StreetEYE Blog

Startup Growth v. Revenue

Nick Bilton points to the lack of revenue at startups as signs of a bubble.

Now, I’m not going to say that things don’t look a little bubbleicious right now, with $1b valuations and acquisitions of tiny startups with no revenue.

But to some degree Bilton is channeling Eduardo Saverin, who famously pushed for early revenue at Facebook, clashed with Zuckerberg, and got squeezed out with a mere $2 billion or so for his trouble.

How to Create the Ultimate Linkfest

At, we love linkfests so much we named our website after them. When a knowledgeable professional is dedicated enough to get up at an ungodly hour to make an up-to-the-minute reading list for us, that just shows true love for the craft of investing, the game, and the readers. It just makes us warm and fuzzy. We salute Web linkfest all-stars like:

The Reformed Broker
Abnormal Returns
Naked Capitalism
The Big Picture
Crossing Wall Street
Economist’s View
Credit Writedowns

Putting together a great linkfest is tougher than it looks. This post is an attempt to put together a meta-linkfest of best practices for linkfest creators. If it saves the brave early-morning soldiers a few extra minutes with loved ones, or Mr. Sandman, it will worthwhile.

The Money Illusion

Irving Fisher (1867–1947)

Image via Wikipedia

Irving Fisher is mostly remembered, a bit unfortunately, for writing that stock prices were at a permanently high plateau…right before the Great Crash of 1929. He also invented the Rolodex, pioneered early economic statistics-gathering, wrote of the Fisher money equation PY=MV and the Fisher debt-deflation cycle. (See Sylvia Nasar’s Grand Pursuit – interesting but wouldn’t consider it must-read.)

For a while, he paid his employees in real wages. When his statistics showed the cost of living went up, their wages went up automatically. This made them very happy and think he was a great guy to work for. But then the price index went down and wages dropped. They weren’t happy about that at all and thought they were worse off.

People clearly aren’t able to make a month-to-month calculation in their head about where their wages stand relative to the economy’s overall price level. If you deem this a blinding glimpse of the obvious, you may not be fit to be an economist. Lots of economic models assume that people do all their thinking in real terms.

It’s all the more astounding that economists think ordinary people can do this, when economists themselves can’t even agree on what price measures to use for different purposes… should the Fed target CPI, the GDP fixed-weight deflator, the PCE chain-weight deflator? And the assumptions that have to go into those about imputed rent, hedonic adjustment, are pretty complicated and at least partly subjective (although they are necessary and smart people do the best they can).  

If you’re an economist, you talk about people’s anchored expectations about prices as ‘money illusion,’ as if the actual greenbacks you’re forking over are the illusion, and the ‘real’ numbers analysts conjure up are substantial.

The New Information Diet: Web and Social Media Best Practices For Investors

The History of every major Galactic Civilization tends to pass through three distinct and recognizable phases, those of Survival, Inquiry and Sophistication, otherwise known as the How, Why, and Where phases. For instance, the first phase is characterized by the question ‘How can we eat?’ the second by the question ‘Why do we eat?’ and the third by the question ‘Where shall we have lunch?” – Douglas Adams

A complete and well balanced information diet is a must for market survival. I talk to investors and Wall Street pros who are vaguely aware that social networking is changing the information ecosystem and the investment food chain, but aren’t sure where to start. They go to Twitter and open an account and ask, “What’s the big deal? Now what?”

The beauty is, you can build an incredible real-time customized information filter from social network tools and their Web 2.0 predecessors like blogs, but it takes a little bit of work.

So this post is meant as a primer for those who might still be on a mostly paleolithic diet of mainstream market news services. If you’re already plugged into a great information firehose, you might pick up a best practice or two, and I’d love to hear yours in comments.

Steve Jobs, by Walter Isaacson

Finally got around to reading the Steve Jobs bio by Walter Isaacson. It’s must read for anyone involved in the tech business. Some slightly less charitable takes: John Gruber is all I Am Disappoint there aren’t more insights into the products and strategy. Self-described underemployed writer Maureen Tkacik notes that Jobs was a Machiavellian liar, exploiter, and control freak.

