Chapter and Lesson #10

Chapter 10 

 

“The four most dangerous words in investing are: ‘this time it’s different.’” 

 Sir John Templeton 

 

I landed a role in Microsoft’s buildup of a team that was going to go after the dial-up and internet king of the day – AOL or America Online , it was a new war for Microsoft, with many veterans of the browser wars taking on new leadership positions in the fight against the newly merged AOL Time Warner.

My first role was in PR, but this PR job would be very different than the role I had in Windows Marketing, and this would be where I received my first promotion to being a Group Product Manager, my first time managing other fulltime employees at Microsoft.   I honestly can’t remember if I was ready to manage people, and thankfully I only had a handful of employees at the time, with well-defined roles.

I am almost certain I was a terrible manager.  First-time managers usually are, and I see no reason why I would have been any better than average.  Most of the skills developed as an individual contributor don’t translate to being a good manager.   I had previously done most of the tasks that each of the people on the team had assigned to them, so I was comfortable enough taking on the role of managing these things.  The problem with first-time managers who previously did many of the jobs he or she is now managing is that they think they know how to do the job better than anyone else.   It takes time and a lot of experience to appreciate how to get things done through and with others.  That is a different book altogether, but a topic that tech companies need to figure out better and fully embrace.

My job was to orchestrate a narrative that Microsoft was serious about competing with AOL.  And, In fact, we were serious.   The company was spending literally BILLIONS of dollars, and taking huge losses that impacted Microsoft’s bottom line to try and slow down the AOL juggernaut. When the effort first began, nobody was really taking Microsoft’s competitive threat serious, so we set out to prove to the press and to Wall Street that we were indeed very serious, and we were going to spend like crazy to compete and catch up to AOL.   They had a big lead, and all the momentum in the marketplace, so proving our ambition was not going to be easy.

The spending to fight AOL was ferocious and the tactics involved in doing so were at times absurd.   I remember at one desperate point in the battle, we hatched a plan to give customers at “Radio Shack” $400.00 to spend immediately in store if a user would sign up for 2 years of MSN Internet access on the spot.   Just as soon as we implemented the plan there were reports of people coming into the retail stores multiple times under fake names, bogus credit cards who were walking out with brand new TV’s and DVD players from their 400 free dollars, courtesy of Microsoft’.  Radio Shack, of course, loved the deal as it drove a ton of traffic and purchases at the store, in hindsight, it was an idiotic and desperate move.   Making things even worse for Microsoft’s financials, we agreed to pay a bounty to RadioShack for every customer who signed up!  There were similar deals offered at Best Buy, Office Depot and other retailers.    It was was a crazy tactic with insane spending to try and steal share away from AOL.   

At the height of it all CNet had reported on a story that covering Microsoft’s earnings “Retailers relied heavily on $400 MSN rebates to sell PCs during the holidays. Customers agreeing to make a three-year MSN commitment with their PC purchase received an instant $400 rebate subsidized by Microsoft. 

But Microsoft also extended the rebate to other non-PC products. Retailing giant Best Buy, for example, sold 200,000 MSN subscriptions worth about $80 million in instant rebates on anything in the store. 

“Obviously stores used the rebates to drive sales across other categories,” said PC Data analyst Stephen Baker. “It means maybe people aren’t as tied to the Internet as a PC thing, so people used that $400 to get a big-screen TV.” 

It was crazy and some would say it was totally out of control spending, all to try and eliminate the fear, and kill off the AOL Time Warner monster.  

To give you an idea of how crazy and frankly unethical things had got inside of Microsoft at that time, they set up a top-secret competitive intelligence group to try and track every move of AOL.  Microsoft even hired private investigators who dug through AOL’s garbage.  At one point there was even an employee who started dating a girl from AOL just so he could collect intelligence.   The Microsoft employee had convinced her somehow give him access to a private internal phone conference call bridge number where the team would sit and listen to many of AOL’s internal conversations.    Later these employees would receive a slap on the wrist for going too far on gathering intelligence.  But it was widely known that this group was pushing the boundaries of corporate “intel” gathering, though most were rewarded and or later promoted for their efforts.   In a very strange twist of faith, one of the employees involved was later arrested for embezzling millions of dollars from Microsoft.     I guess you reap what you sow.

The name of the game was to take away the momentum from AOL, make them look vulnerable, show the marketplace that MSN had a serious competitive offering, and start to erode the finances of AOL to take the wind out of their sails – and their sales I guess too…    Indeed the narrative started to work.   Each Quarter both AOL and MSN would announce how many net new subscribers they had gained.   It had become a brutal game of churning and battling for customers.  The customer acquisition costs for both companies were going through the roof.  It was an arms race.  And MSN with a smaller base of customers, and ridiculous offers in the marketplace was able to show accelerating growth that was outpacing AOL’s customer numbers.   The market started to take the threat from Microsoft very seriously.    Momentum had shifted.    Microsoft had a competitive offering.  And at the same time, AOL was hitting the wall with 3 other nasty problems.    

1) The .com bubble was bursting – revenues from companies who were paying huge sums to advertise on AOL’s network were evaporating as fast as companies like pets.com were going bankrupt.  The outlandish advertising revenue projections AOL had made to justify their merger with Time Warner were looking obviously inflated.    

2) The merger of AOL and Time Warner was breaking down into a mess of two cultures who hated each other – it was a disaster.  Wall Street coined it the worst merger ever in history.  

