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Posts from the ‘Economics’ Category

The Millennial Definition of Success

Wealthfront Team, June 2014

Wealthfront Team, June 2014

It’s hard to believe in 2014, but when I first considered joining LinkedIn in 2007, most of my colleagues had trouble seeing the value in a platform built on top of what looked like an online résumé. At the time, when I was asked why I joined the company, I would tell them that it had always been true that success in business was based on what you know and who you know.  LinkedIn was just the modern incarnation of that powerful fact.

One of the most pleasant surprises in my current role at Wealthfront has been discovering how relevant career success is to millennial investors. As it turns out, every generation has grappled with the issue of how to find financial success, and millennials are no different.

What may surprise most people (including my compatriots in Gen X) is that more than any other generation, I believe that Millennials may have a lot to teach us. You see, it turns out that Millennials have figured out how to make that old adage actionable.

Who You Work With & What You Work On

Increasingly, as I talk to Millennials, some of whom who have found early success in their careers, and others who are just starting out, I hear the same things. This generation overwhelmingly associates success with control over who they work with, and what they work on.

There is an old refrain in management that people join companies, but they leave managers. There is a kernel of truth in that statement. However, in the modern workplace, relationships with colleagues, managers and leadership all have a role to play. Increasingly, valuable employees ask:

  • Am I learning from the people I work with?
  • Are we succeeding together as a team?
  • Do I share the same values as my colleagues?
  • Will I fight for them? Will they fight for me?

Driven by Passion, Seeking a Mission

There have been numerous surveys and studies indicating that Millennials are overwhelmingly focused on “their passions.” I think, in some regards, this has trivialized a more fundamental and important trend.

Is it really surprising that more and more people have realized that what you are working on matters?

The old duality of your work life and your personal life have been hopelessly intermingled. Instead of arguing about whether you live to work or work to live, in the 21st century people increasingly turning away from a purely mercenary view of their labor. They want to believe in the mission, believe their efforts are going towards something bigger than just financial reward. This is why you hear increasing anecdotes of young people choosing lower paying jobs, in some cases jobs that pay tens of thousands of dollars less, to focus on an organization that they draw more purpose from.

Success = Control

Not everyone has this luxury, and in some ways that is the point. What does success really mean, if it doesn’t mean that you get increasing control over who your work with, and what you work on?

Wealthfront now has over 12,000 clients, and most of them are under 35. What I find striking is that, overwhelmingly, with every success in their financial lives, these young people seem to immediately focus on using their success to gain control over their careers. They don’t seek to optimize for title, or  financial reward. Instead, they increasingly use their success to effectively fund the ability to work on a product they believe in, an organization they want to be part of, and a leader they want to follow.

As the CEO of a hypergrowth company, this leaves me with two pieces of actionable advice:

  • Financial reward is not enough. If you want to attract and retain the best and the brightest, financial reward is somewhat of a commodity, and an undervalued one at that. Instead, expect potential candidates to look at your company and ask, “Is this a problem I want to work on?” and “Are these people I want to work with?”
  • This is a networked economy. As Reid Hoffman has described, increasingly the value people build in their careers extends outside of your company. There is a material, and possibly essential difference, in a consumer business where your employees feel like they are punching a clock, versus a team that truly believes in what they are working on and the team they are working with. The influence of your employees, especially as your company grows, is under-measured, and as a result, under-appreciated. But in a huge networked economy, it may be the key to differentiated success.

Leadership Lessons from the Code Conference

This past week, I was able to attend the inaugural Code Conference organized by Walt Mossberg & Kara Swisher.  One of the perks of the conference is, within close quarters, the chance to hear the leaders of huge, successful consumer technology companies.

      • Satya Nadella, Microsoft
      • Sergey Brin, Google
      • Brian Krzanich, Intel
      • Brian Roberts, Comcast
      • Reed Hastings, Netflix
      • Travis Kalanick, Uber
      • Drew Houston, Dropbox
      • Eddie Cue, Apple (iTunes / iCloud)

As I think about lessons from the conference, I find myself focused on a particular insight watching these leaders defend their company’s strategy and focus.  (It’s worth noting that anyone being interviewed by Kara does, in fact, have to be ready to play defense.)

David to Goliath

One of the most complex transitions that every consumer technology company has to make is from David to Goliath.  It’s extremely difficult in part because the timing is somewhat unpredictable.  Is Netflix an upstart versus the cable monolith, or a goliath itself as it is responsible for a third of all internet traffic?  When exactly did Google go from cool startup to a giant that even governments potentially fear?  Apple, of course, went from startup to giant to “beleaguered” and all the way to juggernaut.

Make no mistake, however.  The change in public opinion does happen, and when it does, the exact same behaviors and decisions can be read very differently in the court of public opinion.

Technology to Economics to Politics

Most technology companies begin with language that talks about their technical platform and achievements. “Our new product is 10x faster than anything else on the market,” or “Our new platform can handle 10x the data of existing platforms,” etc.  Sometimes, these technical achievements are reframed around end users: “We help connect over 1 billion people every day,” or “we help share over 10 billion photos a week,” etc.

Quickly, however, the best technology companies tend to shift to economics. “Our new product will let you get twice the sales in half the time,” or “our application will save you time and money.”  As they grow, those economic impacts grow as well.  Markets of billions of dollars are commonplace, and opportunities measured in hundreds of billions of dollars.

Unfortunately, as David moves to Goliath, it seems that many technology leaders miss the subtle shift in the expectations from their leadership.   When you wield market power that can be measured on a national (or international) scale, the challenge shifts from economics to politics.  Consumers want to know what leaders they are “electing” with their time and money, and their questions often shift implicitly to values and rights rather than speed or cost.

What Will the World Be Like Under Your Leadership?

As I watched various leaders answer hard questions about their companies, a clear division took place.  Most focused merely on questions of whether they would succeed or fail.  But a few did a great job elevating the discussion to a view of what the world will be like if they are successful.

There is no question that the leaders who elevated the discussion are finding more success in the market.

Satya Nadella gave no real reason why we would like the world better if Microsoft is successful.  Neither did Brian Krzanich of Intel.

Sergey Brin promises that in a world where Google is successful, we’ll have self-driving cars and fast internet for everyone.  Jet packs & flying cars.  It’s an old pitch, but a good one.

Eddie Cue tells us that Apple cares about making sure there is still great music in the world.  And of course, Apple has spent decades convincing us that when they are successful, we get new shiny, well-designed devices every year.

Is it really surprising that Google & Apple have elevated brands with high consumer value?

Technology Leadership

There is no way around the challenges of power.  As any company grows, it’s power grows, and with that power comes concern and fear around the use of that power.  Google has so much control over information and access to information.  Apple tends to wield tight control over the economics and opportunities within their ecosystem.  However, the leaders at these companies are intelligently making sure that the opportunities they promise the market counter-balance those fears, at least at some level.

Wealthfront, my company, is still small enough that we’re far from being considered anything but a small (but rapidly growing) startup in a space where giants measure their markets in the trillions.  But as I watched these technology leaders at the Code Conference, I realized that someday, if we’re successful, this same challenge will face our company.

If you lead or work for a technology giant, it’s worth asking the question:

Does your message elevate to the point where everyone understands the tangible benefit of living in a world where your company is successful?  If not, I’d argue your likely to face increasing headwinds in your efforts to compete in the consumer market going forward.

Google vs. The Teamsters

Yesterday, Google launched Chromecast, a streaming solution for integrating mobile devices with TV, part of another salvo against Apple.  Google vs. Apple has been the hot story now in Silicon Valley for a couple of years.  Before that, Google vs. Facebook.  Before that, Google vs. Microsoft.  Technology loves narrative, and setting up a battle of titans always gets the crowd worked up.

Lately, I’ve been thinking about the next fight Google might be inadvertently setting up, and wondering whether they are ready for it.

350px-Optimusg1

Self-Driving Cars or Self-Driving Trucks

It turns out I’m not the only one who noticed that Google’s incredible push for self-driving cars actually has more likely applications around trucking.  Yesterday, the Wall Street Journal wrote an excellent piece about Catepillar’s experiments using self-driving mining trucks in remote areas of Australia.  It had the provocative headline:

Daddy, What Was a Truck Driver?

This is the first piece in the mainstream media that I’ve seen connecting the dots from self-driving cars to trucking, even with a lightweight reference to the Teamsters at the end.

Ubiquitous, autonomous trucks are “close to inevitable,” says Ted Scott, director of engineering and safety policy for the American Trucking Associations. “We are going to have a driverless truck because there will be money in it,” adds James Barrett, president of 105-rig Road Scholar Transport Inc. in Scranton, Pa.

The International Brotherhood of Teamsters haven’t noticed yet, or at least, all searches I performed on their site for keywords like “self driving”, “computer driving”, “automated driving”, or even just “Google” revealed nothing relevant about the topic.  But they will.

Massive Economic Value

The statistics are astonishing.  A few key insights:

  • Approximately 5.7 million Americans are licensed as professional drivers, driving everything from delivery vans to tractor-trailers.
  • Roughly speaking, a full-time driver with benefits will cost $65,000 to $100,000 or more a year.
  •  In 2011, the U.S. trucking industry hauled 67 percent of the total volume of freight transported in the United States. More than 26 million trucks of all classes, including 2.4 million typical Class 8 trucks operated by more than 1.2 million interstate motor carriers. (via American Trucking Association)
  • Currently, there is a shortage of qualified drivers. Estimated at 20,000+ now, growing to over 100,000 in the next few years. (via American Trucking Association)

Let’s see.  We have a staffing problem around an already fairly expensive role that is the backbone of a majority of freight transport in the United States.  That’s just about all the right ingredients for experimentation, development and eventual mass deployment of self-driving trucks.

