What Makes You So Special? …and Can Anyone Learn to Invest Well in Startups

This post from venture capitalist Jerry Neuman is excellent and got me thinking once again about my chosen career?

Investing in startups is way different than investing in stocks.

I have sat with Chris Douvos myself (who Jerry talks about in the post) and he has asked the same question…’What Makes Me So Special?’.

I am sure I gave a smart ass answer like ‘my red back hair’ to buy some time. My follow up answer has not been good enough because Chris has yet to invest in our funds (or he hates guys with red back hair)!

As Jerry gets to in his post:

Is there no how?

Some people have better investment results. Is it luck? Michael Mauboussin said you can tell skill from luck by asking yourself “can you lose on purpose?” This is an amazing question. In venture the answer is, trivially, yes.

There are two kinds of pitches. Those that are clearly bad ideas, and those where it’s not clear at all if it’s a good idea or a bad idea. Investing in the former will lose you money. Investing in the latter might lose you money or might make you money. Skill is distinguishing between the two. Then luck comes into play.

The reason I could never say how I’m special is because I’m not. And neither were any of the other VCs I met with. At least not in a way anyone could wedge into a 30-second pitch. Divvying the world into two piles is hard, but it’s not magic. Being special is being magic, that’s what the question is really, how are you magic?

Anyone can learn to invest well in startups. But you do have to learn how to do it and then you have to work hard to do it right, every time. Like any job, you show up and you do the work and you notice your mistakes and you try to do better and you improve over time. It requires thinking and trial and error and trying to be rational and asking yourself if you’re thinking about this right and asking other people how they did what worked and what they think about this one you’re thinking about. Figuring out the nos from the maybes is, more than anything else, like solving a puzzle. The puzzle is different each time. Your job is solving the puzzles.

Good puzzle-solvers have all sorts of strategies they use to solve puzzles, but the main way they become good puzzle-solvers is by solving puzzles. Good puzzles are never the same as other good puzzles. There is no generic puzzle solving process. If you ask a good puzzle solver what makes them so special, they would ask for a puzzle to solve, and solve it. What makes them special is that they solve the puzzles. They do the job.

The Era of Lifelong Learning

I really liked this piece by Ben Sasse on ‘The Challenge of Our Disruptive Era‘.

I generally skim through the worrying and pessimism as it affects the dosage of meds I need to get through the day.

This paragraph nails it:

The rise of suburbia and exurbia, and the hollowing out of mediating institutions, is an echo of the changing nature of work. In the 1970s, it was common for a primary breadwinner to spend his career at one company, but now workers switch jobs and industries at a more rapid pace. We are entering an era in which we’re going to have to create a society of lifelong learners. We’re going to have to create a culture in which people in their 40s and 50s, who see their industry disintermediated and their jobs evaporate, get retrained and have the will and the chutzpah and the tools and the social network to get another job. Right now that doesn’t happen enough.

As for the future…I want my kids to concentrate on Ben’s closing thoughts:

What will the American idea look like when we get to this new, disrupted world of the digital economy? What will entrepreneurship look like? What will cultural pluralism and a robust defense of the First Amendment look like? What will it mean to be able to say that the meaning of America is still centered in institutions that look like the Rotary Club—where people actually live, where they know and love their neighbors, and where they actually want to do good, not just wear tribal labels about some distant fight in Washington that isn’t anywhere near up to the task of the moment we face?

That’s the challenge before us, and here’s the good news: Throughout our history Americans have been optimists, ready to seize the day. Let’s get to work.

The Weed is Coming and The Bitcoin is Not Leaving

I hear the word ‘bagholder’ a lot lately.

Investopedia has a definition of it:

An informal investment term used to describe an investor who holds a position in a stock which decreases in value until it is worthless. Typically, the bag holder will hold the position for an extended period of time in which most of the investment is lost.

I imagine the word came into vogue in the chatrooms post the internet bubble and it is VERY popular term in social finance circles today.

Seeing that most stocks go to zero (I have read it’s 58 percent), it has become hip to throw the term around when the subject of semiconductor stocks, biotech stocks, bitcoin, marijuana or any difficult to explain phenomenon sweeps the markets.

In other words, the bagholders are real, the people using the term loosely today are lazy.

Let me try and explain why you should refrain from loosely using ‘bagholder’ in 2017.

The digital craze has been fast and furious.