3) Broadband was starting to take off and customers were ditching the slow dial-up access provided by AOL to move to the new fast and always on connections provided by their phone or cable companies.   AOL never “owned the pipe” or really any of the actual infrastructures that was carrying the bits and bytes through to the telephone modems to a consumers PC.   They were an easy way to get onto Narrow Band access, and the original “training wheels” for the Internet for the first time, but as people switched to faster DSL and Cable Internet access, they had little use for AOL’s proprietary network.

AOL had missed the strategic inflection point of Broadband mass adoption.  Broadband was always connected, versus AOL’s Narrow Band which used special software which connected the PC to a modem on an old fashioned phone land line.  This software called a “dial-up stack” was one of the differentiated things that AOL had made easy for customers, and it was their bread and butter product that was now no longer relevant.   AOL had thought that their content and services would be the differentiator, and they made a bet that combined with Time Warner they would be able to hold their lock on the consumer market by packaging all the content and services together, even if users did not need AOL as their everyday onramp to get online.    

Over time this proved to be a foolish bet, the World Wide Web, and democratization of inexpensive publishing onto the Internet was a much more powerful force than almost anybody had anticipated.    AOL Time Warner fell into a total meltdown.   It missed the next big thing that was coming, the idea that any individual could publish content for negligible cost.  Content was exploding all over the Internet in the form of blogs and new digital-only publications were more popular than the old analog content that Time Warner was slowly moving toward the digital age.  The great hope of combining Time Warner’s content with AOL’s technical know-how was now looking like a dubious value proposition.  Stockholders in this deal were about to lose their shirts. 

The value of the combined AOL Time Warner sank from $260 Billion to just $20 Billion in a few short years.  The company was forced to write down $99 Billion of “goodwill” assets less than 2 years after the acquisition was complete.

This story is really not all that unusual in the tech sector, but it does illustrate on grand terms why tech leaders are so paranoid, and how fast fortunes can change as technology platforms shift and consumer behavior changes.  The tech sector is littered with these irrational buildups, buyouts and mergers, there are many of them out there today that will end up the next great business flop.  Be careful not to indulge in the irrational valuation of these seemingly “brilliant” next big things.   It is a good way to lose a lot of money.

Learning Lesson #10- The Tech Industry is full of incredible hype and has a massive herd mentality, picking the Winners and Losers is EXTREMELY difficult and can be dangerous for investors.  If you are an investor or somebody who works in the Tech industry.  It is useful to look at the history of the wild swings and the herd mentality thinking that repeats itself again and again in the industry.  Tech is really a series of micro booms and busts of different micro cycles.   It is very difficult to predict both the timing and who will be the winners and losers of the next big wave in tech.   There have been lots of booms and busts in tech.  The .com boom and bust is probably most widely known and understood because of its incredible meltdown of the NASDAQ in 2000.  But there have been many other tech sector buildups and meltdowns.  3D Printing, PC OEMs, Console Gaming, Instant Messaging, Search, Mobile Phones, Social, and many other sub sectors of tech have seen huge crazy run-ups of investment followed by harsh periods of consolidation and price correction.   The same types of buildups will repeat with Wearables, Internet of Things, Electric and Self Driving Cars, Virtual Reality and more.   Globalization, Cloud Computing, and super-fast transcontinental fiber optic communications are hastening the pace of these buildups and meltdowns.  Wall Street is always trying to predict who and when the next big winner will be in one of these hyped-up areas.  Unfortunately, they are almost always wrong, and when they are right, they almost always way overvalue the opportunity to the point where when the damage comes, it cripples the company involved and the reckoning day is very painful for those who have to do deal with it.  If you are an investor, an employee or a partner company of a newly unloved sector or company it can be extremely painful.  But this is what tech is all about, and like it or not, much of the economy is now becoming part of this rapid boom-bust cycle of innovation. 

Chapter and Lesson #9

 

“The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger–but recognize the opportunity.” 

John F. Kennedy 

 

The Internet browser wars were now officially over.  Some at the company felt that the hard fight had done more harm than good.  Many believed that the flamboyant victory over Netscape inflamed Microsoft’s already arrogant reputation.  The Internet Explorer Marketing team I worked on was merged back into the Windows team.  Which made sense, given the argument to the DOJ from Microsoft was that Internet Explorer was really just a feature of Windows and Microsoft had every right to add new features into its operating system.  So it did not look very good to have an entire Marketing or Development team dedicated to a single feature called Internet Explorer.

Having a separate operating unit didn’t really look all that great, and made even less sense when it was clear the war was over.   So the IE team was fully integrated back into the Windows Marketing team.  This turned out to be sort of an odd event for me personally because the Windows Marketing team was the group I had left from to go to the Internet Explorer team.  We were not given any choice as to if we wanted to go back to the old Windows team.  If you wanted to keep your job, you were told that you would be going back to the Windows Marketing team, like it or not.    I did not like it – and didn’t want to go back to marketing operating systems again, but I figured a good job at Microsoft was better than a bad job and some other lesser company. 

For me personally, Microsoft was becoming a less satisfying place to work.  However my life was moving on, I now had a wife and a family to worry about.  Even if things were not as fun and lucrative as they once were, Microsoft was still a very generous company to work for and there were still solid jobs available.  It was different now, it was more like a regular job at any big fortune 500 company.  Probably better than most companies, even with all the new red tape, and problems.  Microsoft was still clearly better than most companies to work for.  

