June 23, 2009
I’m sitting in the corner of the Starbucks at the Southpoint Barnes and Noble in Durham. I’m reading The Dream by Gurbaksh Chalal (nickname ‘G’), a 26 year old internet entrepreneur from India and San Jose, California. G has a compelling writing style in the beginning, writing of the difficulties he encountered growing up as an Sikh Indian-immigrant. Here are my notes from the book.
G dropped out of high school at age 16 to start a performance-based advertising network called Value Click.
Growing Up a Sikh Immigrant Indian in San Jose
Some of the stories in the first part of the book that initially struck me were:
- His father and him day trading on margin in 1997 and doing equity research together. In October 1997 (right before the Asian Market Crisis) the market had a small dip and in fear of the market falling further and not being able to cover his margin sold at the very bottom, which caused his father shame and nearly to lose their new house.
- G being forced to remove his turban at knifepoint when playing basketball in the ‘hood’ of San Jose.
- G taking a public speaking class in high school and having to give a speech as a very traditional Sikh about the randomly assigned topic of Viagra.
Here’s how G. got started…
- Buying the HP.net and Dell.net domain names in 1997 and sending a letter to the companies offering to sell the names back to them for $10,000–and then receiving threatening cease and desist letters and giving the domains back for free.
- Starting to sell printers on eBay, then starting a performance-based advertising network Click Agents
- Setting us his very first deal in a very ‘Elliot Bisnow’ type of way–by getting one ad agency to commit one $30k insertion order (IO) at $1 CPC and only after having it, building his ‘consortium’ of web sites to traffic the ad at a 50/50 rev share, all along using the fake name Gary Singh.
An excerpt from p. 59:
“All the knew was that Gary Singh delivered, and that’s all they cared about. They had no idea they were dealing with a sixteen-year-old kid because I presented myself as a serious professional. Once again, perception is realty. That’s not a kid on the other end of the line. It’s a guy who delivered on his promises.”
On page 80, G tells a story I can relate to, his servers went down for a week due to a vengeful vendor. His story reminds me of the week in December 2003 our server went down due to hardware failure. An excerpt:
“We were offline for an entire week… A week without the Web. Well that was the lifeblood of my business, and that week almost put us under… Time in the Internet is measured in dog years .For that entire week, Click Agents had ceased to exist.”
Ideas Vs. Execution
Gurbaksh makes a good point about the value of ideas vs. execution on p. 100.
“If you have an idea for a company, that’s just the beginning–that’s your entry point. What really matters is execution. Don’t think about the millions you’re going to make, think instead about creating a company that will be worth millions… The difference is huge. Success is laregely about substance. If your company is about real, tangible assets, and you’re looking the the long term, you are going to be handsomely rewarded for it.”
Struggling With Bureaucracy at ValueClick
On page 117, G laments in an amusing paragraph, working for the slower, bigger, public ValueClick. VCLK had bought Click Agents in November 2000 for $40 million.
He notes, “…in this new environment, I couldn’t move forward without official approval. I had to sell an idea to one guy, then to a second guy, and then to two or three more guys after that, and they all seemed incapable of making a decision. I guess that’s what people mean when they talking about the bureaucracy. It’s a place where absolutely nothing gets done. And the larger the organization, the less one is able to accomplish…I couldn’t understand how corporations actually accomplished anything, since the bureaucracy seemed to be designed solely to steer you into one brick wall after another.”
Getting over The Fake Excitement of Materialism
Around page 136, G. begins to talk of all the Ferraris and Lambourghinis he purchased after selling his ValueClick shares. I was disappointed by the materialistic focus of this part of the book, but I could understand it in my own imperfection. I owned a 350z for two years when I was 21 to 23 before I sold it due to what it was doing to my personality.
On p 139, G writes, “I was breaking one of my own business rules. Need versus necessity. Did I really need that king of luxury.? No. Then again, maybe I’d earned it. So I Lived with it. After all, as they say, all work and no play makes G a dull boy.”
