communities populated by persons with recognized and sanctioned bonds to one another. Confining some of our neighbors and friends who share these same values to an outlaw or second-class status undermines their sense of belonging and weakens their ties with the rest of us and what should be our common aspirations."
• YouTube – Sugar: The Bitter Truth – A very interesting, if long and sometimes quite technical (it is a med school lecture) explanation of the scientific, socio-economic, and political reasons our food is making us less healthy as a nation (and ultimately a planet) in the last 30 years. It centers around increasing our refined sugar intake, in particular fructose, which has the same long-term chronic health effects as alcohol.
• The Third & The Seventh on Vimeo – One of the most amazingly photo-real works of CG animation I've ever seen.
• Facebook Developers | Extending Facebook Share – Mention of awe.sm in the official Facebook blog post announcing their new sharecount button and data APIs.
• How Best Buy plans to beat Wal-Mart – Dec. 1, 2009 – A strategy to make Clayton Christensen proud. Best Buy is betting that the consumer electronics and computer markets have not yet reached a good enough point where cost is the only factor. By providing an integrated buying/service solution with their in-house Geek Squad division, Best Buy hopes to differentiate from retailers like Wal-Mart who are commoditizing the purchase experience. In this case Best Buy is playing the Apple Computer role to Wal-Mart's WinTel approach.
• What’s strategic for Google? – An interesting and concise analysis of Google's various product/business initiatives using a simple but intuitive strategic framework.
• 500 Internal Server Error – 500 Internal Server Error
• Entrepreneuring…Side Effects | Howard Lindzon – A humorous (but all too true) list of the potential side-effects of starting your own business.
• Paul Buchheit: Open as in water, the fluid necessary for life – A very interesting rationale for the potential common good of social media behavior that is increasingly referred to as "over-sharing". The more we share about what we think and do, the more information will be available to help improve ours and others' future decisions.

  "The basic pattern of openness is that better access to information and better systems lead to better decisions and better living. This general principal is broadly accepted, but we're just now discovering that it also applies to the minutiae of our lives."

• The New Music Business Model: Imogen Heap « Deep Dive Marketing – A very thorough account of the many ways Imogen Heap is using different social media services (i.e. Twitter, YouTube, Flickr, uStream) as a cohesive whole to build deeper relationships with her most engaged fans.
• Ping – How Sharing Links Has Become Big Business – NYTimes.com – NY Times article on the democratization of influence on the web and the roll of individuals and their social networks as traffic drivers.
• 20×200 : Print Information : think-make-think (second edition) – If I were ever to hang an inspirational print on my wall, this would be it.
• Communilytics: Applied Community Analytics: Web 2.0 Expo New York 2009 – Co-produced by TechWeb & O’Reilly Conferences, November 16 – 19, 2009, New York, NY – Web 2.0 Expo panel on which I will be speaking on 11/16/2009
• Op-Ed Contributor – Wall Street Smarts – NYTimes.com – A deceptively simple (yet likely true) explanation of the underlying cause of the financial meltdown: the level of Wall Street’s intelligence finally caught up with that of its greed.
• Twitter to Facebook: 5 Ways to Post to Both – Mashable mention of TweetPo.st.
• Letters of Note: Okay, you lazy bitch – A great letter from Hunter S. Thompson to a production executive on film adaptation of his book “The Rum Diary.” If you know anything about the film business, you know that sometimes cursing and threats of bodily harm are more than appropriate, they’re necessary
• No. 1 With Bullets? USB Uzi Is Latest Killer Album Format | Underwire | Wired.com – Wired blog coverage of the upcoming release from Get Busy Committee, which will be available on Uzi-shaped USB drives.
• 100 years of Big Content fearing technology—in its own words – Ars Technica – A well-compiled overview of the arguments used by content industries to stifle various production and distribution innovations from the gramophone to the DVR. The overriding theme being that incumbent content producers are more inclined to seek government intervention (usually through sensationalist fear-mongering tactics) to protect old models in the face of new technologies rather than to figure out ways to improve their businesses to take full advantage of the benefits these technologies afford.
• Olark – sell better using live chat – Live chat tool to interact with customers on your website in real-time.
• 30 Under 30 2009 – Hype Machine Profile – Very nice write-up of my friend Anthony Volodkin, founder of the Hype Machine, named #27 in Inc. Magazine’s 30 Under 30 for 2009. He definitely should have been higher
• The power of no reward | Derek Sivers – An interesting article on the difference between ‘Social Mindset’ and ‘Market Mindset’. Actions driven out of personal volition are more authentic and the motivation is more powerful though more difficult to activate. Whereas actions driven out of financial calculation are by definition more mercenary — easier to activate, but of less value and harder to maintain. If you can appeal to someone’s ‘Social Mindset’, you cheapen your offer by invoking their ‘Market Mindset’.
• The Power Of Passed Links – A framework for thinking about the relative value of inbound traffic from different sources based on conversions (however one defines them) and growth. The hypothesis is that links passed from friend to friend via channels like Facebook and Twitter will have significantly higher conversions.
• Edward Sharpe and the Magnetic Zeroes: Get Wasted With The Day, In Robes recorded Aug 31, 2009 – Live session with Edward Sharpe and the Magnetic Zeros, including downloadable tracks.
• Official Google Blog: Leave the math to us: Advertisers increase their profits using Conversion Optimizer – “Each and every time someone types in a search query, AdWords runs a new keyword auction. Advertisers who are still bidding on a cost-per-click basis will be using the same bid in many different auctions, so sometimes their bid may be too high or too low. However, for advertisers using Conversion Optimizer, we’ll automatically adjust the bid for each of these auctions so that it can hit the sweet spot more often, helping the advertiser to make more money.”
• Seed is the new Series A for VCs | VentureBeat – A good overview on the move by later stage investors into earlier “seed” rounds along with advice for entrepreneurs on raising a pre-Series A round.
• Know all those Retweet Buttons across the web? Well now Facebook has one. – The first write-up on fbShare.me, from The Next Web.
• Awe.sm Lets You Track Articles Shared Into Facebook – Write-up of the latest Snowball Factory product, the fbShare.me sharecount button for Facebook.

• Thingfo powers Biggest Gleek social media game for Fox hit “GLEE” – finding, channeling and rewarding the top evangelists at Thingfo blog – Announcement of the new social media game for the Fox TV show Glee, built by Thingfo and powered by awe.sm.
• Facebook | Publishing to Twitter from Facebook Pages – Facebook has released a feature that enables Fan Page owners to syndicate their updates to Twitter automatically.
• 500 Internal Server Error – 500 Internal Server Error
• Peer-to-peer ‘(un)classes’ match interest with passion – Springwise – Another nice write-up of (un)classes.
• Unclasses.org Launches | Culture San Francisco – DailyCandy – A nice (if oblique) write-up in Daily Candy SF on my side-project (un)classes.
• Raphaël—JavaScript Library – Raphaël is a small JavaScript library that should simplify your work with vector graphics on the web. If you want to create your own specific chart or image crop and rotate widget, for example, you can achieve it simply and easily with this library. Used by Thingfo.com.
• Hitwise Intelligence – Robin Goad – UK – An interesting post about Twitter traffic growth in the UK. But, the most interesting part is the chart showing sources of traffic for various vertical categories of websites. Notably that over 40% of traffic to sites in the 'Entertainment' category is coming from either Twitter or Facebook. This reinforces my hypothesis that social media is a particularly powerful marketing channel for content.
• The Smart Growth Manifesto – Umair Haque – HarvardBusiness.org – 20th century economies are limited to unsustainable, unfair, brittle, dumb growth. Smart growth is more sustainable, equitable, and resilient based on 4 pillars:
  1) Outcomes, not incomes
  2) Connections, not transactions
  3) People, not product
  4) Creativity, not productivity
  The inefficient legacy technologies for measuring growth forced us to reduce our understanding of it to purely quantitative terms that don't accurately represent the whole point of progress: to advance humankind. People do not measure happiness and satisfaction in purely quantitative terms, yet those have become our de facto measures of success. Now that we have the capabilities to measure the effects of qualitative goods, we should abandon our legacy tactics that reduce progress to mere numbers.
• Confessions of an Executive Producer: earn it – "The irony is consumers have never been easier to find but never harder to reach. As I see it brand/consumer relationship is analogous to that of a married man to his mistress. For years the affair was a simple proposition. He wined and dined her. Bought her jewelery. Paid her rent. In return he got laid and left guilt free at the end of the evening. After years of this pattern, the mistress begins to feel used and unsatisfied. She desires more than material goods. She wants conversation. She wants to be listened to. She wants to be in a relationship. Much to the displeasure of the adulterer, sex can no longer be bought. It has to be earned. I believe the same thing is happening today with the brand/consumer relationship. Brands must earn consumers time not simply purchase it. The problem is they don't know how and don't seem eager to learn."
• Tweetpo.st – Update Facebook & Twitter At The Same Time | Visit tweetpo.st – Write-up of TweetPo.st on the Killer Startups blog.
• TweetPo.st – the smart way to update Facebook from Twitter « EverythingTwitter – Write-up of TweetPo.st on the Everything Twitter blog.
• TweetPo.st, aggiorna facilmente Facebook da Twitter – Geekissimo – A write-up of TweetPo.st on an Italian technology blog.
• TweetPo.st – a smarter way to update FaceBook from twitter – A write-up of TweetPo.st on twi5, a Twitter tools site.
• Master of 500 Hats: How to Pitch a VC (aka Startup Viagra: How to Give a VC a Hard-On) – Dave McClure's excellent presentation on how to structure a startup investor pitch (oh, and it's funny too).
• the blip.tv blog : blip.tv: the next generation – "Over the course of the last century the television networks (and their younger cable siblings) have evolved into nearly perfect businesses. Unfortunately, however, they have optimized for a historical condition: an oligarchical economy of scarcity. The networks are perfect for an era of expensive production, limited distribution and ubiquitous attention.

  2009 is not 1949. Modern consumer electronics and the Internet have ushered in a new economy of plenty. Production costs have decreased at an astounding rate. Distribution has become ubiquitous. It is no longer necessary, for all but the most ambitious projects, to seek out a studio to bankroll your pilot and a network executive to green light you for a time slot. Your talent and work ethic are now greater predictors of your success than who you know."

• How to Pitch to a VC or Angel – ReadWriteStart – A collection of high-level tips for startup investor pitches, including Guy Kawasaki's 10 slides / in 20 minutes / with 30pt font rule.
• Maturation of the Twitter Ecosystem – A very cool presentation about how the ecosystem of Twitter applications has evolved over time (featuring a shout-out to TweetPo.st on slide 31).
• TweetPo.st a smarter way to update Facebook from Twitter – Another nice write-up of TweetPo.st, a Snowball Factory product
• LocalBunny Gives Businesses Custom Twitter Bots, But It Longs For Old @Replies System – LocalBunny is a new paid service targeted at small businesses that will auto-respond to keyword mentions on Twitter with @replies based on user-defined rules. The kinds of use-cases mentioned as examples are interesting and the app sounds good on paper. But, I'm not sure I'm fully convinced that auto-responses will be successful in a medium like Twitter with such a high value placed on authenticity.
• BackType — Blog Archive » Tweetcount Widget & Plugin – Announcement of the new awe.sm-powered Tweetcount widget from BackType. It shows the number of times the current page has been tweeted using the BackTweets API and uses awe.sm to create new tweets.
• Brand Mentions Preferred over Ads – eMarketer – Study showing that earned media (i.e. consumer/press brand mentions) and permission marketing (i.e. *solicited* emails) are more effective than paid media in general and interruption marketing (i.e. banner ads and pop-ups) specifically.
• Digg the Blog » Blog Archive » DiggBar and Digg Short URLs – Digg reverses course on their URL shortener and states that they have no intention of marketing it as a conventional URL shortener. It is solely a way to share Digg pages.
• 10 Impressive New Implementations of Facebook Connect – TweetPo.st (né TweetFace), an application built by our company to connect Twitter and Facebook, was included as #7 on Mashable's list of "10 Impressive New Implementations of Facebook Connect".
• TweetMeme Blog » Retweets Are Go – Announcement from TweetMeme that their popular Retweet button now supports awe.sm.
• Sharing on Facebook Now More Popular than Sharing by Email – Data from the AddToAny showing that Facebook is now the most popular sharing channel for their share widgets. This data claims Facebook has 24.0% of shares while email has only 11.1% of shares. However, this is inconsistent with ShareThis data from less than a year ago that still had email near 50% of all shares.

• Sorry, There’s No Way To Save The TV Business – A clear and concise overview of how the incumbent stakeholders in the TV business are oblivious to the fundamental changes being wrought by delivery of video over the Internet and how this rising tide will ultimately wash away the strategic underpinnings of their legacy business models, which ultimately cannot be translated to this new world.
• Not safe for work: And we’ll tweet at the end of the tour | Technology | guardian.co.uk – "Looking around the hall at the same-old-same-old faces of microblogging – the people who have been around long enough to have usernames like @amanda and @drew and @mario – all given just enough stage time to remind everyone how awesome their little corner of Twitter is – I realised that 140 Characters was never supposed to be a conference about "the state of now" at all. Rather it's a conference about the state of "then". A conference designed to bring together those of us who have been using Twitter since the start and who now feel like we've lost control of it to celebrities like Aston Kutcher and Oprah. A chance for us all to sit around and talk about the good old days when Scoble and iJustine still mattered a damn and where having 50,000 geeks following you was the pinnacle of success…Or to put it another way, 140 Characters was like a meeting of Twitter Early Adopters Anonymous."