In the transition back to the Windows Marketing team I was fortunate to have landed into a decent job for me.   Prior to the announcement of the IE team being reorganized back into the Windows team, I had already been moved to a new role working in Public Relations for Internet Explorer.  I was able to move into the PR team for Windows as those two teams were being merged together.

My specific job was to work with Technical Reviewers who would be writing product reviews for the upcoming release of Windows 2000.  This was a stretch for me technically.  I was pretty deep on the various browser technologies after spending years working in the browser wars.  But I was far less deep on Windows.   Particularly the enterprise features of Windows, which I had really never paid a lot of attention to.    I jumped in and learned all I could as fast as I could.  I took all kinds of training classes to become a certified Windows Administrator, I went and interviewed all the Windows engineers I could to get every last detail of every feature of the product.  It was my job to write the Windows  2000 “reviewers guide” which outlined every feature and why it would benefit customers.

This job opened an entirely new world to me on how technology companies position and promote their products to the technical press.   Microsoft and its PR agency Waggener Edstrom spent countless hours planning and debating every single detail on how a new release would be messaged to the press.  I could write an entire book on all the behind the scenes plans, strategies, antics and drama that played out leading up to a big product launch for Microsoft.  Microsoft was really good at doing big promotional launches of their important releases.  The pinnacle and blueprint for big launches was the Windows 95 launch, where somehow Microsoft created enough excitement for a new Operating System that people literally camped out overnight at retail stores to get their personal copies!      I can’t imagine that kind of excitement for an Operating System today, but those were very different times.   I think people mostly loath operating system updates these days, they always seem to drizzle down to your computer overnight and want to be installed right when you are doing something important in the morning.   

The core objective of my job was to make sure that every single technical review of Windows 2000 was positive, or what we called a “WIN” review.   I probably should have been more intimidated with such a stretch assignment.  But I was still young and dumb, and also very lucky to be assigned to one of Microsoft’s best OS releases ever.  Windows 2000 was a rock solid OS for that day and age, built on the Windows NT architecture that was designed to be much more reliable and stable than the old DOS-based operating systems, it was designed with Enterprise customers in mind.   The product received fantastic reviews; this was a win for Microsoft and a win for continuing my career progression.  Winning reviews with a great OS was actually pretty easy, but I ended up getting a lot of credit for being part of the effort, and that was great for my personal fortune.  Microsoft has had its share of total flop OS releases.  I always felt sorry for whoever had the job of winning reviews for Windows Me, or Windows 8.  Those were dogshit OS releases, which no PR person could truly overcome, no matter how good they were at spinning.    

Windows 2000 and Windows 2000 Server launched together at the same time.  So this was a really important release for Microsoft because it was really the first time they simultaneously released both a new desktop and server release.  There was a LOT riding on this for the company, so we worked very hard on a massive PR blitz to win reviews.  We held a huge reviewers workshop conference where we brought in the press from all around the world for three days of intensive education sessions on the product.   The PR team I was on traveled all over the country visiting technical reviewers wherever they lived or worked to sit down and walk them through updates of the product and discuss any concerns they might have.   The idea was to get reviewers so bought into the product prior to it launching that they would actually feel bad about saying anything negative in their reviews.   We made them part of the process and fully and deliberately brought them into the tent.   It was not unusual for the product team to change a feature, or remove something that was highly disliked by a technical reviewer.   If a reviewer experienced a certain problem they could not work through when testing the product we would fly a swat team out to help them through it, and if necessary we would again change the product to satisfy them.   It was an intense job, and I was always on the go for many months on end.

After Windows 2000 shipped, I was able to take a bit of a break from the hectic pace of working on PR campaign for a big OS release.  Back in those times, it was common for employees to run as hard and fast as they could up until a product launch.   It was a huge part of the culture of the company.  After a big launch, employees would be exhausted and want to take time off to recover.  It was not unusual that people would quit the company altogether after a launch, or want to move onto a new job within the company.    

It was typical that divisional or full company reorganizations would be planned soon after a big product launch.  In some ways this was becoming problematic for Microsoft, the Internet was staring to take over and other companies were moving faster using agile development where features were released daily onto the Internet.   The old model of doing big monolithic releases of Windows and Office every couple of years with a huge marketing launch event was becoming more and more outdated.   An internal debate on the topic had started to take hold.

Recognizing these changes, and missing the fast moving days of working on the Browser Wars, I was eager to move to a new role.   Many of my best colleagues and friends from the Windows group had already moved on to Microsoft’s online division – MSN.   Brad Chase, a great marketer who had led the Windows 95 launch, along with Yusuf Mehdi, Lora Shiner, Christophe Daligault, and many others were now preparing to fight a new battle for the company.    

In January of 2000, AOL stunned the business world and announced plans to acquire Time Warner for $184 Billion in stock and debt.   It was an announcement that sent shockwaves through Microsoft.   At the executive ranks in Microsoft, AOL was already considered a credible threat to Microsoft’s dominance of the PC Desktop.  AOL was the undisputed leader in connecting consumers to the Internet and they were building out a broad set of Internet services and media properties.  With more than 23 million paying subscribers and growing quickly, the service was generating billions in revenue.  The success at AOL had poked the Microsoft bear.

