Just How F’ed Is The U.S. Dollar? I’ll Tell You.

May 16th, 2007

Here’s how F’ed the U.S. Dollar is right now. If you go for a bit of shopping in Montreal over the weekend these days, you probably pay with your credit card to try and get the best exchange rate. When you next get online and look at your credit card statement, you will be shocked to find:

the USD-CAD exchange rate is so poor right now that, after taxes, you pay more U.S. dollars for your purchase than the price tag in Canadian dollars originally said!

Cheers to our northerly neighbors, I guess. (Although it does kind of put the lie to the whining I heard from some Ontario snorkelers when in Florida, that the boat skipper ought to give them a break on account of exchange rates.)

Posted in finance | No Comments »

How To Be a Biker

May 10th, 2007

If you want to move longer distances than your legs (walking or biking) carry you, such as between major cities or, within our metropolises, from the mire of suburbia to the oases of interestingness, and the generally crappy mass transit options found in the U.S. aren’t compelling for your purposes, it seems that you really have no choice but to give in to car culture and become an automobile driver.

This is a shame, because obligate car culture frankly sucks. It’s wasteful not only of fuel but of resources in the cars themselves. Worse, it constricts the mind’s range by giving a low-activation-energy default pathway for transportation needs, and promotes a positive-feedback loop of car reliance (I have to drive around and find parking so that I can, er, drive some more). And that’s just the effect on the driver; obligate car culture does horrific things to neighborhoods, commercial districts, etc.

(I use the term “obligate car culture” to define a style of living and interacting that requires a car. Rich people, poor people, hippies, students, bobos, and some yuppies can escape this. But the vast numbers of Americans living in suburbs and exurbs — who can’t walk, bike, or reasonably quickly (circa q 15 minutes) get on mass transit to get to places to work, eat, shop, play, and socialize — are obligated to have access to a car or be a pariah.)

In fairness, the pluses of car driving — when everything goes right — are substantial. For a small price, you can go any distance from a few blocks to all the way across the country. Modern vehicles, even the cheapest, are amazingly reliable (if wanting in many other aspects of engineering) and capable of exceeding legal performance limits. The interstate system is a marvel and will take you within a mile of every urban center in the land.

But a car is at least a metric ton of steel, glass, and assorted crap that you’re dragging with you, despite the fact that a knowledge worker typically only needs himself, some papers, and perhaps a laptop wherever he goes for work.

But there’s another means to getting your transportation needs fulfilled. A personal, more human, and cheaper way to travel at high speeds. That way, is, of course, via motorcycle (or scooter, as the case may be).

Let’s take a look at some of the benefits of travel by motorcycle:

  • Lower capital costs. A motorcycle in good repair can be purchased for $500 to $5,000, used, whereas a decent used car will typically start at $5,000.
  • Lower insurance costs. It’s not unreasonable to expect to pay $300 a year for a relatively vast amount of coverage ($250k of liability protection, well above the legal requirements), whereas the same in a car would be a minimum of $1,000 a year.
  • Lower fuel costs. 40-60 MPG is the norm for small- to mid-sized bikes, whereas one would need to shell out for a Prius or a Smart in order to get that kind of mileage on four wheels.
  • Use of HOV (“carpool”) lanes in many states.
  • Lane-splitting (“white-lining”) in California.
  • Occasionally preferential parking. This is dodgy because sometimes you get the shaft by having to pay the full auto rate, but sometimes you get cheap spots, can sneak into smaller on-street spaces, or can downright cheat by parking in (legal, legit, off-street) nooks and crannies.

The downsides are worth considering:

  • Getting creamed by some asshole in an SUV is a real possibility, and injuries in that case are certain.
  • Weather can be a downer.
  • Passenger capacity is limited to one, and then only with appropriate gear, skill, and mutual confidence.

The negatives do have some mitigating factors that should be mentioned, though.

