Josh Richards "jrichard"

We used to have this sort of thing come up at my last company so often that we turned it into a sales approach (that is, we'd help the prospect, usually gently, gain some perspective). That is why this quote hit home with me. Jeff Biggs, CIO of Peak 10 Data Solutions, has established a rule of thumb over the years:

“Whenever I see the Four Horsemen of the Apocalypse, I run for cover,” says Biggs. “The four horsemen are ‘We’re going to have big Sun servers, Oracle databases, tons of bandwidth and a bunch of consultants.’ You need to start small and see if you can make it work. That way, you’re a customer for 10 years and not six months.”

It's just so dead one.

When we came across this, we admired the ambition and vision, but we tried to re-focus the clients energies back into their business in other ways. An incremental approach makes far more sense. Things can always be ramped up for the right reasons when the time comes but it's tough to get back money already spent when things don't ramp up quite at the rate expected.

I'm not saying you should be a pessimist versus an optimist. More like a pragmatist. Toss a bit (not all) of the cash saved towards beefing up your "Slashdot effect" plans (as in, how you're going to get that level of success and what you'll do when it happens not what you've already done) and you'll be better prepared in any case. Besides are you sure you'd know what to do if you outgrew even the big stuff?

When we weren't able to make a convincing case for pragmatism, it wasn't unusual to see them last a year or two as customers... than pretty much disappear. Now even some of the pragmatic ones disappeared too but at least it wasn't because they spent all their cash before they'd even had a chance to become a success in the marketplace.

Most of the time, capital is better spent making the product/service more inspiring and actually getting real paying customers for the new product/service, and whatnot. Don't buy the big infrastructure stuff just because your IT advisor wants to prove his worth or even because you want to prove your own level of seriousness about the venture (there are far better way to do that...like by getting sufficient customers and cost structures in place to be a sustainable profitable enterprise that can afford to invest further in its infrastructure).

Commit your resources to the right things and the rest will come together as needed. Of course, I realize that is easier said than done but it's an important concept to strive for and keep in the back of your mind always nonetheless.

Are you involved in an IT (ad)venture like this? If so, I suggest refocusing the ambition to other aspects of the venture that could benefit from it, and talking the infrastructure over with an objective outsider before taking the leap. And, no, I didn't set out to make this post into a self-serving pitch... it just sort of worked out that way. :)

Best of luck in your (ad)ventures however big or small they may be or seem,

-jr

Perhaps I'm unusual but I tend not to donate to non-profits that don't use Paypal or Google Checkout (or another large well known front-end processor) to accept payments. The reason is because non-profits are rarely large trusted brands, are usually underfunded and thus security isn't a high priority, and their web sites are often a hodgepodge of thrown together stuff hosted who-knows-where.

(It's not just non-profits I take this position with. I often click away from small no-name merchants if I can't be confident I'm bypassing their who-the-heck-knows-who-where-and-how web site to make the actual payment transaction).

I don't see justification for exposing my credit card so easily. With Paypal or Google Checkout, the credit card information is never exposed to the non-profits hosting provider. Plus, at least with Paypal, the person paying doesn't even have to have a Paypal account - any major CC with still do.

If you're a non-profit, give some consideration to how you might improve the trust level of your web site. Come at it with the mindset of a business doing e-commerce... someone may want to buy what you're selling but they also may click away because they are uncomfortable.

This is about more than having just an SSL certificate. Using https:// is meaningless if the server(s) behind it can't be trusted.

How can you give your customers (potential donors) the warm and fuzzy feeling when they hit your web site?

-jr

There's a lot of good stuff in this wonderful post. If you have any interest at all in investing in publicly traded securities I suggest a read:

How can the mindset of chief capital allocator help you distinguish between value and price? If you were in charge of allocating capital around the world, you wouldn’t be able to rely on the market to bail you out of bad investments. The greater fool theory of someone buying your shares at a higher price breaks down if the buck stops with you. Successful investors believe their return will come from the investee company’s return on equity rather than from sales of stock. This mindset produces a very different process of estimating value than if you rely on the market to establish value and then try to gauge whether a company was likely to beat or miss consensus earnings estimates.