Rise of the Machines

In 2011, Andy McAfee & Erik Brynjolfsson published the book “Race Against the Machine“, where they describe both the evidence and projection of how computers & artificial intelligence will rapidly displace roles and work previously assumed to be best done by humans.  (Andy’s excellent TED 2013 talk is now online.)

The fact is, self-driving long haul trucking addresses a lot of the issues with using human drivers.  Computers don’t need to sleep.  That alone might double their productivity.  They can remotely be audited and controlled in emergency situations.  They are predictable, and can execute high efficiency coordination (like road trains).  They will no doubt be more fuel efficient, and will likely end up having better safety records than human drivers.

Please don’t get me wrong – I am positive there will be a large number of situations where human drivers will be advantageous.  But it will certainly no longer be 100%, and the situations where self-driving trucks make sense will only expand with time.

Google & Unions

Google has made self-driving cars one of the hallmarks of their new brand, thinking about long term problems and futuristic technology.  This, unfortunately, is one of the risks that goes with brand association around a technology that may be massively disruptive both socially & politically.

Like most technology companies in Silicon Valley, Google is not a union shop.  It has advocated in the past on issues like education reform.  It wouldn’t be hard, politically, to paint Google as either ambivalent or even hostile to organized labor.

Challenges of the Next Decade

The next ten years are likely to look very different for technology than the past ten.  We’re going to start to see large number of jobs previously thought to be safe from computerization be displaced.  It’s at best naive to think that these developments won’t end up politically charged.

Large companies, in particular, are vulnerable to political action, as they are large targets.  Amazon actually may have been the first consumer tech company to stumble onto this issue, with the outcry around the loss of the independent bookstore.  (Interesting, Netflix did not invoke the same reaction to the loss of the video rental store.)  Google, however, has touched an issue that affects millions of jobs, and one that historically has been aggressively organized both socially & politically.  The Teamsters alone have 1.3 million members (as of 2011).

Silicon Valley was late to lobbying and political influence, but this goes beyond influence.  We’re now getting to a level of social impact where companies need to proactively envision and advocate for the future that they are creating.  Google may think they are safe by focusing on the most unlikely first implementation of their vision (self-driving cars), but it is very likely they’ll be associated with the concept of self-driving vehicles.

I’m a huge fan of Google, so maybe I’m just worried we may see a future of news broadcasts with people taking bats to self-driving cars in the Google parking lot.  And I don’t think anyone is ready for that.

Behavioral Finance Explains Bubbles

Note: This post ran originally in TechCrunch on April 20.  As a courtesy to regular followers of my blog, I’ve reposted the content here to ensure that longtime readers have access to it.

“Bubbles are beautiful, fun and fascinating, but do you know what they are and how they work? Here’s a look at the science behind bubbles.” – About.com Chemistry, “Bubble Science

“Double, double toil and trouble
Fire burn, and cauldron bubble.” – Macbeth, Act 4, Scene 1

Given the incredible volatility we’ve seen lately in the Bitcoin and gold markets, there has been a resurgence in discussion about bubbles. This topic is always top of mind in Silicon Valley, especially given that the two favorite local topics of conversation are technology companies and housing.

Defining a market bubble is actually a bit trickier than it might first appear. After all, what differentiates the inevitable booms and busts involved in almost any business and industry from a “bubble”?

The most common definition of a speculative or market bubble is when a broad-based, surging euphoria or wave of optimism carries asset prices well beyond supportable value. The canonical bubble was the tulip mania of the 1630s, but it extends across history and countries all the way up to the Internet bubble of the late 1990s and the housing bubbles in the past decade.

WHAT DO BUBBLES LOOK LIKE?

Not surprisingly, there are a number of great frameworks for thinking about this problem.

In 2011, Steve Blank and Ben Horowitz debated in The Economist whether or not technology was in a new bubble. In those posts, Steve cited the research of Jean-Paul Rodrigue denoting four phases of a bubble: stealth, awareness, mania and blow-off.

bubble chart

(Source: Wikipedia)

HOW DO BUBBLES HAPPEN?

In 2000, Edward Chancellor published an excellent history and analysis of market bubbles over four centuries and a wide variety of countries called “Devil Take the Hindmost: A History of Financial Speculation.” In his book, he finds at least two consistent ingredients.

  • Uncertainty. In almost every bubble, there seems to be some form of innovation or insight that forces people to rapidly debate the creation of new economic value. (Yes, even tulip bulbs were once an innovation, and the product was incredibly unpredictable.) This uncertainty is typically compounded by some form of lottery effect, exacerbating early pay-offs for the first actors. Think back to stories about buying a condo in Las Vegas and flipping it in months for amazing gains. This creates the inevitable upside/downside imbalance that Henry Blodget recently framed as: “If you lose your bet, you lose 100%. If you win your bet, you make 1000%.” Inevitably, this innovation always leads to a shockingly large assessment of how much value could be created by this market.
  • Leverage/Liquidity. In every bubble, there is some form of financial innovation that broadly increases both leverage and liquidity. This is critical, because the expansion of leverage not only provides massive liquidity to fund the expansion of the bubble, but the leverage also sets up the covenants that inevitably unwind when the bubble turns aggressively to the downside. In some ways, it’s also inevitable. When a large number of people believe they’ve found a sure thing, logic dictates they should borrow cheap money to maximize their returns. In fact, the belief it may be a bubble can make them even greedier to lever up their investment so they can “cash out” the most before the inevitable break.

BEHAVIORAL FINANCE LESSONS IN BUBBLES

Bubbles clearly have an emotional component, and to paraphrase Dan Ariely, humans may be irrational, but they are predictably irrational.

There are five obvious attributes of components of bubble psychology that play into market manias:

  1. Anchoring. We hear a number, and when asked a value-based question, even unrelated to the number, they gravitate to the value that was suggested. We hear gold at $1,500, and immediately in the aggregate we start thinking that $1,000 is cheap and $2,000 might be expensive.
  2. Hindsight Bias. We overestimate our ability to predict the future based on the recent past. We tend to over-emphasize recent performance in our thinking. We see a short-term trend in Bitcoin, and we extend that forward in the future with higher confidence than the data would mathematically support.
  3. Confirmation Bias. We selectively seek information that supports existing theories, and we ignore/dispute information that disproves those theories. (This also tends to explain most political issue blogs and comment threads.)
  4. Herd Behavior. We are biologically wired to mimic the actions of the larger group. While this behavior allows us to quickly absorb and react based on the intelligence of others around us, it also can lead to self-reinforcing cycles of aggregate behavior.
  5. Overconfidence. We tend to over-estimate our intelligence and capabilities relative to others. Seventy-four percent of professional fund managers in the 2006 study “Behaving Badly”believed they had delivered above-average job performance.

The greater fool theory posits that rational people will buy into valuations that they don’t necessarily believe, as long as they believe there is someone else more foolish who will buy it for an even higher value. The human tendencies described above lead to a fairly predictable outcome: After an innovation is introduced and a market is formed, people believe both that they are among the few who have spotted the trend early, and that they will be smart enough to pull out at the right time.

Ironically, the combination of these traits predictably leads to these four words: “It’s different this time.”

IT’S DIFFERENT THIS TIME

After two massive bubbles in the U.S. in less than a decade, many people question spotting bubbles ahead of time is so difficult. In every bubble, a number of people do correctly identify the bubble. As in the story of the boy who cried wolf, however, the truth is apt to be disbelieved. The problem is that in every market, there are always people claiming that prices are too high. That’s what makes a market. As a result, the cry of “bubble” is far more often proven wrong than right.

Every potential bubble, however, provides an incredibly valuable frame for deepening and debating the role of human psychology in financial markets. Honestly and thoughtfully examining your own behavior through a bubble, and comparing it to the insights provided by behavioral finance, can be one of the most valuable tools an investor has to learning about themselves.

Apple & Dow 15000: Update

In February 2012, I wrote a blog post that indicted the Dow Jones Industrial Average for including Cisco in 2009 instead of Apple.  At the time, Apple had just crossed $500 per share, and that simple decision had cost the US the psychology of an index hitting new highs.

I was driving home on Sunday, listening to the radio, and it occurred to me how different the financial news would be if Apple ($AAPL) was in the Dow Jones Industrial Average (^DJI).

Of course, being who I am, I went home and built a spreadsheet to recalculate what would have happened if Dow Jones had decided to add Apple to the index instead of Cisco back in 2009.  Imagine my surprise to see that the Dow be over 2000 points higher.

Update: AAPL at $700

With the launch of the iPhone 5, we find ourselves roughly 7 months later.  For fun, I re-ran the spreadsheet that calculated what the DJIA would be at if they had added AAPL to the index in 2009 instead of CSCO. (To date, I’ve never seen an explanation on why Cisco was selected to represent computer hardware instead of Apple.)

Result: Dow 16,600

As of September 17, 2012, AAPL closed at 699.781/share.  As it turns out, if Dow Jones had added Apple instead of Cisco in 2009, the index would now be at 16,617.82.  Hard to think that hitting all new highs wouldn’t be material for market psychology and the election.

Anyone up for Dow 20,000?

Apple, Cisco, and Dow 15000

I was driving home on Sunday, listening to the radio, and it occurred to me how different the financial news would be if Apple ($AAPL) was in the Dow Jones Industrial Average (^DJI).