In the case of accident and injury factors, you can self-select out of the highest-risk categories with three easy steps. First, take a course, such as the Motorcycle Safety Foundation‘s Basic RiderCourse, which qualifies you for a motorcycle endorsement to your license. This takes you out of the dangerous “self-taught” and “friend/family taught” categories, and takes you out of the “unlicensed” category (NEED CITE). Then, buy appropriate head-to-toe gear — “no skin below the chin” — including a full-face helmet. The helmet alone reduces your risks of the most grievous injuries and death substantially — but make sure it’s full-face, since post-crash analyses of helmet damage areas show that the chin bar takes damage in about a third of head-banging incidents. Really quite decent gear can be assembled for the low side of $500 — consider it a one-time spend of the first year’s car-vs-motorcycle insurance delta. Third, never drink and bike — even if you’re the type who will drive after a beer or three, change that habit for the motorcycle. Studies and anecdotes suggest dangerous impairment well below .08 % BAC for motorcycling (NEED CITE). And there — with three simple maneuvers — you’ve sliced out huge chunks of the risk of major injury or death. Perhaps not quite as safe, still, as being in that SUV, but a minimum of $25,000 cheaper and a thousand times cooler.

(Helmet damage distribution. Used without permission from flamesonmytank.co.za, who in turn used it without permission from David Hough’s Proficient Motorcycling.)

Regarding weather, you’d be amazed at how good the waterproof textile gear can be. I spent a full 8-hour day in the pouring Seattle March rains, doing low-speed exercises outdoors in an instructional course, and my Firstgear jacket kept me completely dry and entirely warm from the waist up, including protecting my cell phone from the elements. (My bottom half, in makeshift “water resistant” gear, was completely soaked.) Gore-Tex is off patent these days, and so everyone and their brother uses it or a knockoff to make waterproof, breathable materials. The technology is to the point where you can practically dress up in black tie, then slide on your waterproof gear, head out in the rain on your bike, and upon arrival, shed the wet stuff and emerge no more rumpled than you might get sitting on a crowded train or bus.

So, when it comes down to logistics, how does a carless urban yuppie type (like your humble correspondent) actually effect becoming a biker?

1. Find a Basic RiderCourse, sign up, and take it. Mine was 12 folks; about 2/3 owned bikes already, and 1/3 were complete novices. I’d been on a bike once (tearing up empty lots on a buddy’s dirtbike down in Oregon as a teenager, before flipping the thing upside down in a misguided wheelie attempt), but there were at least two folks who’d never ridden in their lives. Around Seattle, market for the unsubsidized courses is $240 for an evening of classroom work and two days of riding (state subsidies bring the cost to $100 for some dates, but those fill up fast).

2. If you’re still positive after the course, get your license endorsement. Generally you have some period of time from passing the course to presenting it at the DMV. Washington wants, I believe, $25 for the chore of endorsing your license.

3. Sketch out a feature range and price range for your bike. I recommend spending time on dealership websites to get a feel for new prices and the various available models; then, do likewise on Craigslist and eBay to get the used prices and the (different) models available. Bikes last forever if properly maintained, and it’s not unusual to find Japanese bikes from the 1970s offered for sale today. 1980s bikes are even more common. (However, surviving bikes from the ’60s and earlier become expensive collector’s pieces.)

But these are distinctly different types than one sees today. Since the late
1990s, bike manufacturers have concentrated on two kinds of street bikes: cruisers (kind of “chopper” or “Harley” lookin’ types, low seat, chrome, forward foot position) and sport bikes (“crotch rockets”, with bright colors and plastic, with a forward lean and a rearward foot position). This has pretty much meant the death of the “standard” motorcycle, though Honda still makes the Nighthawk in this category. Another victim of this change is the mid-displacement bike. It used to be that one could buy motors in 125, 250, 450, 600, 750, and 1000 cc sizes (roughly). Now, the 250 cc motors are still around on Yamaha Virago and Honda Rebels, but there’s really nothing until you get to 650-750 cc engines. This is widely viewed as a shame because a 450 cc standard bike, such as might have been common in the 1980s, is a great starter bike but is unavailable new today. (However, see below for a caveat on buying an older bike.)