G was close to coming to the conclusion that the two luxurious $240,000 Lambourghini’s he bought was a little over the top but didn’t quite get there. I was disappointed in him at that point.
One of G’s ‘lessons’ later in the book that he shares is “Forget noble motivations.” On this, more than anything else, I disagreed with G.
After his three year non-compete agreement with ValueClick was up and after G sued ValueClick for securities fraud, he started BlueLithium in 2004 at the age of 22. He raised $11.5 million from 3i and Walden VC when the company was doing $200,000 per month in sales in February 2005. I’m not sure what G was thinking, but as part of this deal he agreed to a 5 person board, of which 3 were selected by the investors.
In my view, it is not in an entrepreneur’s best interest to let investors pick a majority of the board (and thus effectively control the entire company for a minority investment). It seems like G did not have a choice based on the amount of money raised and the stage but I would have thought he would have had more ability to set terms in the round having had a nice success previously. On p 186, G describes the difficulty he experienced with his Board believing in him when ValueClick sued BlueLithium claiming he had stolen trade secrets.
In the end, BlueLithium did well with its behavioral targeting ad technology that was able to show relevent ads to consumers based on their internet browsing history. They sold the company to Yahoo on September 4, 2007 for $300M when they were about the same size iContact is today. They had good timing and in retrospect sold at a good time, following the DoubleClick/Google, aQuantive/Microsoft, and 24/7 Real Media/WPP Group transactions.
The Secret Millionaire
In Chapter 6, G describes how he ended up being part of the current Fox show The Secret Millionaire. The premise of the show is that an American millionaire (in this case, G) lives in a distressed community for one week and talks to people and then decides at the end of the week how to allocate $100,000 to non-profit organizations in the area.
As an aside, relevant to the premise of The Secret Millioniare, last night at Crunkleton’s (bar in Chapel Hill), I had an in-depth passionate debate with my friend Jess last night about Easterly’s The White Man’s Burden and whether any benefactor or philanthropist, including myself, can legitimately and morally go into a distressed community for just one week and then appropriately contribute funds without knowing fully how they will be used and whether the impact will in fact be positive or sustainable.
I made the point to Jess (who spent 2 months in Uganda at the Sachs’ Millennium Village Project in Ruhiira last summer) that I had visited Uganda in July to see the impact of the small funds I’d already contributed and to see with my own eyes how the funds were being used and whether the organizations could efficiently and and positively utilize more in the future. I argued that some BHNs like education, healthcare, and clean water were simply fundamental to humanity and that the core issue with aid that Easterly described were mainly caused by bi-lateral government to government aid that was not reaching the people. Instead, providing aid directly to grassroots organizations run by locals in which you could see the impact yourself was qualitatively a better method. The show has gotten some criticism here and here and of course on ValleyWag multiple times, but I’ll hold my view until I can catch an episode.
G’s Entrepreneurship Lessons
Finally, G ends the book with 27 lessons on entrepreneurship. They are:
- Listen to your heart.
- Forget noble motivations (one I disagree with)
- Adjust your attitude
- Figure out what you’re good at
- Trust your gut
- Do your homework
- Be frugal
- But don’t be frugal with hiring
- Hire smart people
- Don’t expect perfection, but strive for it
- Learn to listen
- Own your mistakes
- Never compromise your morality
- Never lose sign of the competition
- Watch your back
- Don’t procastinate
- Don’t do anything by half-measures
- Be nice to people
- Negotiate from a position of strength
- Expect the unexpected
- Perception is reality
- Don’t get emotional
- Be fearless
- Pick your battles
- Grow a think skin
- Take chances
- When you commit, you really have to commit.
Overall, I would recommend the book as for me it was good to understand the process of professional and personal development of a similarly aged internet entrepreneur. It did not provide much how-to and was more biographical in nature.
I’m sure I’ll meet Gurbaksh soon enough at one of Elliot Bisnow’s get-togethers for young technology entrepreneurs sooner or later, and I look forward to the day. I could relate to much of the bananas G went through including being bullied when young for being different, sacrificing other opportunities to build a business, raising venture capital at 21, and finding flow every day by being immersed in a company.
October 23, 2007
I only had 38 emails going into today compared to the usual 450 (mainly because of having a 4 day week and actually not having such a crazy schedule that I couldn’t answer them during the week) so I’ve been able to spend the past ten hours reading The Winning Investment Habits of Warren Buffet and George Soros, a book I picked up yesterday. The author Mark Tier has come up with 23 investment habits of the ‘Master Investor’ that both Soros and Buffett have shown. Tier also talks about the background, styles, trades, and philosophies of Benjamin Graham, Carl Icahn, John Templeton, Peter Lynch, Philip Fisher, Jimmy Rogers, and Jesse Livermore. I’d say the book was good and would recommend it to anyone fairly new to investing or someone looking to understand how to control the psychological and emotional side of investing and be presented with a view of different systems that have been effective. I would probably not recommend it to an advanced investor with many years of experience, unless they feel like they are in need of focusing on improving their emotional control and are looking for a new systems.
I wanted something that could present a fairly simple and straightforward strategy while helping me develop the mental guidelines to not let emotions control investment decisions. My only suggestion for improving the book would be for it to provide more information on the specific how’s of getting started with a strategy.
The depth of the history behind Buffett and Soros’ trading philosophies that Tier shared was very interesting and inspiring. I find it quite amazing how Buffett and Soros have been able to obtain 24.4% and 28.2% average annual investment returns since 1956 and 1969 respectively. While I have read books about and by Buffett before, after reading this book I know even more that I am much more attuned to the Buffett style of fundamental investing compared to the Soros style of technical investing–though some of his investing based on economic and geopolitical events I could see myself someday modeling. At the end of the day I prefer looking at P/E, ROE, the competitive landscape, and management quality and investing in companies and people rather than candlesticks or directional momentum arrows.
Personally, I have about 5% of my liquid assets in an account I manage and the rest in an account managed by professional money managers. I will probably keep it that way for a few years as for now I feel my time can best be spent working to build the value of iContact. I do want to keep learning and start to spend an hour or week or so making investment decisions for the TD Ameritrade account, so I figured I would start again by reading a book that can help me simplify and add to my personal equity investing beliefs. I have followed the philosophy of Buffett (value investor based on fundamentals) in public equity investing so far (as well as some safer index fund strategies) and wanted to learn more about his strategies.
Until I have much more time to devote to the effort, I will likely never come close to reaching the percentage return levels from public company investing that I can achieve in investing in my own private company (being an ultimate inside investor as Kiyosaki calls it), but someday I would enjoy managing a fund that invests in both public and private companies–so I figure I should keep learning a little bit here and there as I can. Some of the topics in the book like competitive advantage, control-over-emotion, and stock evaluation will be helpful in the continued day-to-day building of iContact.
Now wanting to learn more about the specific Buffet strategy of value-based fundamental investing, I will probably try to find a book that details how to develop a system based on this philosophy and how specifically to find great companies with great teams at periods during which their stock is undervalued by the market. I do have three questions after reading the book that I would welcome any advice on in the comments:
- How does one know when a company is trading at a stock price that is sufficiently low to buy shares. What quantitative measures other than ROE, P/E are good to look at and what are the targets for these figures? What qualitative measures other than competitive landscape and management quality are good to look at? Obviously Buffett wants to buy companies that are valued at less than the present value of their future cash flow–but what are the main determinants in predicting cash flow 10 and 20 years out?
- Tier spoke a lot in his book about Buffet and others going to talk to management teams before making buying decisions. I am a bit unclear regarding the rules for what constitutes illegal insider trading in the U.S.? How is it that you can speak to the management teams to get insight on their business and their competitors’ businesses without it being classified as illegal insider information that you cannot trade based on?