[...]

Investment professionalization has had unintended consequences, as the ultimate owners of capital (households and endowments) have become increasingly detached from security selection. Short term-oriented “security holders,” such as mutual funds and hedge funds, have displaced long-term “owners.” The results have been a greater tendency to choose portfolios that reduce occupational risk rather than investment risk, increased trading mentality, and less participation in company affairs. As Vanguard founder John Bogle points out, “The old own-a-stock industry could hardly afford to take for granted effective corporate governance in the interest of shareholders; the new rent-a-stock industry has little reason to care.”

On Buffett:

[...] Buying businesses cheaply has not generated his long-term returns -- it has merely accentuated them.

Buffett raised eyebrows in the investment community many years ago when he bought Coca-Cola at a mid teens multiple of earnings. Most value investors couldn't understand why Buffett considered it a bargain purchase. Of course, Buffett was allocating capital to a superior business at a fair price. He knew that Coca-Cola would compound the capital employed in the business at a high rate for a long time to come. Buffett did not need P/E multiple expansion to make the investment in Coca-Cola pay off.

It's not all theory... it pulls together a lot of practical stuff.

-jr

Dan Richards (no relation) has a thought provoking (and short) article in The Global and Mail here that reminds us that things are never quite what they seem, in good times or in bad. He starts off:

Psychologists talk about the human propensity to gravitate towards evidence that supports existing biases. What that means, quite simply, is that in buoyant markets, investors are prone to believe outrageous claims by market bulls – think no further than “the world has changed forever” rhetoric and best selling books like “Dow Jones 36,000” and Harry Dent’s “The Great Boom Ahead” in the tech boom in 1999 and 2000.

In the same way, in negative markets such as we’re experiencing right now, investors tend to believe even the most gloomy assertions from “media gurus” and self appointed experts - a recent New York Times article headlined “Forecasters race to call the bottom to the market” discussed the competition among market pundits to come up with the most dire possible predictions. (It’s noteworthy that the same Harry Dent who wrote “The Great Boom Ahead” has just published “The Great Depression Ahead.”)

I encourage you to read the complete article (again, it's very short), for the analysis he does of several commonly touted facts about stock market returns. Anyhow, he ends like this:

None of this is intended to say that stocks will always be a safe or pleasant haven for investors. And despite the overwhelmingly positive returns that long term investors in U.S. stocks have seen across virtually every time frame, there is always the possibility that it could be different going forward. Just remember, though, the only guide we have going forward is what happened in the past. And in looking at the past, we need to look at all the facts – not just those selected by people looking to grab newspaper headlines.

One item I'd add to it: Statistics regarding under-performance AND over-performance touted are both misleading without qualifiers and rarely as meaningful to a given individual investor as they are lead to believe. I have several reasons for stating this and, at the risk of leaving things hanging and encouraging people to misunderstand me since this also touches upon other areas of investing which I've formed strong opinions about, here are some quick reasons:

• Some investors invest in markets (namely those who invest solely in index funds). Other investors invest in companies (those who select & invest, on whatever basis they've determined makes sense for them). And, yes, I realize plenty of folks are essentially hybrids of these two types. These two types of investors have dramatically different strategies. In many cases the returns of the various indexes are irrelevant to investors in individual companies and, interestingly, the inverse is true as well (i.e. the returns of any given individual company are irrelevant to index investors).
  
• Market investors who get in (and out) at different times have dramatically different results even against long-term (say, 20+ year) metrics. This is because even over the long-term, a very small number of days, weeks, or months can account for a large percentage of the overall returns calculated into the average. Unfortunately, the majority of individuals get bit by this one far more than is often believed due to human psychology and our inability to tell the difference between temporary losses of capital and permanent (often exasperated by not truly understanding what we're investing in too)
  
• Indexes are NOT actually the market. Every index is a bit different and represent some portion of the market in different ways. The Dow Jones Industrial Average for example, says absolutely nothing about mid-size and smaller companies and, for that matter, anything about any companies other than the top thirty largest (and most widely dispersed ownership) public companies. Which companies actually fall into this category actually change from time to time (imagine that). The components of the index thus are dynamic over time. That throws a bit of a monkey wrench into the possibility of even holding onto the DJIA for a long period of time (the allusion that it's not changing if you own an index fund is only because you don't own the underlying securities directly). This is to say (almost) nothing about how the weighting of individual stocks (and their price changes) is done inconsistently between indexes (and also not necessarily representative of how an individual investor would view the same portfolio of stocks if held directly).
  

Those who I'll call Superficial Investors are generally universally and especially hard hit anytime things are not all hunky dory in the stock market. I use the term Superficial by way of attempting an explanation and not to be judgmental. Superficial Investors are not really speculating nor are they truly investing (I define investing as Ben Graham did: where upon thorough analysis, it promises safety of principal and a satisfactory return.)

Superficial Investors (SIs) are essentially the masses of folks that have (generally) modest sums of capital in the markets by way of retirement accounts, mutual funds, college savings funds, and the like. Many also have regular brokerage accounts and can toy with investing directly in individual companies that way as well.

It's no surprise that most folks with money in the market these days have no idea what to do. After all, they really didn't know what they were doing to begin with. They were only under an allusion (of self-deception, though not maliciously or even knowingly).

Warren Buffett said just after September 11, 2001 that you only find out who has been swimming naked when the tide goes out. There's a lot of truth to that and its a recurring theme throughout history in many areas other than investing (though it may manifest itself around the search for profits more so than any other).

The credit mess (loans related to real estate but other types as well) falls into this category as well. Though my impression is that more than a few folks did understand they were being foolish - and chose to look past it for short-term gain (now, for a bit of medium-term pain too, doh!). Presumably the majority of folks were simply misinformed and did not understand what was going on...while they were also trying to honestly "get ahead" and saw an opportunity. Something essentially all Americans seek, right?

Human psychology is great at fooling all of us much of the time. Especially when things are good. But the same happens when everything is bad too.

There in lies an optimistic tone. Rarely are things as good or as bad as the popular belief at any given point in time. And there are always opportunities to make money in the market. But they are not for everyone - and that's fine.

My conclusion: Know what your place is (as in decide what it's going to be deliberately and take action that is in harmony with that decision; I'm not saying accept what someone else simply says is "your place" or whatever other clique that phrase may conjure up). And be cautious who you allow to shape your actions -- especially in areas where you are not fully informed yourself.

More specifically, unless you have a solid knowledge of the facts yourself (as well as, perhaps, aspects of human psychology and especially your own), you will be unable to combat some of the distortions and temptations you will be exposed to. If at all possible, invest the time to ramp up your understanding of history and psychology to be a better resource to yourself. If you fail to do this, be careful who you allow you shape your actions, since you are trusting that they've done their homework (yeah, that includes me).

My wife once called me cynical but I had to correct her by saying "I'm not a cynic; I'm a skeptic". It's generally my default initial position. Further, I'm an optimist too. I really don't see a discrepancy between the two.

An ironic twist I suppose is that being a skeptic makes it easier to be confident since I can trust myself more. And that (along with some other things) keeps me pretty optimistic most of the time.

All of the above has ramifications far beyond investing in the stock market - and beyond the pursuit of money - and I hope that if you've read this far that I've been successful at conveying a bit of that sentiment.

-jr

P.S. If you're further interested in the topic of human psychology as it relates to investing, google "behavioral finance" and "behavioral economics". Again, despite its (apparent) ties to finance & economics it's really all about every day human behavior and even a cursory awareness of its implications would benefit you no matter what your area of expertise or aim in life.

Nifty. Locally we have the University of San Luis Obispo School of Law. They offer a part-time weekend program. I had no idea.

As I sit here writing this, listening to our new dishwasher shoot, splosh, and steam our dishes to cleanliness, I'm forced to contemplate why our dishes used to pile up at our old place -- despite our best intentions.

Previously our dish washing foo was less than stellar.