Of course, being who I am, I went home and built a spreadsheet to recalculate what would have happened if Dow Jones had decided to add Apple to the index instead of Cisco back in 2009.  Imagine my surprise to see that the Dow be over 2000 points higher.

In real life, the Dow closed at 12,874.04 on Feb 13, 2012.  However, if they had added Apple instead of Cisco, the Dow Jones would be at 14,926.95.  That’s over 800 points higher than the all-time high of 14,164 previously set on 4/7/2008.

Can you imagine what the daily financial news of this country would be if every day the Dow Jones was hitting an all-time high?  How would it change the tone of our politics? Would we all be counting the moments to Dow 15,000?

Why Cisco vs. Apple?

This isn’t a foolhardy exercise.  The Dow Jones Industrial Average is changed very rarely, in order to promote stability and comparability in the index.  However, on June 8, 2009, they made two changes to the index:

  • They replaced Citigroup with Travelers
  • They replaced General Motors with Cisco

The question I explored was simple – what would have happened if they had replaced General Motors with Apple on June 8, 2009.  After all, Apple was up over 80% off its lows post-crash.  The company had a large, but not overwhelming market capitalization.  The index is already filled with “big iron” tech stocks, like Intel, HP & IBM.  Why add Cisco?  Why not add a consumer tech name instead?

In fact, there is no readily obvious justification for adding Cisco to the index in 2009 instead of Apple.

The Basics of the Dow Jones Industrial Average

Look, I’m just going to say it. The Dow Jones Industrial Average is ridiculous.

You may not realize this, but the Dow Jones Industrial Average, the “Dow” that everyone quotes as representative of the US stock market, and sometimes even a barometer of the US economy, is a mathematical farce.

Just thirty stocks, hand picked by committee by Dow Jones, with no rigorous requirements.  Worse, it’s a “price-weighted” index, which is mathematically nonsensical.  When calculating the Dow Jones Industrial Average, they take the actual stock prices of each stock, add them together, and divide them by a “Dow Divisor“.  They don’t take into account how many shares outstanding; they don’t assess the market capitalization of each company.  When a stock splits, they actually change the divisor for the whole index.  It’s completely unclear what this index is designed to measure, other than financial illiteracy.

In fact, there is only one justification for the Dow Jones Industrial Average being calculated this way.  Dow Jones explains it in this post on why Apple & Google are not included in the index.  To save you some time, I’ll summarize: they have always done it this way, and if they change it, then they won’t be able to compare today’s nonsensical index to the nonsensical index from the last 100+ years.

So what? Does it really matter?

It’s a fair critique.  Look, with 20/20 hindsight, there are limitless number of changes we could make to the index to change its value.  Imagine adding Microsoft and Intel to the index in 1991 instead of 1999?

I don’t think this exercise is that trivial in this case.  The Dow already decided to make a change in 2009.  They decided to replace a manufacturing company (GM) with a large hardware technology company (CSCO).  They could have easily picked Apple instead.

The end result?  People talk about the stock market still being “significantly off its highs” of 2008.  In truth, no one should be reporting the value of the Dow Jones Industrial Average.  But they do, and therefore it matters.  As a result, the choices of the Dow Jones committee matter, and unfortunately, there seems to be no accountability for those choices.

Appendix: The Numbers

I’ve provided below the actual tables used for my calculations.  Please note that all security prices are calculated as of market close on Monday, Feb 13, 2012.  The new Dow Divisor for the alternate reality with AAPL in the index was calculated by recalculating the appropriate Dow Divisor for the 6/8/2009 switch of AAPL for CSCO, and a recalculated adjustment for the VZ spinoff on 7/2/2010.

Real DJIA DJIA w/ AAPL on 6/8/09
Company 2/13/2012 Company 2/13/2012
MMM 88.03 MMM 88.03
AA 10.33 AA 10.33
AXP 52.07 AXP 52.07
T 30.04 T 30.04
BAC 8.25 BAC 8.25
BA 74.85 BA 74.85
CAT 113.70 CAT 113.70
CVX 106.38 CVX 106.38
CSCO 20.03 AAPL 502.60
KO 68.44 KO 68.44
DD 50.60 DD 50.60
XOM 84.42 XOM 84.42
GE 19.07 GE 19.07
HPQ 28.75 HPQ 28.75
HD 45.93 HD 45.93
INTC 26.70 INTC 26.70
IBM 192.62 IBM 192.62
JNJ 64.68 JNJ 64.68
JPM 38.30 JPM 38.30
KFT 38.40 KFT 38.40
MCD 99.65 MCD 99.65
MRK 38.11 MRK 38.11
MSFT 30.58 MSFT 30.58
PFE 21.30 PFE 21.30
PG 64.23 PG 64.23
TRV 58.99 TRV 58.99
UTX 84.88 UTX 84.88
VZ 38.13 VZ 38.13
WMT 61.79 WMT 61.79
DIS 41.79 DIS 41.79
Total 1701.04 Total 2183.61
Divisor 0.13212949 Divisor 0.146286415
Index 12874.04 Index 14926.95

Calculating the “alternate divisor” requires getting the daily stock quotes for the days where the index changed, and recalculating to make sure that the new divisor with the new stocks gives the same price for the day. It’s a bit messy, and depends on public quote data, so please feel free to check my math if I made a mistake.

The Game Mechanics of Silicon Valley Careers

Regular readers of this blog know that I’ve been a huge fan of game mechanics for years.  Game mechanics is a loose term for a variety of insights into the neurological and sociological underpinnings of the games that humans like to play.  In the past decade, there has been a massive growth in our understanding of game mechanics, even to the point now where you can’t go 10 feet in the Valley without tripping over a venture capitalist dropping the term in conversation.

This past weekend, I had the chance to chat with an old friend from a former start-up, and I was talking about why I love Zynga, and why game mechanics were one of the more interesting product insights to come out the last few years of product design.  The conversation moved on to catching up on old friends and careers, and the obvious hit me: our very careers in Silicon Valley are based on game mechanics.

Primal Response Patterns: Schedules of Reinforcement

In Amy Jo Kim’s lecture, Putting the Fun in Functional, she outlines some of the basic neurological drivers for response patterns to reward.

I’m going to grotesquely simplify the concept for the purposes of this post.  Real students of psychology & neurobiology – hold your nose while you go through this section.

It turns out that there are demonstrated patterns for response (neé addiction) for different types of reward systems:

  • Simple: You hit the lever, you get a treat.  Most animals will understand and play this game. (Hello, Pavlov)
  • Variable Interval: You hit the lever, but sometimes you get a treat, sometimes not.  This game turns out to be even more addictive, likely due to the combination of uncertainty (triggers fight-or-flight) and then the rush of the intermittent reward when it comes. (When you go to puppy school, you learn to *not* give your dog a treat every single time they do something right.)
  • Variable Interval, Variable Payout.  The most addictive of games.  You hit the lever, and sometimes you get a treat, and sometimes you don’t.  But sometimes the treat is big, and sometimes the treat is small.  (Hello, slot machine)

I was explaining this fact to my friend, when it occurred to me that this is the game that we all play in Silicon Valley.

Addiction: Hypergrowth Tech Companies

This pattern explains a lot about why Silicon Valley is so… addicting.  Venture capitalists invest capital into startups seeking outstanding returns.  Most engineers, on the other hand, invest their human capital to get the same result.  Engineers join hypergrowth companies with the assumption of receiving an equity stake.  That equity stake is the difference between making a good salary, and potentially hitting a step-function in their net worth.

Let’s play out the reward pattern:

  • Variable Interval: Tenure at tech companies can be anywhere from a few months to a few decades, however it averages about 2-3 years.  Sometimes startups go bankrupt less than 2 years after you join or found them.  Sometimes they get acquired.  Sometimes they become truly large, successful ongoing companies.  The timing definitely varies.  Many people would count themselves lucky if one in three of the companies they join turns out to be successful at a level that provides a meaningful value for their equity.
  • Variable Payout: Sometimes tech companies go bankrupt.  Other times they can produce equity worth 2x your salary.  Sometimes 10x.  Sometimes 100x+.

The lever is joining, and the payout is equity.

Is it any wonder that, after three decades, we’re all still addicted to this game?

 

Why Zynga is a Great Business

With the Zynga IPO filing rumored to be hours away, I thought a light hearted blog post might be in order.

There are many aspects to economics behind video games that have been largely unchanged over the past two decades.  Fundamentally, Zynga lept to an opportunity to take advantage of a social platform (Facebook) to challenge some of the fundamental limitations of distribution and monetization that plagued the software giants who dominated desktop and platform gaming.

Obviously, I am a fan of the company.  The number of blog posts here about Zynga games should tell you that.  But when people ask me in real life why I’m such a big fan of Zynga, I give them a simple tongue-in-cheek thesis.

Selling Things You Don’t Need

It’s a well know fact that selling people things they don’t need is a great business.   Some might say it’s when retailers and/or products rise higher in the Maslow hierarchy of needs.  By definition, when items rise up that motivation chain, more powerful emotions come into play.  Fundamentally, no one needs a cotton candy tree.  But Zynga gets to the emotions of why you might want one.

In the end, the willingness to pay for things you don’t need is shockingly high in an economy where people have disposable income.

Selling Things You Don’t Need that Don’t Exist

Hundreds of years ago, this was what selling “snake oil” was all about.  Selling something that you don’t need, and that doesn’t exist has always been a great way to make money.  Unfortunately, it also used to be a sure fire path to getting run out of town (and perhaps tarred & feathered in the process).