A fear gripped Microsoft that AOL combined with the resources of Time Warner could eventually make Microsoft and their Operating System irrelevant.  AOL was the dominant entry point for mainstream consumers to go online, do email, instant message, chat boards and browse and consume content.  Fear Uncertainty and Doubt (known as FUD in the business) was palpable inside Microsoft at the time.  Steve Ballmer had taken a strong personal interest in the problem,  he even setup camp with an office in the RedWest campus (which was fully off the main campus at the time on the other side of the 520 Freeway)  where the online services division was located.    It was feared that if AOL could convince consumers to consistently pay them $23.99 a month in subscriptions fees, and be the gatekeeper to the Internet, Microsoft might lose relevance and the control of the Personal Computer experience.   

Microsoft was getting ready for another war, and it had a huge cash war chest to play with.  I knew from my Internet Explorer and the browser war experience, if you want to advance your career, it is better to go where the action is.  So I started making haste to find a role in the new battle.   That ended up being a wise move.   The next few years got very interesting.

Learning Lesson #9 – Corporate Fear Can Deliver Big Opportunities.  This lesson takes a little bit of explaining, but if you start to understand it you can likely play this to your own benefit. 

If you are a Senior Executive at a huge company, like Microsoft, your biggest fear is being made irrelevant.   In the technology sector, this fear is massive.  You need to only read one of many business books like  “Only the Paranoid Survive” by Andy Grove of Intel fame to understand this phenomena.   Grove describes “strategic inflection points” that can either be an executives worst nightmare, or an opportunity to win a major new marketplace. 

The stress of being made irrelevant very quickly in tech is profound because in the business of tech, pretty much all the spoils (money, power, future…) go to the 1st place player.  There is almost no profit in being a 2nd place player, and 3rd place is worse than not playing at all.   As an example, Facebook will make almost all the money in Social Media, Google in Search, Microsoft in desktop OS & Office Productivity Suites, Intel in x86 processing chips, Apple in phones, Uber in rides etc.   It is for the most part a winner takes all type of game in big tech. I can’t even think of a significant third place player who has made any money in a big tech market. 

Owning the platform for the hottest tech spaces is where all the riches are harvested. This is the way the economics work in technology.  If you win the platform, you will have all the best developers, if you have all the best developers they will increase the value of your platform with new applications and hardware to support your platform.  The ecosystem reinforces itself, and it quickly locks out other players.  

Executives at all big tech companies know this, and they always fear that something will somehow disrupt their dominant share position, and will bring on competition, or even worse, relegate their position to being irrelevant in the latest most important trend.   You want to be at the center of where these battles take place.  You want to make money from this fear.  So for example, if you work at Microsoft today, you absolutely want to be working on a cloud, but more specifically, you want to be working in highly competitive areas where Amazon’s AWS battle directly against Microsoft’s Azure.  Both companies will be fighting like mad for talent in these areas, and both companies will pay top dollar to talented engineers and marketers for their efforts.   This book is about learning how to thrive in these environments.   But it is also how to be in the right environment in the first place.   You want to be right where these companies are spending their war chests to compete.    Just being at Microsoft or Amazon in a random role is NOT GOOD ENOUGH!   To make the big money, you need to be in the exact right area where the battle is taking place.   As recently as April of this year Microsoft gave special bonuses to employees working in the most coveted areas of cloud development.  Up to $100,000 dollars in stock, just to make sure employees would not walk away.   I have seen this time and time again throughout my career at Microsoft, and I know other companies play the exact same game when competing for talent.

Even if your company does not stand a chance in hell of winning the battle, it is better to be working wherever the hot battle is happening.  Executives will spend crazy amounts of money to fend off potential threats, they will build big teams, create huge marketing budgets, and they will spend like drunken sailors to fight off the fear of falling behind.   This is where careers get a real boost!   When teams are building fast, and money is being spent like wildfire, that rising tide is good for all the boats (people) who are lucky enough to be in that division.   You don’t have to necessarily be the best, (but it helps) you just have to be there. 

I saw plenty of overpaid middle managers get pushed upward with money and responsibility as these manic buildups took place.   These things are easy to spot.  Look for the new strategic imperative spelled out by management.  The press will be squawking about the companies coming doom or possible glory because of some new company or trend wiping them out or being harvested.   Sometimes it is real, sometimes it is hype.  It is hard to know, but it really doesn’t matter all that much for your own personal growth.  You just want to be in the center of it, and rise with the tide. 

From a career perspective, if you are a lower to middle level executive at a huge company, it actually doesn’t matter that much if your company wins or loses in these battles.  It feels a lot better if you win, and it is more fun for sure.  But from the perspective of moving your career forward, it is better to be in the battle, even if you lose.    I saw a lot of great people sit on the sidelines at Microsoft in boring jobs, making OK money in a “OK” division while the people in the big battle divisions where raking in the new responsibilities and the money to go with it.   Those people in the OK divisions did fine, but they got nowhere near the career acceleration vs. people who moved to the strategic hot spots.   And my bet is that they probably didn’t have as much fun either.   There is money where there is fear.  Don’t be afraid.  The company will reward you, win or lose. 

That said, if you are at the top of the leadership team and you lose, watch out, you will probably get canned, and it is much harder for senior and midlevel executives to regain their footing from.  If you are early in your career, take the risk and seize the opportunity! 

Chapter and Lesson #8

Chapter 8 

“You will never understand bureaucracies until you understand that for bureaucrats procedure is everything and outcomes are nothing.”  

