A Whole Lot of Nothing

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A couple of years ago, when the markets went to hell, I offered to help my parents with their retirement planning. I was working in finance at the time, and it seemed like a sensible division of labor for me to help out this way.

Since I’m taking this responsibility on, at the least I need to measure if I’m doing right by my family. So every year, in January, I try to look back over the previous year and see how I did and how the market did.

The one thing that jumped out at me was that the market did shockingly little. In it 2011 seemed like a lot happened. It looked like Greece was going to default. Then it didn’t look like it. Then it did again. The US economy looked like it was going to tank. Then it didn’t. But it still might. But in the end, it was basically just a lot of noise. The news channels have to put something on.

On the last day of 2010, the S&P 500 closed at 1,257.64. On the last day of 2011, it closed at 1,257.60. the market ended 2011 down 0.003%. I read somewhere that the market actually moved that little in the 40’s but I haven’t been able to confirm: it seems like this was the smallest move ever.

The most meaningful thing I can say about 2011 is that the people who looked really smart in 2007 and 2008, almost to a man, had awful years. On average, hedge funds were down 5%.

After a year like this, I think back about all the effort that goes into predicting the market. There are whole channels devoted to what the market will do. And nothing happens. It boggles my mind just how much nothing there is.

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http://www.hulu.com/embed/UCk_RCrh-vDqocjgtos2-A

Jimmy Fallon as the Peter Principle in action. I saw a highlight reel of his stuff on SNL a couple of days ago- I had forgotten how funny he could be. Now I see clips of him on his show and I just cringe.

Also, the language in the first video might be offensive to you, if you’re the type of person who finds stuff on SNL offensive. If that’s the case, I’m sorry: I know the last 40 years have been tough- I don’t mean to pile on.

I’m actually sorry that I just put up two videos with ads in front.

(Source: http://www.hulu.com/)

Decline and Fall

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Anyone who grew up in the 80s and lived even marginally above subsistence level remembers their first cassette, and they probably remember playing that tape in their first Walkman. Mine was Arrested Development’s 3 Years, 5 Months & 2 Days in the Life Of… which I bought in a Borders in a mall north of Chicago in 1993.

That was a really long time ago. People born that year can vote now. Arrested Development isn’t really remembered- now when you say the name, people think of the TV series. Borders went bankrupt. And a little over a year ago, Sony ceased (cassette) Walkman production in Japan.

I now own a couple of iPods (I know, what were the odds?) and the end of the Walkman got me thinking- how did they compare in adoption? And what happens to the iPod 20 years from now?

The decline of a product is a key question for those of us who try to create technology and try to invest in it. People in the tech world, I have noticed, are almost obsessed with growth, and for good reason: they invest in small companies, often with no product at all, let alone an established sales base. How fast a product can grow is basically the only criterion that can even be estimated at this point.

I came to the tech world from a stodgy value investing background. This is the world of cigar-butt investing. Find companies that have fallen out of favor and invest in them cheap, because they’re still pumping out cash, and just hanging around is much more profitable than growing in the medium term.

I’m particularly interested because, as a start-up founder/employee, investing in current technology titans is probably my best strategy to ‘hedge’ myself. I know the space. If a start-up disrupts and takes down a titan, I’ll probably be right on top of it (able to trade ahead of the market), and start-up companies (generally) hire start-up ‘guys’, so I’ll probably employable. If the interest in the current start-up boom fades, and the big guys are able to hang-in, though, I should at least make some money on my investments. I take a lot of ‘basis risk’ (my investment is an imperfect hedge due to possible fraud, companies I never considered might take down an incumbent, the market just vanishes, etc.) but I’m comfortable with that risk.

I currently own some Cisco stock, and a good friend has been trying to get me to buy Frontier Communications (these are not recommendations, btw- just disclosure). I think that these are the kind of places you should be investing if you are working in the space. The main reason not to is because these companies are still within the tech sector, but I don’t think that’s a major driver: correlation is high across all stocks now, and (some) old companies are at such low valuations that, if their sales hold up, even some shrinkage in their multiples shouldn’t hurt too bad.

But anyways: as to whether the Walkman or iPod sold faster, Apple conveniently lists its annual sales figures- you can grab them off Wikipedia. Sony’s a little tougher, as they don’t even report Walkman sales as its own unit. I grabbed this graph and estimated the values using engauge (which is great but I don’t love- if anyone has a digitizer they like more please let me know). This only gave data up through 1999, so I made educated guess about the years after based on sketchy cumulative sales numbers and 20-F filings: if you want my numbers just email me. Also, let me know if you can locate annual sales data on Discman products.

Year 1 for the iPod is 2002, for the Walkman it’s 1979. The iPod has been far more successful than the Walkman was in terms of raw numbers. But its fall may be faster: already competitors and better phones are eating into the market. The iPod already defines an era like the Walkman did, but I don’t think that era is going to last as long.