There’s truth to both of those, but the book is a rollicking good read and creditable first draft of history, with some good details about the creation of the iPad, iPhone, iPod. So if that’s the sort of thing you’re into, you’ll be into this.

Jobs could have picked a lot of other people, but he picked Isaacson, a non-tech, non-business writer. Maybe he wanted someone to just tell the story, not the strategy or product vision.

Isaacson not only doesn’t know the technology or the tech business, but I didn’t even get a sense he likes them, or liked Steve Jobs. He was so afraid of getting snookered that if Steve Jobs had said the sky was blue, Isaacson wouldn’t have quoted it without the confirmations and qualifications of colleagues and competitors. It’s the mark of a true professional to write a good book when he’s not really interested in the topic.

Maybe Jobs picked the wrong guy. Maybe Jobs ended up running out of time to give a real memoir and insights into all dimensions of his legacy.

Or maybe Jobs was a control freak and just didn’t want to give them. He wanted to get everyone to read a somewhat shallow but presumptively authoritative treatment, sucking all the air out of the market for books about him.

Buffett, Stocks, Bonds, Gold

Warren Buffett contributed a Fortune article with his customary paean to the virtues of stocks over the long term. There is some worthy discussion from John Hempton and the pseudonymous Kid Dynamite.

Is Facebook Worth $100B?

Since everyone else is playing the Facebook valuation parlor game, here is a stab at it.

Are long term asset class relationships stable?

Last week, we looked at gold as part of a long-term asset allocation.

I was curious about how stable those relationships would be over time, so I ran the same plots, starting from different inflection points.

Portfolio Optimization and Efficient Frontiers in R

If you want to frustrate someone for a day, give them a program. If you want to frustrate them for a lifetime, teach them how to program.

A brief overview of how to use R to generate the analysis and plots in the most recent post, Gold as Part of a Long-Run Asset Allocation, using R, and code shared at Systematic Investor.

Gold as Part of a Long-Run Asset Allocation

What does an efficient long-run portfolio look like for major US asset classes, and where does gold fit in?

Let’s take US annual stock, bond, T-bill, and gold returns for 1928-2010, and subtract CPI inflation to get real returns.

  Real Return   Real Risk
Stocks   8.1%   20.1%
Bonds   2.1%   9.1%
Bills   0.5%   4.1%
Gold   1.7%   15.8%


Let’s plot an efficient frontier. This shows the highest return you could achieve with those four assets over those 83 years at different levels of risk.

Efficient Frontier

  Real Return   Real Risk
4% real return portfolio
(34% stocks, 44% bonds, 22% gold)
  4.1%   8.4%
5% real return portfolio
(49% stocks, 32% bonds, 19% gold)
  5.0%   10.7%


Let’s plot a transition map. As you move from low risk to high risk left to right, it shows you the composition of the best-performing portfolio at that risk level, how much would be in each asset.

Transition Map

What does this tell us?

  • For minimum real return risk, the best portfolio was mostly cash (bills), with a small amount of gold (and a smidgeon of stocks). This would have given a modest real return of 0.8%.
  • For maximum real return, stocks were big winners.
  • Gold had a modest real return in this period, which ended in 2010 with gold at 1225. In real terms gold performed better than bills and just behind bonds, and added value as a modest fraction of most optimal portfolios. Gold’s volatility was high, and is also understated since its price was pegged for more than half of this period (and Americans couldn’t legally hold it).
  • TIPS only became available recently, so there isn’t enough history for this analysis, and they also have their place. (But with rates at and sometimes below zero, CPI basis risk, fees, taxes, they will only shine if there is inflation.)

While returns are adjusted for CPI inflation, they don’t reflect fees and taxes.

The analysis is based on this post at Systematic Investor, and the gold mine of R code generously shared there. Will post more technical details, code, and some drill down analysis in coming days/weeks.


(A 2015 update also looking at how stable this relationship was over time.)

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