Thomas Sowell
 

The hyper growth years of Microsoft were pretty much official over after the year 2000.  The company was still in great financial shape and an excellent place to work, and there were many tremendous opportunities to advance personal computing and to advance my career.   But Microsoft had become a big, fairly slow, bureaucratic machine, it was now playing defense.  The DOJ case and ensuing settlement, the declining stock price, and the overall size and bureaucracy of Microsoft was settling into the company culture.

Microsoft was now afraid to be aggressive competitively which was core to it’s culture.  It seemed that everything had to be checked and double-checked by a growing legion of lawyers, lobbyists and PR experts at the company.  It felt like lawyers were involved in every decision the company made, big and small.   Every product move, every marketing message, even internal communication emails were being reviewed for DOJ compliance.  The company was wounded and just did not want to take on any additional risk.  In hindsight, the company needed to change the culture and grow up.   So in many respects, that company was just evolving to a more mature and responsible corporation.  Personally, I found the changes hard to deal with, working at Microsoft was less fun, it took way longer to get less done.  Work started to really feel like a lot of work!     

The bureaucracy It slowed things down, it made jobs much harder, and getting stuff done was way more difficult than it had been in the past.   But the worst part was, Microsoft was losing its focus on the customer, and it was losing its drive to innovate.   Fear had taken over.  Fear of being sued, fear of losing your job, fear of another stock price meltdown.   More than ever bureaucrats were running the show at Microsoft, there was an attempt to take the risk out of everything.  It was suffocating.   

I vividly remember one of my favorite managers at Microsoft, Lora Shiner, telling me that once the lawyers and the bureaucrats take over it is better to leave and find a new place where you can focus on doing stuff that matters over just covering your ass all the time.  She was of course right about that.  But it is very hard to leave a good thing, and I had a family to think about – so I took the risk-averse path and stayed with the company.    I mostly regret staying at Microsoft as long as I did.   I took a comfortable route that was good for me financially, but it slowed my learning and stunted a lot of growth that I think I would have enjoyed had I left to try new things.  It also landed me ended up landing me into a spot where I was branded a “lifer” at the company.  Not that there is anything wrong with spending a lifetime at a great company like Microsoft.  But for me personally, my dream was never to be a lifer at some big company.  I just didn’t fit what I wanted to do with my life.       

Lesson #8  When the lawyers and bureaucrats start to take over at your company, getting stuff done gets way harder, it’s a good sign that it is probably time to leave for your next opportunity 

I will never really know if I would have been better off leaving Microsoft when it became obvious to me that the company was becoming a “big slow corporation”.   I do know that most of the real fun of showing up to work and getting a lot of stuff done was fading pretty fast.   The company was becoming excruciatingly slow.  Important decisions took countless meetings with “stakeholders” from so many different divisions and groups all over the company that often times a decision would just never get made.    Worse, many decisions were made for internal political reasons, to protect a senior manager’s turf, or to make sure a certain group or Corporate VP would make their fiscal year numbers.   Microsoft had gone from a company that encouraged their people to take risks, break rules and focus on customers; to a bloated organization that made a lot of internal backroom decisions to protect the growing layers of middle management,   too often at the cost of creating badly inferior products.   The signs were there for me, and if you see them at your company consider leaving!   

As a footnote: It appears that Satya Nadella has done a lot to change the culture at Microsoft.   I have not been at the company for a long while, so I really don’t know first hand how different things are today.  But certainly Nadella deserves a lot of credit for turning around Microsoft and by most reports he has changed the culture significantly.

 

Stop Your Delusion – You Can’t Beat The Market and You are Wasting Your Precious Time Trying

In my last post, I wrote about the things that I learned and relearned by investing in MoviePass and HMNY.  Believe it or not, HMNY is not the worst investment I have ever made, at least not yet.  I have actually owned stock in two other companies that lost 100% of their value.  Washington Mutual was one, and XO communications was the other company, both went Bankrupt because of bad management and risky bets that did not pay off.  Yes, I should have learned my lesson fully with those two terrible stocks, and in fact, I had learned my lesson but unfortunately, I fell back into a bad habit of using the wrong parts of my brain (which are always functioning whether you like it or not) to make my investment decisions.  Luckily, I had previously experienced enough pain with those prior decisions to limit my portfolio exposure to HMNY.  I only wish I would have not wasted any time or money investing in HMNY at all.   The ONLY good thing that has come from investing in HMNY has been the reaffirmation that it is totally foolish and delusion to try and beat the market.  Again, this is something I inherently already know, both from hours and hours of studying investing and from my own experience over 35 years plus of investing.

There is a saying that I have seen around that goes something like this.  If you could beat the very smartest students on a test 99.5% of the time, by doing essentially no studying and putting in almost zero effort or preparation but simply follow a simple prescribed method of filling out a test, VS. studying for hours and hours, fretting over every decision on what you study and if you were considering the right factors; only to be almost certain you would not beat the average benchmark, what would you do?   The answer is obvious, you would take the path of least resistance, you apply the obvious known prescribed method to score in the 99.5% percentile of returns.   In investing, it is so obvious that our miswired silly human brains almost refuse to acknowledge it.

WAMU, as it was called, was a very big company, with almost 50,000 employees and around $40 Billion dollars of assets under management.   Because I lived in Washington, I could see first hand how big and successful WAMU appeared to be, they had branches all across the state, and eventually grew all over the West Coast.   They were a beacon of strength and stability, or so people thought.   When 2008 rolled around, it became evident that WAMU had taken on way too much subprime business, their assets were seized by banking authorities, a bunch of their assets were sold off in a fire sale, and the Feds sold the rest of the business to JP Morgan Chase for a huge discount.  Stockholders of WM were totally wiped out via a Chapter 11 bankruptcy filing.