A little computer icon of a purple cow does not exist, and you don’t need it.  But that doesn’t change the fact that Zynga has found a way not only to make you want it, but deliver it to you with an effective cost of goods sold of approximately zero.

So now we have a high willingness to pay, combined with low friction and low cost of goods sold.

Selling Things You Don’t Need, That Don’t Exist, and That Are Addictive

This might be called the holy trinity of virtual goods, but in the end, this is the most amazing part of the Zynga model.  Certain types of social interaction are clearly pleasurable to people at a fundamental level.  We love the inherent stimulation in getting a response, recognition or even just insight into another human being.  Once we find a path for these interactions, we want more of it.  By leveraging a social platform for its games, Zynga has integrated social stimulation into their economics with outstanding results.

So now we have a high willingness to pay, combined with low friction and low cost of goods sold, with relatively low distribution costs and a high propensity for repeat activity.

Any wonder that I wish I owned Zynga stock?

Congratulations (in advance) to all of my great friends on the Zynga team.

Personal Finance for Engineers

Last Friday, LinkedIn had it’s monthly “InDay”, an event where the company encourages employees to pursue research, ideas & interests outside of their day-to-day responsibilities. (This is the same day that I run the regular LinkedIn Hackdays for the company.) This month, the theme was “personal finance” as a brief nod to the ominous due date for income taxes in the United States.

For fun, I volunteered to give a talk based on material that I’ve put together over the years called “Personal Finance for Engineers”

I cover the most obvious two questions up front:

  1. Why Personal Finance?  Personal finance is a bit of a passion of mine, and has been for almost twenty years.  It’s both amazing and shocking to me that you can attend some of the finest secondary schools and universities in this country, and still not get a basic grounding in personal finance.  More importantly, it happens to be an area with a huge signal-to-noise problem:  there is far more “bad” advice and content out there than good content.  And lastly, I believe that money matters are deeply important to the long term success and happiness of most people. (Let’s face it, money happens to be one of the top three causes of marital problems)
  2. Why Engineers?  The talk isn’t purely for engineers, per se, so this reflects a personal bias (I just empathize more with engineers more than other people).  That being said, engineers tend to make higher incomes earlier in life than most people, and thus face some of these questions earlier.  They also tend to have stock options, a fairly advanced financial instrument, as part of their standard compensation.  Probably most troubling, engineers also consider themselves exceptionally rational, which makes them more prone to human weaknesses when it comes to money.

It was very hard to decide how to condense personal finance into a 60 minute talk (I leave 30 minutes for advanced topics).  I decided to focus on five topics:

  • You Are Not Rational (Behavioral Finance)
  • Liquidity is Undervalued (Emergency Fund)
  • Cash Flow Matters (Spend less than you Earn)
  • The Magic of Compounding (Investment Returns & Debt Disasters)
  • Good Investing is Boring (Asset Allocation)

The deck is not perfect by any stretch, and I have a number of ideas on how to improve it.  There are some great topics / examples I missed, and there are some points that I could emphasize more.  I spend literally half the time on behavioral finance, which may or may not be the right balance.

The talk went extremely well.  We had well over 100 people attend, and stay through the full 90 minutes.  Surprisingly, I got more thank yous and follow up questions from this talk than any other that I’ve given at LinkedIn.  I’m strongly considering giving it again, perhaps at other venues, depending on the level of interest.

Let me know what you think.

Personal Finance: Refinancing a Residential Mortgage for 2011

One of my “To Do” list items for the end of 2010 was to investigate refinancing the mortgage on our house in Sunnyvale, CA.  As a sign of the decade, this actually is the third time we’ve looked to refinance our mortgage in about seven and a half years.  I was actually a bit surprised at the complexities involved, so I thought I’d share the results here on the blog.

Background

Our current mortgage is a “5/5 ARM” offered by Pentagon Federal Credit Union, a credit union that specializes in military families.  We completed that refinancing at the end of 2008, and I actually wrote a blog post about that experience if your curious about Pentagon Federal.  (Quick Summary: They are awesome, I highly recommend them for low rates on home & auto loans).

The “5/5 ARM” is an unusual program.  Like a normal 5/1 mortgage, it’s a 30-year loan with a fixed rate for the first 5 years.  Except, instead of repricing every year after that, instead, it only reprices every five years.  It reprices based on a rate tied to US Treasuries, and can rise no more than 2% at a time.

This means that if you get a mortgage at 5%, it will be 5% for years 1-5, and then can rise as high as 7% for years 6-10.  There is a cap of 5% on the total life of the mortgage, so if Obama turns out to be Jimmy Carter II and rates have to go to 20% in 2019, you’re protected.  All of this is fairly standard for high quality mortgages, except for the 5 year repricing schedule.

What makes this appealing is that the 5/5 rate tends to be the same as the 5/1 rate, so you are getting some extra stability effectively for free.  The only gotcha is that these are all FHA qualified loans, so they have to conform to their standards.  ($417K for normal mortgages, $729K in “high income” areas like Silicon Valley, 80% Loan-to-Value, etc).

The rate we got at the end of 2008 was 4.625%.  At the time, I thought that was the best rate we’d seen in 40 years, and it was good to grab.  Turns out, I was wrong about how low rates could go.

Why Did I Want to Refinance

Looking up rates on the internet can be very confusing.  The reason is that few sites offer a comprehensive average of rates, and more importantly, the ones that do tend to ignore complexities around terms like the number of points paid.  When you hear rates on the radio for a 3.875% 30-year fixed mortgage, you are hearing the interest rate that assumes a massive amount of up-front payment and some stricter-than-average terms.

I was exclusively looking for the “perfect repricing”:

  • No money down
  • Monthly payments drop
  • Interest rate drops
  • Total amount paid over life of the loan drops

You might be wondering why I would think this was possible.  Well, in 2004 and 2008, it was.  It turns out in 2010, there is no real free lunch.

Based on advertisements, and some spreadsheet calculations, it seemed like there was a real opportunity to achieve the above with current rates.  I was seeing advertisements for rates as low as 3.5% on 5/1 ARMs, which would not only drop our payment by hundreds of dollars per month, but literally would save us tens of thousands over the life of the loan.

Where Rates Are Now

This was my first surprise – it’s not that easy to get a great rate, even with great credit, with zero points.  It’s not that there aren’t great rates out there – there are, but the plain vanilla, no catches, no points and rock-bottom rate days seem to be behind us.

To evaluate options, I checked the following sources:

  • Internet searches at sites like bankrate.com
  • Quotes from big banks, like Wells Fargo and Bank of America
  • Quotes from credit unions, like Stanford Federal Credit Union and Pentagon Federal
  • Brokers like Quicken Loans

First, the Big Disappointment with Pentagon Federal

Pentagon Federal has a current price (as of 1/2/2011) on a 5/5 ARM of 3.5%.  Yes.  Awesome.  I was ready to just refinance and be done.

I should have known that there was a flaw with PenFed.  Sure, they offer great rates.  Sure, they offer clean terms.  But it turns out that there is one ugly fee that they do charge, and I was about to get caught in it.

On top of regular closing costs, title search, etc, Pentagon Federal charges a 1% origination fee when you refinance an existing Pentagon Federal mortgage.  So, for example, on a $500K mortgage, this would be an extra $5K.  Up front.  Not interest.  Not deductible.

I argued with them about it.  I escalated.  I tried sweet talk.  Nothing worked.  They admit that this is an incentive for me to leave Pentagon Federal.  They admit that it is bad for the customer.  They are not interested in changing it.

Strike 1. No worries, it’s a big internet out there, isn’t it?

Don’t Bother With These

Just don’t even bother wasting time with Bank of America, Wells Fargo, or no-name shops on the Internet offering mortgages.  You put in a bunch of time and effort, fill out forms, submit applications, etc.  The end result is underwhelming.

Countrywide, I actually miss you.

It’s pretty clear that the big banks really aren’t feeling the need to push to get people with great credit scores to refinance with them.  Whatever was driving the banks to want to “take your business” from other banks is clearly pretty weak.  I was actually a bit surprised, since I tend to think of a mortgage as a way for a bank to take a “loss leader” approach to getting a valued customer.

The Easy Orange Mortgage and Bi-Weekly Payments

ING Direct is the oddball in the group.  Since they originate their own loans and do not syndicate them, they set their own terms.  They have rates based on a $500K size and $750K size, and a variety of terms.  Definitely worth checking out, because some of their mortgages are best in class.

For example, their under $500K 5/1 is at 2.99%, with reasonable closing costs.

I spent quite a bit of time in Excel working on the options offered by ING Direct and their Easy Orange mortgages.  They offer both regular and “bi-weekly” versions.  In fact, most banks now seem to offer bi-weekly options for their loans.

If you are unfamiliar with the concept, a bi-weekly mortgage involves making a payment of 1/2 of the normal monthly payment every 2 weeks.  Since you pay more frequently (effectively you pay an extra month’s payment every year), you end up paying off your mortgage faster and with less interest.

Unfortunately, this largely seems to be a gimmick.  Technically, you can send money in early to almost any legitimate bank, and they’ll apply the early payment to principal without penalty.  Mathematically, it’s very hard to see the benefit of these type of programs once you price in the amount of cash you’d accumulate outside of your mortgage if you just put that extra payment in the bank.  Even with 0% interest, in the first ten years, there is almost no measurable benefit to bi-weekly payments at current rates.  (By the way, here is a cool website that let’s you calculate bi-weekly options without building a spreadsheet.)