- Tier talks about taking losses quickly, beating a hasty retreat and admitting mistakes, but what is Buffet’s guidelines for getting out and admitting a mistake? Per page 85 he says When the business no longer meets his criteria. When it’s broken and we can’t fit it. To me, this means a fundamental shift in the company’s management, earnings results, or product prospects–and nothing to do with the price. Is there a metric-based guideline that is good to have (10% earnings drop, 15% price drop). How do you know when to admit your mistake and move on in a public equity investment?
Below are my notes from the book. Off to write up my Directors’ Report for last week and compile survey results. I truly do love Sundays.
Notes from The Winning Investment Habits of Warren Buffet and George Soros by Mark Tier
- Don’t buy a stock when you expect the price to go up. Buy it when it meets your investment criteria.
- Intriguingly, often when the market is collapsing, investment professionals suddenly discover the importance of preserving capital and adopt a wait and see attitude, while investors who follow the first rule of investing, never lose money, are doing the exact opposite and jumping in with both feet.
- When you can’t find an investment that meets your criteria, don’t invest at all. Put it in T-bonds.
- Only invest when you can buy at a price significantly below your estimate of the business’ value. (the margin of safety)
- Buffett’s only concern is whether his investments continue to meet his criteria. If they do, he is happy–regardeless of how the market might be valuing them. He simply doesn’t care what the market is doing. He wouldn’t mind if the stock market closed down for 10 years.
- Graham’s ideal investment was a company that could be bought at a price significantly below its liquidation or book value
- Anecdote about Mr. Market and his whims and changing emotions. The more manic-depressive his behavior, the better for you. At times he falls euphoric, at other times he is depressed.
- Mr. Market is there to serve you, not to guide you. It will be disastrous if you fall under his influence. Use your own, independently derived standard of value for determining when a business is cheap or expensive.
- One way or another, the market is always wrong.
- Buffet started with Graham’s model but became influenced by the Fisher model starting in 1963 with his purchase of American Express (after his partner Charlie Munger’s influence, who he met in 1959).
- Fisher – Reading the printed financial records about a company is never enough to justify an investment. One of the major steps in prudent investment must be to find out about a company’s affairs from those who have some direct familiarity with them.
- Fisher – If the job has been correctly done when a common stock is purchased, the time to sell it is–almost never. His average hold was 20 years.
- There are only 3 times to sell a stock–when you’ve found you made a mistake, when the stock no longer meets your criteria, or when you find a fantastic opportunity and the only way to buy it is to sell some stock.
- If there is one factor that sets the Master Investor apart, it is the amount of thinking they have done.
- To Buffett, a company’s worth is the present value of it’s future earnings.
- Companies that focus on making their moats (of competitive advantage) wider and deeper, and fill them with piranhas, crocodiles, and fire-breathing dragons, are what Buffett is after.
- Diversification is for commoners.
- The right amount of a good investment to buy is as much as possible
- Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing. — Warren Buffett
- The opposite of diversification, concentration in a small number of investments–is central to both Buffett’s and Soros’ success.
- To Soros, investment success comes from preservation of capital and home runs.
- Soros incorporated the Quantum Fund in a tax haven, the Netherland Antilles, so it can compound its profits tax-free.
- How did Soros and Rogers find stocks? They read. Intensely. Trade publications like Fertilizer Solutions and Textile Week were common.
- Read annual reports of the companies you plan to buy–as well as those of their competitors.
- You make your money when you buy
- Monitoring your investment after you make it is just as important as buying
- Story of Harold saying, How would you like to be the target of a class-action lawsuit on behalf of the minority shareholders for failing to maximize this company’s value?
- The Master Investor has the patience when he can’t find an investment that meets his criteria to wait indefinitely until he finds one that does.
- Soros insists on formulating a written thesis before taking a position.