For the sake of brevity, I won’t go into detail on what happened with XO Communications.   Basically, that was a riskier tech/communications stock that was similar to HMNY in that it had very dishonest management, it cleaned out stockholders, filed Chapter 11, got reorganized giving the dishonest and terrible management fat pay packages after totally ruining the company.  It was a sham, and it was many years ago now.   But you remember the really bad ones like HMNY, XOXO, and WM.   They hurt, and they should hurt.  As Warren Buffet says, the first rule is “Never Lose Money”.   And as easy as that sounds, when you are picking individual stocks, it is surprisingly easy to lose money, permanently and forever.

The good news is, that there is really no good reason at all to own individual stocks.   In truth, it is a terrible mistake for almost all investors to even try and pick stocks.   It is as the title of my post suggests, delusional to believe that you as an individual investor will beat the market averages.   But you definitely should not feel bad about that. Professionals also can’t beat the market.  It has been proven over and over again, for decades now, that fewer than 1% of professional traders beat the market.  And when they do beat the market, it is usually by a very small amount 1-2%.   There is literally reams and reams of studies and data that prove that Mutual Funds, Hedge Funds, Private Equity Funds and any other type of fund you wish to call into question simply cannot beat the market over a long period of time.  One of my favorite articles on this topic is from Julie Segal from the Institutional Investor, “Beating the Market Has Become Nearly Impossible”  It is worth a read if you insist on insisting that you can deliver better returns than the market.    In particular, I like that the article discusses some of the reasons that institutions keep trying to beat the market.   The article also has some links to academic studies that prove with data that professionals simply can’t beat the market.   It is a fact, people who are very smart, who have years of training and experience in the market, who spend their entire days working on finding unique opportunities to deliver market-beating returns – simply can’t beat the overall indexes.

What is the reason for this?  Well nobody knows for sure why.  But the simple answer is that markets tend to behave irrationally and humans tend to make bad decisions when faced with irrational markets.   It is as simple as humans tend to buy high and sell low.  But it is really more complicated than that.  There are all kinds of theories about the market and how it behaves, how information is disseminated, received and acted upon.  You can read book after to book on this subject.   I can save you the trouble here, all the factual based books come to the same conclusion.   You can’t beat the market, and it makes no difference how much you have studied them, how much experience you have, how many people you have working for you, or how smart you are.

Why do people with wealth keep trying to beat the market even when they know it is extremely unlikely?  That is an interesting question.  I have heard and read a lot of different reasons for this, and I will explore a few of them here.

One reason I often hear is that people with wealth tend to view themselves as somehow special.  After all, wealth has bought them privilege and luxury in almost every facet of their lives.   From private schools to luxury vacations, luxury cars, to the best doctors, to the best country clubs, wealthy people live a life of constant privilege.   From this experience, they have grown accustomed to “paying up” for the very best.  So when it comes to investing, most wealthy people simply believe that they need to “pay up” to get the best financial advisors and management.  For the wealthy, it is totally incongruent with the rest of their lifestyle to think that they could do something pedestrian like simply buying a low-cost Vanguard ETF to achieve performance that is on par or better than what they could receive from their high priced or “sophisticated” investment or wealth advisor.   It doesn’t matter if Warren Buffett himself advises personal investors to stick to low-cost by7 ETF funds.  The rich think that they can and should do better, even if all the evidence points in the other direction, they want to pay for the “best”.

Another common reason I hear about is that people with money like the “club-like” nature of investing with a wealth manager.  For high net individuals, many wealth management firms offer all kinds of special activities for customers who invest with their firms.   I have been to a few of these things over the years while being pitched to invest with various firms.   They offer things like nice dinner events, event tickets like sports or concerts, exclusive things like meeting local celebrities and such.   Some of the things are actually really cool and fun.  To me, it always felt like a very expensive way to buy friends.  Most firms charge around 1% of your total portfolio yearly.   That doesn’t sound too bad until you look at how much that will cost you over several years – most people agree that paying that kind of money to join a “club”  and to buy some friends is not worth it.   Trying to be open-minded about this, there may be some good networking opportunities in things like this, I never really found that to be the case, but I was not really in a position where networking with high net-worth people was super important to me or to my lifestyle.

A third reason that people choose to pay expensive financial advisors who don’t beat the market, is they both lack the confidence in themselves to manage their own money, and they prefer to be separated from that task.  Both to protect themselves from their own mistakes and to insulate themselves from any bad outcome that may happen, such as losing money or badly trailing the market.  It is easier to tell the significant other that the “guy or gal” we hired to manage our money sucks!  Than it is to tell them – hey I suck!  These are not necessarily bad reasons in my opinion.   However, there are good and bad ways, or better put, excessively expensive and fair priced ways to get this job done.  It makes zero sense to pay expensive fees to a salesperson, relationship manager, investment advisor, or whatever other bullshit titles these people put on their business cards.