4. Find a place to get your bike worked on and to park it. These two logistical hurdles are not insubstantial. A lot of the cheaper bikes you’ll find for sale are sort of DIY projects on wheels; unless you have, or want to acquire, tools, skills, time, and a work area, you’ll need to trade your treasure to someone with these things. Complicating matters, dealerships and service facilities sometimes limit the model years they will work on. This will, therefore, interplay with #3 above. (This was a factor in my decision to buy used from a dealership.) Parking, depending on your area, may require permits for on-street, or may require a parking pass. However, be sure to ask around for “boots-on-the-ground” info about motorcycle parking in your neighborhood. There are certain facilities and areas where one can park a bike for free, but these are unlikely to be publicized on the Internet for fear of overuse or loss of the privilege, so talking with local bikers, garage attendants, etc. can be rewarding.

5. Find a way to get the bike home from purchasing it. (I agree with the author of the article linked above that riding the bike home is a last resort; I did so, but it was under half a mile, early on a weekend morning.) If everything is cool, you may be able to ride home from the purchase, but you may need a trailer. The carless yuppie will note that U-Haul offers motorcycle trailers at a reasonable rate, which trailers may be attached to one’s rented truck. Alternatively, if you’re the kind of carless urban yuppie whose friends drive cargo vans or pickups, strike yourself a deal.

6. Get the gear. Full gear, no excuses. Budget $60-200 for a helmet, $80-300 for a jacket, $50-200 for pants or chaps (chaps not recommended; the not-too-squeamish can look at this for evidence), $20-60 for gloves, and $60-200 for boots. The boots are kind of negotiable; good work or hiking boots will work for starters. Otherwise, get motorcycle stuff: no football helmet, no fashion leather, no garden gloves. Ebay can be a source for very cheap entry-level stuff.

7. Inspect, negotiate, select. Look at several bikes. You might not get test rides; dealer insurance issues and private-owner reluctance are unfortunate but standard problems. Get a checklist such as the Used Motorcycle Evaluation Guide to help you walk through the inspection process. Other online buying guides can help you with this process. You should have ammo for negotiation from your online research into the models you want: make sure that among your data points you have recent comparable asking prices from e.g. Cycle Trader or Craigslist, actual closing prices from eBay, and Kelly Blue Book values. Try not to get walked on; read a book or two on negotiation. FYI, the dealer I dealt with opened with a highball for almost 30% higher than our final sales price (though our final deal included things like cash payment, additional gear purchases, etc.; these are gives you, too, can offer in exchange for a lower price). Don’t take possession right then! Finalize your deal and schedule pickup for the next possible day (Fridays are therefore good for this). Before you leave, get the VIN (Vehicle ID Number).

8. The night before. Check the VIN online; depending on the price of the bike you’re acting on, it may not be worth paying for a full Carfax-style report, but you should definitely Google around; see if anyone has posted the VIN as stolen; make sure that the make, model, and year as represented to you match up with the manufacturer’s coding scheme for the VIN.

9. Get insured. You can sign up for insurance online. I used Progressive to get a quote that ran $330 annually. At that price (and given my good experience with Progressive in the past), it wasn’t worth shopping around for a 10% discount. YMMV. A modern insurance company should let you not only sign up, but add a specific vehicle (by VIN) and print out insurance ID cards, all online and within minutes. (Again, YMMV: Progressive’s lack of sucking may not be representative of all insurers.)

10. Take delivery. Use good practices if buying from a private party, such as a written bill of sale. If you must ride it home, ride real safe! Once home, make sure that you’ve got all the state paperwork underway and, if you’re going to ride before getting back any tokens from the government that you need fully to be legal, try carrying copies of what you sent in, to try and get sympathy from any possible cop stops until you become “official.”

11. Practice slow and easy for starters. Even if you live in a dense urban environment on a steep hill (like your correspondent), you can find a block to circle around so as to get a feel for the bike. Please, and this is important, please just ride like a total pussy for the first couple days and several hours. It’s important to remember that you’re already 10x more badass than anyone else who’s not a biker at this point, so just slow it down, and do exactly like you learned in class. Don’t worry about delaying or slowing down motorists while riding around your neighborhood, or about seeming odd for running the same route ten times — naysayers can kiss your ass. There are no bonus points for scraping off someone’s side-view mirror an hour into owning your new ride (except for the extra caution karma that you will then enjoy for quite some time…).

12. Use a checklist like the one at (NEED CITE) to step up your riding over the next several days and weeks. Take graduated steps out of your comfort zone. Don’t stick to parking lots; you’ve got to push yourself to expand your skills and confidence. As you grow, continue to read, perhaps starting with David Hough’s “Proficient Motorcycling.”

Here are some other tips:

1. If you’re busy, start this process in the late winter (early spring if you’ve got time to move through it rapidly). As spring moves in and the rains stop, sales pick up, and with the extra demand so go prices. This is also true for things like occupancy at the classes, lines at the DMV, etc. If you’re ahead of the curve, you’ll be riding with less time and capital outlay. Plus, taking the MSF class in absolutely dismal weather (large swaths of our riding range were covered in multiple inches of water, and it rained for about 12 of 16 hours) means the first time the weather turns sour during a ride, you’re not experiencing something new.

2. If you’ve heard that “everyone lays it down in the first year of riding,” think again. My riding instructor reports that he has never, in 20 years of riding, laid it down. Is he phenomenally skilled or just lucky? Probably a mix of both. But if you follow this guide (and / or other good info sources) there’s no reason why you can’t be the same way. On the other hand, w
earing All The Gear, All The Time (ATGATT — not, as it might seem out of context, some sort of six-base-pair polymorphism conferring hereditary safety-mindedness but an acronym for volitional safe behavior) is your way of hedging that bet.

3. Take the time to research the concepts of “countersteering” (not “counterweighting”) and “high side” vs. “low side.” The topics are too involved for me to delve into here, but suffice it to say that countersteering (push right, lean right, go right) is the only way to turn your bike above about 10 MPH, and a low side is a relatively “nice” crash where the rider goes down low (usually below / behind the bike) while a high side is the perilous case when the rider goes over the bike, sometimes to be followed by the bike itself! Neither topic is covered very well in the Basic RiderCourse, and in one case, my instructor gave bad info about countersteering due to a terminological error.

An estimate of the time and money spent on this:

Internet research on safety

20 hrs

Internet research on bikes

20 hrs

Basic RiderCourse

18 hrs

Shopping for bikes

6 hrs

Negotiation

1 hr

Total

65 hrs

Bike (with tax, title, etc.)

$3,800

Insurance

$300

Gear

$600

Basic RiderCourse

$240

Settling with guy whose mirror I smashed

$500

Repairing my damage from the smash

$200

Total

$5,640

Yes, that comment about smashing off a guy’s rear-view mirror is from real life. Sucked to be me.

You could do this for about half the price I paid, if you’re willing to cut some corners and do a lot of the maintenance-type stuff on an older bike yourself (and not crash). You could also easily spend twice or even three times this (there were some people in my class who were bragging about financing $16,000 worth of purchases from the Harley dealership; good for them, I guess).

Posted in moto | No Comments »

Printing From Mac OS X Without Going Bankrupt

May 10th, 2007

One thing about buying a new(ish) MacBook Pro loaded with Tiger: they really aren’t cutting a lot of corners. This includes in the area of resource usage (see e.g. memory usage, as you buy another gig of RAM). This, of course, is done in the name of an “Insanely Great” user experience, and mostly, it works.

One difference from Windows is that the Mac, when printing, defaults to the best mode possible on our big office multifunction color laser printer; in this case, it’s fully glossy color. Those of you who’ve ever had to buy toner for such a printer are now wincing: it is damn expensive.

In Windows, it seemed, I had to opt in to print in color. I’d like to run the same sort of system on my Mac.

Well, as it happens, this is one sad case where the Mac requires you to know more about how the OS works than does Windows. Specifically, we want to use a feature of “Quartz” (the graphical engine) to convert colors to greyscale before sending them to the printer. Do it like this:

  1. Open a print dialog with command-P.
  2. It should show a box with pulldowns at top for “Printer” and “Presets”
    1. Make sure you’re working with the Printer in question.
    2. You’re probably using Standard Presets — that’s fine for now.
  3. In the middle is a third pulldown that says “Copies & Pages.”
    1. Choose it and change to “ColorSync.”
    2. Set a “Quartz Filter” to greyscale or black & white (maybe test each to see what works best).
  4. When satisfied, go up to “Presets” and save your settings under a name like “dreary grey.”
  5. Keep this selected and it should now show up as your default settings for this printer.

