Eventually rising!

Draft version 0.18

Last quarter, I took a Marketing class at Stanford called Global Entrepreneurial Marketing (GEM – MS&E 271). The first exam was a strategic thinking paper (STP) that required students to analyze themselves as a startup using a marketing toolkit called DEDART which stands for:

  • Diagnosis Where is this market in its life cycle? How attractive is the market opportunity?
  • Experience How will customers experience the benefits of the new product?
  • Decisions What is your marketing (or business) plan?
  • Analysis Why is your plan the best way to go?
  • Reality Test What are the risks of your plan, and how can we manage those risks?

It was an awesome class and I learned a lot of valuable entrepreneurial lessons from great teachers and professionals while working with a talented team of students.

As part of my STP for the GEM class, I wrote about a mathematical model that I have been thinking about as a bonus exhibit. This post is about that model which I called “Eventually Rising“. Here goes:

Bonus Exhibit I: Eventually Rising 

Given my engineering background, I often like to use mathematical concepts to illustrate my life view. I view constant change in life like a sinusoidal function that keeps falling and rising over time. A lot of people hate change and try to prevent it from happening, or they deny it or try to stop it once it happens. However, as John C. Maxwell once said “Change is inevitable. Growth is optional.” Success and failure are two examples of change, but unlike change, success and failure are not constant and they are not inevitable.

While change is inevitable, it’s not always forced upon us. Most of the time, we are the primary change inducers in our own lives. The sine and cosine functions are two functions that alternate between a peak positive value equals 1 (maxima – ultimate positive change) and a bottom negative value equaling -1 (minima – ultimate negative change). We all want more successes (maximas) and less failures (minimas) through our actions.

Our actions cause change to the world around us for better or for worse. In an ideal world, we could ensure that change is always positive and all outcomes of our actions are desirable. The world of mathematics offers a great function that represents this ideal world and that is the tangent function. The tangent function is a strictly monotonically increasing function over the period [-π/2, π/2] or [-180°, 180°]. Check Bonus Exhibit III for the definition of monotonic and non-monotonic functions.

Source: http://goo.gl/erVwO

I especially like the fact that the tangent function is the result of dividing two constantly changing functions that results in two exaggerated values -∞ and +∞ on the edges . We often hear, someone changed a 180 degrees and turned his or her life around. That’s exactly what the tangent function does, it goes from the absolute infinite bottom (-∞) to the absolute unattainable maximum (+∞) over a 180 degrees.

In Reid Hoffman and Ben Casanocha’s book, “The Startup of YOU“, they talk about introducing small risks to one’s life on regular basis to build up more resilience and achieve stability through low levels of volatility. That is the division of two changing functions to achieve growth 🙂 Its exactly like dividing the sine function by the cosine function. If we introduce changes to our lives at the right frequency and at the right magnitude, we will get a net positive constant growth. In reality, getting it right every single time is probably impossible. But if you if we introduce small changes to your life as a habit, you will see a lot of benefit.

We have to be careful though. Simply changing sin(x) into sin(-x) will result in a monotonically decreasing function (the exact opposite of what we want):

sin(-x)_div_cos(x)

* sin(-x) / cos(x) using http://www.onlinefunctiongrapher.com/

Or if you change the frequency of the changes, for example by dividing sin(-2x) by cos(0.2x), you will get a very bumpy ride:

sin(-2x)_div_cos(0.2x)

* sin(-2x) / cos(0.2x) using http://www.onlinefunctiongrapher.com/

We don’t live in an ideal world and we are never really at -∞ and we will never reach +∞. However, the lesson that I do take from that ideal model is that we should always strive to be growing. Its hard to be monotonically increasing, its probably impossible to be strictly monotonically increasing, but we can be eventually increasing. We are not always able to induce the right amount of change at the right time. Sometimes, change is induced upon us in ways that we have no control over. By investing in yourself, learning new things, gaining new skills, and making new connections as a habit, you maximize the chances of introducing the right change at the right time. When undesirable changes happen, you will take a fall. Those undesirable changes can be external (an earthquake for example) or internal (we all make mistakes).

That’s the math and philosophy behind the term “Eventually Rising“. The following image is a good visual representation of an eventually rising plot:

GoogleStock

* Source: this site was tracking Google share value since inception

By focusing on our own constant growth, we may be able to neutralize the undesirable change around us and turn it around to be rising just like the tangent function. By constantly taking any potential failure and flipping it a 180 degrees and making a success out of it.

Every company, large, medium or small, publicly traded or a private startup has its ups and downs. The same applies to people. No one is always winning or always losing. You want the net average over time to be heading up.

