Written by Jay Turo on Tuesday, January 27, 2009
Sometimes things are so obvious as to be hard to see.
That is certainly the case right now with the incredible flood of federal stimulus pouring into the economy - both in terms of fiscal and monetary policy. But saying it in this way, as it is often done by the chattering media classes, makes the issue unnecessarily opaque and complex. We agree with Milton Friedman (and not just because of his long Stanford connection) when he describes inflation as "always and everywhere a monetary phenomenon."
Written by Jay Turo on Tuesday, January 20, 2009
In my 10 years at Growthink and my 20 years in business, I have never
lived nor worked through a period with as much uncertainty and
negativity, as much economic depression, as much market fear, as we are
living through right now. As spirits have waxed low in the markets, I
would be not candid if I did not confess that I have bouts of
Written by Jay Turo on Wednesday, November 12, 2008
How many times have you heard someone say, "Don't put all your eggs in one basket"?
When it comes to any kind of investing, this is very good advice.
But, if this is the case, why don’t private equity investors diversify?
Unfortunately, most individual investors in private equity significantly under-diversify their portfolios -- investing in one or only a handful of companies. By so doing, they both greatly increase their risk profile and greatly decrease their probabilities of seeing investment return.
Written by Jay Turo on Wednesday, November 5, 2008
As the investing month of October mercifully draws to a close, there is now a palpable sense of calm in the financial markets. While the horrific damage – in both value and psychological terms – is very, very real, and may take years from which to recover, there has been a healthy mindset transition to a “what is to be done” thinking, feeling and acting.
Written by Jay Turo on Wednesday, October 8, 2008
The extreme malaise in the financial markets is unlike any of us have seen in our lifetime. It is discouraging and disconcerting on many levels.
As Americans it is gut-wrenching to see so many proud institutions and the country as a whole take such a hit in prestige, wealth, and reputation.
For the private equity and venture capital world's as a whole, the erosion of stock market value reduces the likelihood and size of prospective acquisitions and the buoyancy of the IPO market - which in turn drives down earlier-stage deal valuations and the general "doing deals" excitement levels. We have already seen the shrinking of the hedge fund world these last few months - look for this contract to start hitting the private equity and venture capital markets.
But certainly by no means is all bleak nor are we at the end of days. As we know, at the end of dry desert, green grass grows. Without question, from the seeds of the current market correction will grow the great opportunities of the next 5-10 years.
So, for those with creativity, resilience and persistence, now is a great time to start and/or grow successful, lasting businesses.
Written by Jay Turo on Thursday, October 2, 2008
We are living through one of the most tumultuous periods in the history of the financial markets. It is rattling even the most steadfast and optimistic of investors. For better or for worse, we can only look with misty memory to the halcyon, golden, go-go market and investment days of the 1980's and 1990's. We are truly in a brave new world - one where the old assumptions and dogmas are truly on the dustbin of history.
A few takeaways:
Big is Not Safer Than Small. Whatever the results of the government mortgage bailout, both in terms of the House vote and its market impact, for equity holders of the big banks and mortgage and insurance players caught up in the mess (Bear Stearns, Fannie, Freddie, Lehman, AIG, WaMu, Wachovia, and to a lesser but still painful extent, Merrrill, Goldman, and Morgan), it is misery. For the big financials, if there wasn't horrendous news these last few weeks, there would have been no news at all. It is absolutely astounding – though not necessarily surprising when viewed through the prism of the dysfunctional and way over-blown incentive systems of key executives and traders at these firms – that so much value could be wiped out so quickly. Investors for a long time will have serious hangovers and reservations regarding investing in these entities in any form – stock, debt, and/or derivatives. Quite simply, the whole sector is tainted.
Cash Is Not Safe. Never in U.S. economic history have there been as many question marks as there are now around the security of cash – passbook savings, checking accounts, money markets, certificates of deposits and other cash-like instruments.
The question marks are threefold:
- The underlying entities holding cash are more sick than not, and, as such, their liabilities (i.e. your deposits) are exposed.
- The FDIC backstop/guarantee – as it gets stretched by Congress in terms of amount and type of cash instrument – is getting spread thin across an unprecedented number of defaults and in too tight a time frame.
- Inflation. The old truism is that governments never actually “default” on their debts. Rather, as expenditures for bailouts, wars, transfer payments between generations, and bridges to nowhere mushroom the budget deficit aside the enormous trade deficit the inevitable outcome has to be the government simply printing more and more money. Thus inflation.
So cash, our old friend – whether in the bank or under our mattress – is both under parking risk of default (a low risk for sure but much more so than just a few weeks ago) and under systemic, significant inflation risk. .
Executives Good, Traders Bad. In 2007, venture capital firms invested approximately $26 billion in startup and emerging companies. These companies were the best of the brightest stars in dynamic new industries like green/alternative energy, medical technology, digital media, and Internet software. In Washington, the nation's political leaders are committing more than 25 times this amount, effectively, in bailing out the residential mortgage market.
Now don't get me wrong, the housing and foreclosure crisis is real and painful in this country. But let's take a step back and think about priorities for a second:
- Would it be better to have more non-fossil fuel startups and technologies and fewer McMansions?Would we rather have more medical researchers and scientists or Wall Street derivatives traders?
- Who should be rewarded: the executives and visionaries working to build real operating companies, or the Wall Street whiz kids that made billions trading leveraged “house of cards” sub-prime mortgage portfolios?
- Quite simply, do we want to be a nation and a society that rewards entrepreneurship and business-building or one that rewards financial instrument manipulation?
Thinking about it for only a minute, the answer is obvious. It is even more obvious to the biggest investors in this toxic debt: the Chinese, the Koreans, the Japanese, the Russians, and the Arabs. Certainly, owning U.S. mortgage-backed securities now looks like a losing hand for these folks and far more disturbingly, owning U.S. treasury securities is far from being, as they say in the finance textbooks, a "riskless" investment.
So where is this foreign capital now going to go? Well, most of it will now in all likelihood stay home, or be invested in emerging/developing economies. But here is the key point: while the U.S. investment climate looks very, very unattractive compared to what it once was it is still by far the best place in the world to invest in startups, to invest in entrepreneurs, and to invest in operating companies. And it is not even close.
While most Americans – terrified by the hysterical financial media that the end of days are near – are increasingly blind to this fact, the more detached foreign investment players know the real deal. There are both uniquely and insanely great American operating companies all in our midst. Some are publicly traded, most are not. In the coming years, watch for a return to this kind of back-to-basics business-building/value creation investing. It can’t come soon enough.
Written by Jay Turo on Thursday, September 18, 2008
Amidst the extraordinary, mournful crisis in the financial markets these last few weeks, a few truths have become painfully evident:
- Leverage is a far more dangerous mechanism than any probable scenario models had predicted.
- The very ephemeral concept of public and market trust is the core asset of financial and insurance institutions. Even the slightest weakening of this trust can almost instantly cause a cascading effect – driving down asset and equity values, which in turn further erode trust and confidence. This negative feedback loop can quickly cause panic mindsets even among the most sober and experienced Wall Street hands.
- Financial markets and instruments – fundamentally transformed by the information technology revolution of the last 25 years – have and continue to morph at a far faster rate that both self-regulatory and government oversight bodies are equipped to handle.
From Growthink’s entrepreneurial economy perspective, a few more truths are less readily evident, but fundamentally more profound. Quite simply, Wall Street finance has lost connection these past few years with its core purpose and intent – namely to provide intelligent advice and capital to operating companies. While significant efficiencies (and correspondingly wealth-building) can be achieved from trading platform and instrument innovation, the value of this “innovation” is vastly over-rewarded in the marketplace.
The very fact that the most highly compensated roles in our economy over the past few years have been hedge fund managers, derivatives traders, and sub-prime mortgage hypsters points to the heart of the problem. While these folks serve a role, for sure, the combination of their almost comically (if it were not so anger-inducing) inflated compensation structures, combined with the systemic risk to which they exposed both their fellow workers and the economy as whole, is a failure of priorities for which we are all paying the price.
Where do we go from here? My hope is that finance and general marketplace incentive structures revert to more wholesome, “vanilla” dynamics. Traders are rewarded less, and company-builders rewarded more. Capital is more difficult to come by for hedge funds, and easier to come by for entrepreneurs. Harder for derivatives traders, and easier for scientists and engineers. Harder for debt, and easier for equity.
The fundamental good that can and should come out of this market cataclysm is a cleansing and a re-ordering of priorities. Provide a milieu and an incentive structure for operating companies to access capital and grow. And contrastingly – devalue activities that simply move capital as opposed to creating it.
Written by Jay Turo on Monday, September 15, 2008
"It takes many good deeds to build a good reputation, and only one bad one to lose it." -- Benjamin Franklin.
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