Conventional Wisdom Will Be Wrong
As I read through all of these third quarter letters from various fund and asset managers I am getting, I keep reading the same things. It’s time to cut exposures, leave equities for now, expect 2009 earnings estimates to get cut a lot more, you can’t buy this market right now, etc, etc. It’s amazing to see how everyone is saying the same thing. I even see it in the the comments to my posts on this topic to my post on this topic yesterday.
It’s the same thing with VCs and entrepreneurs giving advice (me included). We are all saying the same things. And we are doing that because of the lessons we’ve learned in prior downturns. Nothing wrong with that.
But I am reminding myself this morning that conventional wisdom will be wrong. It will not play out exactly the way the best fund managers, VCs, and entrepreneurs think it will. I like what Max Levchin said at the venturebeat downturn event:
Don’t listen to anybody. Nobody knows what’s going to happen next … Better to be contrarian in times like these than not.
I’d alter that a bit. Listen to everyone. Read everything you can. And then come to your own conclusions. It is better to be contrarian in times like these. But do it wisely and don’t bet the farm.
I think that people are planning to fight the last war. The best opportunities exist when people panic.
I said that in my post late last night….STOP BEING BEARISH – that call was already missed.
Shit. As usual I should have read howardlindzon.com before posting this morning
Great point. I have been thinking and writing about this myself in the past days. We all want someone to tell us what will happen next. What we have all learned, the hard way, in the past weeks is that the people we have been listening to may have more opinions and knowledge on the topic to draw from, but they still did not get it right.Void of that compass everyone feels lost and hesitant. What do you do when you cannot follow any direction?I think you nailed it, listen to everyone and everything you can (Without it overwhelming yourself so you feel even more lost) and then listen to what feels right to you. You know your business. You know your customers. You set the tone and the direction.As I wrote in my book, focus on the basics and hitting “singles and doubles.”
I like singles and doubles too. That’s how I’ve built my track record in vc over the past 20 yrs. A few have gone over the wall but I was not swinging for the fences, they just came off the bat really well
I like that metaphor: the Ichiro Suzuki of VC’s.
I like your version better than Max’s. Encumbering oneself with the facts is always better than the alternative, and on any topic there is always someone smart that is spending more time thinking through possible futures than you. Still, in the end, as it relates to the future, no one truly knows anything. We tell our companies to focus on those things they can influence or control, and not to get lost hyper-focused on those things they can’t.
Great advice jim
You guys should all go an read The Black Swan by Nassim Nicholas Taleb, to find out why Max is right and Fred is wrong.
I read the Black Swan earlier this year
Good point, but I think it works differently for different people…specifically, some people have an issue blocking out the noise. Those are the types that should NOT listen to as many opinions as possible. More specifically, I lean toward being the contrarian type. Regarding all the articles penned by VC’s and entrepreneurs recently about the startup depression – and how they should get profitable as soon as possible… I disagree, smart VC’s/Startups will use this economic slowdown to gain users and market share while cost of acquisition will be less (bargains can be had!), and their competition is hurting.www.twitter.com/A_F
The most important point is that the consensus is probably wrong: how we choose to process the consensus (i.e. listen to everything, listen to nothing, listen to everyone outside your echochamber) is an individual decision.Personally I’ll listen to lots of noise to find the signals because that’s what I’m comfortable with, but as Andy points out it just depends on the person.
Seesmic video reply from Disqus.
Seesmic video reply from Disqus.
Commenting while stoned is dangerous. Next time, hold your tongue.
But that is good advice in both good times and bad: take a balanced approach, and understand your goals and ensure you protect the things most important to you. It seems that the increase in media has exponentially increased the amount of the same advice you are hearing!Have a great day.
Absolutely spot on Fred. In fact I would call your advice – not conventional, not contrarian, but fundamental. Yes everyone can read everything and they can listen to everyone to understand the external world.In the end if we have the strength to shut the noise out and listen to the voice within ourselves – the wisdom that is naturally there will provide the fundamental difference between panic and calm, between failure and success.
Great points.The only problem with being contrarian is how painfully early most contrarians are.Bottom line: Make a decision that you will OWN.
And don’t bet the farm now, scale into it as the bet starts working
I’m betting the farm, but trying to do it wisely.