Bonus Exhibit II: Functions of constant change (sine, cosine, and tangent)

The Sine and Cosine functions represent the inevitable and constant changes in our lives.

Source: http://goo.gl/erVwO

The tangent function = Sin(x) / Cos(x) over the period [-π/2, π/2] or [-180°, 180°] is a strictly monotonically increasing function.

Bonus Exhibit III: Monotonic and nonmonotonic functions 

“A function  is called monotonically increasing if for all  and  such that  one has , so  preserves the order (see the left figure below). Likewise, a function is called monotonically decreasing if, whenever , then , so it reverses the order (see the right figure). If the order  in the definition of monotonicity is replaced by the strict order , then one obtains a stronger requirement. A function with this property is called strictly increasing. Again, by inverting the order symbol, one finds a corresponding concept called strictly decreasing. Functions that are strictly increasing or decreasing are one-to-one (because for  not equal to , either  or  and so, by monotonicity, either  or , thus  is not equal to .)” *Source: this Wikipedia page 

The following figure is a monotonically increasing function. It is strictly increasing on the left and right while just non-decreasing in the middle.

*Source: this Wikipedia page 

The following figure is a monotonically decreasing function. It is strictly decreasing on the left and right while just non-increasing in the middle.

* Source: this Wikipedia page 

The following plot compares a nonmonotonic function to a monotonic function:

The impact of the Economic Crisis

The impact has been as follows:

1. Ali Baba and the forty thieves are now Ali Baba and the thirty thieves. Ten were laid off…

2. Batman and Robin are now Batman and Sanjay. Batman fired Robin and hired Sanjay because Sanjay (Indian) was willing to work twice the hours at the same rate.

3. Spiderman is now “air-pooling” with Superman to save fuel costs.

4. Women are finally marrying for love, and not money.

5. Q: With the current market turmoil, what’s the easiest way to make a small fortune?
A: Begin with a large one.

6. The credit crunch is getting bad isn’t it? I mean, I let my brother borrow $10 a couple of weeks back, it turns out I’m now America ‘s third biggest lender.

7. Q: Why have Dubai real estate agents stopped looking out of the window in the morning?
A: Because otherwise they’d have nothing to do in the afternoon.

8. Q: What’s the difference between an American and a Zimbabwean?
A: In a few weeks, nothing.

9. Dow Jones is re-branded as “Down Jones”.

10. Quote from a wall street banker: This is worse than divorce. I’ve lost half of my assets and I still have my wife !!!

Co-opetition

I first passed by this term in the Art of Strategy book. Wikipedia has more details on the term here. Nalebuff and Dixit say in The Art of Strategy:

Good strategy must appropriately mix competition and cooperation.

Interestingly enough, they describe that young immature thinkers tend to think in terms of “self centered competition” and as they progress, they start thinking in cooperative as well as competitive terms. I noticed that in my own thinking patterns throughout the years.

Japanese Economy in Recession – US to follow

Based on BBC Article here

“The downtrend in the economy will continue for the time being as global growth slows,”

said Japanese Economy Minister Kaoru Yosano.

“We need to bear in mind that economic conditions could worsen further as the US and European financial crisis deepens, worries of economic downturn heighten and stock and foreign exchange markets make big swings,”

Mr Yosano added.

“The risk of Japan posting a third or fourth straight quarterly contraction is growing, given the fact that we can no longer rely on exports,”

said Takeshi Minami, chief economist at Norinchukin Research Institute.

The US market is expected to follow. What does this mean? Don’t buy now. Wait and buy in the heart of the recession when things look the worst. Don’t look at this as a disaster but as an opportunity. It is in fact a disaster if you were planning on cashing out your 401K this year, then you just got unlucky. I’m losing a lot of money in my 401K but hopefully the market will rebound and I will redeem my losses.

According to Reuters article here:

The U.S. economy is in recession and will contract at a faster pace in the fourth quarter, extending the decline into early 2009 as high unemployment crimps consumer spending, a survey showed…..
“With the recession continuing into 2009, GDP growth next year is expected to be a meager 0.7 percent. This would be the slowest growth over a two-year period since the early 1980s,” said Varvares, who is also the president of Macroeconomic Advisers.

Despite the gloomy economic outlook, the Federal Reserve would probably keep its benchmark overnight lending rate steady at 1 percent, raising it by 25 basis points in the last quarter of 2009, according to the survey.

Smart Stops

This post is based on an email I received from the SF IBD Meetup Group (most of it is copied verbatim)

There is a new startup company called SmartStops.net, that helps investors know when to sell.