Posted in bugfix | No Comments »

Ruby’s ActiveRecord Makes Dropping to Raw SQL a Royal Pain (Probably on Purpose)

May 9th, 2007

The opinionated programmers behind Rails have generally done a good job. (There are couple of FUBARs in their bag of tricks, such as the boneheaded choice to use pluralized table names (in some places) and use automagical pluralization code to try and mediate between the singular and plural.)

There’s another item I’d like to bring up, however, and that’s the fact that ActiveRecord intentionally cripples your ability to do raw SQL queries. This is, I’m sure, done to discourage raw SQL hacking in favor of using the ActiveRecord objects (which, for small numbers of objects, is admittedly a superior way to do many things, because of concerns for clarity, maintainability, etc.).

However, sometimes you need SQL, dammit. Especially when you’re doing a correlation between, say, different tags that describe business plans, and the people that link those business plans together, plus the number of times that such tags appear, there’s just no sense in pulling thousands of records into memory, instantiating Ruby objects, and improperly reimplementing basic CS sorting algorithms to link them up. You’ve got all that sitting right there in your RDBMS.

ActiveRecord lets you do something like this: 

BusinessPlan.find_by_sql(    [      'SELECT s2.id FROM (COMPLICATED_SUBSELECT) AS s2',      var1, var2, var3    ] )

Which will run the complicated SQL and replace the bind vars (question marks) in the raw SQL with var1, var2, var3, etc., and give you a bunch of BusinessPlan objects that it’s instantiated off those IDs. Easy enough.

But what if you need not merely to get the objects, but to get some other important info (say, COUNT(something)) out? You’re shit out of luck with ActiveRecord. The .connection.select_all method returns you an array of record hashes, but it requires fully-baked SQL (no bind vars).

  • You could manually construct the SQL and manually quote each bind variable into its place, but avoiding that kind of retarded scut work is exactly why you’re using Rails in the first place.
  • You could try and get the DBI handle that underlies ActiveRecord (does it?), but it’s very unclear as to how or if you can do that. If you call .connection.raw_connection you get a PGConn object (for PostgreSQL), not a DBI handle.
  • You could open up your own new DBI handle, which involves recapitulating the Rails initialization code for ripping the config values and rewriting connection-pooling code, which is bad for all sorts of reasons, not least of which is that you’re already f’ing connected to the DB!

WTF? If you read the code for the find_by_sql method, you’ll see: 

def find_by_sql(sql)   connection.select_all(     sanitize_sql(sql),      "#{name} Load"   ).collect! { |record| instantiate(record) } end

Given this, you might think: “aha, I’ll just use a similar method and pass to sanitize_sql an array with my SQL and bind vars, then pass that on to select_all. No can do. sanitize_sql is a protected method.

So, here’s my encapsulation-breaking, OO-unfriendly, scofflaw workaround to let you have access to what you should already get: a decent bit of code for binding SQL parameters:

(In helpers/application_helper.rb) 

arb = ActiveRecord::Base def arb.sanitize_fucking_sql(*args)   sanitize_sql(*args) end

Now, you can happily go about your business and, when necessary, call ActiveRecord.sanitize_fucking_sql(...) to get ‘er done. No special-purpose DB connections, no wrangling thousands of objects in memory.

Caveats:

  1. I suck at Ruby, I know. There’s a more elegant way to add a public method to a class, but that works and I understand it.
  2. Eventually, this will break. But it will probably be a long time and the, er, unique method signature I suggest should be easily globally replaced.

Posted in bugfix | 6 Comments »

Making Subversion Set Reasonable Default Properties Like Keyword Substitution

May 9th, 2007

(Programmers: skip down to the Meat section below.)

