Daily Dose of Optimism

Is this at all a fair analogy?

Only time will tell, but it could be. The idea of a giant computer system sucking all the "alpha" out of the market sure ain't a pretty idea for flesh-based fund managers, but it's a possibility.

Renaissance Technologies was started by Jim Simons in 1982. Its $5 billion Medallion Fund has averaged 35% annual returns, after fees, since 1989, and is considered in the industry to be the most successful hedge fund, yielding returns ten percentage points higher than legendary investors Bruce Kovner, George Soros, or Paul Tudor Jones.  Extremely secretive, the company operates out of a mini-campus on Long Island, New York. Administrative functions are handled out of offices in Manhattan.

For over two decades, Renaissance has been at the forefront of research in mathematics and economic analysis. Renaissance employs more than 60 top scientific specialists, including mathematicians, physicists, astrophysicists and statisticians, who review market data to find statistical relationships that predict the price movements of commodities, currencies and stocks.

Renaissance uses computer-based models to predict price changes in easily-traded financial instruments. These models are based on analyzing as much data as can be gathered, then looking for non-random movements to make predictions. Renaissance represents a validation of the quantitative trading model and trades with such high-frequency that it accounts for 10% of all the trades occurring on NASDAQ some days.

For more information about Jim Simons, see here. - Ed

Ticker Garden: Watch Your Portfolio Grow

In the first-ever DDO beta-test of financial technology, I was recently asked by Hao-Hsiu Chiu, a  doctoral student at the Harvard Graduate School of Design, to take a look at the Ticker Garden, a stock market visualization tool. From the Digitectonics website:

Ticker Garden is a new kind of stock ticker with simplicity, usefulness, style and fun! It is an innovative data visualization application that monitors your stock portfolio. Different flowers represent the real-time performance of selected stocks via the color, height, & radian of animated blossoming flowers. A flower grows from the bottom (ground) & stops at the height reflecting its share price. The higher the stock price, the higher the 'flower stem'. As soon as it reaches the top, it begins to blossom fan-wise to the degree that reflects the percentage of price change. The color (green or red) & direction (upward or downward) of a blossom indicates a particular stock's status of ascent or descent in price compared to its previous trading day. A flying bee will show up around a flower if there is recent news of that particular stock.

 

I took a look at the tool and offered some feedback. Things I like about it:

• Simple and customizable market visualization
• Lite-install (simple executable file)
• Mountain range is great for major indices

Download it here. Feel free to give it a shot, and let Hao-Hsiu know what you think. - Ed

George Reyes Inserts Foot in Mouth - Accidentally Speaks Truth? (GOOG)

I wrote this a while back:

...thinking of search engine market share as a "monopoly" like an OS is crazy. There are no barriers to entry in starting up a website, and there are hundreds of open-source and private initiatives to make information more searchable. [... Google is f]aster to grow, faster to get hyped up, faster to react to pressures...[but isn't it also] faster for competitors to enter the market, faster to stagnate?  No one thinks this can happen now, we just can't imagine it...

Then I read this:

NY Post: "We are getting to the point where the law of large numbers starts to take root," Google CFO George Reyes said. "At the end of the day, growth will slow. Will it be precipitous? I doubt it. Most of what's left is just organic growth, which means you have to find ways to grow your traffic. Our growth rates are slowing, and you see that each and every quarter."

Well...what can I say? Pretty much as expected, only a bit sooner than anticipated.

Competition keeps heating up in the search space. Ask.com finally dropped the lame butler, Jeeves, and is taking steps to create a viable search engine. Most promising from my vantage point on Ask.com? Stock-search. I think Ask.com still lags Google overall, but Ask is still refining it's approach, and there's plenty of room to chisel away. - Ed

CNET: Google Finance Update (GOOG, YHOO)

CNET News: According to an industry source, Google is developing a personal finance site to rival Yahoo Finance. The talk is that a Google Finance, or whatever it might be called, will include real-time streaming quotes, Really Simple Syndication (RSS), news syndication and aggregation, and a retail-trading feature that could end up being imbedded into the company's instant-message service, Google Talk. It could launch by April.