Their solution is based on facilitating and optimizing the use of stop loss protection and making it easier for the investors to take protective action. At the end of each market day, they publish an updated SmartStop for each covered stock calculated for use the next trading day. If the stock falls and triggers its SmartStop, it is an indication that the stock has entered a downtrend and it is recommended that you sell the stock or take other protective action.

They monitor their member’s portfolios continuously and email them when a SmartStop is triggered. If you receive a SmartStop QuickAlert – Take Action.

Their algorithms are designed and maintained by Chuck LeBeau, a well regarded author on technical analysis. Their stops move closer to or further from the stock as trading patterns dictate to keep you in up-trends longer but exit you early in down-trends. Their stops are designed for investors more so than active day traders. They do not hug the stock close enough to trigger daily trades and do not adjust intraday. However, traders, as we know are information hounds and many day traders are early adopters of their solution.

Recent articles in Barron’s, Kiplinger’s, WSJ, Fortune and The Street.com can be found at:

http://smartstops.net/PublicPages/Press.aspx

They are always looking for feedback from experienced investors. A guy I know who works with them spoke with the CEO and he would like to extend a free trial offer to the IBD Meetup group.

The IBD Meetup Group Code Is: IBD90FREE.

This code will give all members 90 days free SmartStops Portfolio Protection Service at the 10 or 20 stock portfolio level.

Microsoft & Yahoo …. is it gonna happen?

Check here. Jerry Yang is suggesting that Microsoft buys Yahoo. Looking at their market quotes today, the are both at:

MSFT 21.63 -0.45 (-2.04%) 192.41B
YHOO 14.45 +0.53 (3.81%) 20.02B

Yahoo went up more than $0.50 after Yang announced that Yahoo is up for grabs again. Yahoo’s 52 weeks low was $11.25 and Microsoft 52 weeks low was $20.65. This is an opportunity to make some cash in a depressed market, however, knowing that the market is headed for worse times, I wonder if this deal would happen now. Microsoft initial offer to buy Yahoo earlier this year was valued at $33/share. Yahoo is much cheaper now and MS still got the cash. MS could even do a share for share matching deal buying Yahoo at $21.63/share which would be a premium for Yahoo’s value right now and fitting to MS. I don’t think Yahoo can argue a price in the $30s anymore given the economy and their failed attempt to collaborate with Google. Reuters said the following:

Shares of Yahoo surged after a report surfaced online that the Web pioneer’s Chief Executive Jerry Yang was leaving the Company and that Yahoo was in late stage talks to sell the whole company to Microsoft for between $17 per share and $19 per share. Speculation about a possible deal between the two companies intensified after Google Inc scrapped plans for a Web search advertising partnership with Yahoo.

I would wait until we can find out more about MS’s real intentions. Off course you could take a risk and buy Yahoo now, let me know what you think.

Stocks worth buying

Sony

SNE 24.68 -0.21(-0.84%) 24.71B

Intel

INTC 15.28 -0.84(-5.21%) 84.93B

Nvidia

NVDA 8.76 -0.22(-2.51%) 4.85B

Nintendo

NTDOY 43.30 +0.60(1.41%) 48.97B

Visa

V 57.74 -2.07(-3.46%) 48.68B

Amazon

AMZN 53.25 -5.20(-8.90%) 22.87B

EA

ERTS 22.66 -0.74(-3.16%) 7.20B

The problem is finding the right time to buy. I’m happy I did not buy yesterday cause I thought the market would react to Obama’s election. Here are the indicators from Google Finance:

9,295.06 -330.22 (-3.43%)
970.87 -34.88 (-3.47%)
1,714.98 -65.14 (-3.66%)

The Dow, Nasdaq, and S&P are all down. We might be heading to worse times. So hold your cash for now and don’t buy. The sweet point where you should buy is close though. We have to keep a lookout. If anyone has any insights, please let me know. The world’s best investors make their wealth by buying when times are bad and selling when times are good. Thats how you milk the market. The worst thing happens to people who sell in bad times and buy in good times. It takes a lot of discipline and understanding of the market dynamics to make the right decision. Unfortunately, I do not have that information and I don’t have the time to learn the ins and outs of the market.

How to deal with downturns in economy if you are a startup

Sequoia Capital held a meeting a few days ago with all of its portfolio companies, telling them how to adjust to current economic conditions. Somebody leaked the slides from the meeting (see link below). Very interesting. You have to get to slide 37 for anything resembling a hopeful message (Amazon.com and Salesforce.com’ s successful growth during the downturn of the early 2000’s).
Check here for the slides
.

I also embedded the slides here: