A Meaningful Life

Donkey prices are going through the roof. A good mate on the trading desk at Deutsche Bank I worked with sent me a hilarious news snippet (in a nervous laughter kind of way).

For those who are wondering if there is inflation: the Turkish newspaper Zaman reported the price of donkeys in Yozgat district in central Turkey has increased 7 fold as local people give up the use of tractors over high fuel prices. Because of increased demand, the price of one donkey grew from EUR 26 to about EUR 180.

Equally funny is Pete our CEO was telling me about a guy who buys Ass’s and sells them as Donkeys. They are the same beast. So the Ass fraternity needs to work on their personal brand a little.

It’s good to see some financial respect for the noble steeds.

It was strange for me moving from a trading environment to the software as a service industry (SaaS). One of the biggest differences I noticed straight away was how sparse web pages were. Even the early web tools like online banking and broking portals were so inefficiently designed. They failed to optimise screen real estate and forced users to scroll, mouse, search, yada yada yada.

Traders Reuters/Bloomberg terminals and their spreadsheets were nearly always set to the smallest font size you could find (or read). You would use efficient fonts like Arial Narrow to try and squeeze a few more prices into the screens that surrounded you. You didn’t have the luxury of whitespace (actually it was blackspace). The vast majority of traders went for black background designs. This was interesting in itself.

In a way I miss that, it was extremely time and information efficient. It was also easier on the eyes and clearer for the mind. You had all your information laid out in front of you. It can be likened to ‘chess boarding’ your desk with all your paperwork so that you would know exactly where everything is and be able to grab it instantly.

You could see the markets and the world events unfold in realtime. You could be efficient, no transition costs, such as the need to navigate a clumsy mouse, tab through browsers, scroll down screens, drag and drop or refresh web content. Screen real estate was prime real estate. No cares for font-type, white space pixel counts and the finest navigation effects. Just jam it in was the approach so you don’t have to do a single thing except read it.

It dawned on me when I first came into the web applications space that financial markets traders had actually evolved their own designs. The result was quite different to web applications as we know them. Here’s some of my observations.

Traders designed and built their own screens

Traders designed their screen themselves, or ex-traders working for Bloomberg or Reuters helped them. Extremely user centric design, they got exactly what they wanted. There was no lost-in-translation, lost-in-budget or lost-in-design-ego issues to contend with.

Traders built their screens like engineers and not like designers would

Traders are generally left brain logical types which could be described as ‘engineering like’. So their screens were very matrix like. Information was given the best screen real estate if it was the most financially sensitive. Really important financials received the mega-font treatment.

Traders were bad designers, but did it matter?

Web designers and now usability designers tend to come from right-brain imaginative and creative backgrounds (in my experience). The traders didn’t care much for good looking screens. This wasn’t a male thing. There were plenty of female traders in the organisations I worked for and it made no difference. Design extended to font colour and that was it. A non-black background was an outlier in this crowd. Traders seemed to naturally design for screen real estate optimisation and minimal navigation choices (no navigation), so there was an element of design in usability.

I thought I’d write this post to highlight something which has influenced keeping features a click or two away in our Saasu application. It has been extended further in our next Saasu.com release with the new one-click menu.

Photo credit: Matt Seppings

Inflation is bullish for stock markets longer term. Yep, those of you who remember inflation spikes of decades past might recall doubling of prices across decade periods. Stock markets doubled also, they had to, the math required it.

Stock markets aren’t alone. Your home is the biggest asset you’ll probably ever buy but for some reason incumbent conservative governments and their Fed Reserves don’t care much for affordability. While the “consumption inflation numbers” hang around 2-3% they are doing their job. Well that’s like telling a kid “don’t worry, the mixed bag of lollies are only going up 2% this year”. Meanwhile you neglect to mention that the bike (his big asset not yet purchased) is going up 10-20%. All the time you know his McDonald’s wages will never catch up to that kind of asset inflation.