As a last note, I did discover that ING has a lot of terms that are left open that could turn ugly.  For example, their Easy Orange mortgages are designed as balloon mortgages.  So in 10 years, the rate doesn’t adjust – you literally owe the entire remainder of the loan.  This is fine, if you are allowed to refinance at the time.  But ING does not guarantee you will be able to.   So, this is a great loan if you plan on selling your house before the term is up, and a bad loan if you don’t want to be caught in a situation where you have to.

Close, But No Cigar

I was very impressed with the level of effort that Quicken Loans put into helping me, even though in the end, I didn’t use them.

At first, I was somewhere between annoyed and amused when I got a phone call the next day after submitting my application.  On Day 2 when they had called 3 times, I was ready to be annoyed.  I decided to call back and let them know I wasn’t interested, but when I got them on the phone, they impressed me with the breadth of their knowledge about different options, and I was convinced they could help.

So I told them – find me a 3.5% 5/1 mortgage out there with zero points, and I’ll go with them.  I pointed them to PenFed, but didn’t tell them about the 1% fee I would face.  They went to work.

The next day, they found a few options, and I got a call from the Director of their team.  She wanted to clarify a few things in terms of income and home value, to evaluate all options.  In any case, she seemed sincerely interested in the business, which is more than I can say about any of the traditional banks.

They got close.  They found a 5/1 mortgage with $6600 up front costs and a 3.875% rate.  They also found a 5/1 at 3.5% rate, but that required $11.3K up front.  While both of these mathematically were good options compared to the 5/5 I have, I was disappointed at the size of the up front cost.

Strike 2. What’s left?

Final Decision

Fortunately, while searching the internet, I came across some great discussion boards about Pentagon Federal.  Thinking that in a world of cheapskates, I could not be the only one complaining about refinancing with Pentagon Federal.  And I was right, in a way.

In the end, I discovered 2 things:

  • There really aren’t many other mortgage options that are better than Pentagon Federal for what I was looking for.
  • Pentagon Federal has a repricing program that is documented on their website, but that they never actually promote.

Here is the program.  If your mortgage conforms to these requirements:

  • Conventional Adjustable Rate Mortgage (ARM loans) are eligible. All other types
    of loans are not eligible.
  • Loan must be 100% owned by PenFed. The loan, or any portion of the loan, cannot have been sold, or committed to be sold to Fannie Mae, or any other public or private investor.
  • No late payments showing on first mortgage payment history over last 12 months.

If you meet the terms, they will reset your mortgage to the current rate for a fee of 1%.

Now, you may be wondering why I’d be excited about this.  After all, wasn’t the 1% fee the problem with refinancing with PenFed in the first place?

The answer is simple – a 1% fee on top of normal closing costs of $3000+ is prohibitive.  A 1% fee in lieu of closing costs is pretty attractive.  No points.  No title search or insurance.  No paperwork fees.  Nothing.  Just 1%, flat.

They reset your mortgage at the current rate, give you another five years before the next repricing, and they leave your mortgage term as is.  So, since our mortgage currently completes in 2038, it would keep that completion date.

The result: lower monthly payment, lower total costs of the mortgage, dropped interest rate.

Swing and a Hit. Not perfect, but definitely the best option.  So we went for it.  Only took a phone call – no application, no paperwork.

Final Thoughts

The average duration of a home mortgage in the US is between 7-8 years, which tends to mean that mortgage rates correlate strongly with the 7-Year Treasury rates.  In the past six weeks, the rates on US Treasuries have moved up quite a bit, likely in anticipation of an economic recovery, inflation, or both.

In any case, the decision to refinance is based on a huge number of factors, not the least of which is how long you plan to stay in your current home, and how secure you feel about your current job / income stream.

But if you’ve been thinking about refinancing, and you’ve just procrastinated, I’m hoping the info above will be useful.

Personal Finance: How to Rebalance Your Portfolio

One of the prudent financial housekeeping chores that people face every year is rebalancing their portfolio. Over the course of the year, some investments outperform, and others underperform.  As a result, the allocation that you so carefully planned at the beginning of the year has likely shifted.  If left unmanaged over the years, individuals can end up with profoundly more risk or worse performance than expected.

Rebalancing your portfolio annually tries to address this issue by forcing you to sell asset classes that outperformed in the previous year, and purchase those that underperformed.  In practice, I try to rebalance the week before New Years as a way of “cleaning up” going into the next year.  While most academic research points to rebalancing as healthy every one to three years, I find that annual rebalancing provides the following benefits:

  • Forces you to see how your investments performed for the year
  • Forces you to learn which asset classes actually did well during the year, and which didn’t
  • Forces you to re-assess the appropriate “asset mix” for your risk tolerance and financial situation
  • Forces you to revisit which investments you are using to represent each asset class (mutual funds, ETFs, individual securities, etc)
  • Forces you to actively engagement with your portfolio, and reset your balance to the appropriate mix

I’ve just completed my rebalancing for 2011, and I thought I’d share some of the process here, in case it’s useful to anyone whose New Year’s Resolution is to be more proactive about their finances.

Rebalancing is actually a very simple process – it’s kind of surprising that basic financial tools like Mint and Quicken don’t actually help you do this.  Whether you’ve never rebalanced or your rebalance every year, there are fundamentally five steps:

  1. Assess your current investment portfolio, broken down by types of assets
  2. Calculate the percentage of your portfolio in each asset class
  3. Calculate the difference in dollars for each asset class in your portfolio from your ideal mix
  4. Finalize the list of investments you will use to represent each asset class
  5. Make the trades necessary (buys and sells) to bring your portfolio into balance

This can all be done within an hour, with the exception of making the trades.  Those can spread over days, potentially, since certain types of securities (like mutual funds) take time to execute (typically 24 hours).

Step 1: Assess your current investment portfolio

Believe it or not, this can actually be the most time consuming part of the process, especially if you have accumulated accounts over the years and haven’t ever used any sort of tool like Quicken to pull your portfolio together accurately.

A few ground rules on how I think about portfolio allocation:

  • I’m a big believer in the research that shows that most of your long term investment return is based on asset mix, not security selection.  This means I do not spend time picking individual stocks, bonds, or dabble with active mutual funds in general.
  • I use very broad definitions of asset classes.  For example:  “US Stocks” vs. “International Stocks” vs. “Emerging Markets”.   These tend to correlate with the standard definitions used broadly to define popular investment indexes. Technically, with sophisticated software and data, you can do very fine-grained breakdowns.  I don’t bother with this, as the resulting differences are statistically marginal vs. the effort / complexity involved.

Fear not, because with tools like Microsoft Excel or Google Docs, this has become much, much easier.  All you need to do is:

  • Make a spreadsheet with the following columns:  Security Name, Ticker, Shares, Share Price, Total Value, % of Total Portfolio
  • Fill in a row for everything you own, regardless of account

The second part is very important, if you want to avoid the “mental accounting” that leads people to invest differently in one account versus another.  If you’ve worked at multiple companies, you may have multiple 401k, IRA, college savings accounts, and brokerage accounts in your name.   Obviously, reducing the number of accounts you have is helpful, but sometimes its unavoidable.  Maybe you have a Roth IRA, a regular IRA, and a 401(k) with your current employer.

This becomes important because certain accounts may have limited access to different types of investments.  For example, your Vanguard IRA might only let you buy Vanguard funds (not such a bad thing), while your 401(k) at work might limit you to some pretty meager options.  When we get to Step 5, we can take advantage of multiple accounts to get the right balance by buying the best investments in the accounts with the best access to them.

Here is an example screenshot of a simplified list of investments that I bet wouldn’t be that unusual in Silicon Valley.  This person has some Vanguard index funds that they purchased prudently the last time they looked at their portfolio, combined with some stocks they purchased based on TechCrunch articles.  (I wish I were kidding).

You can see immediately that this small amount of accounting can actually help organize your thinking about what you own, and force you to remember why you own it.

Notice, I do not recommend putting in columns showing how well an investment performed historically.  For rebalancing, you only care about the here and now.  The past is just that – the past.  Performance data will likely just add emotion to a decision that, when made best, should be purely analytical.

Step 2: Calculate the percentage of your portfolio in each asset class

The hardest part about this step is defining what you are going to use as “an asset class”.   There is no one right answer here – I’ve seen financial planners break down assets into literally dozens of classes.  I’ve also seen recommendations that literally only use two (stocks vs. bonds).

The great thing about asset classes is that you can always break down an existing bucket into sub-buckets.

For example, if you decide to have 30% of your money in bonds, and 70% in stocks, you can then easily make a 2nd level decision to split your stock money into 50% US and 50% international.  You can then make a third level decision to split the international money 2/3 for developed markets, and 1/3 for emerging markets.  In fact, for some people, this is a much easier way to make these decisions.  Do whatever works for you, but be consistent about it.

Personally, I’ve gotten quite a bit of mileage using the following break downs:

  • Stocks
    — US Stocks
    — Large Cap
    — Mid Cap
    — Small Cap
    — International Stocks
    — Developed Markets
    — Emerging Markets
  • Fixed Income
    — Standard
    — Inflation Protected
  • Real Assets
    — Commodities
    — Real Estate

You can see in the screenshot above, calculating these buckets is fairly simple.  You just total up each group, and then divide it into the portfolio total.  So in the example I provided, the individual has 11.5% of their money in fixed income.

As the size of your assets increase, more sophisticated breakdowns are likely warranted.  But for the purposes of this blog post, I think you get the idea.