Every human is being onboarded onto digital platforms.

It’s no wonder Visa, Mastercard, Square, Paypal, Tencent and Alibaba are at or near all-time highs. They are in the middle of it all. Payments is the ultimate digital prize.

The most exciting and of course volatile proxy for this latest stage of the digital (and payment) boom has been the digital assets like Bitcoin and Ethereum. I like to say that they offer all the digital juice without the costliest pieces (employees and their benefits).

Digital assets like Bitcoin and Ethereum are still in their infancy. At Passover, the topic of Bitcoin came up with my 17 year old nephew Aaron who said a friend of his was buying. I told him his friend was interesting and smart. My father in law called it a scam. Thank goodness gold is going up so we just congratulated him on his yellow metal prowess and changed the subject. I only like to argue on Twitter.

If you think Bitcoin is volatile today, I give you this tweet from 2010:

If only I was the ‘bagholder’ that paid .37 cents that day for Bitcoins!

The digital boom was wicked volatile until Facebook became a monopoly. It is a must read. The big get bigger. Bigly is here to stay.

The weed craze is a little different. It is like Bitcoin in 2010. It’s not as disruptive as digital, unless you are a gangster.

Large booze and tobacco conglomerates are fine. They will likely own a big chunk of the marijuana industry as it matures over the decades to come.

Today, Bloomberg put some fuel on the weed fire (naturally on 4/20) with this piece entitled ‘54 Stocks Deep in the Weeds‘.

The ‘bagholder’ tweets were fast and furious.

There will be ‘bagholders’ for sure…but I will focus on the bigger picture and the truth of opportunity and profits.

The Boulder Energy

I had a fantastic day in Boulder. 

Here I am with my friend Jud who I mentioned yesterday founded Gnip (it will be if not already is the most important part of Twitter). Though our heads may be the same size his brain is way bigger. 

I sat in this spot for a few meetings staring out at the mountains surrounding Boulder. 

The building across the street houses TechStars and The Foundry Group. I spent some time at both. 

I am a little concerned though about our National Parks. I had no idea they had offices in Boulder and they happen to be right next to Foundry.  It looks like Trump really does plan to shut them down. 

Then again if I worked for the government and lived in Boulder I would never be in the office either. 

Off to Techstars Boulder

I am in Boulder for the day tomorrow seeing friends and catching a Techstars demo day.

Way back in August, 2008 I headed to Boulder on an invite from Brad Feld to visit with Techstars. That blog post was so long ago that Techstars was still a .org.

It turns out that Boulder had more to offer than mushrooms and skiers.

The vision for Techstars has been the same from day one…build a global ecosystem that helps entrepreneurs build great businesses.

I immediately imagined there would be a big rollup in entrepreneurship schools. I definitely got the direction of this trend early and right. There has not been a way for the public to participate and that is a bummer (I got that part wrong).

With Techstars and Boulder I was hooked. I invested in many Techstars early classes and founders individually and through our Social Leverage funds. I became quick friends with David Cohen (the founder of Techstars) and invested in his first ‘seed fund’ which had turned into one of the great funds of all time (Uber, Twilio, Sendgrid).

I met Dave Tisch in 2009 who ended up putting Techstars New York on the map. We have been great friends from that day.

I stumbled into the GNIP offices one day looking for directions and met Jud Valeski (the founder) which was acquired by Twitter and now one of the biggest companies in Boulder. Jud and I are having lunch tomorrow.

I met Ari Newman the founder of Filtrbox and made a seed investment. Filtrbox was later acquired by Jive Software and went public in 2011. Magic. Excited to see Ari tomorrow who now runs the Techstars fund.

The only bad thing about Boulder is leaving.

All Hail Vanguard?… The Facebookization of Markets and Everyone in the Index Clowncar

Bigly things are happening in financial markets right now, but before I get started… in the ‘I suck at marketing’ story of the day the SEC is investigating a hedge fund that that promises no losses. This guy must have taken the hedge fund marketing class at Trump University


There is Vanguard and there is everyone else…

Of the $5 trillion in index funds today, $4.2 trillion is controlled by Vanguard. More astonishing may be that Vanguard is growing faster than all its competitors together . Here is an excerpt:

The Vanguard trading floor is the epicenter of one of the great financial revolutions of modern times, yet it is a surprisingly relaxed place.

A few men and women gaze at Bloomberg terminals. There is a muted television or two and a view of verdant suburban Philadelphia. No one is barking orders to buy or sell stock. For a $4.2 trillion mutual fund giant that is still growing rapidly, it occupies a small fraction of the space of a typical Wall Street trading hub.

You can barely hear the quiet hum of money being invested — money in scarcely imaginable quantities, pouring into low-cost index mutual funds and exchange-traded funds (E.T.F.s) that track financial markets.

In the last three calendar years, investors sank $823 billion into Vanguard funds, the company says. The scale of that inflow becomes clear when it is compared with the rest of the mutual fund industry — more than 4,000 firms in total. All of them combined took in just a net $97 billion during that period, Morningstar data shows. Vanguard, in other words, scooped up about 8.5 times as much money as all of its competitors.

Why should you care?

While Vanguard is accelerating, the amount of public companies is in rapid decline. This is further pressuring the downward spiral of investment fees. The rise of roboadvising and the surge in information access (I would add a huge rise in misinformation) are the other big themes that rule the markets.

Sadly, only Trump can stop this stock market and he seems up to the task.

Trump and his crackpot clan are taking credit for the surge in the US averages since election night. Despite the huffing, puffing and flip flopping by Trump, just 43 percent of stocks are above their 50 day moving average, the lowest since the election:

charliebilello shared a chart on StockTwits

As for data, what will get Trump re-elected is GDP growth (don’t get me started on how outdated/lame we are at measuring GDP in a digital and software eats everything world). The GDP is why Trump has switched to war mongering so quickly. The actual planning that would be needed to create jobs outside the military is not going to happen under a Trump administration.

Elsewhere in Trump trends…

Gold is at it’s highest price since the night of the election. This seems obvious in light of the fact that Trump has been hoarding gold furniture and drapes at the White House since the day he moved in. I am happy with my digital proxies for gold (Bitcoin and Ethereum).

The Mexican Peso is at it’s highest price since the night of the election. This is not something Trump will brag about but it shows how little weight or fear the words of Donald Trump carry. Unfortunately, the bombs that we handed over to him carry too much weight.

charliebilello shared a chart on StockTwits

Back to index investing…

The trade is crowded. Indexing is creating some new problems. At minimum you should take it as yet another wake up call to know what the hell you own and why you own it. It’s a great reason for not allowing the ETFization of everything. I’m glad the SEC shut down that Bitcoin ETF idea for example.

The other day I was writing about the markets and moods and Josh had this post up on called ‘cognitive clownshow‘ that puts an exclamation point on what I call the ‘Facebookization‘ of the markets. Moods matter in markets more than ever, even fake moods.

One of the most interesting trends that I continue to read up on is international stocks. Factset has reported that 30 percent of all S&P 500 revenues came from international markets. We all own international stocks now.

I own my first Indian Stock ($MMYT) and a few Chinese stocks (Ctrip and Tencent). I talked about India on March 1 back on the blog and bought $MMYT soon after on March 9th.

(I sold a little after this big run last week)

This weekend I read this New York Times piece on Uber in India and it’s a reminder that the world has shrunk and become more investable in a digital world. That does not mean eyes and ears and your feet do not matter more than ever.

I saw this today which was interesting. If you think Fox news and CNN are making us cranky today…by the year 2100 the average age of everyone alive will be 42. It was 24 in 1950.

Finally – Netflix reported their numbers tonight. On the surface, they missed ‘estimates’. The joke is that people get paid to game this stuff with straight faces. Netflix is a cult stock at this point. Someone pointed out today that they have global product market fit. Every human loves endless good content and Netflix has $14 billion set side to please humanity. Every dip is being bought because nobody wants to miss the next Amazon or Priceline even though Amazon and Priceline may be the only next Amazon and Priceline’s.

Voice…The Final Frontier

A lot of people are feeling pretty sure about the future these days.

Amazon is over $900/share.

Tesla passed $300/share.

Chipotles stock is going up again.

Retail is in total meltdown.

As overpriced as the momentum favorites seem to be (to the upside and downside), the catalyst for their future success might just be getting started…voice.

My friend Semil said this about voice recently:

By voice, I don’t mean podcasting. There are 1000 podcasting pitches in my inbox, but I agree with Doc Searls who says nobody is going to own podcasting.

Our voices and our faces are going to lead us into a new revolution in computing, security and ecommerce.

Quant Chaos and the Rise of Mood Experts

I see, read AND hear about quants, AI and machines taking over the world all day…but it does not scare this knucklehead:

My friend Josh had an amazing post up the other day called ‘pure comedy‘. It is funny, but sad. At the end, Josh dove into the incredible fees our financial overlords have skimmed:

92% of all actively managed stock mutual funds have failed to beat their benchmark over the last 15 years, according to S&P Dow Jones Indices. Stated another way, only 8% of thousands of fund products have been able to do what they were supposed to have been able to do.

Can you imagine if 92% of the cars sold by auto companies couldn’t drive? Or if 92% of the pills sold by the pharmaceutical industry were placebos, or worse? What if 92% of the pizzas sold by Domino’s were just Ritz Crackers. How is this a thing that exists?

Don’t worry, nobody knows.

For the ten years ending 12/2015, mutual fund investors, collectively, have received returns that were $545 billion below what the indices would have given them. And for that, they’ve paid $437 billion in fees.

No wonder everyone has been rushing to low cost ETF’s and now that the trend has accelerated the banks are in on it themselves.

All this plays into the hands of machines and the too big to fail financials because as Fred Wilson notes in this recent post – the machines are now in charge of voting for you as to how companies run.

No wonder Zuckerberg and Spiegel (Snapchat) want to control every decision for their companies even after they are dead!

No wonder people are chasing private equity at all stages.

If you are not a mood expert or hold some edge with mood data, good luck gathering public market assets in this new world…at least from me.

Road Biking Scare

I have been on the road way too much this year and am trying to stay off a plane for a few months.

More dangerous than flying though are my miles on the bike.

According to Strava I have rode 698 miles this year. My goal is 3,000.

Today I had a few asshats and one robot try and run me off the road.

There is not much I can do about some nut thinking it is funny to brush me. It is one of the risks of the road.

More frightening was a Tesla whose driver was trusting autopilot and/or busy texting and searching the web. The Tesla came within inches of my wheel at 40 plus miles/hour and as it passed I saw the car ease back between the lines.

Fry the Friendly Skies of Blackrock and Warren Buffett

A few years ago I started flying last minute.

I figured for all the anxiety that ticketing changes brought me, the extra 10-20 percent a year in travel costs was a good trade.

I have been lucky the last 30 years to have mostly flown Southwest and JetBlue.

This recent United shitshow is a new level of bad behavior, but it was inevitable and will hopefully inspire some change.

Matt Levine has the definitive piece on these bad actors entitled ‘overbooking and cross-selling‘. You have to read the whole piece and all the links to understand how diseased this industry is and how it’s tied to our markets, but here is a good excerpt:

United then went on to demonstrate that if you are a major airline in 2017, you don’t have to be very good at public relations, putting out a series of blasé statements whose main message was “whatever, we are an airline, you will come crawling back.” It was interesting to see people on Twitter talk about boycotting United over this incident, as though that was a possible course of action. Consider the revealed preferences: The man at the center of the incident, who was violently attacked for sitting in the seat that he had paid for, tried to run back onto the plane. He’s not boycotting United! He just wanted to get home.

We talk a lot around here about the theory that increasingly concentrated cross-ownership of the airline industry by institutional investors has reduced competition among airlines, and I suppose you could read this incident as proof that United is so insulated from competitive pressures that it can afford to beat up its customers without losing any market share. But really this story seems more like the result of competition — but competition solely on price, not on service. If airlines compete solely on price, some passengers will get beaten up. “Investors seem impressed by the sadistic commitment to cost control,” comments Matt Klein. “By auctioning off overbooked seats, economist James Heins estimates that $100 billion has been saved by the airline industry and its customers in the 30-plus years since the practice was introduced.” Ryanair would introduce Beating Class if it could save money.

If this does not depress you enough, I loved this Wired piece today about the airlines and United specifically.

The airlines, much like the railroads and the banks have become enterprises focused on ‘calculated misery’. They profit from people’s fear of suffering. Mr. nice guy Warren Buffett is the king of calculated misery (Wells Fargo, most railroads and now United).

We are in the worse phase of this airline debacle. Everyone thinks it is their right to fly and the airlines are run by the banks and institutions who believe it is their right to ‘milk’ you.

Luckily, this consumer era is led by Amazon who will jigger the cloud and Wall Street to get into the airline business.

For Amazon and Prime, travel is the ultimate bundle.