I’m an optimist by nature but — hopefully you see that through the rest of my articles here — but I’m also practical.
And there’s a weird amount of $hit going on in the U.S. and abroad these days that’s got me preparing for a possible economic meltdown.
And I’m not talking about the staggering U.S. federal deficit — that’s got serious longer-term consequences. I’m talking about a handful of other scary items that worry me more in the short-term. …
I’m one of those weird guys who likes to pour through documents like the 182-page LinkedIn S-1 Registration Statement (while flying to Salt Lake City for a trip with high-school buddies!).
An S-1 is what a company files in preparation for “going public.”
Here are some highlights:
This excludes what looks like an $8.2 million payout to preferred shareholders
* 2009 to 2010 reflects just 9 month periods.
Hiring Solutions: 44% — Recruiters (3,900 of them in 2010) pay LinkedIn to access and market to its database of users. This includes 69% of the Fortune 100.
Advertising: 31% — Marketers (33,000 in 2010) run ads on LinkedIn’s page views.
Subscriptions: 25% — LinkedIn members can use much of LinkedIn for free but there are additional things that users must pay for (such as seeing more than 100 results at a time or being able to filter your searches by seniority of a LinkedIn member).
*Breakdown as of quarter ended Sept. 30, 2010
“LinkedIn is not as automated a business as some may think…over half their revenue comes from Field Sales.”
Due in part to LinkedIn’s money spent on a sales team in the field, their profit margins are lower than Google’s and Facebook’s.
“I bet that Groupon’s profit margins will be closer to LinkedIn’s than they are to Google or Facbeook when Groupon files its S-1…due to the large field sales team they employ. “
Did anyone notice that I just quoted myself? I’m just trying to break up the text components here!
* For the 9 months ended Sept. 30, 2010
*As of December 31, 2010
LinkedIn is currently being valued at around $2.9 billion according to the latest shares being sold on SharesPost (note: this is not in the S-1 Registration).
A LinkedIn IPO could value the company at a great price than the $2.9 billion based on those recent privately-traded LinkedIn shares.
Of course, the LinkedIn valuation could change big time if we have an Internet bubble burst before they go public.
I found this terrific video (below) in which Buffett teaches students how to become the business hero they want to be (the video is pretty crappy quality but fantastic content!).
I wrote down the basics of the exercise (it starts around Minute 2 of the above video)
As Buffett explains, you don’t have to be a student to benefit from this exercise, but the earlier in life you do it the better!
Ok, grab a piece of paper…this won’t take long:
1) Pick a fellow student/colleague who you’d like to own 10% of for the rest of their lifetime
Question: Is it the person with the:
Buffett thinks you’ll probably end up looking for qualitative factors such as:
Write down the qualities of that person you want to own 10% of on the left-hand side of a piece of paper.
and then, to continue the exercise, you then:
2) Pick a person who you would like to “sell short” based on their performance for life.
This would probably not be the person with the lowest IQ or lowest grades — more likely, Buffett says, this person has turned you off with such qualities as:
Write down the qualities of this person you want to “sell short’ on the right-hand side of your sheet of paper.
Buffett suggests that if you focus on emulating the qualities on the left-hand side and avoiding the qualities on the right-hand side, you’ll eventually become the person that you want to own 10% of.
But even better than owning 10% of that person, you’ll own 100% of that person…because it’s yourself!
I sat in on a conference call hosted by Sharespost, a marketplace for privately-held stock, today to learn more about buying stock in private companies. Nearly 100 Sharespost members were on the phone.
I thought I’d share the basics of how buying privately-held stock works using Facebook (the topic of today’s call) as the example.
The below information is based on knowledge as well as things I learned from today’s call (hosted by Tim Sullivan of Sharespost).
Some Facebook insiders, such as former employees, have begun to sell their privately-held shares through new private exchanges such as Sharespost, SecondMarket, Cogent Partners and Campbell Luytens.