With mutual funds, this can be tricky.  For example, did you know that the Vanguard Total Market fund is 70% Large Cap, 21% Mid Cap, and 9% Small Cap?  (I got this data off etfdb.com).  In order to solve this problem, I actually create a separate column for each asset class.  I then put the percentage for each fund in each column, totaling to 100%.  I then multiply those percentages by the amount invested in each fund, giving me an actual dollar amount per asset class.

Step 3: Calculate the difference in dollars for each asset class in your portfolio from your ideal mix

This is the step where your self-assessment turns toward action.  How far are you off plan.

The hardest problem here is the implied problem: what is your ideal mix?

There are quite a few rules of thumb out there, and more than enough magazines and books out there to tell you what this should be.  Unfortunately, all of them are over-simplified, and none of them likely apply exactly to you.  At minimum, it’s a whole separate blog post to come up with this.  Fortunately, if you pick up the 2011 planning issue from Smart Money, Kiplinger’s, or Money magazine, you’ll probably end up OK.

But let’s say our individual in question is a 30-year old engineer who believes in the rule of thumb that they should take 120 minus their age, put that in stocks and the remainder in bonds.  Let’s say also that they’ve read that their stock investments should be split 50/50 between the US & International, with at least 10% of their overall portfolio in Emerging Markets.

That would leave our hypothetical engineer with the following breakdown:

  • 90% in Stocks
    — 45% US Stocks
    — 35% Developed Markets
    — 10% Emerging Markets
  • 10% in Bonds

Based on the numbers from the first screenshot, they would create an spreadsheet table like this:

This shows that our hypothetical engineer needs to rebalance by selling US Stocks, Emerging Markets, and Bonds.  The extra money will be re-allocated to international stocks in developed markets.

Step 4: Finalize the list of investments you will use to represent each asset class

Most people skip this step, but that’s a real missed opportunity.   Once you decide how much money to allocate to a given asset class, it’s worth a bit of thought about what is the best way to capture the returns of that asset class.  For example, is owning Google, Apple & Goldman Sachs the best way to capture the returns of US Stocks?  I’m not a professional financial planner, so you shouldn’t take my advice here.  But my guess is that you’ll be hard pressed to find a professional who believes that those three stocks represent a balanced portfolio.

We live in an unprecedented time.   Individuals with a few hundred dollars to invest can go to a company like E*Trade, open an account, and for $9.99 buy shares in an ETF that represents all publicly traded stocks in the US, for an annual expense of 7 basis points.  That’s 0.07%, or just $7 for every $10,000 invested.  That is an unbelievable financial triumph.  Previously, only multi-millionaires had access to that type of investment, and they paid a lot more for the privilege than 7 basis points.

Personally, I’m heavily biased towards using these low cost, index based ETF shares to represent most asset classes.  In fact, E*Trade let’s you mark any ETF for “free dividend reinvestment” under their DRIP functionality.  As a result, you get all the benefits of mutual funds with lower annual costs!  It takes some research to find the best ETFs, and in some cases, standard no-load mutual funds are a better option.  (Once again, I’m not a professional, so do your own research on what secrurities make sense for you.)

The biggest exception to this is with 401(k) plans, where you have limited choices on what types of investments you can make.  In these cases, I evaluate all of the funds in the 401(k), find those that are “best in class”, and purposely “unbalance” the 401(k) to invest in those.  I then make up for that lack of balance with my investments outside the 401(k).  For example, let’s say your current 401(k) has excellent international funds, but poor US funds.   you can skew your 401(k) to international funds, and make your US investments outside of the 401(k) where there are better options.

For our hypothetical engineer, let’s say that he’s decided to stick with Series I Savings Bonds for his fixed income, and uses the Vanguard ETFs to represent the different stock classes.

Step 5: Make the trades necessary (buys and sells) to bring your portfolio into balance

It seems like this part should be simple, but it can be surprising how many complications arise.  For example:

  • Sometimes the model says to sell $112 of something.  The trading costs alone make that likely prohibitive and unlikely to be worthwhile.
  • Share prices change every day, and your model leaves you short a few dollars here and there.
  • The model doesn’t take into account commissions for trading
  • Some funds have fees
  • Some transactions have tax consequences
  • Some investments can only be purchased in one account, not another
  • Some investments cannot be bought in a given account (like a 401k)

As a result, there is no advice that will apply to everyone.  Taxes alone make this the time when you may have to consult a professional.

In our hypothetical case, our engineer would:

  • Sell their stakes in Apple, Google, Goldman Sachs, and Teva
  • Decide to leave their Series I Bonds alone – not worth the trouble.  Take the extra money out of the developed markets stake.
  • Purchase / Sell shares in the Total Market, Ex-US, and Emerging Market ETFs to meet their new allocation goals

The following table shows how to use a spreadsheet to calculate the different trades (buys in Green, sales in Red):

Last Thoughts

I’ve been doing some version of the process above for at least fifteen years at this point, and it’s never failed to help me with my financial planning.  Of all the benefits described, annual rebalancing gives me the confidence to withstand the day-to-day gyrations of the markets, with the confidence that at the end of the year, I’ll get a shot to rebalance things.

There are a few “temptations” that I’ve noticed could lead someone astray:

  • Changing the “ideal asset mix” year-to-year based not on financial research, but based on what’s “hot” at the moment.  For example, if you find yourself saying that Gold should be 10% of your portfolio one year, and then the next year it’s “Farmland”, you’ve got some popular investing psychology drifting into your process.
  • You pick arbitrary “hot stocks” to represent asset classes.  This can lead to a double-whammy, you not only pick a bad stock, but you also miss out on key gains in your selected asset class.
  • Splitting hairs.  Don’t stress about small dollar amounts, or potentially, asset classes when your portfolio is small.  I remember investing the first $2500 I ever made from a summer job, and I got a little carried away with the breakdown.  In general, you can get pretty far with just the “Total Stock Market” and “Total Bond Market”.

This was a really long blog post, but hopefully it will prove useful to those who are interesting in balancing their portfolios, or just curious on how other people do it.  In either case, please comment or email if you find mistakes, or have additional questions.   Happy to turn the comment section here into a useful discussion.

The Incentives for Inflation Going Forward

In my last blog post, Lessons from the Masters of Deflation, I alluded to an upcoming article on why I expect heavy pressure towards inflation in the United States in the coming years.  I don’t think I’m at all unique in this projection – there are currently a huge number of economics and financial analysts that expect significant inflation in the coming years in the United States.  The rationale is almost universally the unprecedented expansion of the money supply by the Federal Reserve.  With over $2 Trillion on the balance sheet, and the acquisition of debt of questionable value, it’s easy to look at the incredible growth in M2 (a measure of money supply) and project out inflation once the economy recovers.

My rationale for significant inflation in the future is not actually based on these facts, although I don’t dispute them per say.  The rapid deleveraging of our economy argues for short term deflation.  The massive and hastily executed fiscal stimulus and monetary expansion argues for long term inflation.

I’m going to argue instead that you should just follow the incentives.  It is fairly obvious that a vast majority of Americans will benefit in the short term from a significant devaluation of the dollar.  If you believe that this country’s politics (and economics) tend to follow the majority opinion, then it seems like just a matter of time before we talk ourselves into policies that lead to inflation.

For the sake of argument, let’s assume that we could conjure up an instant 25% devaluation of the dollar. In this world, everything that costs $1 now will cost $1.25 tomorrow. Let’s look at some of the large groups of Americans that will benefit from this type of massive devaluation:

  • Homeowners.  A dominant majority of American households are homeowners, and almost all of them carry weighty mortgages.  More importantly, by some counts, almost 20% of those mortgages are underwater.  Inflation to the rescue!  In this world, every $400,000 house is now worth $500,000.  But of course, the mortgages themselves don’t grow, since they were written in the past.  Debtors love inflation, because they get to pay off old debts.
  • Federal Government. This is a two-fer.  First, most of our taxes aren’t indexed to inflation.  Want to keep that promise to tax only people making over $250K?  Devalue the dollar, and now more people will cross that threshold.  Capital Gains taxes?  Booyah, those aren’t indexed to inflation.  Now everyone whose stock just keeps pace with the devalution will owe taxes to boot!  Besides increasing revenue, the devaluation makes it easy to pay off bond holders of those trillions of dollars of debt, since they are all denominated in dollars.  With benefits like these, why stop at a 25% devaluation?  Let’s go for 100%!
  • Consumers in Debt. The average American has thousands of dollars in debt.  Assuming that wage inflation approximates price inflation, consumers can benefit from seeing increased nominal wages, and then paying off debts that were made before the devaluation.

Sense a common theme here?  Debtors.  The United States is a nation of debtors.  Individual households are in debt.  State governments are in debt.  Homeowners are in debt.  The Federal Government is in debt.  Debtors, in the short term, love devaluation because it means they get to pay off old borrowing with inflated currency.  On average, we are in debt, which means, on average, we’re incented to devalue the dollar.

In fact, you could argue that Japan, a nation of savers, has been stuck in a deflationary spiral precisely because, as a nation of savers, they benefit on average from seeing their saved Yen go farther at the market.  Of course, the younger Japanese don’t see those benefits, but thanks to aging demographics, they are outnumbered by older generations who saved massive amounts of wealth.

Yes, I know I am grotesquely oversimplifying the ramifications for all parties involved once an inflationary spiral takes hold.  And believe, me, I do not believe that this is a good outcome for the country (or the world economy).

Of course, I am a saver, so I would be biased against inflation…

Lessons from the Masters of Deflation

You can’t open a decent newspaper these days without coming across an article warning of impending deflation.  (Yes, I know.  How many people still open a decent newspaper?) Deflation, the Bizarro twin of inflation, has been a major concern for the United States since the financial crisis unfolded in 2008, and fears of a Japan-style lost decade emerged.

We’re now two years into the unfolding drama, and fear of deflation has resurged in the past few months as the sovereign debt crisis in Europe has led to a spike in the value in the dollar, a potential for weakening global demand, and the threat of a double-dip recession.  While I personally don’t believe we’ll see an extended period of deflation given the current monetary & fiscal incentives in our country (a blog post on this topic is coming), I do think a few years of borderline deflation may still occur.

From today’s Wall Street Journal:

The old bogeyman of deflation has re-emerged as a worry for the U.S. economy. Here’s something else to fret about: After studying more than a decade of deflation in Japan, economists have slowly realized they have no idea how it works.

Every time you see a piece on deflation, you find references to Japan.  This is not unexpected – Japan is the second-largest economy in the world, and it wasn’t too long ago that many highly educated people thought that it would usurp the US role as the dominant western economy.  This is really the only large-scale modern example of deflation – to find another you have to revisit the 1930s, and too many elements of our system have changed for those analogies to be completely helpful.  In fact, I see some pieces stretch back into the 1890s at times.

Unfortunately, Japan has been a wreck of an example.  They pursued massive borrowing and Keynesian stimulus, running their national debt to over 200% of GDP.  In fact, the most notable thing that they’ve achieved is setting incredible new records for the potential debt a country can take on without completely imploding.  This is similar in some ways to new records being set for over-eating.  Impressive, scary, and not something that inspires you to try it yourself.

However, if you want to understand deflation, and more importantly how to handle deflation, you need to turn to the true masters of deflation.  That’s right, living in our midst, there are huge multi-billion dollar economies that have not only survived a deflationary environment for forty years, they’ve thrived in it.

I’m talking, of course, about the children of Moore’s Law: our high tech industry.  Moore’s Law (circa 1975), loosely put, predicts that the number of circuits that you’ll be able to put in a semiconductor for a fixed cost will double every two years.  This is the equivalent of saying that the price of a circuit will drop by 50% every two years.

That’s deflation of 22.47% per year.  Put that in your pipe and smoke it.

But the industry has thrived, and looking at the financial structure of high tech companies, you can learn a lot about the topsy-turvy logic of deflation and how individuals can cope.

  • Debt is Bad. For decades, high tech companies have resisted the traditional financial wisdom of adding leverage to their balance sheets.  Why?  Theoretically, leverage is one of the key ingredients in Return on Equity, a primary measure of financial performance.  The answer is, when it comes to deflation, debt can kill you.In an inflationary environment, being a lender is tough.  There is a risk that inflation will eat of the gains (or more) of the interest you are charging.  If I loan you $10,000 at 5%, and inflation jumps to 8%, I’m losing 3% on the deal.   $300/year lost purchasing power is tough, but imagine that being $3B on a $100B loan portfolio.  This is because as a lender, my return is the interest rate I charge MINUS the inflation.In a deflationary environment, roles are reversed.  As a lender, I’ll lend you money at 0%!  After all, if deflation increases the value of a dollar by 3%, then I effectively make 3% on a 0% loan.  My return as a lender is the interest rate PLUS the deflation.  But the borrower has the other end of the deal.  Not only do they have to pay the interest, but they have to pay it with higher value dollars in the future.  Ouch.

    Moral of the story: In a deflationary environment, you do not want to owe debt. This is why deflationary environments lead to massive deleveraging.   You do not want to be caught holding a check denominated in low value today dollars, and forced to pay it back with higher value tomorrow dollars.
  • Don’t Buy Today What You Can Buy Tomorrow. This is something that any avid purchaser of computer equipment knows.  You pay a lot for the privilege of buying computing power today.  I guarantee you, it will be cheaper 6 months from now.  Want a 2TB hard drive?  Just wait a few months for significant discounts.  Want that Mac Mini?  It will be cheaper (or faster) in a year.  Same item, same condition, same quality – lower value in the future.  That is what deflation looks like.In a deflationary environment, on average items will cost less in dollars in the future than they do today.  So if you don’t need it now, you should wait.  In fact, you are paid to wait.  Literally.  High tech companies know this – they don’t source components until they absolutely need them to put in boxes.  High tech consumers know this.  Want to buy a 42″ LCD TV?  Wait a year, I promise you that exact same model, brand new in the box, will be a lot cheaper.This may not seem weird to you, but think about it for a second.   It’s not normal.  In order to keep the box the same price, most consumer products companies literally shrunk what they are offering you, or raise the price.   In high tech, they regularly have to double what they give you every two years, just to keep the price the same!  This is also why high tech companies are desperate to unload inventory as soon as possible… within days.  When I was at Apple, we moved our days of inventory on the books from eight week to just under two days!  Dell at the time was at six days.  Just six days of inventory!  That’s how you handle deflation.

    Moral of the story:  If you don’t absolutely need it now, wait. In inflationary environments, we buy now to avoid paying a higher price in the future.  In deflationary environments, the later you buy, the cheaper it is.  So don’t buy it unless you need to use it, immediately.

  • Success Depends on Increasing Value through Innovation. We take this for granted now in the high tech industry, but let’s face it:  high tech is unique.  If the internal combustion engine followed Moore’s law, we wouldn’t be worried about oil usage right now because we’d all be getting over 1M miles to the gallon.What people don’t realize about Moore’s Law is that it isn’t some government regulation.  There is no one handing out 2x performance every two years that high tech companies can just cash in periodically.  Literally hundreds of thousands of brilliant people, across a range of disciplines, degree programs, and commercial ventures are constantly ahead of the curve, inventing the technologies that will deliver that incredible curve.It’s a trap, in a way.  The innovation that makes the deflationary environment a fact is also the path to surviving it.  If you miss the next step on the curve, you’ll find that your products quickly are only worth half as much, and your more innovative competitor will still be collecting full price.

    This is tough to handle at an individual level.  In an inflationary environment, everyone gets some form of raise to “adjust for inflation”.  In a deflationary environment, everyone should get a pay cut to “adjust for deflation”.  However, since employees, managers, unions and even governments hate to see this happen, you tend to see layoffs instead.   It’s a vicious productivity war.  If you want earn the same paycheck next year, and deflation is running at 3%, you have to be 3% more productive to make that math work for the business.   At the company level, you need to see companies that can deliver productivity gains every year at a rate above deflation, just to tread water.

    Moral of the story:  There is no coasting in a deflationary environment, no rising tide that lifts all boats. Inflation may be an illusion of more money, but it’s an illusion that people emotionally depend on.  Deflation forces people to come to terms with a basic economic fact – if you aren’t able to make more with the same cost next year, you’ll likely be worth less next year.

I’ve obviously oversimplified a fairly complicated macroeconomic situation in the comments above.  However, I’m hoping that the insights provided will be helpful to those of you who have trouble visualizing what deflation might look like, in practice.  If there is interest, I may put together another post on what types of investments perform best in a deflationary environment.

Accredited Investors: Fixing the Dumb Money Problem

We’re now days away from the potential passage of significant financial reform, and a particular issue in the bill caught my eye.  This excerpt is from Businessweek:

Currently, a person must have a net worth of $1 million or an annual income of $200,000 if single or $300,000 if married (and filing jointly) to be an accredited investor. The senator’s proposed bill doesn’t say what inflation adjustment will be used to convert these numbers, established in 1982, to today’s dollars. But if we use the Bureau of Labor Statistics inflation calculator to adjust these figures on the basis of the consumer price index, then the annual income requirements for accredited investor status would become $449,000 if the investor were single and $674,000 if the investor were married, while the net worth requirement would become $2.25 million.

This is exceptionally bad news, if it passes, on multiple fronts.  To explain why, let’s review some of the basics.

What is an accredited investor?

Investing in public securities, like stocks and bonds, is heavily regulated.  There is a long standing legal concept, dating back to the 1930s, that individual investors need to be protected from nefarious money raising capitalists.  However, a special exception was carved out for the rich, under the auspice that sufficiently wealthy investors have enough education and resources to protect their own interests.  Thus, for private companies that wish to raise capital from private investors outside these large regulated facilities, there is a concept of an “accredited investor”.

Accredited investor qualifications have changed over the years.  Currently, there are two ways to qualify as an individual:

  • You are single and make $200K/year, or you are married and make $300K/year as a household
  • You have over $1M in liquid assets

When do you need to be an accredited investor?

You need to be an accredited investor to invest money in angel investments, hedge funds, certain private partnerships, and other high risk / unregulated investments.  For example, if Mark Zuckerberg came to you in 2005 and offered to let you put $25,000 into thefacebook.com, you’d need to be an accredited investor to do so.   (BTW If you can go back in time and do this, I highly recommend it).

Who is this going to hurt?

This is really going to hurt two groups – entrepreneurs and individual investors.

Entrepreneurs are going to be hurt by the severe limitation of who they can potentially raise money from at the angel stage.  As the Business week article points out:

Updating Reynolds’ estimate of the share of the adult population who are accredited investors to the 2008 adult population as reported in the Statistical Abstract of the United States, there were 5 million to 7.2 million American adults who were accredited investors in 2008…

Adjusting the income and net worth requirements for accredited investing to those proposed in the Dodd bill would reduce the number of accredited informal investors to 121,000 to 174,000 people.