- Soros – To be successful, you need leisure
- The Master Investor acts instantly when he has made a decision.
- The Master Investor never makes an investment without first knowing when he is going to sell (based on pre-set criteria)
- The Master Investor almost never talks to anyone about what he’s doing. He is not interested or concerned with what others think about his investment decisions.
- In evaluating people, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. – Buffett
- Warren gets people to work their butts off after he buys the business. Now that’s a good skill to have.
- Buffett’s two roles are 1) capital allocation and 2) to motivate people to work who simply have no need to
- One of Buffett’s conditions when he purchases control of a company is that the existing owners stay on to manage it. Part of his success is choosing to only do business with people who simply love their work the way he does.
- Munger – I had a considerable passion to get rich. Not because I wanted Ferraris–I wanted the independence.
- If you are inspired by what you do, then any money you make while pursuing your goals is merely a side effect.
- Buffett – Money is a byproduct of doing something I like doing extremely well.
- When Soros burned out in 1981, he was already worth $25 million, but he had no accomplished what he set out for in life.
- Soros wants to write a book that will be read for as long as civilization lasts.
- For Buffett and Soros, making money is a means to an end, not an end in itself.
- The artist has a vision of his painting–of his ultimate goal. When he paints, his focus is on his craft, on the way he applied his brush to the canvas. He is absorbed by the process of paining. When he is totally involved in what he is doing, the master painter enters a mental state called flow. Flow is a state where absorption is so complete that one’s entire mental focus is on the task being performed.
- Buffett- The first question I always ask myself about a business owner is: Do they love the money or do they love the business, because the day after I buy a company, if they love the money, they’re gone.
- Neither Buffett nor Soros have passed the Series 7 exam. Soros took it and failed. Buffett was the CEO of Salomon Brothers and never took it.
- The Master Investor puts his net worth on the line and has most of his net worth in his company.
- Carl Icahn’s strategy is took take large positions in ‘undervalued’ stocks and then attempt to control the destinies of the companies in question by a) trying to convince the management to liquidate or sell the company to a white knight b) waging a proxy contest, or c) make a tender offer or and/or d) selling back our position to the company.
- They buy companies trading at or below book or liquidation value where no one including incumbent management had a significant stake in the company.
- He would create confusion in the market place by talking and talking and talking to keep the management off guard–he would sow confusion.
- Alfred Kingsley joined Icahn as his associate in 1968
- They then seek a seat on the board. Icahn is actively involved in creating his own exit path by finding the highest bidder.
- Icahn’s biggest mistake was buying TWA in 1985
- Templeton – Buy in bear markets. The best time to buy is when the markets are down and most investors, including the professionals are too scared too invest.
- Templeton got a Rhodes Scholarship after finishing an economics degree at Yale
- Templeton moved to the Bahamas so he could live there tax-free. Templeton views his money as a sacred trust that he can use to help other people.
- Templeton shorted individual dot com stocks in January 2000 systematically 11 days before the 6 month lockup period was set to expire and made $86 million.
- Buffett and Soros believe that they deserve to succeed and make money and that they are in control of their own destiny.
- The strategies were: Buffett-Buy a good business that can be purchased for less than the discounted value of its future earnings. Soros: Buy (or sell) an investment that can be purchased or sold prior to a reflexive shift in market psychology/fundamentals that will change its perceived value substantially. Icahn – buy a company with no controlling shareholder trading below its breakup value that’s a potentially appealing candidate for a takeover. Graham – buy a company that can be purchased for substantially less than its intrinsic value.
- One investment approach is to find good investments by reading and then talking to managers, competitors, retailers, suppliers, and others in the business.
- A complete investment system has detailed rules covering what to buy, when to buy it, what price to pay, how to buy it, how much to buy as a percentage of your portfolio, monitoring the progress of your investments, when to sell, portfolio structure and the use of leverage, search strategy, protection against systemic shocks such as market crashes, handling mistakes, what to do when the system doesn’t work