Fred, I think what you’re generally saying is on target, but I would be careful about broad statements like “it’s better to be contrarian in times like these,” even with the caveat of doing it wisely. Historically speaking, now is the time that people do one of two things: they either jump in to take advantage of the ample value plays (i.e., cheap valuations), or they will take the attitude of contrarian and go against everything. It was the latter group who missed out on great tech opportunities in the 2000’s after the bubble burst and rebuilding began. The first group are the Warren Buffet wannabe’s. But it all depends on what you’re investment strategy is … for someone looking to rebuild the losses in their retirement capital, they need to think about following the value opportunities. Being contrarian is fine if 1) you understand your investment strategy; and, 2) you have the ability to take advantage of structured short-term asset vehicles. Playing contrarian with equities and without proper hedges will kill you everytime.
“Listen to everyone. Read everything you can. And then come to your own conclusions. It is better to be contrarian in times like these. But do it wisely and don’t bet the farm.” — Great quote. And great advice. Agree.
I’ll go way out on a limb and make a prediction about why most predictions will be wrong.Investing in the last fifteen years has been heavily influenced by asset inflation due to leverage. Yes, a lot of genuine value has been created in high tech, but it has been topped off by a thick layer of speculation. The extra margin from this ponzi-style scheming has turned marginal failure into a marginal success for a host of startups and venture firms. For great companies, it turned huge success into an overwhelming spectacle of success.I’m guessing that this speculative element will be largely missing for the next decade or so. Companies will be judged much more by the net present value of their future stream of payments. In other words, investing will look a lot more like investing.Instincts formed over the past two decades will turn out to be misleading. Investors who’ve been around for a while will unconsciously expect the froth to start bubbling again. For example, this concept of hunkering down and “waiting it out” presumes that the future will look like the past.Remember “irrational exuberance”? Greenspan uttered that phrase during the first Clinton administration, when the Nasdaq was about 1300. We went so far beyond irrational that it started to seem rational. The generation that grew up during this time will have to recalibrate if it wants to stay relevant.
This is by far the most insightful comment I have read. What is going to be washed out, over a prolonged period, is the very speculative, gambler gene that was so successful in the past 15 years. *That* is the real downturn.
I must that after watching John Doerr’s video and then reading this, I find yours to be the more insightful advice.The turnaround will not be lead by fear. It will be led by a little bit of greed and a lot of hope. Those companies that seek to do something different than the conventional wisdom will gain the most advantage. If nothing else, startups have to be different. They’re too weak to do anything else. The big guys already have the job of marching to the conventional wisdom.More on my blog: http://smoothspan.wordpress…
Gee Fred, I would think that it would have made more sense to be sensible in the good times – then, whenever a downturn took place, you wouldn’t even notice it because you would have already been running things they way they should be ran.What I see from my end of things is that people are getting laid-off, position cuts, and a tightening of the purse strings. The lay-offs are mostly occurring because those positions should not have been created in the first place. (Funny how they chalk it p to “non-essential” personnel – seems that anyone hired would have first been “essential” to make the company grow).It would be nice if we all came out of this and learned a few things about how to focus on actually growing a company – things like getting new carpet and furniture every 6 weeks because there’s a ton of VC cash to spend might look a little silly – sadly, I think that a lot of people will quickly forget their “lessons learned” when the economy recovers.If I had my $100 million, I would be seeing this as the perfect time to build a company – land is cheap, salaries are cheap, everything is cheap – build it up now and be ready for the recovery – heck, it might even help to speed along the recovery process.
cheaper is coming .. and your 100 mill will be worth a bit less .. ok to wait
Does that become self-fulfilling then?If I’m holding on to my money, and I keep holding on to it – it doesn’t help the economy out much.True though, my 100 mill will be worth less, but I won’t be – since I am not a product of my bank account balance, perhaps there is a greater good to be had.Oh yeah, and then there’s the chance that if I hold on to my money too long, a new President just might decide to take it and redistribute it for me anyhow ;^)
Fred,While I understand what you’re saying–figure it out for yourself–your title sucks.It is NEVER different, that’s the kind of thinking that got us into this mess. The technology and the names involved may change, but what we’re going through right now is almost a play-by-play repeat of 1929-1931.I find the idea that we’re somehow far superior to the generations that came before us and made the same mistakes to be just insanely egotistical. I sure as hell am not basing my investment thesis on it.Jason
Every cycle they say ‘this time its different.’ You’re right, it’s never that different. The causes may change but the effect is the same every time. You’d think we learn, but that’s an entirely different philosophical discussion for another day.