If you are so bored as to actually have read all the articles on this blog, you may have noticed that the “Id: lucas blah blah blah” string that shows up at the bottom of the articles. This is an interpolated keyword, put in by the revision control system, that shows in the text of the document when it was last committed to revision control.

Subversion (svn) is a revision control system — probably the leading such system for new deployments (I am not counting Microsoft-land, where old, proprietary systems still abound). It’s most familiar as the replacement for the venerable CVS, which used to do replacement more or less automatically. But a stock Subversion install won’t do keyword replacement unless you do a “property setting,” or propset, on a file-by-file basis (this is to prevent clobbering a file that happens to have the magical string in it).

Therefore, you have to remember to do something like this to your new files: 

svn propset svn:keywords Id myfile.txt

This tells svn to set the “svn:keywords” property to “Id,” meaning it will replace instances of $Word: $ with the ID string (when “Word” is “Id”).

However, this is a pain, and although you could conceivably script this action as a hook upon new additions to svn, there’s an easier way.

Meat

Find your local ~/.subversion/config file and edit it. Set the following: 

[miscellany] enable-auto-props=yes  [auto-props] *.txt=svn:keywords=Id

(The default config file has a bunch of examples commented out for you to base your settings on, but the above is the minimal set to get textfiles set with keyword substitution for the “Id” keyword.)

Posted in bugfix | No Comments »

The Housing Bubble and General Financial Depravity

May 8th, 2007

Yesterday the Seattle Times brought us this gem:

… the couple — with no savings and about $20,000 in credit-card debt — shopped for a mortgage to buy their 1,200-square-foot house in Tukwila last year, they heard the same thing from lenders and in a home-buying class they attended: Forget it.

“You basically had to be Scot free, no massive credit debt, which we had, and to have money in the bank, which we didn’t,” said Swartz, 31. “How do people buy houses in America anymore?”

In a nutshell, the country is going to hell in a handbasket. When people are so poisoned with the mindset of entitlement that they literally can’t comprehend why having no cash and a negative $20k net worth doesn’t qualify one to incur a quarter million in debt, well, it’s hard to believe that these are the attitudes and values that built the greatest economy in the world.

Posted in finance | No Comments »

Hurrah for Kwiki

May 8th, 2007

… and for Jeremy Smith. Thanks to Jeremy’s hack on top of Ingy’s quickie wiki, we can now get proper behavior inside of table cells.

In a nutshell, Kwiki didn’t handle things like italics inside of a table. This should fix it. Previous posts that used the stock Kwiki should be fixed now.

Now, to remedy blockquotes …

Posted in bugfix | No Comments »

Installing RMagick on OS X with Fink

March 29th, 2007

Hold on: I’m not sure that the below works right. Don’t use it yet.

There are lots of instructions out there for installing RMagick, which is a graphics manipulation library used by many Ruby-istas for things like thumbnailing, resizing, etc. I wanted to use it for an internal database I’m building in Rails.

Some of the sites offering instructions:

  • The RMagick site itself. This one is tilted toward using Darwin Ports (the BSD-ish way to do third party package management on your mac; I prefer the Debian-ish “Fink”).
  • Hivelogic. This one involves manual downloads of tarballs and configure; make; make install type loving. I don’t like this way of going about it because you lose the package management features.

But nobody seemed to have a Fink-friendly way to do this.

If you naively try to install with gem install rmagick, you’ll get something like:

configure: error: Can't install RMagick. Can't find libMagick or one of the dependent libraries. Check the config.log file for more detailed information.

My solution:

1. Install the needed dependencies from binaries using Fink. 2. Use gem install to install RMagick (the Ruby bit) itself.

The dependencies include (as best I can tell):

freetype freetype-shlibs imagemagick imagemagick-dev imagemagick-shlibs ghostscript ghostscript-fonts gv libpng-shlibs libjpeg libjpeg-bin libjpeg-shlibs lcms lcms-bin lcms-shlibs libtiff libtiff-bin libtiff-shlibs

Therefore, you should probably be able to install simply by doing:

sudo apt-get install freetype freetype-shlibs imagemagick imagemagick-dev imagemagick-shlibs ghostscript ghostscript-fonts gv libpng-shlibs libjpeg libjpeg-bin libjpeg-shlibs lcms lcms-bin lcms-shlibs libtiff libtiff-bin libtiff-shlibs

sudo gem install rmagick

(I realize that this is probably overkill and that you don’t actually need all those packages above. If you figure out the minimal subset, why don’t you post a similar blog entry of your own?)