Governments shrug of asset inflation as good economic management that makes people rich. That’s all well and good if you are already on board and own assets that ride the liquidity wave.

There was a saying in markets. You own two houses, you’re long. Own one, you’re square. Own none, you’re short the property market.

How many liquidity booms, housing booms, commodity booms do governments need to see before realising it ends up wrecking many lives, spoiling many dreams and leading to parents working many more hours than they spend with their kids.

Sure governments and federal reserves will testify their concerns, but at the end of the day they let these assets booms go on unabated until the next collapse proves them wrong. By then it’s the next guys problem, or some other countries fault. They just hope the history books note them down as boomtime public servant success stories.

The bulk of your spend these days is twice as much as it was in the 90’s. Sure your PC and food bills might not have grown much but look at your big spends, your home and your vehicle. The big ticket items that lead to a fat mortgage and a 60 hr work week is a lot more expensive.

Here’s the drum

Inflation is (generally speaking) very bad for socially equality

When asset inflation goes up the wealth divide grows. When consumption inflation goes up the wealthy don’t feel it but the masses do.

Inflation is good for stock markets longer term

If it costs us twice as much to get things done then it costs a business twice as much also. If you want to build a business you will be paying asset plus consumption inflation prices. Thus, a built business must go up in value (risk adjusted) to create parity with starting one from scratch. Yes, this is way too simplistic (leaving sectors etc aside) but it highlights this historic market fact. Just ask Buffet if you don’t believe me.

I thought I’d write this because there are a lot of bears around and I realised many of them have never seen a recession. Sure stocks will and can remain depressed for some time but inflation will at some point drag them substantially higher, beyond what you would expect, crazy prices.

For people without investment banking backgrounds this could make or save you a fortune. Worst case it might take the blinkers of your eyes around the topic of free or cheap options that are all around us.

There’s a simple test to see if something is like a option. Have you been given the right to do something for free or cheaply for a period of time. If so, then it’s an option and has financial value.

Here’s a few examples:

Quotation Option

Getting a quote is a chance to better a price. So each quote has value while a vendor has agreed (or implied to agree) to beat any other price.

Reverse Auction Option

I once bought a car from my desk. I called six dealers and told them I will buy the car specified in the fax I was sending them at 4:00pm that afternoon. I told them they were in competition and that my purchase was only about price. I repeated this to make it clear. I said that you only get one quote, no second chance. Five dealers faxed me their prices, one refused and one was extremely aggressive on pricing whom I ended up buying from. I removed variance in the product with my faxed instructions and specs. e.g. removing service location as a consideration. I saved 18% off the list price.

Pricing Mechanism Option

Continuing from above, I was told that this dealer network closed their sales books mid month (another option they had with their manufacturers where if they exceeded ‘x’ sales they had a jump in revenue payment to the dealer group). So the pricing mechanism was multifaceted. What they sold at wasn’t a clean equation. Towards this special date of theirs it wasn’t so much about profit but about vehicles sold. Vendors give you the option to chose when you buy from them. Again, that’s worth money.

Deposits On Goods (in some cases)

Sometimes you can legally walk away from a deposit, sometimes you can’t so make sure you have the vendor spell it out to you. I’d never do it personally for ethical reasons unless I’d checked they were ok with it in advance. The option here is to find something the same but far cheaper. This sounds lame but there are actually millions of dollars made and lost on this one alone by the big end of town.

The housing market is a classic example of it. Back in the 80’s and 90’s the deposit on a property bought of the plan was a cheap upside option on house prices. Developers didn’t always document the transaction as a full sale with delayed payments but instead they just asked for a forfeitable deposit of say 5% that you could walk away from. This doesn’t happen as much these days, but there are still anomalies even though more complex. The developers didn’t realise they were ‘writing’ call options on property prices extremely cheaply. Property markets were moving 10-30% per annum.

Some smart cookies ran around buying 5% options and just sat on them waiting for prices to go up. The downside was 5% and the upside was, well lets call it, the Moet outcome. The kicker was not having to fund the full price of property if they invested the traditional way. Some made fortunes. I was only a kid then

Decisions With Financial Impact

There are dozens of these, too many trade secrets I’m sorry, become a Saasu.com customer and I’ll reveal some One example is the right of Company Management to decide if a company wants to buy back its own shares from the market. There are multifaceted advantages in this ‘decision option’. Accordingly it has value when the circumstances are right.

The Time Extension

When someone is willing to sell you something and leaves a firm price with you for a day then they are giving you the right to accept or decline for 24hrs say. This is an option with very little time value. Accordingly it isn’t worth much. However if you ask for (or are offered) a time extension you are effectively being given money. That time has value. If the market price changes but you can still transact at the offered price per your agreement then you stand to save money or avoid losing money.

Either way you win in this situation so the option had value. I could go on for a while but I’ll save some for another day. If you have any share them and I’ll post and credit them to you next time around.

Facebook may not have worked it out yet but they are getting played with. 1-2% is nothing, it’s not a takeover, it’s a cheap option to play the game, with a lot more power as an investor.

The oldest trick in the M&A world is to “get a chunk”. Taking a bite gives you so many benefits that the first and smallest investment is often the best. It can be the buyers most profitable in the event they lose and sell to the winning bidder in defeat. Else, it can be the cheapest equity the buyer will have bought in the company.

I was pretty surprised by the amount of blogging out there talking like it’s a done deal. Sure it might happen one day but this isn’t the normal way you would see it play out so far in a pure, fast takeover. The deal in M&A is never the deal the public see’s. It’s more complex, it’s modelled payoffs. Such as the free press component valuation for the aggressor or better still the brand wash value which is very high on this deal.

What does this deal do?

• Buys probably the equivalent of 10’s or possibly close to 100 million dollars worth of PR. Online, paper and TV. Screen real estate for 3 months as people speculate. So their Facebook spend isn’t 260mio already it’s a lot less.
• Wash Facebook brand onto Microsoft’s brand.
• Makes it easier for Microsoft to buy a blocking stake later. They already have a start now.
• Buys Microsoft time and holds other players out. Other suitors will have their shoulder devil telling them this might be too hard. It’s Microsoft after all, a no debt cash rich company.
• It keeps Facebooks management thinking Microsoft loves them. Microsoft might not love them they just want their new date to think that so they don’t sleep with anyone else.
• Opens compulsory dialogue between the companies. Microsoft is now an investor.
• Equity blood brothers never slag each other and will tend to cross promote better. What would you pay Facebook to be a channel partner for your software company if you have one?
• Microsoft undoubtedly starts to get some influence in Facebook product direction or at least learns what the next steps are.
• Facebook will look to impress it’s big daddy by considering everything Microsoft asks for. Microsoft have a big fat chequebook, wouldn’t you get on your knees? Plus you would never bite that big Microsoft mitt of a hand, it might just feed you a lot of green.

And the best M&A trick of all is…

Microsoft pays up for the first chunk, then the seller/victim re-benchmarks price in their mind and any suitors that come along look cheap and nasty. As a result new suitors say no to Facebooks attempts to get some price tension. The new suitors don’t even try. Then all of a sudden Facebook is left with their initial investor who has only bought a small percentage. Time passes, more time passes and Facebooks business model of low cash and high cost is starting to show particularly as the US economic slowdown hits. What do you know Microsoft does not want to pay the same price any more.

Microsoft still could be aggressive

My guess is they won’t. 15Bio is a big number and if they do get aggressive it’s out of desperation. Let’s not forget it Microsoft can take just about any player out of the market a lot earlier than this, but they didn’t. What does that mean for this deal? Are they that late and stupid? I doubt it.

I can’t put trading advice on my blog because I am employed by an investment bank. However, here’s someone else’s tip that is very true. “If you don’t know who you are and what you do, the stock market is an expensive place to find out.” Adam Smith