• Edward Sharpe & the Magnetic Zeros: A folk-rock revival with L.A. roots | Pop & Hiss | Los Angeles Times – LA Times write-up on one of my new favorite bands, Edward Sharpe and the Magnetic Zeros. They call them 'folk-rock', I think they're more 'folk-funk'. But we both agree their live show is not to be missed!
• Why Advertising Is Failing On The Internet – The title of this piece is a bit of a red herring, and some of the arguments may be somewhat inflammatory. But I agree with the underlying premise, which is that the dynamics of the Internet are exposing the inherent flaws in conventional interruption marketing aka advertising. As a result, the author, a Wharton professor, argues online advertising will not be able to provide a broad-based revenue model to support the majority of web companies as commonly expected. He should have stopped there, but then goes on to examine other potential revenue models in a manner that detracts from his core point IMHO.

• Secret of Googlenomics: Data-Fueled Recipe Brews Profitability – Purportedly a story on the role of Hal Varian, Google's chief economist, I found most interesting the history of how the AdWords bidding process was developed.
• Constructive Capitalism – Umair Haque – Daytona Sessions vol. 2 – A very in-depth (and thus long) talk by Umair Haque on the transition from 20th Century economics to 21th Century economics, which he calls Constructive Capitalism. He makes a lot of the same points as in his BRITE talk, but arguably less concisely.
• Where culinary dreams take shape, batch by batch – Los Angeles Times – A really cool concept of specialty food incubators, essentially commercial kitchen space for rent hourly. I wonder if something similar could be done as a restaurant with different chefs being able to rent out specific meals to do a part-time restaurant.
• Crimes suspected in 20 bailout cases — for starters – Los Angeles Times – The official charged with monitoring the bailout program says it lacks transparency and is very susceptible to fraud and abuse by participants.
• The Life and Times of A Twitter Link :: Blog :: Fuel Interactive – Based on anecdotal empirical testing, the average useful lifespan of a link shared on Twitter is only ~5 min.
• ConvoTrack – A bookmarklet (or embeddable script) for showing you all the conversations happening about a given page across the web (powered by BackType Connect).

• TweetFace is a More Powerful Way to Update Facebook from Twitter – A nice Inside Facebook write-up on TweetFace, the Snowball Factory's second product, which we soft-launched last week
• Website: Wilson Sonsini Goodrich & Rosati – Term Sheet Generator – An automated tool to generate draft financing term-sheets for startups, from one of Silicon Valley's most prestigious law firms.

• Analytics Talk » Blog Archive » Tracking YouTube Videos with Google Analytics – How to build a chromeless YouTube player with Google Analytics event tracker code. Useful if you want embedded YouTube videos but care enough about Google Analytics data to build your own custom player.
• startuptools / FrontPage – A wiki-fied list of useful business tools for startups across various categories from development frameworks to CRM.
• More Ways To Shorten Those URLs: UnHub And Lnk.by – The first public mention of awe.sm in the blogosphere
• URL Shorteners: Which Shortening Service Should You Use? – A comprehensive analysis of the 15 most used URL shorteners out there today based on criteria such as redirection type, tracking, client support, and domain length. Also includes some interesting survey responses on which shorteners people use and why.
• 140 Characters » How Twitter Was Born – A first-hand account of how Twitter was born out of foundering startup Odeo. From the humblest of beginnings to Oprah and Ashton Kutcher!

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.

• Digg support, Brazilian shortener, and all sorts of other awe.sm-ness « feed your blog to twitter – Announcement of the first third-party tool to officially support awe.sm
• L.A. starts buying up foreclosed homes with federal aid – Los Angeles Times – This is the best use of federal bailout money I've heard yet: the city of Los Angeles is buying up foreclosed residential properties and turning them into low-income housing. This is toxic-asset relief (buying foreclosed properties puts a value on their mortgages) with real equity for the government and a social benefit. I hope more funding goes towards programs like this.
• The Banker Who Said No – Forbes.com – A fascinating profile of banker D. Andrew Beal, who runs Texas-based Beal Bank. Beal Bank is privately held and approaching $7 billion. But the most interesting part is how they got there: by essentially sitting out the market 2004-2007. Seeing the state of the lending market in 2004, Beal essentially put his bank into hibernation by suspending new loans, hoarding cash, laying off half his workforce, and working half-days. Over the next 3 years, he was mocked by mortgage brokers and scrutinized by regulators for sitting on the sidelines. But his intuition, conviction, and self-restraint have paid off in a big way as he is now using his cash stockpile to acquire assets at pennies on the dollar. IMHO, no publicly traded bank would have been able to pull this off even if they had wanted to.