“I find the idea that we’re somehow far superior to the generations that came before us and made the same mistakes to be just insanely egotistical.”Well, it’s not egotistical, we SHOULD be superior to prior generations; there is written record there that we should be able to learn from. The fact that we don’t is rather depressing…
I’m sorry, but shameless plug:I created a website this weekend. Basically, it’s twitter for VC’s and EntrepreneursI’d appreciate any feedback or participation!http://venturedig.com/
Unlike you and most of those who comment here, I am a small business owner. Really. Small. But I would say that I have learned far more from my mistakes and problems than from when my business was humming along smoothly. I expect we will learn a lot from the current economic situation and come out better… or.. different.I also think that my kids coming out of college and my oldest new to the workforce are getting a true education in this new political and economic climate and they will be stronger for it. Just an opinion.Love your blog.
Sure it’s a good time to be careful. But it’s also a great time to buy real estate – if you’ve got the cash.Likewise it’s a great time to buy equities that were never so affordable.Or an unbeliveable opportunity to hire a coder who you couldn’t afford 6 months ago.Cash is definetly king right now.
Well said, Fred. The best entrepreneurs and CEOs I know do just that: listen to everyone, and then come to their own conclusions. Often, everyone else is right. Sometimes everyone else is wrong. You’d be foolish not to get others thoughts and opinions, but the only way to proceed is on your own best judgment.
“better to be contrarian” totally agree, following like a bunch of lemmings will only end up in failure.
I don’t know if anyone else would agree with me, however I happen to deeply agree with the conventional wisdom of Tom Friedman (that we cannot consume of way out of this mess and “Have you ever been to a revolution where nobody gets hurt?”). Hello… The Big Three in Detroit! The fact is that the current economic conditions will cause a lot of companies to close their doors (websites too), and lots will die off altogether due to lack of understanding (underestimating) the competitive landscape. Those that will fight to stay alive will need to figure out — What’s Next?I believe that the New Green Economy will include the Rise of Green Real Estate Markets paired with the continued success of Cleantech, Clean Energy Markets, and large scale shifts toward Clean Transportation, and the Greening of the IT Industries (plus a fourth quarter of record investment!!), which will lead to a boom in “American Made” Green Collar Jobs and the creation of new wealth. The trick is: “who will get it right??” Execution makes all the differencefor most of these opportunities and green investors need to pay more attention to the items that management claim they can achieve.I will be honored to reference this post in my opening speech for a panel discussion to Eco Investors around the world called, “What’s Next For The Green Economy??”, especially this line; “It’s time to cut exposures, leave equities for now, expect 2009 earnings estimates to get cut a lot more, you can’t buy this market right now, etc, etc.” The Eco Investment Club is hosting this Special Panel discussion for the very reason of strategy and action for here on out (Nov 5th – The Day After)! We are holding the meeting live in San Diego, however we are broadcasting the talk to members of ours around the world via Go-To-Webinar for folks to listen into.This is a Special Panel Discussion To Answer Your Toughest Questions and Provide Green Investors and Green Entrepreneurs With Positive and Meaningful Insight and Honest Outlook… Panelists are being asked thefollowing (Unedited):Will a Green Economy Rebound Faster From Financial Turmoil? Will the current banking chaos reduce innovation in the green tech sector such as solar panels and hydrogen cars? And Is there a new green technologythat the media is not talking about due to the elections that would have been developed sooner had the current financial crisis not taken place?Will consumers stick with Green during tough times?What do you think Google’s Next Big Green pick will be?What is the next administration really facing that’s not being talked about in the media?Are non green companies still jump on board the the Green Wave or are the jumping ship?Are there any studies or signs the green food companies are profitable and appealing to large non-green companies that want to acquire them?Are there any academically validated theories on how to pick stocks, startup stocks in particular?Is high nonrenewable prices the only way to reach the point where we significantly shift to renewable energy?? Or are we toast??What Does Economic Populism Mean For The Green Economy?Bottom line: Does America need a energy technology bubble just like the information technology bubble?1st) Has Goldman Sachs’ strategy to support “Sustainability” help them weather the storm and avoid collapse, and 2nd) Warren Buffet isn’t stupid, So has Smart Money finally gotten wise to the writing on the wall (street) and make large large bets on those that are betting on Green? 