If you really want or need help, pay fee-based certified financial planner for some time to help you understand how to efficiently allocate your portfolio.    If you want a firm that will do basically all the work of setting up a portfolio, rebalancing it, do loss harvesting in a tax-advantaged way, take a look at betterment, they charge only .25% and their results are consistently much better than any private client banking.   They have some good historical comparison data on their site that shows how much better they do.     I know a lot of really smart people who have done really well in their respective fields who simply have zero interest in managing their own money.  They just don’t want to deal with it for whatever reason.   I think that is fine, but just like buying a house or a car, or managing your healthcare, or any other major life decision you make.  You should at least get educated enough so you don’t get totally screwed over.   You wouldn’t buy a house without investigating the neighborhood, looking at comparable homes, getting an inspection and all the other things homebuyers do.   You certainly wouldn’t just hire a realtor and say, buy me whatever you think is best, and I will just live with it!    So don’t do that with your money either.  If you do, you are pretty much guaranteed a subpar return, and worst-case scenario, you could get totally burned by another Bernie Madoff like scandal.

Finally, there is the “I like the game” rationale for why people try to beat the market.  I fall into this category some, so does my father.  So I get this idea, it is part gambling, part skill,  part entertainment.  It is hard to blame any of us for wanting to play the game.   You only need to watch CNBC for a few hours to see what a bedazzling casino-like world investing can be.   Having worked in media for many years, the tricks CNBC uses to keep investors glued to the set and salivating for the next nibble are as old as the knowledge of not being able to beat the market.   CNBC is an exercise in eye candy, sensationalization, and the constant promise of continual changes that seem oh so important.   It is like crack to the personal investor/gambler.    I remember when CNBC for started out in 1989, yep I am that old and have been watching it from the start.   It was a totally different animal back then.  There was very little in terms of slick graphics, wild entertainment commentators like Jim Cramer had not really gotten started yet.   For most of the day they didn’t even run a ticker across the bottom of the screen.  (Take a look at the Inaugural broadcast, we have come a long way from 1989!)

Compare those early days of CNBC to what you see now.  It is a fined tuned machine for grabbing and holding your attention.  Not only do we have a constantly changing ticker running all day, we now have two of them stacked up at the bottom of the screen.  In addition, there is a constant barrage of fancy graphics zooming in and out of the screen, a charging bull! – A scary bear!  Instead of one or two anchors, most CNBC shows have 4-5 people at a roundtable, and if that is not enough, they are constantly bringing in guests from Wall St with their latest calls!   In the lower right-hand corner of the screen, you have the constant update of the Dow, the S&P 500 and the NASDAQ.  And if all that were not enough to put you into hyperstimulation mode, that graphic constantly flips over showing the 10YR bond, the dollar and some other crazy thing I can’t even remember.    My dear wife says it the best, turn that damn thing off it is stressing me out!   Personal investors who pick stocks live in this bizarre state of FOMO, (Fear of Missing Out).  Will I miss a critical piece of news on a stock I hold, will I miss out on an up and coming IPO, or a new opportunity?  Will the market make a turn right when I was not looking!!?    The game of investing is stressful and exhausting.  Along with being totally delusional and pointless.   One good piece of advice I have heard on dealing with the need to “play the game”.  Take a very small part of your portfolio to gamble with, maybe 1-3% of your total assets.  Set that aside in a different account for discipline.  Trade that account any way you see fit.  Compare your results against the results of the rest of your portfolio that is in low fee market-based ETF’s.  Do that for at least 10 years.  If you significantly beat the market-based approach, go apply for a job on Wall Street.   There is a 99.5% chance you won’t be changing your day job

Coming full circle, every single serious scholarly and professional data-driven study has proven that it is almost impossible to beat the market averages.  Hedge funds almost never beat the averages.  Highly paid wealth management firms do not beat the averages.  Day traders almost never beat the averages.   The industry and the media make a lot of money trying to convince you that you can beat the averages, but they all know that it is not true.   It is a lie you are told and marketed to so that they can make money.  CNBC, Fox Business News, Motley Fool, Seeking Alpha, the myriad of investment newsletters, they are all trying to make a buck off the industry.

Worst of all, trying to beat the market takes an incredible amount of your most precious asset!  Your time!  Further,  it can be extremely stressful so it is bad for your mental and physical health trying to beat the house.  So my very strong advice.  Stop being delusional.   Stop buying individual stocks.  Don’t lose money!  Make investing boring again.  Buy a basket of low-cost ETF’s from Vanguard, rebalance yearly to the exposure you desire, and never look back.  You will do very well, and you will perform better than 99.5% of your peers!  OH – and STOP with the delusion!

 

 

 

 

 

 

What I Personally Learned Investing – or umm Gambling – on HMNY/Moviepass

Wow did Moviepass and HMNY really humble me as an investor, or should I say gambler, on stocks.   I learned a lot and man oh man did the experience humble me and make me a bigger skeptic than ever before on Wall St. and buying individual stocks.   I have always accepted that buying individual stocks is risky, and have always tried to advise people who read this blog to not invest more than 1% or possibly 2% of your portfolio in ANY single stock.  I sure stand by that advice as we head toward the end of the year.  With Moviepass in a literal death spiral that looks very unlikely to correct, I am very grateful this Thanksgiving that I stuck to that rule.

In this post, I want to share some of the biggest lessons I learned and really relearned after investing in HMNY.  I think it is important to write these things down so I am less likely to repeat the same mistakes, and I figured I might as well share them with others in hopes that maybe they can learn from my mistakes and save them from making the same.

First big lesson – I did not do enough due diligence on the management of this company.   I was aware that Ted Farnsworth had a less than stellar record, but I did not truly understand what a total crook and fraud that guy was and still is today.  It is just about impossible to do well with a stock if the leadership is dishonest, self-serving, and has a bad past.   I overlooked Farnsworth because I really believed in Mitch Lowe, that also turned out to be a mistake.   While I still believe that Mitch Lowe has some good qualities, I believe I heavily misjudged him as well.  While Mitch did play a role in Netflix and he also did a decent job at Red Box, it appears that he is not investible on his own right.  He really spent a relatively small amount of time at both of those companies, and it now seems more likely than not he had little to do with their success.  Mitch and Ted together was a toxic management combination, bringing together greed, entitlement, carelessness, hubris and all kinds of bad things for shareholders.   I should have listened more closely to what others were saying about Ted, the signals were there, it was my mistake not to listen to them.  I truly hope Ted lands in jail someday.   His deceit caused many individual investors to lose a lot of money, some have said that people potentially committed suicide over their losses related to this company.   I sincerely hope that is not the case.   I think Buffett and Charlie say something like that greatly prefer a talented management team, but they would take honesty over talent any day.  Because if you are both talented and dishonest, you are very dangerous.  It may be giving too much credit to Ted to say he has any talent at all, but he most certainly is dishonest.  It was a big mistake to trust him with a single penny of my money.

My second big learning lesson.  I was arrogant and put on blinders.   This one really gets me as I have had enough training and experience to know better and to be more thoughtful and fully consider other people’s ideas and opinions.  In this case, it was even worse because there were good people who knew more than me about the potential pitfalls of this stock, that I should have listened to more carefully and with much more respect.   Mark Gomes was one such person, but there were others who also warned me that this was a risky bet and that dilution and potential lack of funding were serious potential roadblocks with the company.  Obviously, they were right, and had I listened and really sought to understand their arguments and weighted their experience and opinions equal or better than my own, I would not have bought a single share of HMNY.   I have always loved Warren Buffet’s simple baseball analogy for picking stocks.   There was enough wrong with HMNY that I was a fool to swing at that pitch.  The bad and dishonest management history and the fact that others with solid stock picking experience were waving red flags over the company’s dilution and ATM plans.   Those were more than enough to toss this one on the heap of “I am not sure, maybe later maybe never pile”.  Unfortunately, my own arrogance and bullheaded nature enticed me into believing what I want to believe about Moviepass, I was stupid enough to also believe what dishonest management was saying about their business.   I used management’s lies to reinforce my own arrogant tunnel vision on the positive prospects for the company.  This made for a fool and his money – being easily parted.  Shame on me for not fully listening and considering more viewpoints.  That was a rookie mistake, and I know better.  Damn it!

Third learning lesson.  Wow is this an obvious one, if it is too good to be true – it is!  That was definitely the case with Moviepass, both the consumer deal and the business story really was too good to be true.  I can almost give myself a pass on this one because Mitch Lowe, in particular, was so convincing with his pitch, he had his song and dance on how they had years of data that proved that people would “settle down” and on average utilize Moviepass less than one time a month on average.  That was total bullshit of course, and only now after making the product totally impossible to use have they been able to get utilization rates anywhere near where they had promised they would be with the unlimited once daily plan.   But I can’t give myself a pass on this one, because

Fourth learning lesson.  This is really an aside, but may be useful for some.  Generally people on stock boards like stock twits, yahoo etc. are really horrible people.  Not all, but most.  I have bumped into a few good people on these boards, but for the most part, these boards are full of angry, strange, rude, petulant trolls who seem to be miserable most of the time.   I regret almost all the time I have spent on these boards, and regret engaging in similar conduct from time to time on them.   These places bring out the worst in people.  They are like the Vegas strip full of losers, gamblers, and hustlers – only they are worse because it is all virtual and almost entirely anonymous which means that it is rare to run into anyone with even a modicum of civility.   I am pretty sure that an eternity in Stocktwits is what hell would be like, just add the fire.  I highly advise people to totally stay away from these boards, and if you do go to them, visit them sparingly.   The advice is generally bad, not trustworthy, and the environment only leads to bringing out the worst of human behavior and it is hard for it not to rub off on you.

My fifth and most important lesson – or reaffirmation in this case.  It is almost impossible to beat the market, and it makes no sense to try.  I know this and have known it for many years.  There is so much overwhelming evidence of this fact that it smacks of total stupidity to try and pick stocks that will help you do better than the market.   I will write another post that goes into this in more depth soon.   I will also talk about why I think many people just keep on trying, even when they know that can’t beat the market.  It’s something like a gambling addiction, but worse because it is so delusional.   But it is important to reflect here that this was another insane attempt to beat the market that backfired for a lot of people.  As a group, we know it is stupid to try, and if you don’t know, I will spend a good amount of time trying to convince you that you are not the 1% or less of people who can beat the market.  If you are reading this, I can guarantee you that you are not the type of person who will likely ever beat the market, so you should just put down the mouse and turn off your trading screen before you hurt yourself, or your financial future.

In the end – I promised myself and readers I would hold on to this stock for 5 years.  I have about 4 years left to hold this heavy bag, and there is a cold day in hell scenario where this stock does return some value, it will never ever get back to its all-time high.  But there are some possible scenarios where this POS gets a bit back.  They are highly unlikely of course, and I absolutely do not recommend this stock to even my worst enemy on Stocktwits.  – Well maybe to them, but nobody else 🙂