This is too weird… since I have lived in Silicon Valley all of my life. I’m pretty sure my “American Accent” is California.
But, according to this website:
Discuss.
Month: November 2006
Don Norman in Defense of PowerPoint
How is it possible that I didn’t know that Don Norman wrote a post entitled:
He wrote the post over two years ago. However, I remember the storm over this like it was yesterday. It all started with a New York Times article in 2003 called “PowerPoint Makes You Dumb“. It was written in response to the investigation into the Space Shuttle Columbia disaster, which pinned part of the blame on a “PowerPoint Culture” with too little detail.
A sample paragraph from the NYT article:
This year, Edward Tufte — the famous theorist of information presentation — made precisely that argument in a blistering screed called The Cognitive Style of PowerPoint. In his slim 28-page pamphlet, Tufte claimed that Microsoft’s ubiquitous software forces people to mutilate data beyond comprehension. For example, the low resolution of a PowerPoint slide means that it usually contains only about 40 words, or barely eight seconds of reading. PowerPoint also encourages users to rely on bulleted lists, a ”faux analytical” technique, Tufte wrote, that dodges the speaker’s responsibility to tie his information together. And perhaps worst of all is how PowerPoint renders charts. Charts in newspapers like The Wall Street Journal contain up to 120 elements on average, allowing readers to compare large groupings of data. But, as Tufte found, PowerPoint users typically produce charts with only 12 elements. Ultimately, Tufte concluded, PowerPoint is infused with ”an attitude of commercialism that turns everything into a sales pitch.”
This issue resonates with me for three reasons:
- Don is one of the HCI legends. Even though I now work at eBay, I began my career at Apple Computer, working in the Advanced Technology Group before transferring to the WebObjects team after Apple acquired NeXT. Towards the end, ATG was rebranded the “Apple Research Labs”, and Don Norman was the VP (and Apple Fellow). Don’s book, The Design of Everyday Things
, is one of the standard bearers for an education in design.
- I find myself using a lot of PowerPoint. It started with my work in venture capital, digesting 6-10 new presentations a day presented live, and an uncounted number over email. Now at eBay, I find that in the end, there is no better way to pitch a new business or a new product strategy broadly than to go through the exercise of producing a truly great slide deck. I wonder sometimes whether I now see more decks at eBay than I did in venture capital.
- Don is right. PowerPoint has its place. I love to joke about PowerPoint – I even use some quotes from the article in a lunch presentation I do at Stanford every year as an ice-breaker. But the fact is, there is a time and a place for a PowerPoint presentation. Like any other mode of communication, there are situations where the ability to distill concepts into a short, simple visual presentation is the right answer. I have written my share of 1-page memos, 10-page decks, and long emails. There is a time and a place for each, and if you think any one of them is right for every audience and every situation, then you are not thinking hard enough how to match the best communication vehicle to every situation.
So while I can’t say that I’m proud of the fact that these days I probably produce better PowerPoint decks than Java code, sometimes it is the right tool for the job.
As an aside, I remember the Columbia disaster like yesterday. It was a relatively quiet time for me, as I was home with my wife and our new puppy, Newton, who was only a few months old. I woke up that morning, read the news, and we went to get coffee and a bagel to relax and absorb it. (For those in the Valley, we went to the Starbucks & Noah’s Bagel on the corner of De Anza & Stephens Creek, right near Apple)
The Starfish and the Spider
I don’t normally do this, but my friend John Lilly featured a book on his blog that sounds extremely interesting. I’m going to pick up a copy myself, but I thought I’d let other people know about it here as well.
John’s post can be found here:
The Starfish and the Spider, by Ori Brafman & Rod Beckstrom
John is a good friend of mine, and also currently happens to be the COO of Mozilla, makers of the ever cool Firefox browser. This is his personal blog, but hopefully he won’t mind a few extra page views today.
John & I pursued similar programs at Stanford, separated by two years. We were both Coordinators for the famous CS 198 program, and we both pursued a Master’s degree in Computer Science, with a focus on Human-Computer Interaction under Terry Winograd.
Like John, I haven’t read a good book on human-computer interaction and/or design in quite some time. But this one sounds extremely interesting and relevant. A quote from John’s summary:
The premise of this book is that there are a couple of very distinct models for organizations: centralized (the spider) and wholly decentralized (the starfish). The authors (Stanford GSBers, but worth reading in spite of that…) use this analogy: cut off the head of a spider and the spider dies. Cut off an arm of a starfish, and you often end up with two starfish. Starts by exploring the Spanish conquests of the Incas & Aztecs (spider organizations) and comparing them to the United States’ mostly ineffectual campaign against the Apaches (a starfish organization). The Apaches were harder to fight against because decisions weren’t made by any one person, but were made on what the US would have perceived as the edges — by medicine men who were empowered by their community. The strange thing (for the US, at any rate) was that whenever they killed any of these important people, more would spring up in their place. I thought it was interesting that the authors point to the US giving the Apaches cattle as something that ultimately led to the disintegration of their coherent society. (The implication here is that the sedentary nature of livestock & farming necessitated the creation of societal structures which were more centralized and less flexible — spider-thinking, where there was only starfish-thinking previously.)
Understanding the right organizational structure to produce truly excellent software is one of the reasons I pursued graduate programs in Human-Computer Interaction and Business. With the incredible amount of innovation and dynamicism on the web and in e-commerce today, it’s an incredibly relevant subject.
I think I’m going to have to pick up a copy.
Books: Yes, You Can Still Retire Comfortably by Ben Stein & Phil DeMuth
One of the original reasons that I thought that writing a blog would come naturally to me was because I’m an avid reader. When I started this blog in August 2006, I figured that many of my posts would be the standard “book reviews and baby pictures” type of posts that people make fun of blogs for.
Ironically, I realized tonight that I have not yet done even one book review post… until now. Recently, I wrote a post about Ben Stein, and in the process I discovered the commercial website for his new book. I ordered the book that night, and received it this week. I just completed reading it over the last few days, and it’s worth commenting on.