3rd) Who’s the next Billionaire to money the money??Is Thomas Friedman the prime leading indicator of the conventional wisdom for this new Economy??T. Boone promises the largest transfer of wealth in history… Is he right or full of oil?Will toyota and honda bury the big 3? and will Tesla, Fisker, Aptera become the next big 3?Is investment in Renewable Energy too risky right now because of low oil prices?Does Carbon Regulation cause real job creation?63% of Americans claim they believe that tackling climate change will benefit the economy (despite the crisis on Wall Street), according to new consumer research. Do any of you believe this??I have a friend who lost 300K in WaMu bonds… What can we all do tosave ourselves from losing everything?Are IPO’s a death sentence or what?Will so-called angel investors follow the smart money and put their own funds (in new record amounts) into the youngest of companies — including outfits that are pursuing the most innovative, but not yetcommercially viable, approaches to serious problems of global warming? Or will this kind of seed-stage investing that traditional venture funds have largely abandoned, jump ship, run and hide because they’re scared?I’m curious to know about green collar jobs. Where will the opportunities be and what kinds of education will be most valuable?Bill McKibben, the Author of Deep Economy, is arguing that we don’t have enough time for “green capitalism” to react and respond to avert the climate crisis. This raises the fascinating issue of how quickly capitalism does adapt. How quickly do you think our entire system will adapt? Bill sounds pessimistic arguing that our free market Titanic will hit the iceberg even though we are now incentivized and awake and trying to avoid it!Is now a good time to start a social/ sustainable startup?Should innovation in the financial services industry be the mostimportant priority of the next administration and progress inengineering green savings bonds as Friedman suggests?Khosla in an article: (contends that hydrogen fuels are a dead end! Although he drives a hybrid car, he believes that hybrids won’t significantly slow global warming. And he’s convinced that, in mostplaces, energy from solar panels will for many years be much too expensive. He also says “There are only four problems with global warming,” he tells me, “oil, coal, cement, and steel. If we do those four, we’re done.”) Is he correct or arrogant and short minded like so many have observed?Will “Smart Grid” outpace “Thin Film” in raising capital or will Tide Energy, Algae shock us?? Bill Gates shocked me recently, so What’s Next??Will Cleantech reach a fourth quarter of record capital raising?I am a struggling San Diego based organic farmer/horticulturist… I have seen the decimation of Agriculture in the So Cal region over the last 30+ years… It has reached a point of “no-return”. We are now as dependent on our food supply as we are energy! Why energy was never regarded as a National Security issue after the Iran embargo I’ll never know… and now as Chilean avocados are sold in San Diegomarkets–the one time “avocado capital” we talk about global warming/carbon footprints at mealtime, as foreign foods arrive longdistance by truck and boat… Is food production not a National Security issue? Energy? Water? Or is this status only reserved for failing banks and huge auto makers….Will an Eco Investor become a Celebrity in today’s new Economy? I like my privacy!Will the US Climate Brand Index make a difference?Will Khosla continue to be the world’s foremost investor in environmental startups or will Doerr or Pickens do him in and or show him how it’s done?Is the sky falling for alternative energy?Will Kleiner Perkins die if they’re wrong by “betting the farm”? I’m ready to bet the farm!Will EcoInvestors provide support for land development industry-led initiatives to develop projects which balance the needs of people, planet and profit – for today and future generations?Is Clean Coal real or an illusion for political gain?Who is in the drivers seat of this new green economy?I think is vital is: “With reference to ‘green’ — What are the changes to individual and collective consciousness wrought by this recession?”Whoa! Great questions right! Ask more and more! Our time is now! I will recommend that you all listen in for a question or two and email me your own questions at ecoinvestors [at] gmail [dot] com. http://www.ecoinvestmentclub.com