A former Facebook employee is selling 50,000 shares of their Facebook stock, according to Tim Sullivan of Sharespost.
No. You typically buy membership units in a new fund that buys the Facebook stock for a group of investors and you own your pro-rata % of the fund.
For example, Sharespost in this case is offering membership units in a newly-formed Delaware-based LLC that will hold up to 50,000 of Facebook’s privately-held shares at $20 per share.
No. You have to be an accredited investor and you have to be chosen by the firm (e.g. Sharespost in this case) offering the Membership Units.
There may also be a minimum investment you have to make to be buy Membership Units (e.g. Sharespost is asking that you commit at least $100,000).
In this case, Sharespost is setting the price. They have closed an exclusive deal with the former Facebook employee to buy their 50,000 shares at $20 each (a total of $1 million).
Around $45 billion based on these Sharespost Membership Units.
Yes. Facebook can exercise their right of first refusal (also known as a “rofer” or “rofering”) on stock that their insiders are trying to sell within 30 days of the attempted sale of the Facebook stock.
Facebook rofers their purchase of privately held Facebook stock about half the time it’s available, according to Sharespost’s Tim Sullivan. He added that he heard that Facebook rofered stock at $18 per share recently.
Owners of the Facebook Membership Units could sell their stocks through Sharespost private marketplace (though it’s not guaranteed that there will be a buyer) or at the point of a Facebook IPO (Initial Public Offering).
note: there will be lock-up restrictions on the exact timing of your sale of the Membership Units/Facebook stock.
Sharespost is charging a one0time services fee of 5% and a distribution fee of 3% (of the total size of the round of funds they raise through the private placement).
It’s not publicly disclosed, but there are reports of Facebook’s revenues for 2010 being projected at anywhere from $1.5 billion to $2.4 billion, according to Tim Sullivan.
Tim says that there are reports of Facebook being more profitable (on a margin basis) than Google, one of the most profitable publicly-traded Internet companies.
Yes, there was a 5 for 1 split of Facebook shares October 1, 2010, according to Tim Sullivan.
Yes. Sharespost expects to offer additional Facebook shares in the future. Other private marketplaces likely will too.
I was on an interesting conference call by Arcstone Equity Research & SharesPost in which they walked through the Web business Etsy.
New York-based Etsy is clearly a company on the move.
The gist of Etsy’s business is that they’re a marketplace of hand-made goods (sort of eBay but primarily hand-made)…here’s a screen shot showing you some of the types of things they sell.
Disclaimers: The #s I mention are not from Etsy (they are all estimates based on Arcstone Equity Research & SharesPost)
Special thanks to Arcstone & SharesPost for all the graphs below:
Outside Board Members
Some sites like Etsy are:
Fascinating Internet business on the move…a real niche dominator.
My best guess as to what will happen with Etsy: They will go public or be acquired by Amazon (Amazon loves to take out companies when they’re in the $100 million to $500 million per year revenue and if they own a niche).
When a super smart guy like Steve Ballmer (he is that smart…I’ve met him a few times) dumps $1.34 billion worth of stock — his first stock sale in 7 years! — I like to dig in a bit
Ballmer was part of a slew of insider stock sales last week, which saw a 2-year high in stock prices.
The volume of insiders selling their stock versus those buying their stock is a good leading indicator of where the stock market might head.
Afterall, if insiders (defined as stock sales by directors, executives or employees of a public company) are selling their own stock, it may be because they believe the stock price has hit a peak (alternatively, they may just need some quick cash).
In more extreme examples, insiders may sell their stock because the company is in real trouble; some speculate that’s what was happening in the below chart (from a decade ago) showing an Enron insider selling a bunch of stock (the blue columns) when the stock price was peaking (the red line).
The news this week doesn’t necessarily involve fraudulent activity but clearly some insiders see the market peaking.
Back to Ballmer…
Ballmer was among executives at 125 companies in the S&P 500 who sold a total of $4.5 billion in stock between Nov. 3rd and 9th… at a ratio of 12 insider sellers for ever 1 insider buyer.
That’s the highest ratio of sellers to buyers on record (InsiderScore has only been tracking the data since January 2004).
The best other explanation for high insider sales is that some insiders may be worried that their capital-gains tax rate for assets owned at least a year will increase from 15 percent 20 percent in January (unless President Barack Obama and Congress extend the 15% rate.).
My take is that the reason for the record insider sales is a combination of insiders thinking that the market may be peaking AND some folks worried that cap gains taxes are going up.
You guys know I love Charlie Munger and Warren Buffett… I consider them American hereos.
I read an interesting book called The Four Filters Invention of Warren Buffett and Charlie Munger (by Bud Labitan) the other day — if you like business, investing or Buffett or Munger, you should buy this book.
I thought I’d briefly summarize their “Four Filters” below — I paraphrase Bud Labitan’s book at times and add in a dose of quotes I’ve collected (see my past postings on Charlie Munger Quotes or Warren Buffett Quotes) as well as some quotes and insights from other folks.
Circle of Competence
Buffet advises investors to focus on their “circle of competence” (that which they know the most about).
“Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management and limited exposure to hard times.” — Warren Buffett
Michael Porter suggests that there are two major types of competitive advantages:
1. A Cost Advantage
2. A Differentiation Advantage
“Something Special in People’s Minds”
Buffett and Munger have simplified this to “something special in people’s minds.”
“American Express has financial integrity; there’s worldwide acceptance of its name. It holds two-thirds of the market while charging more for its product…you have something special in people’s minds.” — Buffett at Berkshire’s 2000 Annual Meeting
“A Moat Around Their Economic Castles.”
“We look for moats around the castle. We think in terms of moats and the impossibility of crossing it — we want it widened every year. If it’s too narrow, we leave it alone.” Buffett at Berkshire’s 2000 Annual Meeting
The strong consumer brands of CocaCola and Gilette (later bought by Proctor and Gamble) were examples that Buffett gave in his 1993 Letter to Shareholders: “The might of their brand names, the attributes of their products and the strength of their distribution systems give them an enormous competitive advantage…”
Here’s another classic Buffett quote on the topic: “I look for businesses in which I think I can predict what they’re going to look like in ten to fifteen years time. Take Wrigley’s chewing gum. I don’t the think the Internet is going to change how people chew gum.”
“We look for a horse with a one in two chance of winning and which pays you three to one. You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing. Charlie Munger from Poor Charlie’s Almanack.
Margin of Safety — Benjamin Graham called this “margin of safety” — that is, the difference between the intrinsic value of a business versus what the asking price is.
How do you calculate intrinsic value?
Well, I recommend digging into Ben Graham’s Intelligent Investor book for the real details…but if you want a neat little formula than check out this Warren Buffett Intrinsic Value Calculator.
Patience For A Sensible Price Tag — Munger & Buffett refer to waiting for the “fat pitch.” Be very patient, but be very aggressive when it’s time.
There have been numerous financial crises in our world’s history but the financial meltdown of 2007-2008 will certainly be remembered in the history books.
A clever man named Jason Witt has compiled a list of the 52 key players in the financial crisis.
Why 52, you might ask? Well, to put them on the faces of a deck of cards of course.
Witt, from my neighboring town San Ramon, California, is emulating the success of other Most Wanted Playing Cards such as the Iraq Most Wanted.
I spoke to Jason and he’s a good guy — If you’d like to buy a deck, you can do so here: Financial Crisis Cards.
While this isn’t meant to be a financial crisis blog, I am into business, the media and Wall Street…so I couldn’t wait to order a pack of these for myself and one other for my good buddy Larry the Wall Street Recruiter (Jason says that most people are like me: They’re buying 2 to 3 packs each).
And for those who can’t wait to see who “made the deck,” below is a list of the players that Jason was kind enough to email me. He told me he felt bad about putting Obama in the deck but that he believes that half the country thinks Obama is to blame for the financial crisis.
Without further adou, here are the men Witt thinks made financial crisis history.
Ace: Bernard Madoff, Chairman, Bernard L. Madoff Investment Securities
2: Warren Buffett, CEO, Berkshire Hathaway Inc. (WILD CARD)
3: Martin Sullivan, ex-CEO, AIG
4: James Lockhart, Director, Office of Federal Housing Enterprise Oversight
5: Stephen Schwarzman, Chairman, Blackstone Group
6: Stephen Joynt, President, Fitch Ratings
7: Herb Sandler, ex-CEO, Golden West Financial Corp.
8: Vikram Pandit, CEO, Citigroup
9: James “Jimmy”Cayne, ex-CEO, Bear Stearns
10: Timothy Geithner, Secretary, U.S. Department of Treasury
Jack: Christopher Cox, ex-Chairman, U.S. Securities and Exchange Commission
Queen: Deven Sharma, President, Standard and Poor’s
King: Alan Greenspan, ex-Chairman, U.S. Federal Reserve
Ace. George Bush, President of the United States (2000-2008)
2: Jeffrey Immelt, CEO, General Electric
3: Bill Miller, Chairman, Legg Mason Capital Management
4: Ronald Logue, CEO, State Street Corporation
5: John Paulson, President, Paulson & Co.
6: Neel Kashkari, Assistant Treasury Secretary, U.S. Department of Treasury
7: Sheila Bair, Chairman, U.S. Federal Deposit Insurance Corporation (FDIC)
8: Jamie Dimon, CEO, JPMorgan Chase & Co.
9: Rick Wagoner, CEO, General Motors
10: Alphonso Jackson, ex-Secretary, Housing and Urban Development, (HUD)
Jack: Hank Paulson, ex-Secretary, U.S. Department of Treasury
Queen: Barney Frank, Chairman, House Financial Services Committee
King: Ken Lewis, CEO, Bank of America
Ace: Ben Bernake, Chairman, U.S. Federal Reserve
2: Michael Perry, ex-CEO, IndyMac Bank
3: John Stumpf, CEO, Wells Fargo
4: Christopher Dodd, U.S. Senate, Chairman Senate Committee on Banking
5: Allen Stanford, Chairman, Stanford Financial Group
6: Alan Mulally, CEO, Ford Motor Company
7: Kerry Killinger, ex-CEO, Washington Mutual
8: Charles “Chuck” Prince, ex-CEO, Citigroup
9: Lloyd Blankfein, CEO, Goldman Sachs
10: Phil Gramm, U.S. Senate, ex- Chairman Senate Committee on Banking
Jack: John Thain, ex-CEO, Merrill Lynch
Queen: Jerome Kerviel, Trader, Societe Generale
King: Daniel Mudd, ex-CEO, Fannie Mae
Ace: Jim Cramer, TV Host/Author, CNBC
2: Richard Syron, ex-CEO, Freddie Mac
3: Robert Toll, CEO, Toll Brothers Inc.
4: Ken Thompson, ex-CEO, Wachovia Corporation
5: Stanley O’Neal, ex-CEO, Merrill Lynch
6: Robert Nardelli, CEO, Chrysler
7: Robert Kelly, CEO, Bank of New York Mellon
8: Barack Obama, President of the United States (2008- )
9: Raymond McDaniel, President, Moody’s Corporation
10: John Mack, CEO, Morgan Stanley
Jack: David Lereah, ex-Chief Economist, National Association of Realtors (NAR)
Queen: Angelo Mozilo, ex-CEO, Countrywide Financial
King: Richard “Dick” Fuld, ex-CEO, Lehman Brothers
If you like Financial Crisis Cards, you may also be interesting in buying the Iraqi Most Wanted Playing Cards and America’s Most Wanted Playing Cards.
Disclaimer: I do earn commissions off of products mentioned in this blog.