Yes, You Can Still Retire Comfortably! by Ben Stein & Phil DeMuth
Overall Rating: Good, but not great. I’m glad I read this book, and it had a significant amount of unique content. However, the style is dry & negative enough, that many people may not love the experience.
Synoposis: At least 25% of this book is just depressing. It basically lines up all of the reasons, at both a macroeconomic and microeconomic level, that the retirement of the Baby Boomer generation is going to strain the US economy and your own personal finances. There are three legs to retirement financing: social security, corporate pensions, and personal savings. None of these are looking very good for the Baby Boom generation and Generation X. At the same time, the percentage of people in the economy who are working and adding value is going to continue to fall sharply, straining many aspects of our economy.
I think the authors summarize their feelings well themselves here:
Ten percent of seniors already live below the poverty line. This is no way to spend your days when you are old. Your authors fear that many in our generation are going to be joining their numbers.
What’s more, the retired baby boomers are going to be living well compared to Gen Xers, because the bones will be picked completely clean by the time they retire.
Having said this, we’d like to add one more thing: Yes, you can still retire comfortably. Maybe not everyone will, but you can, and we’re about to tell you how. Don’t get overwhelmed with the fate of the whole generation. Just worry about yourself, and then plan to act. You don’t need to outrun the bear; you just need to outrun the other hunter. Read on.
The rest of the book is a fairly dense, well-researched walk through of how you can outrun the other hunter. It places a strong emphasis on saving, saving, and more saving, with a dollop of extending your working career as long as possible thrown in. The book features a lot of tables and numbers – it’s clear the authors have back-tested their program, and have provided a lot of “short cut” calculations to help the reader quickly assess where they are in terms of saving for retirement.
I have likely read over three dozen books over the years on this topic, and this book was fairly unique in a number of ways:
- No magic path to high investment returns. The authors do not spend any time trying to explain how to beat the market, or how to achieve 10%+ annual returns on your portfolio. They basically advocate the “couch potato” portfolio of 50% total stock market, 50% aggregate bond market. (They do provide a more advanced portfolio breakdown of 25% each US Stocks, International Stocks, Inflation-protected bonds, and aggregate bond index).At first, I recoiled at this recommendation given it’s low growth potential. But having completed the book, I now realize that the authors primary concern is running out of money. Having run Monte Carlo simulations and historical back-testing, it’s very clear that the way to the poorhouse in retirement is having your stock portfolio hit a set of “bad years” early on. That depletes your funds, and since you are withdrawing every year, you never recover.
- Try to be conservative in your saving plan, and then when you have it worked out, try to save even more. More than any other retirement planning book I’ve read, this one really emphasizes the fact that there are still a lot of economic unknowns to come with this generational shift. For example, marginal tax rates have been as high as 90% in the past 50 years. Who knows what rates will be when you retire! Will social security be there for you when you retire, or will “means testing” or some other political fiction be deployed to balance out the books of the dwindling “trust fund”. Even Roth IRAs may not be safe, since Congress could decide to start taxing or penalizing those withdrawals in future years.
- Positive recommendation for variable annuities? It has been a very long time since I’ve seen anyone recommend these, given their notoriety for high fees and low returns. However, Ben has a positive family experience with these products, and he provides very sound analysis on how a mixture of fixed and variable annuities could help provide for a stable and comfortable retirement. In the end, however, the primary recommendation of the book is not annuity based, so I’ll let this one slide.
- You need to plan for your maximum life span, not average life span. Most retirement books I have read tend to focus on average life spans. While these are high, they are not as high as planning for the possibility of a very long retirement. Most of the planning in this book focuses on either the 5% chance of living to 100, or the 1% chance of living to 105.This struck a chord with me, as I tend to be on the optimistic side of this equation. I believe that advances in technology related to longevity and health are on an inflection point that will hit in our lifetime.
- 4% is the only safe number. This is a really important point, so I’ve saved it for last here. In a previous post about Social Security, I explained the “Rule of 25” in terms of planning for assets to provide an ongoing income stream. That back-of-the-envelope rule was based on the idea that you can only withdraw 4% annually safely from your assets and protect your principle.Scott Kleper posts a comment on that entry that asked whether or not I was being too conservative with the 4% number. After all, you don’t need your money to last forever, right?At that time, I hadn’t read this book. If I had, I would have been able to answer that question better. This book goes into quite a bit of detail about different strategies for withdrawing money in retirement. The short answer is that 4% is really the only safe solution that handles out-of-band eras like the 1930s stock market, or the 1970s stock & bond markets.In fact, this book goes out of its way to explain that the only really safe income strategy is to have fifty times your income saved, so that you can invest it in inflation-protected securities paying 2% above inflation on an ongoing basis. Since that’s unreasonable, we’re left with a requirement to invest in stocks, with all the risks and variability associated with it.
The entire book is written in Ben’s typical terse and plain-spoken style. It’s not a long book, and there is clearly a lot of data behind the conclusions that are presented.
The book is also not a riveting page turner, and I am pretty sure that people who are naturally more “grasshopper” than “ant” will get irritated pretty quickly by the constant barrage of negativity about the future and about the need to save at all costs.
I am glad, however, to have read this book. While I’m not going to be shifting my portfolio to the “couch potato” blend so quickly, I may have to revisit my natural revulsion to bonds and consider adding them to my asset mix. The data in this book on withdrawal strategies has me convinced that the best defense is to save early and often.
One last note:
Check out this table from the book:
It’s amazing. This table shows, based on a number of assumptions, what percentage of your salary you should be saving every year, based on your age and how much you have already saved. Look at the power of saving while in your 20s & 30s. If you can save even 1/2 of your salary by the time you are 25, you only need to save 5% for the rest of your career to retire comfortably. If you wait until 35, you need to save 11% every year just to make up for lost time.
While this book was worth reading, I still prefer reading Ben Stein’s periodic articles to the book. He has a natural gift to provide very simple and compelling analysis in a very short space. It’s more powerful in small doses.
History Doesn’t Repeat Itself, But It Does Rhyme
This quote may be by Mark Twain (or it may not).
If you want an example, here’s one:
How Google Hits $1000 a Share (2006)
[Cisco’s] Market Cap Climbing to $1 Trillion (2000)
At least I’m not the only one who thinks so.
On the Record: Meg Whitman
Normally, I don’t read the San Francisco Chronicle. I read the New York Times & Wall Street Journal for my national news, and the San Jose Mercury News for local & high tech coverage. I’m not really sure why anyone actually reads the San Francisco Chronicle anymore, but I digress.
However, they have a great interview with Meg Whitman this week, and I think it’s something worth reading. It’s certainly the longest interview with Meg that I’ve seen in print this year, and it covers a lot of the topics that have been noteworthy in 2006.
ON THE RECORD: MEG WHITMAN
eBay, Garth Brooks, and Making Money On Inefficient Global Markets
(Part 1. When finished, you should read Part 2.)
One of the reasons I love working for eBay is that I am constantly surrounded with interesting empirical evidence of how markets for physical goods behave. Today, I thought I’d share with you a single anecdotal example of how eBay creates opportunity from a very mundane retail product.
Yes, the product is a Garth Brooks DVD.
Well, to be more specific, it is the new, 2006, special-edition 5 DVD Garth Brooks “The Entertainer” set that comes in a collectible tin. It’s $19.96 at Wal-Mart, and there are two angles here. One, they are only going to make one million copies. Two, they are only available at Wal-Mart in the US.
There was a lot of press about this release, largely because I guess the 2005 edition had sold out quickly and led to a lot of pent-up demand for the product. On a lark, I dediced to order 10 copies from Walmart.com. Total cost, with tax & shipping was $238.77, so I was basically out $23.88 per DVD set.
When I placed this order, I had checked the completed auctions on eBay.com for “garth brooks the entertainer”, and I had seen sets going for as much as $39.99. So I figured I’d be able to make a few dollars selling these off.
However, by the time I received the DVDs, the average price on eBay.com had dropped to about $26, and I wasn’t sure I would make any money on these, after fees, with that type of price. After all, Walmart.com still hasn’t sold out, so I guess it is somewhat interesting that anyone was basically paying 30% over retail price for something that wasn’t in limited supply.
On a hunch, however, I decided to check out the completed auctions on some of eBay’s international sites. One of the amazing things about the eBay site is that it is integrated globally. With the same eBay account, I can log into any eBay site around the world and list an item. What I found was very interesting:
- “Garth Brooks The Entertainer” completed auctions in the US.
- “Garth Brooks The Entertainer” completed auctions in the UK.
- “Garth Brooks The Entertainer” completed auctions in Germany.
- “Garth Brooks The Entertainer” completed auctions in France.
Now, these are live links, so what you see is going to be different than what I saw two weeks ago. But what I saw was this:
- High volume in the US (over 50 listings), average price about $26
- Medium volume in the UK (20 listings), average price about 35 pounds sterling.
- Low volume in Germany (8 listings), average price about 50 Euro.
- No volume in France. No one cares about Garth Brooks in France, I guess. 🙂
Wow. 35 pounds and 50 Euro are the equivalent of about $60 US. That’s a big difference, and a big markup over the cost of buying these at Wal-Mart.
So I did a little experiment. I put up a single, fixed-price listing with Best Offer on eBay UK for 9 of the DVD sets for 29.99 pounds with free shipping, and a put up a single auction in the US, starting at $0.99.
End Result: I sold all 9 of the sets in the UK in five days… I wish I had more. The US listing closed at $22.01, with $8.95 for shipping because the buyer ironically was from Canada.
Let’s look at the economics in more detail.
If I divide the costs across the 9 sets in the UK, my numbers are as follows:
Sales Revenue £29.99
Shipping Cost $15.75eBay Fees $4.96
– Listing Fee $0.54
– Feature Fees $1.89
– Final Value Fees $2.53PayPal Fees $2.52
– Transaction Fees £1.07
– Cross Border Fees £0.30Pounds -> Dollars $1.8830
Currency Conversion Fee 2.50%Total $ Revenue $55.06
Total $ Costs $47.10Total $ Profit $7.95
Wow. Thats a 14.1% profit margin on the sale price. All for something anyone could have purchased on Walmart.com.
Just for completeness, here is the economics for the US sale:
Sales Revenue $30.96
Shipping Cost $6.00eBay Fees $2.26
– Listing Fee $0.20
– Feature Fees $0.90
– Final Value Fees $1.16PayPal Fees $1.51
– Transaction Fees $1.51
– Cross Border Fees $-Total $ Revenue $30.96
Total $ Costs $33.65Total $ Profit $(2.69)
Yes, that’s right. Lost money on the US sale.
The fact that I lost money on the US sale isn’t surprising… eBay is a pretty efficient market, and the idea that you could make money buying a product at retail and selling it on eBay is dubious at best, and given that the retailer is the biggest retailer in the US, it’s nearly impossible.
However, I’m amazed at how much money was available to be made selling globally. And eBay makes this so incredibly easy:
- Listing. I basically just went to the eBay UK website, clicked Sell, and used exactly the same form that is available in the US to list. Incredibly easy.
- Pricing. The exact same completed auctions functionality is available for the UK site as the US site. Easy.
- Shipping. I just priced out the shipping via USPS Global Priority mail on the usps.com website. $15.75. Easy.
- Payment. PayPal is absolutely amazing. Not only could UK buyers pay me in pounds sterling, but I discovered that PayPal will actually let you maintain an account balance in 19 different currencies! They charge a flat 2.5% to convert the payment to dollars, but you can leave your money in pounds sterling and still earn interest on it! (Not a bad feature financially if you believe in diversifying your currency exposure…)
- Managing your Listings. The UK listing showed up in My eBay and all of my eBay tools the same way every other listing did. Seamless. Painless. Amazing.
I have a few takeaways from this experiment. No, I am not planning to quit my day job to be an import/export eBay seller. But, I do think this example points to some key truths about global e-commerce today:
- Global markets for retail product are very inefficient. This Garth Brooks DVD was only released in the US. Why? Wal-Mart has a presence in other countries. Maybe it wasn’t worth the logistics for relatively low demand in other countries. Maybe there was limited supply, and they figured the US market was sufficient. Who knows. The point is, there are clearly buyers in other countries who were being underserved here, and it also looks like not enough sellers were stepping into the void to help them.
- eBay helps make inefficient markets efficient. Meg & Pierre have been talking about this effect for many years, but this is a direct example of it. eBay significantly lowers the barriers to trade globally, and as a result an individual like myself can quickly step in and create value. That 14.1% profit is value, and it doesn’t even count the additional value that was realized by eBay & PayPal through their fees.
- PayPal is a game changer for international commerce. I knew this academically before doing this experiment, but now I can really feel it viscerally. Being able to handle foreign currency is not something that most businesses, let alone individuals, can handle. But PayPal makes it seamless. Unbelievable. It’s also worth noting that PayPal made a pretty penny here too. My fees on an average UK sale to eBay were about 8.8% of the sale price. The PayPal fees, including currency conversion, were 7%.
As the internet continues to grow, more and more online retailers are going to wake up to the international opportunity. Leveraging PayPal, any webfront store could likely easily collect sales globally (although not with the demand generation of eBay).
To continue the experiment, I’ve ordered 10 more DVD sets… I’m going to try to sell these in Germany, to see if I can overcome the language barrier. To date, I have sold items on eBay to buyers in over 30 different countries, so I’m optimistic that it will work. I’ll post the results to this experiment as well, if people are interested.
P.S. If you are wondering why I take the time to do things like this in my spare time, the answer is pretty simple. I’m a big believer that in technology you have to use your own product, so that you can better understand the experiences of your users. At eBay, it is even more important than at a typical technology company, because the product isn’t just a list of features – it’s the basis for running a business online.
Also, I tend to shop on eBay quite a bit, so making money through selling on eBay helps “fund my habit”, so to speak.
(Please check out Part 2 of this article.)
Your Employee Stock Purchase Plan (ESPP) is Worth a Lot More Than 15%
First, credit for this article goes largely to “The Finance Buff“, a great blog I just discovered today. He wrote a post about Employee Stock Purchase Plans (ESPP) that really struck a chord with me, and I thought I’d share it with my readers.
Employee Stock Purchase Plan (ESPP) Is A Fantastic Deal
Most people think of their ESPP plan as a nice little perk. But after running the numbers, it seems like it’s a much better return that people give it credit for. It’s definitely a much higher return, on average, than the 15% number that people tend to gravitate to.
Let’s walk through the highlights of why by walking through the original post. First, he defines the basics of what an ESPP plan is:
An ESPP typically works this way:
1. You contribute to the ESPP from 1% to 10% of your salary. The contribution is taken out from your paycheck. This is calculated on pre-tax salary but taken after tax (unlike 401k, no tax deduction on ESPP contributions).
2. At the end of a “purchase period,” usually every 6 months, the employer will purchase company stock for you using your contributions during the purchase period. You get a 15% discount on the purchase price. The employer takes the price of the company stock at the beginning of the purchase period and the price at the end of the purchase period, whichever is lower, and THEN gives you a 15% discount from that price.
3. You can sell the purchased stock right away or hold on to them longer for preferential tax treatment.
Your plan may work a little differently. Check with your employer for details.
OK, so that covers the basics. I have seen minor variations on the above, but nothing that eliminates the math that he is about to walk through:
The 15% discount is a big deal. It turns out to be a 90% annualized return or higher.
How so? Suppose the stock was $22 at the beginning of the purchase period and it went down to $20 at the end of the period 6 months later. Here’s what happens:
1. Because the stock went down, your purchase price will be 15% discount to the price at the end of the purchase period, which is $20 * 85% = $17/share.
2. Suppose you contributed $255 per paycheck twice a month. Over a 6-month period you contributed $255 * 12 = $3,060.
3. You will receive $3,060 / $17 = 180 shares. You sell 180 shares at $20/share and receive $20 * 180 = $3,600, earning a profit of $3,600 – $3,060 = $540.
Percentage-wise your return is $540 / $3,060 = 17.65%. But, because your $3,060 was contributed over a 6-month period, the first contribution was tied up for 6 months, and the last contribution was tied up for only a few days. On average your money is only tied up for 3 months. So, earning 17.65% risk free for tying up your money for 3 months is equivalent to earning (1 + 17.65%) ^ 4 – 1 = 91.6% a year.
90%+ a year return is fantastic, isn’t it? That’s when the employer’s stock went down. Had the stock gone up from $20 at the beginning of the purchase period to $22 at the end, your return will be even higher at 180%!
I think the reason people focus on the 15% is a classic example of why people, even very educated people, are not very good intuitively at dealing with money. 15% feels like the value of the ESPP program, because that is the “cash on cash return”, as we used to describe it in venture capital.
Let’s take the example of a hypothetical engineer, Joe, who makes $85,000 a year working for Big Tech, Inc. Joe is a saver, and as a result he puts 10% of his salary into his ESPP plan. Over the course of the period, the stock goes nowhere. Big Tech shares are always worth $50.
At the end of six months, Joe has contributed $4250 to his ESPP plan. They take the lower of the two stock prices, which are both $50, and set the price at 15% lower, $42.50 per share. (You can tell that I used to be a teacher… my numbers are suspiciously turning out to divide out evenly…)
$4250 buys 100 shares at $42.50 each. Since you got a 15% discount, people think that you got a 15% return.
Wrong. A 15% discount actually means you got a 17.65% return. (Read that line again). You have stock worth $5000. But you only paid $4250 for it, for a gain of $750. $750/$4250 = 17.65%.
This isn’t some sort of numbers trick – it’s actually just the difference between looking at what discount you got off full price (15%) versus the return on your money that you received (17.65%). Percentages going down are always more than percentages going back up. For example, if you got a 50% discount on a $1000 TV means you only have to pay $500. But if they raise the price from $500 to $1000, that’s a 100% increase.
So that’s the first gotcha. And 17.65% is nothing to sneeze at. That’s better than the historical average return of every easily accessible asset class I know of (I am excluding Private Equity & Venture Capital, since most people do not have access to them.)
The second gotcha is the fact that Joe didn’t just give them $4250 one day, wait six months, and then got $5000 back. He actually paid it in gradually, paycheck by paycheck. So, he didn’t get a 17.65% annual return.
Now, this is the place where I’ll get technical and explain that Joe didn’t get 17.65% return over 3 months either… that math is faulty. To calculate this correctly, you need to do a cash flow analysis where you evaluate the internal rate of return taking into account each paycheck that Joe made.
In fact, using the numbers provided in my example, I get an annualized return of 98.4% for Joe – and that’s for a stock that didn’t go up!
Salary: $85,000.00
ESPP: 10%
Paychecks/Year: 26
1/14/06 $(326.92)
1/28/06 $(326.92)
2/11/06 $(326.92)
2/25/06 $(326.92)
3/11/06 $(326.92)
3/25/06 $(326.92)
4/8/06 $(326.92)
4/22/06 $(326.92)
5/6/06 $(326.92)
5/20/06 $(326.92)
6/3/06 $(326.92)
6/17/06 $(326.92)
7/1/06 $(326.92)
7/1/06 $5,000.00
IRR 98.4%
So, I think the lesson here is pretty clear. The biggest problem with ESPP programs is that you can only contribute up to 10% of your salary to them, typically. Otherwise, it would make sense to take out almost any type of loan in order to participate. You’d easily be able to pay it back with interest.
However, be forewarned. All of this analysis assumes that you will sell your stock the day you get it. It also is a “pre-tax” return, since you own income taxes on the $750 gain the day your ESPP shares are purchased.
Disclaimer: I am not a financial professional, and every personal situation is different. This blog is personal opinion, not financial advice. You should thoroughly investigate and analyze any financial decision yourself before investing any money in any investment program.
Update (11/10/2007): There has been some commentary that questions the IRR calculation for this example. I’ve uploaded an Excel Spreadsheet for this example. It shows that for this series of cash flows every 2 weeks (13 negative, 1 positive) that the IRR is 98.4%. For this spreadsheet, I use the XIRR function, which is part of the Excel Analysis Toolpack Add-on, which handles IRR calculations for non-periodic cash flows.
From Excel Help:
XIRR returns the internal rate of return for a schedule of cash flows that is not necessarily periodic. To calculate the internal rate of return for a series of periodic cash flows, use the IRR function.
Nostalgia on the Auction Block: Super Nintendo (SNES)
A little trip down memory lane today.
I’ve finally dusted off, organized, and listed my old Super Nintendo Entertainment System (SNES) on eBay. My parents found these in their garage when they cleaned it out last year for remodeling. Five listings actually:
- SNES Console, with Super Mario World
- 33 SNES Games
- ASCiiPAD Turbo Controller
- SNES Game Genie
- Extra AC Adapter
I searched the completed auctions for prices, and it seems like the SNES is actually worth more than a Gamecube these days. I guess nostalgia is worth a lot. I have to admit, when I plugged it into my TV today and got to play a little Super Mario World, all those memories came back to me.
I’ve dedicated the auctions to a good cause… I’m going to use the money to get a Nintendo Wii for Jacob. Yes, I know Jacob is two years old. But he’s incredibly facile already, and I think within the next year he’ll be able to enjoy it with me.
Anyway, here is the link to my SNES auctions on eBay. I’ll post next week with how the pricing worked out.
For more fun, I also have my original Nintendo and Atari 2600 with games to auction off. Nostalgia city!
US Mint Unveils the 2007 Presidential Dollar Coins
I have been pleasantly surprised by the popularity of my first post on this topic:
Coming Soon: The Presidential $1 Dollar Coin Program
Well, the day has arrived. It’s November 20th, and the US Mint has officially taken the wraps off the first four Presidential Dollar coins, the ones that will be issued in 2007.
The first four coins represent the the first four Presidents of the United States. The US Mint is really going out of their way to make this an educational program. They have a page set up for every design, with historical facts about each president:
They have a nice Flash demo up that highlights the new features of coin. Basically, it will be the same size and color as the Sacagawea dollar, but they have expanded the space for the portraits by moving some of the text to the edge of the coin.
The reverse of the coin features the Statue of Liberty, as a sly nod to previous efforts to feature prominant women from US History on the dollar coins.
This coin is a great idea, as it will definitely bring in revenue to the US Mint from collectors, and will spark a whole decade of fun, historical exercise with children.
The one mistake this program is making is not tying it to the removal of the $1 Bill. As Canada has shown recently, eliminating the $1 bill does not have to be traumatic. However, it is necessary if you want to force adoption of the new coin by both consumers and by retailers.
I’m excited about this program, although I’m a little disappointed to hear that they will not be making a precious metal version of the dollar coins. Gold & silver are better base metals for collectibles, since they also have intrinsic value. I would love to see them make a special edition gold version of each coin for collectors.
Unfortunately, they have decided to only make special edition gold coins of the First Ladies for each President… and I’m not sure I’m willing to spend tens of thousands of dollars on a group of people with dubious historical significance… OK, I might pony up for Jacqueline Kennedy coin… 🙂
Here is the release schedule for all the coins, in case you haven’t seen it. They have only plotted out until early 2016 (Richard Nixon), as I think that’s the point where they start running into live Presidents. We have quite a few living ex-Presidents now (Ford, Carter, Bush, Clinton), so they won’t get coins unless something unfortunately happens before 2016.
Yahoo “Peanut Butter” Memo Calls for Big Headcount Cuts
I normally don’t like to do this, but Paul Kedrosky had excellent coverage today of the Yahoo “Peanut Butter” memo, and it’s worth reproducing here. I have quite a few friends at Yahoo now, I’ll have to reach out to them to find out how this might affect their areas. It’s a bit surprising to me to see Yahoo, who has nominally always been organized by business unit, come out and say that they want to move even further in that direction, with a much stronger “General Manager” role for their properties.
Everything below here is from his post.
This critical, internal Yahoo memo was being forwarded all over the place late yesterday, and made the WSJ this morning. The author is allegedly Brad Garlinghouse, a Yahoo senior V.P.
I’m guessing this was written with full knowledge it would be forwarded outside the company, but it still has some strong statements about Yahoo’s fuzzy strategy, its duplicate properties, and its messy structure. Among other things, it calls for 15-20% cut in headcount, which should get traders busy on Monday.
Three and half years ago, I enthusiastically joined Yahoo! The magnitude of the opportunity was only matched by the magnitude of the assets. And an amazing team has been responsible for rebuilding Yahoo!
It has been a profound experience. I am fortunate to have been a part of dramatic change for the Company. And our successes speak for themselves. More users than ever, more engaging than ever and more profitable than ever!
I proudly bleed purple and, yellow everyday! And like so many people here, I love this company
But all is not well. Last Thursday’s NY Times article was a blessing in the disguise of a painful public flogging. While it lacked accurate details, its conclusions rang true, and thus was a much needed wake up call. But also a call to action. A clear statement with which I, and far too many Yahoo’s, agreed. And thankfully a reminder. A reminder that the measure of any person is not in how many times he or she falls down – but rather the spirit and resolve used to get back up. The same is now true of our Company.
It’s time for us to get back up.
I believe we must embrace our problems and challenges and that we must take decisive action. We have the opportunity – in fact the invitation – to send a strong, clear and powerful message to our shareholders and Wall Street, to our advertisers and our partners, to our employees (both current and future), and to our users. They are all begging for a signal that we recognize and understand our problems, and that we are charting a course for fundamental change, Our current course and speed simply will not get us there. Short-term band-aids will not get us there.
It’s time for us to get back up and seize this invitation.
I imagine there’s much discussion amongst the Company’s senior most leadership around the challenges we face. At the risk of being redundant, I wanted to share my take on our current situation and offer a recommended path forward, an attempt to be part of the solution rather than part of the problem.
Recognizing Our Problems
We lack a focused, cohesive vision for our company. We want to do everything and be everything — to everyone. We’ve known this for years, talk about it incessantly, but do nothing to fundamentally address it. We are scared to be left out. We are reactive instead of charting an unwavering course. We are separated into silos that far too frequently don’t talk to each other. And when we do talk, it isn’t to collaborate on a clearly focused strategy, but rather to argue and fight about ownership, strategies and tactics.
Our inclination and proclivity to repeatedly hire leaders from outside the company results in disparate visions of what winning looks like — rather than a leadership team rallying around a single cohesive strategy.
I’ve heard our strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world. The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular.
I hate peanut butter. We all should.
We lack clarity of ownership and accountability. The most painful manifestation of this is the massive redundancy that exists throughout the organization. We now operate in an organizational structure — admittedly created with the best of intentions — that has become overly bureaucratic. For far too many employees, there is another person with dramatically similar and overlapping responsibilities. This slows us down and burdens the company with unnecessary costs.
Equally problematic, at what point in the organization does someone really OWN the success of their product or service or feature? Product, marketing, engineering, corporate strategy, financial operations… there are so many people in charge (or believe that they are in charge) that it’s not clear if anyone is in charge. This forces decisions to be pushed up – rather than down. It forces decisions by committee or consensus and discourages the innovators from breaking the mold… thinking outside the box.
There’s a reason why a centerfielder and a left fielder have clear areas of ownership. Pursuing die same ball repeatedly results in either collisions or dropped balls. Knowing that someone else is pursuing the ball and hoping to avoid that collision – we have become timid in our pursuit. Again, the ball drops.
We lack decisiveness. Combine a lack of focus with unclear ownership, and the result is that decisions are either not made or are made when it is already too late. Without a clear and focused vision, and without complete clarity of ownership, we lack a macro perspective to guide our decisions and visibility into who should make those decisions. We are repeatedly stymied by challenging and hairy decisions. We are held hostage by our analysis paralysis.
We end up with competing (or redundant) initiatives and synergistic opportunities living in the different silos of our company.
• YME vs. Musicmatch• Flickr vs. Photos
• YMG video vs. Search video
• Deli.cio.us vs. myweb
• Messenger and plug-ins vs. Sidebar and widgets
• Social media vs. 360 and Groups
• Front page vs. YMG
• Global strategy from BU’vs. Global strategy from Int’l
We have lost our passion to win. Far too many employees are “phoning” it in, lacking the passion and commitment to be a part of the solution. We sit idly by while — at all levels — employees are enabled to “hang around”. Where is the accountability? Moreover, our compensation systems don’t align to our overall success. Weak performers that have been around for years are rewarded. And many of our top performers aren’t adequately recognized for their efforts.
As a result, the employees that we really need to stay (leaders, risk-takers, innovators, passionate) become discouraged and leave. Unfortunately many who opt to stay are not the ones who will lead us through the dramatic change that is needed.
Solving our Problems
We have awesome assets. Nearly every media and communications company is painfully jealous of our position. We have the largest audience, they are highly engaged and our brand is synonymous with the Internet.
If we get back up, embrace dramatic change, we will win.
I don’t pretend there is only one path forward available to us. However, at a minimum, I want to be pad of the solution and thus have outlined a plan here that I believe can work. It is my strong belief that we need to act very quickly or risk going further down a slippery slope, The plan here is not perfect; it is, however, FAR better than no action at all.
There are three pillars to my plan:
1. Focus the vision.
2. Restore accountability and clarity of ownership.
3. Execute a radical reorganization.
1. Focus the vision
a) We need to boldly and definitively declare what we are and what we are not.
b) We need to exit (sell?) non core businesses and eliminate duplicative projects and businesses.
My belief is that the smoothly spread peanut butter needs to turn into a deliberately sculpted strategy — that is narrowly focused.
We can’t simply ask each BU to figure out what they should stop doing. The result will continue to be a non-cohesive strategy. The direction needs to come decisively from the top. We need to place our bets and not second guess. If we believe Media will maximize our ROI — then let’s not be bashful about reducing our investment in other areas. We need to make the tough decisions, articulate them and stick with them — acknowledging that some people (users / partners / employees) will not like it. Change is hard.
2. Restore accountability and clarity of ownership
a) Existing business owners must be held accountable for where we find ourselves today — heads must roll,
b) We must thoughtfully create senior roles that have holistic accountability for a particular line of business (a variant of a GM structure that will work with Yahoo!’s new focus)
c) We must redesign our performance and incentive systems.
I believe there are too many BU leaders who have gotten away with unacceptable results and worse — unacceptable leadership. Too often they (we!) are the worst offenders of the problems outlined here. We must signal to both the employees and to our shareholders that we will hold these leaders (ourselves) accountable and implement change.
By building around a strong and unequivocal GM structure, we will not only empower those leaders, we will eliminate significant overhead throughout our multi-headed matrix. It must be very clear to everyone in the organization who is empowered to make a decision and ownership must be transparent. With that empowerment comes increased accountability — leaders make decisions, the rest of the company supports those decisions, and the leaders ultimately live/die by the results of those decisions.
My view is that far too often our compensation and rewards are just spreading more peanut butter. We need to be much more aggressive about performance based compensation. This will only help accelerate our ability to weed out our lowest performers and better reward our hungry, motivated and productive employees.
3. Execute a radical reorganization
a) The current business unit structure must go away.
b) We must dramatically decentralize and eliminate as much of the matrix as possible.
c) We must reduce our headcount by 15-20%.
I emphatically believe we simply must eliminate the redundancies we have created and the first step in doing this is by restructuring our organization. We can be more efficient with fewer people and we can get more done, more quickly. We need to return more decision making to a new set of business units and their leadership. But we can’t achieve this with baby step changes, We need to fundamentally rethink how we organize to win.
Independent of specific proposals of what this reorganization should look like, two key principles must be represented:
Blow up the matrix. Empower a new generation and model of General Managers to be true general managers. Product, marketing, user experience & design, engineering, business development & operations all report into a small number of focused General Managers. Leave no doubt as to where accountability lies.
Kill the redundancies. Align a set of new BU’s so that they are not competing against each other. Search focuses on search. Social media aligns with community and communications. No competing owners for Video, Photos, etc. And Front Page becomes Switzerland. This will be a delicate exercise — decentralization can create inefficiencies, but I believe we can find the right balance.
I love Yahoo! I’m proud to admit that I bleed purple and yellow. I’m proud to admit that I shaved a Y in the back of my head.
My motivation for this memo is the adamant belief that, as before, we have a tremendous opportunity ahead. I don’t pretend that I have the only available answers, but we need to get the discussion going; change is needed and it is needed soon. We can be a stronger and faster company – a company with a clearer vision and clearer ownership and clearer accountability.
We may have fallen down, but the race is a marathon and not a sprint. I don’t pretend that this will be easy. It will take courage, conviction, insight and tremendous commitment. I very much look forward to the challenge.
So let’s get back up.
Catch the balls.
And stop eating peanut butter.
Sony Playstation 3 (PS3) vs. Nintendo Wii: The Game Professional Pespective
There is a very interesting Question of the Week on Gamasutra today. They asked an audience of video game professionals which console they were going to buy. The question was:
As a video game professional, are you buying a Sony PlayStation 3, Nintendo’s Wii or both on their North American launch later next week? How are you securing your console (eBay, pre-order, queue?), and what underpinned your buying decision?
I thought the answers were fairly interesting. Overall, game professionals are not really happy with the direction of the industry at this point. They see a very hardware-focused generation this time, with not a lot of focus on the quality and playability of the games. Many of the titles for Xbox 360 and Sony Playstation 3 are sequels to existing games, just upgraded with new graphics (ie, every Electronic Arts sports title).
As a result, there is a lot of excitement about the Nintendo Wii, and their stake in the ground that it is game quality and playability that matter, not next-generation graphics.
Personally, I think in the end, there is not question that consumers will continue to push for increased graphics and processing. This continues to make professional game economics look more and more like movie economics. Many new game titles now cost $15M-$20M to produce. This economic one-up-manship will not stop, however, as long as the profits from a successful title continue to rise into the hundreds of millions. Just like the movie industry, there will always be low-budget, independent games that make news. However, by and large, it will be the bread-and-butter, expensive titles with expensive franchises that dominate the industry.
It’s the price that the video game industry is paying for being as large and mass-market as they have become.
Still, you have to credit Nintendo for fighting the good fight for game design. After all, this is the company that literally saved the industry in the mid-1980s from the ruin that was left after the Atari rocket crashed. Their party line then was they same as their party line now: too many games of low quality will kill the industry. It’s better to have fewer, higher quality titles that really deliver great games.
Vanguard Launches High Dividend Index Fund
Two news tidbits this week that had me thinking about new investment options.
First, Vanguard just launched a new index fund: the High Dividend Index Fund. They are going to be providing access to the fund in both traditional mutual fund form (Ticker: VHDYX) and in ETF form (Ticker: VYM).
Based on the press release, it looks like the funds will match the FTSE High Dividend Yield Index, which is shrouded in some marketing double-speak mystery. I cannot find the actual companies included in this index anywhere. It looks like this index was created almost exclusively to be mirrored in the Vanguard fund.
The mutual fund version of the fund will have a 0.40% expense ratio, the ETF will have a 0.25% expense ratio. As a result, you’ll want to use the mutual fund as a vehicle if you are making small, regular investments in the fund (like $100 per month). Otherwise, the commissions will killd you. If you are putting a lot of money to work at one time, and you are using a low-cost broker, the ETF is going to be a better “buy and hold” vehicle given it’s low expense ratio.
This fund might seem to be similar to the Vanguard Dividend Appreciation Index Fund. They launched the mutual fund (Ticker: VDAIX) and ETF (Ticker: VIG) in April 2006, and those funds feature expense ratios of 0.40% and 0.28%, respectively. The difference is the index it tracks – this older fund tracks the performance of the Dividend Achievers Select Index, which includes stocks with a record of steadily increasing dividends. The fund’s focus on stocks exhibiting dividend growth distinguishes it from this new fund, which emphasizes purely yield.
I personally have a stock account made up of high dividend/cash flow companies as a conservative base to my retirement funds. Seeing this type of product from Vanguard has me thinking that it might make sense to just let them do the work for me here – the expense ratio is incredibly low.
This fund is clearly a response to the very high interest in more “fundamentals-based indexing”, which John C. Bogle, Vanguard Chairman, has been fairly vocal about dismissing. There is definitely a very grey area between an index fund and an actively managed fund. After all, an index itself is created by a group of people, and changed over time. So the truth is, index vs. active is somewhat in the eye of the beholder. The assumption is that an index will change infrequently, leading to lower trading costs and more consistent representation of some asset class or sub-class.
For those of you who are curious, it looks like the FTSE High Dividend Yield Index will be recalculated annually, based on the following formula:
The new custom index consists of stocks that are characterized by higher-than-average dividend yields, and is based on the U.S. component of the FTSE Global Equity Index Series (GEIS). Real estate investment trusts (REITs), whose income generally do not qualify for favorable tax treatment as qualified dividend income (QDI) are removed, as are stocks that have not paid a dividend during the previous 12 months. The remaining stocks are ranked by annual dividend yield and included in the target index until the cumulative market capitalization reaches 50% of the total market cap of this universe of stocks.
There are already a large number of “high dividend” focused mutual funds and ETFs out there (for example, the iShares Dow Select Dividend (Ticker: DVY)), but with Vanguard’s reputation and penchant for low costs, it’s always worth giving their offerings a strong look. As I’ve posted before, I am a huge fan of Vanguard, and truly believe that they work to lower costs to the bare bone for their investors.
Bix.com is Bought by Yahoo
One of the great things about working for eBay has been all of the great people that you meet and work with. Leonard Speiser was one of the great product managers I had a chance to learn from at eBay, and now his company, Bix.com, has been acquired by Yahoo.
Here is the note on the Bix website from Michael Speiser, who I think does a nice job explaining why they are excited about the deal.
If you haven’t tried Bix.com, it’s a fun site where anyone can set up contests that people vote on. It makes it fairly easy for people to create profiles, and then upload video or pictures related to the contest. It’s like American Idol for everyone. A relatively simple idea, but executed well, and no doubt a very addictive application to add to the Yahoo family. Contests are a great excitement driver, and there is no doubt that Yahoo will try to leverage Bix with large clients who are looking to generate buzz.
One of the most interesting things about working in Silicon Valley is how quickly people can move around and do new and wonderful things. It’s part of the culture – the assumption that everything and everyone will keep moving and changing.
It doesn’t feel like that long ago that I joined eBay, and that I stopped by for some advice and help from Leonard, one of the Senior Product Managers. It doesn’t feel like that long ago that after five years, Leonard decided to go off an pursue a startup.
As a funny anecdote, we had a roast for Leonard at his going away party. Everyone had these masks made of Leonard’s face, propped up on rulers. I actually auctioned one off on eBay.com, got it to be the “Most Watched” item on all of eBay, and ended up making $400 from Golden Palace Casino to fund a going away present for Leonard (an engraved iPod).
It’s also a great feeling to see friends go off and be successful like this. There is no better way to start the day than to open the newspaper and see good news like this.
So, congratulations to Leonard and the Bix.com team.
The Death of Economist Milton Friedman
This is very strange and sad.
On November 5th, I wrote my initial post about Milton Friedman, based on a San Jose Mercury News interview I read that weekend. In it, Friedman discusses his thoughts on education, health care, and Iraq.
Milton Friedman has now passed away today, eleven days later. There is really nice coverage of his death on the Business Week website. A sample:
More than anyone else, Milton Friedman was responsible for challenging the worldview of British economist John Maynard Keynes, who believed in the power of government to guide and stimulate economic growth. As an alternative to Keynesianism, he put forth a more laissez-faire philosophy known as monetarism—the doctrine that the best thing the government can do is supply the economy with the money it needs and stand aside.
Friedman blamed inflation on tinkering by governments and central banks. Along with Edmund Phelps of Columbia University, who won the 2006 Nobel prize, Friedman showed that central banks can’t buy permanently lower unemployment with slightly higher inflation. Wrote Friedman: “Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.”
One of the things I learned from responses to my original post is that far more people disagreed with Milton Friedman than who had actually read or understood his work. I think I’m going to re-read some of the material I have on my shelf from him this weekend.
Paul Kedrosky’s comments on his blog sum up my feelings as well:
Whatever your views on Friedman’s economics and/or politics, he was a giant of an intellectual figure, a provocative, thoughtful, and maddening figure, about whom the least you can say is that his influence and reputation will outlive all of us.
I want to take this opportunity to just say thank you to Mr. Friedman for his contributions to my understanding of economics.
Psychohistory 