The Deal With Microsoft and Facebook

Numerous disparaging articles point to the “bubble deal” over Microsoft’s recent stake in Facebook. The naysayer’s have a point; however, they are missing the main reason for the investment—to one-up Google.

Google is advertising on the internet. Seriously, the company is a force with no end in sight. They continue expanding into different markets with ease. This deal is a success for Microsoft because they are tired of losing the internet battle to Google. From this standpoint, the strategic investment by Microsoft in Facebook makes perfect sense to me.

Did they pay overpay? It’s tough to tell. I wasn’t in the negotiation following their logic. However, I’m sure the main motivation for paying $240 million was simply to oust Google; not to mention the long term advertising deal.

Is this the AOL + Time Warner bust all over again? I highly doubt it, but time will tell if the investment actually pays off.

The Importance of Brainstorming

How many people actually brainstorm ideas? I do all the time. Typically, I’ll have a random thought or idea that I make sure to write down. Some ideas get pitched, while others stick, and I’m left to sort through what’s left.

If I get stuck with no further application for a thought or idea, I’ll take it to someone else for another opinion. Creating some type of verbal interaction usually helps spark ideas I hadn’t thought about. For me, getting others involved adds a considerable amount of value.

Read the BusinessWeek article on brainstorming, and the importance of getting others involved when making decisions.

The Dip

I just finished reading The Dip: A Little Book That Teaches You When to Quit (And When to Stick) by Seth Godin. It’s a quick read (76 pages), and he brings up an interesting argument that fly’s in the face of what we’ve been taught our whole lives: winners never quit, quitters never win.

He claims the old saying is wrong—winners do quit and quitters do win. The difference is that a winner knows when to quit something that won’t get better. A winner knows when to battle through The Dip, and when to move on, while a loser continues to fight an unwinnable battle and refuses to shift their resources into something more valuable.

Winners quit fast, quit often, and quit without guilt—until they commit to beating the right Dip for the right reasons. In fact, winners seek out the Dip. They realize that the bigger the barrier, the bigger the reward for getting past it. If you can become number one in your own niche, you’ll get more than your fair share of profits, glory, and long-term security. Losers, on the other hand, fall into two basic traps. Either they fail to stick out the Dip—they get to the moment of truth and then give up—or they never even find the right Dip to conquer.
- Seth Godin (The Dip)

What is The Dip? The Dip is the long hard slog that most successful people endure on their way to mastery. Initially, something new gets you excited. Feedback is abundant from those around you. However, over time, most people fall victim to The Dip—the trials and tribulations that accompany anything worth fighting for.

Here is an example of The Dip in my life:

When I bought my first guitar, I was excited. My parents and friends were astounded that I wanted to learn and play guitar. The feedback stimulated my excitement. However, once I tried to teach myself, The Dip set in. This is where most unsuccessful people quit. The excitement wore off. The feedback ceased because I was a beginner—nobody wants to hear a beginner, they want to hear someone with talent. At first, I quit in The Dip. Every time I tried to play, I felt like I wasn’t getting any better. I felt like it would take too much time and effort to play the guitar.

Then came the breakthrough. It started when I learned three chords—A, C, and G. I found out I didn’t need feedback because I just enjoyed learning to play the guitar. It took roughly five years to fully overcome The Dip, but I learned a lot about myself along the way. For me, I think this is the secret to success—finding the things you really enjoy doing, even when there is minimal feedback to guide your path and ensure your success.

More to come on this topic...

Warren Buffett Speaks

Warren Buffett spoke in South Korea today regarding the subprime woes in the States, and offered a troubled outlook for both financial markets and the ever weakening dollar.

I am waiting to see fourth quarter earnings before getting nervous; however, there are no shortages of warning signs throughout the markets, as evidenced by the recent drop in the DOW.

I am surprised that consumer spending hasn’t decreased. On the other hand, nobody really knows the long term effects of the subprime credit woes until more data is released.

Is Great Wealth Overrated?

Jonathan Clements wrote an interesting article in Saturday’s Wall Street Journal regarding wealth in this country. He claims great wealth is overrated, and that enjoying what you do and having a sense of purpose are much more important factors towards achieving happiness. Moreover, he says everyday Americans should not be impressed by the wealthy.

Flaunting material wealth does not impress me. The reason: in a world of credit, most people who seem rich are actually in debt. Obviously, there are exceptions to this statement; professional athletes, founders of Fortune 500 companies, etc…

The richest people I know simply hide the fact they are wealthy. I’m not saying they don’t spend, they just allocate more dollars for income producing investments rather than depreciating assets (fancy cars, clothing).

The wealthiest people I respect live a life of service and use their material wealth to impact the world in a positive way. Warren Buffet donating $44 billion is one glowing example.

Is great wealth overrated? Not if used in a positive way….

Marriage and Personal Finance: Yes, They Are Related!

A weekend of marriage counseling led me to a troubling conclusion about education in this country: Why aren’t marriage and personal finance classes taught in the public school system? Marriage is one of the biggest decisions a person will make in their lifetime, and yet there are no formal requirements to educate young people before getting married. Is it a wonder that 50% of new marriages end in divorce?

Personal financial problems continue to rise in this country. In 2005, the average American household with at least one credit card carried a balance over $9,000. In terms of real world application, I can’t think of another subject that equals personal finance. Every American should have a baseline understanding of finance and investing; however, most people learn about it through trial and error after they are already in debt.

I believe marriage and personal finance have an obvious connection: 50% of new marriages end in divorce; 80% of divorcees cite financial problems as the main reason for separation.

The ironic part of this debate is that marriage actually makes you richer. A study by an Ohio State University researcher shows that a person who marries — and stays married — accumulates nearly twice as much personal wealth as a person who is single or divorced.

If marriage makes you richer, and the divorce rate is tied to financial problems, why don’t more people stay married? People don’t plan to fail; they fail to plan. However, it’s not entirely their fault. The lack of formal education in these two critical areas is a main factor. American schools should make marriage and personal finance classes mandatory from a young age. Starting early will only help people plan for success.

More to come on this topic……

Predatory Networking

There are many ways to connect with people both socially and professionally. However, in the process of increasing your network, when do you cross the line and become a predatory networker?

Liz Ryan describes what it means to be a predatory networker, and then offers 10 tips to help connect in a courteous and professional manner, while providing insight for dealing with those who don’t.

What about connecting with someone you don’t know? In my experience, just because you don’t know someone doesn't mean you shouldn't connect. Most people are more than willing to offer career advice, lessons learned, etc; but present them with reasons why you are seeking their help. Spell out areas where you are the same, and areas that differ. If they accept, make a solid first impression and stick to some sort of agenda. Remember, reaching out is a good thing, but forcing ideas, beliefs, etc, will only hurt your chances of connecting with them again.

So, continue to reach out and seek advice from as many people as possible, but avoid predatory networking!

Indexing

I’m sure you know by now that I am a huge proponent for low expense ratio index funds. Investment gurus Ben Graham, Warren Buffet, and John C. Bogle realized a long time ago that the best way to ensure a fair market return is to own all the common stocks through a total market index fund.

"If the data do not prove that indexing wins, well, the data are wrong." - John C. Bogle

See the charts found on John C. Bogle’s Vanguard Morningstar Invest Forum website to understand why these assertions are correct.

Reversion to the mean (RTM) as discussed by Bogle is the “pervasive law of gravity that prevails in the financial markets—and never stops.” The real market return (after expenses) of owning individual stocks or mutual funds will eventually sputter because of this law. Those stocks and mutual funds that greatly outperform the index are fighting an un-winnable battle; eventually they to will fall victim to the forces of RTM.

My current individual holdings Chipotle Mexican Grill (CMG), Conoco Phillips (COP), and Best Buy (BBY); collectively continue to outpace the S&P 500 and total market index funds. I guess time will tell whether or not these dollars would have been better off in the indexes.

However, I still feel there are certain times to buy and hold individual companies as long as you can handle the ups and downs. I do know; however, some ways to be below average:

- Daytrading. Jumping in and out of all holdings on a daily or weekly basis will hurt you in the long run. Why? Capital gains taxes and trading commissions eat away potential returns

- Buying Penny Stocks. There is a reason why companies trade for less than $1. Do yourself a long term favor and don’t buy them. The risk is not worth the potential return!

- Bandwagon Trading. If you find yourself buying yesterday’s big gainer, odds are you’ve already missed the return

Avoiding these tempting pitfalls will put you on a much more positive trajectory relative to your peers. Trust me; I have tried them all with minimal success!

Understanding the Buzz in China

After reading The Undercover Economist by Tim Harford, I began to understand the reasoning behind China’s rapid economic expansion. I articulated these findings in a presentation last May, which centered on the main points in Chapter 10 of the book.

The title of Chapter 10 is “How China Grew Rich.” However, China is not rich. Not yet. Millions of Chinese citizens live on less than $1 per day; well below the poverty line compared to the United States. See below for economic data.

As China began to modernize, investors realized the value in cheap labor. Moreover, less governmental restrictions led to outside investment, which would eventually increase their economic output to record levels.

I feel China is an economic hotbed, which will continue to increase output well into 2009 and beyond. As long as you have a tolerance for risk, foreign investments (like China) may be the best place to put your money, especially as the dollar continues to weaken relative to foreign currency.

View the main points from my presentation here
China vs United States economic comparison

Are the Reckless Getting Relief?

Response to Fortune Magazine article Heads I Win, Tails I Get Bailed Out by Allan Sloan.

The main point of the article was to criticize Fed Chairman Ben Bernanke for cutting short term interest rates, because prudent investors actually suffer in the long run. Here are some highlights:

• Even though the Fed’s stated reason for cutting short-term interest rates by half a point was to help keep the economy from falling into recession, anyone who’s been paying attention knows that a major motivation—if not the major motivation—was to try to calm the turbulence that has been roiling the markets since August.

• Those who keep score in dollars are losing because the rate cut contributed heavily to the dollar’s recent sharp drop in the currency markets.

• Even though the Fed has cut short-term rates, long-term rates, which it does not control, have risen in reaction to the cut.

• Some junk mortgages will reset at lower rates, however, the cost of large, high-quality fixed-rate mortgages, which are tied to long rates, will be higher than they’d otherwise be.

I agree with Allan Sloan that the short-term cut actually hurts some investors. However, I believe Mr. Bernanke and the rest of the Federal Reserve Board was acting with the best of intentions.

Sometimes, short-term relief is enough to remove emotion from the market, which will have a positive effect long term. In doing so, investors jump back in, helping to divert a recession. The market has stabilized (at least for now); and struggling financial companies are getting back on track.

I don’t think the majority of investors see the short-term cut as a “bailout.” Moreover, savvy investors are in long term index funds, so the ups and downs of the stock market don't really matter anyway.

Vehicle Buyers Guide

I couldn't help posting a reply to the Yahoo Finance article about buying a car. Unfortunately, I have not had good luck buying vehicles, even after doing extensive market research. However, there are a few mistakes I will NEVER make again.

- If buying a used car (which I highly recommend versus buying new) GET A WARRANTY! I had problems with my first vehicle that didn't have a warranty, so I vowed to buy an extended warranty on the next purchase. Three weeks after driving my second used car off the lot, it needed a new transmission......lesson learned.

- A used car with 50-70K will save money on the purchase price, but hurt in the long run. In my experience, random problems arise after this mileage threshold, and it's not cheap to have any type of work performed on a vehicle.

- A vehicle is not an investment, it is a depreciating asset (liability) to take you from point A to point B; so don't fall in love with any one in particular.

- Unless absolutely necessary, buy a car. 25-30 miles per gallon is better than a gas hog when oil rises to $100 a barrel......which may happen sooner rather than later.

I hope this information helps. Rest assured I will never make these mistakes again!

Blogs, Blogs, Blogs

As a (fairly) young person myself, you don't always have the privilege of meeting an even younger person who is very dynamic. Typically, the teen years are spent balancing school, sports, friends, etc. There just isn't much time for intellectual stimulation. Unless you're way ahead of the learning curve like 19 year old Ben Casnocha: entrepreneur, writer, and blogger. Ben is not your typical teen (You'll understand what I mean when you read his blog.)