So if this passes, we are talking about a massive decline in the number of potential angel investors in a new business.  Potentially a 98% decline, if the numbers above are accurate.  Outside of web 2.0 companies in Silicon Valley, raising angel funding is not trivial as it is.  Reducing the pool of investors here is massively disadvantageous to most entrepreneurs.

Individuals are also hurt here – that same 98%.  These are people who make a lot of money – $200K/year individually or $300K/year if married.  Imagine yourself as the founder of a cool web company, which sells to Google for $10M.  Your cut is about $1M after taxes.  Your friend is starting a new company, and you want to make a $50K investment.  You can’t because… the government says you aren’t rich enough?  Really? (I guess you are rich enough for a top tax bracket, just not rich enough to make investment decisions.)

Why do they think this is a good idea?

The amounts to qualify as an accredited investor haven’t been changed in a very long time.  Originally, these amounts were incredibly large, but they were never indexed for inflation.  I don’t think anyone ever envisioned millions of Americans qualifying.

Given the recent scandals around hedge funds and related ponzi schemes, these changes are an attempt to “protect” the public from people who would trick them into investing into shady schemes and poor investments.  The assumption is the same as the original one in 1933 – that in order to be sophisticated about investments, you need to be rich.

Alternatively, you could argue that we just don’t care that much if “rich” people lose their money, but that normal people, even those earning $300K/year, need to be protected from charlatans and rogues who would trick them into unregulated investments.

A better solution: make accredited status earned by knowledge, not income or assets.

We are learning the wrong lessons from the recent financial crisis and scandals.  If anything, recent events have demonstrated that dumb money is bad in large amounts, whether it is aggregated from a bunch of small investors, or funded by large rich investors.

We know from clear evidence that lottery winners, professional athletes, movie stars, and other wealthy people can still be incredibly financially ignorant.  Just because a retiree has accumulated $2M over a lifetime does not mean that they have significant financial education, or that they understand how to evaluate a hedge fund for legitimacy.  We also know that there is significant danger in this money being lost, stolen, or even worse, leveraged and invested in ways that can exacerbate bubbles.

My thesis is as follows:

  • Just because someone has a high income and/or significant wealth, does not mean that they have significant financial education, or will appoint/hire people who have significant financial education.
  • Depriving entrepreneurs and individuals from the opportunity to fund new businesses is completely unfair, and likely counter-productive to goals of encouraging new business formation and entrepreneurship.

My proposal would be as follows:

  • We introduce a new form of license / test that gives you “accredited investor” status for a fixed number of years (3-5 years).
  • We do increase the accredited investor limits – in fact, we eliminate them over time.

Look, we force people to repeatedly take a test to prove that it’s safe for them to drive.  It’s not a big stretch to insist that people who believe they are capable of making unregulated investments have the proper education.

The advantages of this program are clear:

  • Meritocracy.  This allows for anyone with the will to research and learn the ability to become an accredited investor.
  • Education.  This allows the government to ensure that all accredited investors, regardless of wealth, are aware of relevant financial and legal issues around investments.  This would help prevent charlatans from taking advantage of people.  For example, the test could ensure people are aware of their rights, of recent financial returns, of warnings signs, and of recourse for reporting fraud.
  • Self-funding. The government could charge a fee to take this test to help fund the license and potential even some enforcement resources.  It could also charge a licensing fee for institutions that want to offer classes around the license.
  • Centralized verification.  This would ensure that every accredited investor is easily verifiable.

As always, very interested in thoughts and feedback from those familiar with the issue.

Update: Good news.  It looks like some amendments have made it through on the Senate bill that restore much of the status quo.  That means the primary damage will be avoided.  Maybe now there is an opportunity over the next four years to take a different approach to qualifying accredited investors.

Café World Economics: Spiceonomics

I really didn’t think I was going to write another blog post about the economics of Café World.  However, the rollout of the spice rack was just begging for some financial analysis, and so here we are.

gameBig_cafeworld

Since I’ve written three previous articles on the topic:

The Economics of the Spice Rack

The “Spice Rack” is a concept I have advocated previously for Farmville.   A mechanism to purchase items that would accelerate / change the equations for existing actions.  (My original request was for increased levels in Farmville to actually accelerate the length of time it would take you to harvest any crop, like a 10% cut in time, etc.)

Café World has rolled out 7 spices:

  • Mystery Spice – Random improvement (reduce time by 1,2,5 min, +5 or +20 CP, +5% or +10% servings)
  • Super Salt - Increase the number of servings by 5%
  • Power Pepper – Increase the number of servings by 10%
  • One hour Thyme – Speed a dish by one hour
  • Six Hour Thyme – Speed a dish by six hours
  • Instant Thyme – Make a dish ready immediately
  • Salvage Sage – Rescue a spoiled dish

For this analysis, I’ve started with the simplest spices: Super Salt and Power Pepper.

For each dish, I calculated the increase (or decrease) in profit for buying the spice and applying it to one dish for the cycle.  I assume that Café World rounds down when you apply the 5% or 10% increase in number of servings. I express the number as an “Return on Investment” percentage (ROI) on the cost of the spice.

So, for example, if spending 600 coins on Power Pepper yield an extra 150 coins of profit after subtracting the cost of the pepper, I describe that as a “25% ROI” for Pepper for that dish.

Results of Spiceonomics

There are a few very interesting takeaways from the table below:

  • Spices are rarely worth it. Salt & Pepper have negative ROIs for almost all dishes.  In fact, in the history of the game, only 9 dishes are profitable when using the spices.  Interestingly, Grand Tandoori Chicken is net neutral (ROI = 0%).
  • Spices help more advanced players. Almost all the dishes with positive ROI are at the higher levels.
  • Spices help infrequent players more. The way the numbers work out, all the dishes where spices help are longer cooking time dishes.  This is good for players that might only play the game once a day (say, in the evening).

The Spiceonomics Table

Here is the summary table.  As usual, you can find all the supporting data in my Café World Economics spreadsheet on Google Docs.

Dish Salt ROI Pepper ROI
Chinese Candy Box 200.00% 200.00%
Impossible Quiche 153.33% 153.33%
Gingerbread House 124.00% 133.33%
Chicken Pot Pie 84.00% 85.00%
Giant Dino Egg 80.00% 80.00%
V.I.P. Dinner 32.00% 48.50%
Martian Brain Bake 30.00% 30.00%
Ginger Plum Pork Chops 30.00% 30.00%
King Crab Bisque 9.67% 10.83%
Grand Tandoori Chicken 0.00% 0.00%
Steak Dinner -4.00% -2.50%
Homestyle Pot Roast -5.00% -4.17%
Seafood Paella -6.67% -6.67%
Mystical Pizza -8.33% -8.33%
Veggie Lasagne -10.00% -10.00%
Chicken Adobo -18.33% -18.33%
Delicious Chocolate Cake -21.67% -20.83%
Herbed Halibut -25.00% -25.00%
Overstuffed Peppers -28.33% -28.33%
Loco Moco -30.67% -30.00%
Savory Stuffed Turkey -40.00% -40.00%
Crackling Peking Duck -40.00% -40.00%
Lavish Lamb Curry -45.33% -45.33%
Spitfire Roasted Chicken -46.67% -46.67%
Dino Drumstick -50.00% -50.00%
Lemon Butter Lobster -55.00% -55.00%
Voodoo Chicken Salad -56.67% -55.83%
Rackasaurus Ribs -57.33% -56.67%
Stardust Stew -58.00% -58.00%
Bacon and Eggs -58.00% -58.00%
Smoked Salmon Latkes -60.00% -60.00%
Tostada de Carne Asada -60.00% -60.00%
Valentine Cake -60.00% -60.00%
Sweet Seasonal Ham -60.00% -60.00%
Shu Mai Dumplings -61.33% -61.33%
Corned Beef -63.33% -62.50%
Fish n Chips -67.00% -67.00%
White Raddish Cake -68.00% -67.00%
Vampire Staked Steak -68.00% -67.00%
Triple Berry Cheesecake -73.00% -72.50%
Kung Pao Stir Fry -73.33% -73.33%
Tony’s Classic Pizza -78.33% -78.33%
Spaghetti and Meatballs -78.33% -77.50%
Fiery Fish Tacos -80.00% -80.00%
Eggs Benedict -82.00% -81.00%
Pumpkin Pie -82.67% -82.67%
Atomic Buffalo Wings -84.00% -84.00%
Crème Fraiche Caviar -89.33% -89.33%
French Onion Soup -90.00% -90.00%
Belgian Waffles -90.67% -90.00%
Macaroni and Cheese -92.00% -91.50%
Buttermilk Pancakes -93.33% -93.33%
Tikka Masala Kabobs -94.67% -94.00%
Caramel Apples -95.00% -95.00%
Hotdog and Garlic Fries -98.00% -98.00%
Powdered French Toast -98.00% -97.00%
Jammin’ Jelly Donuts -98.00% -98.00%
Super Chunk Fruit Salad -98.33% -98.33%
Chicken Gyro and Fries -98.67% -98.67%
Jumbo Shrimp Cocktail -98.67% -98.00%
Bacon Cheeseburger -100.00% -99.33%
Chips and Guacamole -100.00% -99.50%

Updated Tables for Profits, Café Points, and Real Hourly Wages

Have trouble figuring out whether Mystical Pizza is a good dish?  Deciding on whether to make the Dino Egg or Rackasaurus Ribs?  My Google Doc is now updated with tables for all 62 Cafe World dishes for data, and color coded based the cooking time of each dish, to help make picking the right dish easy.  Rather than cut & paste everything here, I’m going to just link to the doc.

Click here to view the Google Doc

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