Although the company may eventually decide not to launch a finance site, it wouldn't be much of a stretch--and it actually seems like a likely extension of its current news and alert services.

Yahoo: The Market Leader in Cluttered Pages?

It wouldn't take much to make Yahoo's search results a little more palatable - ie, faster, clearer - but I guess that's not a priority:

"We don't think it's reasonable to assume we're going to gain a lot of share from Google," Yahoo! Chief Financial Officer Susan Decker said in an interview. "It's not our goal to be No. 1 in Internet search. We would be very happy to maintain our market share." Link: NY Post

Based on what I see on their sites, I guess they'd rather be the leader in offering cluttered page views.

Good news: they're winning! - Ed

Google (& Microsoft), Thy Enemy is Within

Paul Kedrosky brought my attention to this news article, which I should have ignored and left well enough alone. But, here goes:

WSJ: Google plans to announce Friday that it will begin allowing consumers to buy videos from major content partners through the Google site and will also roll out a new downloadable bundle of software for consumers that could heighten Google's competition with Microsoft...

[Google Pack will allow consumers to download and install multiple applications through one interface, which will include] the open-source Firefox Web browser, a version of Norton AntiVirus software from Symantec Corp., Adobe System Inc.'s Reader software, RealNetworks Inc.'s RealPlayer multimedia software, Trillian instant-messaging software from Cerulean Studios and Lavasoft AB's Ad-Aware antispyware software. Google Pack will also include Google's own desktop search software, Google Earth satellite imaging and maps software, Picasa photo-management software, Google Talk instant-messaging program, its Toolbar add-on for Web browsers and screen saver software. (Note: Full article is after the jump at the end of this article)

(1)

I feel like the Microsoft vs. Google battle has a strong dimension where two parties are fighting for turf while leaving their home bases unprotected.

A business historian will someday precisely document when it became an anathema for major technology firms to focus on their strengths and competitive advantages, as opposed to trying to be all things to all people. I want to say that they get tricked into it by the hoopla generated in the press, as though the objective were to win the attention of journalists, rather than make money.

This must be why startups are able to trump majors on innovation in virtually every product category, because startups focus on doing only one thing right, have no media attention to distract them, and, lacking a brand to use as a billy club in distribution, their only hope is to focus relentlessly on user friendliness and product quality.

Microsoft: here is a company with not one, but two of the most enviable monopolies on the earth - in both OS and Productivity Software (PS). However, instead of focusing on putting a fast, usable OS into every electronic device on earth, or making the Office suite even more usable, integrated, etc...we get MSN...MediaPlayer10 (vs. iTunes), etc... all from a company focused on growing everywhere except where it has the most unique advantage of any business in the world today. I am seeing more and more cars with GPS computers in them that have a few other functions...I don't see Microsoft anywhere.

From an OS perspective, the miracle for me right now would be an OS that could run "ultra lite" - even if your PC was three years old - with super fast boot times. Of course, each subsequent upgrade to Windows also seems to require a several thousand dollar upgrade to my computer, which, frankly, I would prefer not to need to do, having already jumped through that hoop a few times. Why can't a new OS make my 3 year old laptop run faster? That would be awesome, but it might require Microsoft to realize that its fortunes and Intel's fortunes - predicated on ever increasing spend on hardware along with software - doesn't have to proceed hand-in-glove.

Google: I keep thinking that rather than rolling out another bunch of random betas and marginally useful consumer applications they've built or acquired, Google should get more meaningfully into... search.

For example: instead of "Google Scholar," which for however long it's been available, I've never used...they could make search engines tailored to specific functional requirements...like "Google Investor," "Google Lawyer Researching a Case," which could utilize paid add-in search modules for proprietary databases and bring valuable new meaning to the phrase "just Google it."

Google spends so much time jawboning about "opening up information"...and yet, I wonder if they're trying to open up the wrong information in the wrong ways, when so much of great information - the stuff you have to pay top dollar to get today, like historical news stories, legal searches, etc - will remain locked up and "outside the scope" of what Google can do. Alexa at least seems to realize that customization is probably the next step for search.

The fact that Google hasn't done any of these things yet makes me wonder whether they really understand search, or whether they weren't just very lucky in developing a better mouse trap for finding web pages with their original relevance algorithm, and have since chosen to focus their business on things that create maximum hype. Perhaps that relevance algorithm doesn't work as well when there aren't links to signpost importance, and if not, that sounds like an opportunity for a search startup to me.

(2)

One of the few things I understand about the "Google vs. Microsoft" fantasy is that GOOG could eventually build an OS that would allow them to "cut Microsoft out of the loop." Of course, why Google would bother building an OS when they seem plenty capable of making scads of cash with search alone eludes me. Perhaps the "Google Pack" is a step in the direction of an OS.

Let's sum up Google's contributions to the pack:

• Cash - for development, etc
• The Google Brand
• Google's Software Applications

When I think about it, it seems that the "Google Pack" is a trojan horse for Google's "software development" efforts, one which bundles big-brand, must-have applications like Firefox, Norton AntiVirus, and Acrobat Reader along with disposable, lesser apps, like Google Desktop Search (by my testing, clearly inferior to Yahoo's), Google Talk (inferior to _____) ... just to get Google products on people's desktops, because Google's products aren't useful enough to merit downloading them on their own. (But if they could trick people into installing them...)

On the subject of a trojan horse, there apparently will be a "Google Updater" bundled in the pack, which would presumably allow Google - as does Microsoft - push out ever more crap to the desktop without users really knowing about it. (Don't be evil...yeah right!)

While reflecting on all this, I also realized that...Google-developed applications like Talk and Desktop Search are weak, while the "not invented here" Google applications (Picasa, Earth) are the ones I would recommend, even though I grant that all are of questionable utility.

Here's where I'm going with this:

Is it possible, from a software-development perspective - the very capacity that would theoretically drive Google's much-ballyhooed ascension to Microsoft-like domination - that Google has already developed a culture like the Microsoft of today?

Even at Google, a company full of the most-hyped engineers on earth, the most innovative software is still written by relatively capital-starved startups, who are in turn bought bought by big hubristic companies whose primary competitive edge over these nobody-startups is their brand and ability to raise capital in share lots matching the digits in Pi.

Said another way - Google's software development strategy is awfully "Microsoft-ean" in it's implementation. (Google, thy enemy is within.)

In fact, given that Google doesn't seem to have a real edge when it comes to software development, it also seems unclear how they would ever take over the desktop OS, unless someone smaller did it first, and Google bought them...

But now I really may have run on too long. Let me leave with this thought:

With one great near-monopoly that butters most of its bread, a bunch of lesser, derivative ideas funded by it's core business, and a big balance sheet, Google, the company most-hyped to become the Microsoft of the future, already sounds a lot like Microsoft right now, only Google's monopoly is less defensible, and is not being guarded.

And if that's at all true...

Remind me again why people pay a 50-100x multiple for this company? - Ed

“An Owner's Manual” for Google's (GOOG) Shareholders

Now that Google's enterprise value approaches that of their idol's (Berkshire Hathaway), I thought it might be a good time to take a look back at the Google "Owner's Manual" for their shares.

Google EV = $92 billion (100x ttm EPS, 40x 2006 EPS)
Berkshire EV = $99 billion (17x ttm EPS, 20x 2006 EPS)

Obviously, Google's multiples leave something to be desired relative to Berkshire, as does their competitive positioning. But hey...none of that matters, right?. Just do no evil... - Ed

LETTER FROM THE FOUNDERS - “AN OWNER’S MANUAL” FOR GOOGLE’S SHAREHOLDERS

(Note: Much of this was inspired by Warren Buffett’s essays in his annual reports and his “An Owner’s Manual” to Berkshire Hathaway shareholders.)

INTRODUCTION

Google is not a conventional company. We do not intend to become one. Throughout Google’s evolution as a privately held company, we have managed Google differently. We have also emphasized an atmosphere of creativity and challenge, which has helped us provide unbiased, accurate and free access to information for those who rely on us around the world.

More Thoughts On "GOOG, America's Triple Bagger"

As a follow-up to my post The Popularity of GOOG, Explained, Paul Kedrosky had this to add:

According to Reuters, there are 174 stocks that have tripled in the year since Google's IPO. Most of those stocks are not, however, ones that make the front page of the Wall Street Journal every time their CEO announces something. Link

When I wrote the first piece, I assumed there would be a statistic to corroborate what I'd said, and there was. Paul was kind enough to share with me the list of these stocks. When the list was filtered for companies with a market cap over $50 million, 45 companies remain. I ran a similar screen with Yahoo Finance's free tool, and came up with 30 companies.

Point remains the same. There are quite a few companies that make 300% moves in a year - obviously, it is a small percent of all public companies, but it is a number greater than 1 (GOOG) - and most are not celebrated in the press.

If we extended the 300% gain criteria over a multi-year period, I'd say the list grows considerably larger.

We'd then have a list of companies that serve as the drivers of great investment returns, and a lot of potentially great news articles...maybe a front page feature every day for a year! - Ed

The Popularity of GOOG, Explained

Google has captivated the imagination of the financial punditry. Why is this?

• Widely available, useful and free consumer product - most Americans have heard of it.

• The stock price effectively tripled in about a year or so.

Now, most people are not experienced investors. And although stocks triple all the time, we tend not to know many examples of them that are "lying in plain sight" for all Americans to see.

That means that Google, unlike any other stock that has risen 3x over the past few years, has an unrivaled ability to elicit perpetual feelings of "why the hell didn't I buy that earlier", and everyone can relate to the need to avoid blaming themselves for inaction on this one. - Ed

Well, That Didn't Take Long (GOOG)

I thought this WSJ bit on Google's recent secondary was interesting:

Gone is any mention of its corporate motto, "Don't be evil," that figured in the 2004 offering prospectus. There is no open letter to potential shareholders from the founders in their Securities and Exchange Commission filings, as was the case with the IPO.

There is no auction format -- the stock will be sold in the traditional way, through investment banks marketing the shares.

Most of all, there is no pontificating in the prospectus this time -- instead of intoning that Google "has a responsibility to the world," the most revolutionary statement being made is the company's assertion that advertising, which generates 99% of its revenue, "should not be an annoying interruption" to users of its Web site. Link

Well, that didn't take long.

My thoughts from a while back (when Google first began to give guidance, which they said they wouldn't do):

My interpretation of Google's thought process: "We said we wouldn't give guidance, then stock price gains made us one of the biggest companies in America, suddenly too many people cared about our performance, now we have to give guidance!"

Faster to grow, faster to get hyped up, faster to react to pressures...

Warren Buffet's no-guidance approach doesn't work so well for companies that are so heavily hyped.   

2 analysts "cover" Berkshire. 33 analysts cover Google.

All that talk around the IPO was hubris; here is a company at their IPO wanting to show the parallels between them and the richest man in the world. Of course, Buffet built that fortune over 40+ years by buying companies no one wanted with enduring franchises; everyone wants a piece of Google, and there are no barriers to entry in the search market.  Link

So what do we have left with Google? A company running at 50 miles per hour, with quite a few companies chasing, raising $4 billion to help it...well, do whatever they think they'll need:

We anticipate that we will use the net proceeds from this offering for general corporate purposes, including working capital and capital expenditures. In addition, we may use proceeds of this offering for acquisitions of complementary businesses, technologies or other assets. We have no current agreements or commitments with respect to any material acquisitions. Link

Somehow, I think the reason they stopped trying to act and sound like Warren Buffett is because they know that there are really no similarities between Google and Berkshire, and there never will be. For starters, they started giving quarterly guidance. Next, there is the fact that Google lacks the number one characteristic that Buffett looks for: wide "moats" around its business. Finally, Buffett has never been a fan of debt or share sales, and in fact idolizes companies like Capitol Cities, which grew for 30+ years on $300,000

The talk at the time of IPO was hubris. Evidence suggests that this $4 billion sale may be as well. I will be amazed if a company born and incubated in such hype can continue to go for long without disappointing. At $300 / share, we are looking at 90x ttm EPS and 40x forward EPS.

In the meanwhile, I'll plumb around for the other hundred companies that are still poised to make 4x up moves, rather than the ones who have just completed it. - Ed