I try and devote roughly 30 minutes per day reading others people's blogs. I find them using basic search techniques on Google, and seek to find those blogs that add value to my life. I also discover interesting blogs from a blog I read every day, titled: Ben Casnocha: The Blog. He posts about anything and everything, while providing incredible insight about life in general.

I'll keep you posted when I discover more worthy blogs......

B-schools?

After conducting extensive research on the best B-schools and what it takes to land a spot in a highly regarded program, I feel like I know as much now as when I first started.

It is extremely frustrating trying to decide where to go, how much will it cost, what kind of time frame.....the list goes on.

The conclusion I reached: GO WHERE YOU WANT TO GO, WHEN YOU WANT TO GO, BUT YOU'RE GOING TO GET WHAT YOU PAY FOR......SO TRY AND GET INTO A TOP SCHOOL BECAUSE IT DOES MATTER IN CORPORATE AMERICA!

I also believe individuals looking to "check a box" underestimate the value in getting in to a top notch school. The instructors, curriculum, and environment may not differ significantly from a lower level program; however, the value added comes from the quality of students in the class. NETWORKING, NETWORKING, NETWORKING! In class discussions, case studies, and relationships formed are what really matters.

I do not plan to attend B-school until I can get into a top notch program.... (U of A, Harvard, Stanford, Penn, Northwestern, etc......I guess I am hoping for a very high GMAT score!)

However, there are those who disagree with the value of an MBA , and that it may not serve as a differentiator anymore. I don't agree with Penelope Trunk here, but interesting nonetheless. B-school Confidential: MBAs May Be Obsolete

If you have any experience with B-school, please feel free to comment.

Continuous Learning

I have always been a huge proponent of "continuous learning," which is the process of constantly learning, improving, innovating, and adapting. This is especially critical in fast cycle markets, where products and processes are changing rapidly. In this environment, the only way to compete is to constantly seek ways to improve. I argue that life works much the same.

The earth has become a fast cycle market, and those who continue to learn and adapt will be those who compete in the changing landscape of the 21st century. There is already a growing gap between "Haves" and "Have-Nots" regarding wealth distribution in this country. The gap will continue to widen, and the wealthy will continue to control lawmakers while seeking legislation to benefit themselves.

The only way to fight back is for the "Have-Nots" to realize the importance of education and continuous learning. There are many programs available to help with tuition costs, etc. However, if nobody takes action, the wealthy will continue to control the country.

On My Flight Home........

After spending five weeks in Dayton, OH, the return flight this past Friday from Chicago was an eye opener as to the current state of the airlines.

I was on TED, which is United's low cost carrier, reading a book and relaxing.....kinda. The beverage cart began it's first trip through the cabin shortly after takeoff on the 3 1/2 hour flight from Chicago back to Phoenix.

With the exception of dirty floors, a delayed departure, and an overall nauseous feeling from watching the majority of overweight guests scarf down McDonald's during the safety video, I guess it was business as usual.

The flight attendants were very nice; but I happened to notice they were only pouring beverages into the plastic airline cups, and not providing the whole can. Just for fun, when it was my turn, I asked for the can. The flight attendant responded that she had been instructed NOT to give the whole can, even if a passenger asks for it. Although there are certainly bigger tragedies in life than not getting the entire can of ginger ale on a flight, I guess the larger issue with the airlines hit home, which is why I don't invest in them.

Considering inflation and rising oil prices, how can they afford to offer a ticket under $200 round trip? The answer......they shouldn't be, which is why many carriers have filed for bankruptcy protection. If they are so squeezed as to not provide a $.25 can to a paying customer, why don't they just charge more upfront? I guess anyway they can save a buck helps the bottom line; however, it seems like an unreasonable tradeoff in my mind.

Even an airline like Southwest (LUV), which continues to do very well despite overall industry troubles, may have a hard time in the future when their oil hedges run out. In my opinion, there are just to many problems affecting the industry in a negative way that I don't see going away.

In the words of former Virgin Atlantic Airways owner Richard Branson when asked the best way to become a millionaire, he responded: "Start as a billionaire, and then buy and airline."