Lesson #1 from the New Depression
I’ve been thinking a lot about what the New Depression represents for our society and for our economy and, perhaps correspondingly, to the music industry. I was working out last Saturday and I came up with three pithy lessons and then I promptly forgot the third one and nothing elegant is popping up that isn’t already tried, true and cliche. But I’ll remit back to you if I can remember it. For now, I’ll start with Lesson #1.
Lesson #1 from the New Depression: Your gut represents long term mean reversion.
This is a pretty simple idea. Another way of saying it, “If it looks too good to be true, it probably is.” Another way of saying it, “If all of your friends and everyone you know start quitting their jobs to become real estate agents, and they seem to not know very much about real estate, and they seem a little oblivious to basic market economics that might dictate real estate prices, then be skeptical about the long term viability of that specific segment.” Another way of saying it is, “If the secretary is telling you which dot com stocks to buy, get nervous.” Another way of saying it is, “Use common sense.”
Common sense would dictate that the economics of the hedge fund business and the compensation structure did not align properly with the limited partners in the hedge fund business. And, more importantly, that the likelihood that all of these market participants were smarter than the market itself (which they ironically represented) was very low and that the likelihood that they’d be able to effectively pursue long-term strategies outwitting themselves (essentially) was also correspondingly low. Therefore, when you see twenty-something hedge fund analysts talking about hiring bodyguards to go to clubs because they’re being paid so well to be smarter than themselves that they can afford a bodyguard (Big Nate) and a rented Escalade (true story), common sense would tell you that it probably wasn’t going to last.
Importantly, though for Lesson #1, is that timing plays a part. Your gut only represents long term mean reversion. That is to say, there is still plenty of money to made in the short term if you time it correctly.
Here’s another common sense application of Lesson #1.
I don’t know anyone who ever systematically finds value or clicks on Google ‘Sponsored Links’. Seriously, I don’t know anyone. And I know a decent number of people. Enough, I would hope, to at least give some indication that the central business model of the entire Internet is viable. Right?
AdWords is the business upon which the modern internet is based. The idea that contextual advertising against expressed intent (search) is a gold mine. That Search Engine Marketing is valuable, perhaps just as valuable as Search Engine Optimization.
But I honestly don’t know anyone that systematically finds value from AdWords and expresses that value by clicking on a link that has been sponsored by the advertiser and thus helps recoup the investment that the advertiser made in Google.
I’m not saying they don’t exist. And I’m not saying I understand perfectly. But I AM saying that if I don’t know ANYONE that is a buying/paying participant in Google’s entire business model, that seems like a red flag to me.
We can look at their cash flows and we can look at their financial position and we can look at their great products (and I do think that many of them are great) but, as we’ve seen with other internet concepts, the important thing here is that businesses need a business or they become not-businesses which are more difficult to monetize, financially speaking.
My gut tells me that if I don’t know anyone that is a paying customer (I mean clicks on ads) of the internet’s biggest business than there is a problem and that business is not worth very much. And, again, I mean in the long term. This is a lesson that I’m learning. Lesson #1 in fact. Just saying.
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John Manfredtangensin