In the old place we didn't have a dishwasher machine -- other than our own hands. We'd go through periods of keeping up on the dishes. It usually persisted through the first few days (rarely weeks) of clean house euphoria that resulted from spending a day cleaning the entire house or kitchen. Then, we'd fall off the wagon and dishes would pile up. Rinse repeat. Same thing every time.

Our behavior never changed despite our interest in keeping the dishes from piling up.

It was pretty frustrating. Each time we'd discuss it and get up the courage again, telling ourselves we'd do better this time. Then we'd fail. It became pretty stressful in and of itself.

Stress is usually the result of missed expectations. And our expectations were pretty shot to hell the millionth time around.

Now, throughout all this, one of us might pop in and pound some dishes out in random bursts but there was no consistency. And, usually, this was out of frustration over our falling off of the wagon versus a genuine desire to keep things clean. In an ironic twist, this actually added to the frustration -- because it seemed to be a demonstration to ourselves that we could do it when we chose to. So what the heck was our problem?

There had to be something that we were missing. The solution couldn't be that easy (just choosing to do it).

Sure, we could say it was because we just "didn't have the time" but really that was just a convenient excuse.

Our productivity, or lack thereof, was really driven entirely by our mood. We liked the idea of having a clean house and no dishes piling up. But, somehow, we just weren't totally getting it. Why were we committed to the idea but not the action? And what else was really going on?

• What mental hurdle does it take to turn an idea into an action?
• How do you know when you are failing because of, in fact, time (or an unrealistic goal) versus when you are failing because you are approaching things the wrong way?
• How do you determine the difference between persistence (often a good thing when aiming towards a goal or dream) versus banging your head against the wall?
• How do you effectively develop new habits (or change old ones) when you are "focused" on achieving a million other things in your life as well?
• How do you coordinate this process across a household of different family members all with different time, energy, and stress tolerances and responsibilities?

How indeed.

Well, in our case, we got a dishwasher. :-)

But, the (more useful) explanation is of course more than that.

Yes, perhaps there were other things we could have done to motivate ourselves, penalize ourselves, etc. Perhaps we were too undisciplined. But sometimes a completely different approach is what is actually most effectively. Especially when there's no downside to doing something completely different.

Just because we could have found a way to achieve our aim, doesn't make it the best approach. I had no big deep down desire to prove to myself (and especially not anyone else) that we were the manual labor dish washing motivation experts. In fact, I just wanted clean dishes -- I didn't care how we got 'em as long as it didn't take much time, energy, or money.

I even only half jokingly mentioned to my wife that maybe we ought to hire someone to come in and do the dishes (and a few other things while they were at it). That thought stayed in my mind for a month or two but we never did pursue it.

In any case, sometimes tweaking the goal makes sense. The idea of hiring somebody actually was closer to where we should have been thinking even if it didn't end up being our ultimate solution. In our case, we were too focused on the goal of "how do we get -- and keep -- ourselves in the habit of washing the dishes?". It sounds simple now, but a lot of solutions do -- in hindsight.

Sometimes we get so caught up in a solution that we've been attempting that we become convinced that we "can beat it". That's not an un-admirable attribute, but we have to remember it can work against us to. Awareness of this problem is probably the best means of sorting out those situations where it is occurring from the others where raw persistence really is what's needed.

How we frame our problems (or goals) makes a big difference in our approach to them. In my case, caught up in the daily tasks and lots of other goals and dreams, I routinely frame seemingly less important issues (such as keeping the dishes from piling up) the wrong way. Most likely because I don't put enough energy upfront in pondering them. I am continually dumbfounded by how easily I can solve a stressful problem that's been lingering by simply re-evaluating the entire premise.

Often I'm stressing not because something isn't done but because I'm not yet sure how I'm going to get there. Or, the goal isn't really all that clear to begin with. Once I realize that something is not right, I mentally pull back and reboot. That takes some energy but far less than it would to persist down the wrong path -- or no path at all.

We're all pretty good problem solvers. That doesn't mean that we're always solving the right problems.

-jr

Buffett was interviewed on the Charlie Rose show for just under an hour on Wednesday evening: