Is Long Term Stock Selection Dead?

Since the financial meltdown of 2008 I’ve been trying to pull my thoughts together around the idea that long term stock selection is dead. Recently, I came across two articles that really got my thoughts in order.

Article 1: NY Times. Nov. 26, 2010A Dying Banker’s Last Instructions. Gordon Murray was a hotshot at Goldman Sachs, Lehman Brothers and Credit Suisse First Boston. Even though he was in the business for over 25 years his own finances were pretty haphazard and realized most investment advice is skewed in favor of the advisor. Meaning the advisors select products that maximize the advisors returns not yours. The general theme of the article is that no one can predict the future with any regularity, so why would you think that active managers can beat their respective indexes over time?

Article 2: SF Mag. Dec 2006. The best investment advice you’ll never get. Google can afford to bring in the best investment advisors and they did right before their IPO. Most of the big names said the same thing:

Put your savings into some indexed mutual funds, which will make you just as much money (if not more) at much less cost by following the market’s natural ebb and flow, and get on with building Google.

I couldn’t agree more.

For most people getting an index fund that tracks the entire market is the way to go. I believe picking a basket of stocks today and saying it’s part of your long-term portfolio is just plain stupid, it might have worked in the past but there are to many new factors that might skew the 10-30 year horizon for investing.

Case in point, Skype filed their S-1 document in August with the intention of going IPO very soon. Skype is an amazing technology/service and I have been using them for many years, but would I buy their shares during the IPO? no chance.  Do you honestly think Skype will be around 10-15 years from now? I doubt it, the speed with which internet technologies move, Skype could be outdated in 5 years. An IPO is simply a way for founders to get liquidity, plain and simple. Of course, everyone will point to a Google or the highly anticipated Facebook IPO but those are far and few between.

Let’s forget technology for a while and focus on what made America great – the car industry. If you had GM shares from the first IPO they would be worthless today. In a cruel joke, the US government took over GM and then re-IPO’d the shares in the world’s largest IPO a couple weeks back. I would love to ask those fund managers back in 2000 where GM would be in 10 years.

It’s not just the US, look at the current flavor in India – microfinance.  3 months back everyone was tripping over each other to praise SKS Microfinance and the feel good story of helping poor woman in India make a living. Now the stock is down over 20% because the business model is not healthy…what? SKS has been around for 12 years and somehow in the last 90 days their business model is out of whack?  I would say it has more todo with politics and money, people saw how much money SKS made in the IPO and they felt left out.

So what is an investor to do? As I said before put most of your equity allocation into an index fund and forget it.  Then if you have the urge to gamble, put 10-15% of that equity allocation into investments you track on a daily/weekly/monthly basis. Activities can include trading stocks based on information you get or the latest algo-trading genius or some new IPO to flip. This approach will give you the “feel” of the market and yet have most of your equity investments in an index fund.

Hockey Stick of Growth

When an entrepreneur starts a company one of the things they all secretly dream about is the hockey stick of growth, which is exponential growth within months of starting up. Beyond the entrepreneur, it seems everyone is chasing the “new thing” whether  it is reporters, venture capitalists or consumers who all want to be a part of the winning team.

So how do you achieve the hockey stick of growth? That is like asking what is the meaning of life. Achieving exponential growth is a combination of many things – product fit, hard work, excellent team, market timing, money to spend, etc…and of course luck. So in essence there is no real answer to the question, you can only guess and make assumptions.

Recently, an internet company called Evernote added it’s 5 millionth user and they talked about their growth curve on their blog.  The first million users took 446 days to achieve whereas adding the most recent 1 million users took only 83 days. That is absolutely hockey stick growth by any measure.

It’s not only about growth but also retaining those customers, as they say “easy come, easy go.” Friendster one of the first social networking sites had so much exponential growth early on that their servers would constantly crash. This left many users frustrated and looking for other sites they could visit such as MySpace. Of course, as an entrepreneur the first goal is to get big and then worry about turning into the next Friendster.

The above article originally appeared on GQindia.com.

Apple Simplicity, Dell Stupidity

Some people say Steve Jobs can see the future and others say he is an amazing marketer. I would agree with the later and it really hit home this past weekend as I was reading a magazine and saw an ad from Dell. Last week Dell launched it’s iPhone killer called the Streak and partnered with Tata-DOCOMO for the 3G launch. It was a full page magazine ad and a paper cut-out of the actual size phone that was attached to the magazine via a string. I will give the Dell marketing team kudo’s for the cut-out so I could compare the Streak to my current phone, but the full page ad in Forbes Magazine was complete techno-speak and I’m sure the target audience just glazed over it.

The list of features on the full page ad were:

  • 5″ multi-touch LCD display with Corning Gorilla Glass
  • Qualcomm Snapdragon 1GHz Processor
  • 3G, Wi-Fi
  • 5MP cameras
  • 1530mAH battery
  • 512MB ROM + 512MB RAM + 2GB non-user accessible MicroSD
  • 16GB MicroSD card included
  • Free upgrade to Android 2.1 post availability

Let me dissect each feature:

  • Does anyone really care about Corning Gorilla Glass? Does the glass break easily or not is the question.
  • Qualcomm Snapdragon 1GHz Processor. 1GHz means nothing to me and most people, is it fast or not.
  • 3G, Wi-Fi. Good.
  • 5MP cameras – why not spell out megapixel?
  • 1530mAH battery – this just made me explode, I really have no context of what this means. Does the battery last a long time or not.
  • 512MB ROM + 512MB RAM + 2GB non-user accessible MicroSD. Non-user accessible? then why even tell me
  • 16GB MicroSD card included. Good
  • Free upgrade to Android 2.1 post availability – I have no idea what 2.0, 2.1, 2.2 means. And a true Android geek would call these releases by their code names such as Eclair (2.0/2.1), Froyo (2.2), Gingerbread (2.3), Honeycomb (3.0), etc…

I can partly understand where the Dell marketing team is coming from, they have always had to compete on technical computer specs.  But, when it comes to the phone they need to have a marketing team that understands that selling a phone is not the same as selling a computer. Which is something that Apple gets whether they are selling a computer, iPhone or iPad.

Got a Question?

The internet has made it easy to get information on almost anything with the help of search engines like Google. But, if you have a specific question then getting an answer is not so straight forward.  Sites such as Yahoo! Answers were supposed to fill that gap, but instead have de-generated into a spam fest. Over the past 18 months many new sites have come online to fill the role of Yahoo! Answers, sites such as Mahalo, Stack Overflow, Hunch and Quora.

Most people are talking about Quora since it has a very easy to use interface and highly curated content. The initial launch was restricted to select people in the technology sector such as entrepreneurs and venture capitalists which created the buzz. Also, many of Quora’s employees have came over from Facebook including the CTO of Facebook, Adam D’Angelo. However, what really has set Quora apart is they actively monitor the conversations which leads to very rich content. Recently, someone ask a question about how much does Netflix spend on shipping costs.  Normally, a question like that would get all sorts of responses but the correct answer came from the CEO of Netflix himself.

The recently launched Q&A sites have taken the original idea of a question and answer forum and added a social element to it. In business, sometimes it’s not always about creating something completely new but improving on an existing idea.

The above article originally appeared on GQindia.com.