As a parting thought, I can’t think of a more amazing business victory than Apple’s win over Sony in this market. Sony owns a ton of the content in the market and their product was ubiquitous. Apple had no experience in the portable consumer goods market. When was the last time you used a Walkman or Discman? Boggles the mind.

I should note, in the spirit of disclosure, that Sony is a client of my employer. I did not obtain any info in this post from them and I have not received any compensation. That’s probably obvious, but it warrants mentioning.

Curmudgeon

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Saw a great tweet from Abdur Chowdhury today

Remember the curmudgeons in your org care deeply. When they quit you have lost balance & are left with self congratulatory cheerleaders.

I spend much of my time trying to be positive and watching my tone, but there is a place for the pessimist, especially in business. I learned a long time ago that the word came from the French couer merchant (evil heart) but the internets say that’s wrong.

One thing I like about working in the tech world is that there’s so much less pomp and nonsense than in my old jobs. I suspect that’s why I see more people who are openly grouchy, but don’t attack others behind their backs. It’s a much better life, at least for me, though if you’re thin skinned I can imagine it being tough.

Lawyers- How Law & Order: SVU Ruined Your Lives

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I live in Manhattan. In a related story, I hang out with a lot of lawyers. Enough that it’s pretty difficult for me to make generalizations about them.

However, I have noticed some commonalities in interests among my legally-inclined friends:

Stuff Lawyers I Know Like:

  1. Complaining about the job market
  2. Complaining about the absurd amount of debt they have
  3. Watching (& over-analyzing) Law & Order

Now, a caveat. Anyone who knows me knows I dislike very few things. I’m not judgmental and judicious, which somehow makes sense. But I hate Law & Order.

I can’t really put a finger on why I hate it. Maybe because it makes my friends suspicious of others to the point of paranoia. Maybe because it’s so locked into its formula that I can set my watch by when they find the victim and when they end up in court. Maybe I just don’t get it.

But I do know that, almost without exception, my lawyer-friends love the show. They say that they watched it while they were in college. And as they complain about the glut of lawyers who probably also watched the show, I wondered: are there too many lawyers because of Law & Order?

So being a data geek, I looked at the data.

The Law School Admission Council (LSAC) tracks info on how many LSATs are administered each year and how many applicants there are each year. Unfortunately, applicant data only goes back a few years, so I looked at the historical relationship between LSATs and applicants (for every 100 LSATs, there have been 60-65 applicants). I applied this relationship backwards as far as I had data, to 1987* to estimate applicants. So I get a history of Law School Applications:

There’s some literature that says that there is a relationship between the demand for higher ed and wages. It’s a little dicey but let’s say that it might hold for law schools. We’ll graph the annual change in GDP (scale on the right side of the graph, in %):

Looks like it’s not a totally crazy idea. We get an r-squared of .314**. A weak relationship, but ‘meaningful’. Still, notice that there are more applications than we might expect in the early 2000s.

Law & Order

Law & Order ran for 20 years: 1990-2010. In the beginning, it wasn’t really that popular. For the first 8 years, it couldn’t crack the top 20 shows on TV. That’s about as popular as Modern Family was in 2010. And then, in 1999, with no warning it took off. Which leads us to…

SVU

1999 was also the launch of Law & Order: Special Victims Unit. Combined, the two shows had almost 30 million viewers. In less than 5 years it would be more popular than the original. The 1999 season (which runs into 2000) matches up with the time people would be preparing for law school entry in 2001. Here’s a graph of law applicants vs. SVU viewers

Hmm. So does this improve our model fit? Let’s look at the model:

We now have an R-squared of .60, with significance for both variables (and a slightly lower AIC). We still have serious auto-correlation, though.

Translation for you lawyers: STOP WATCHING SVU! For every million people who watch the show per year, this estimates that 850 500 more people apply to law school than we would expect otherwise***.

Josh

EDIT: It was annoying me that I hadn’t accounted for auto-correlation, so I reran the analysis with a lag on Law.Applicants. This knocks the DW-stat and the impact of GDP just out of ‘significance’, though both, I think, are likely making an impact. (Note: I didn’t muck with the data to push these out of significance. Scout’s honor). Here are the results- now estimating 500 more applicants per million views.

Also, I meant to mention this in the original post, but 2001 was also the year that TNT relaunched as ‘We Know Drama’ TNT with L&O reruns on *all* the time: I don’t have any data on their viewers, otherwise I’d test that effect.

Josh

*This is the first of many questionable things I will do with the data here. I should say this is more for fun than anything. This involves an olympic long-jump of faith so don’t take it too seriously. At the very least, causality could go the other way as future lawyers go out of their way to watch their future selves kick ass on TV.

**For stat geeks: the relationship is highly auto-correlated, with a D-W stat of .66.

***I also checked a model that included the number of bachelor degrees awarded each year. To my surprise this performed worse by AIC and was less significant than SVU watchers (and just as auto-correlated).