Good luck!

Posted in bugfix | 1 Comment »

VC Essential Tensions: Momentum vs. Contrarianism

March 21st, 2007

It is my intention to begin a series of entries dealing with “essential tensions” in investing in general and VC in particular. This is the first of the series.

Venture capital as an industry deals with momentum investing. Paul Kedrosky has argued on his Infectious Greed blog that VC is a “bubble business,” and that venture returns, when they’re good, come from momentum-fueled exit events. This is an argument where the counterexamples are the exception that proves the rule: Google’s IPO (unimpeachably a deal that stands on its own merits rather than a momentum exit) stands out for having decisively ended the exit drought that had plagued the industry since 2001. Indeed, GOOG going out kicked off the recent positive-momentum exit cascade that gathered steam throughout 2006.

Likewise, on the “entry” side of new financings, momentum tends to rule the day (especially when exit momentum “spills over” into fundraising and new financing activity). See, for example, the cavalcade of YouTubettes that have been trotted out, freshly funded and hoping to hit warp 10 and slingshot off the perceived stellar performance of online video and user-generated content. (Indeed, it would take some backwards time-travel for most of these to capture any fraction of the value in that particular space.)

It is easy self-righteously to laugh at the absurdity of funding 30 YouTubes. But if we accept whole-heartedly the ad absurdum version of Kedrosky’s argument, we can’t blame VCs for believing in momentum. After all: if folks today are buying online video companies, then the savvy VC better have one to sell.

But investing is not a game played alone, and contrary to the bluff and bluster of some VCs, no deal is “binary.” Every deal is implicitly an auction, with a bid and an ask, and the formula for investment return is ancient and venerable: buy low, sell high. Momentum helps with the latter, but crushes our ability to do the former. Apart from the occasionally perverse incentives provided by large, fixed fund sizes, pricing going in is even more leveraged in ROI than pricing coming out. Getting into a good deal at an attractive price — and hence, the longer lever on ROI — depends on a virtue diametrically opposed to momentum, namely, contrarianism.

The contrarian looks for undervalued purchasing opportunities by ignoring or subverting the prevailing wisdom of the day. He makes it his job to call the tops or bottoms of markets, and sometimes is the one declaiming the emperor’s nudity. An occupational hazard of this is that sometimes, the market has a ways to go yet, and occasionally the emperor still has flesh-colored tights on — and early is the same as wrong when timing markets.

Certainly, if there is a mythical hero of venture capitalism, it is the steel-nerved visionary contrarian who makes what looks like a long-shot bet, boldly doubling down when others are fearful, and propelling forward great companies and great technologies that nobody else dared touch (and hence, that he invested in on the cheap). Where else do we get the nerve lionizing our asset class as “venture?”

So, we are faced with a contradiction between the mythology of our industry and the harsh reality. You don’t get to be both the visionary contrarian and still have the online video portfolio company. Why do so many venture firms seem to choose momentum in this tradeoff?

I have two theories. One is that, although entry price has more theoretical leverage over ROI than does exit value, exits are so much more visible that they dominate the consciousness of most VCs. That is, given the implicit opportunity to make a 8x ROI on, say, a $60 M exit, or to make a 2.5x on a $500 M exit, and assuming that the probabilities and amounts are adjusted to keep other comp and performance measures ceteris paribus, I bet that VC decision processes are strongly skewed to the big dollar, highly visible exit. Half-billion IPOs are much better bragging fodder at the VC confabs than mid-market M&As, even though the latter may well pay off better. This would be a great master’s or Ph.D. thesis if one could substantiate and measure the value of this skew.

The second theory is a general theory for understanding why contrarianism, itself, is “meta-contrarian” (that is, why contrarianism is selected against as an investing style). I call this the “rich friends theory.” I use it to explain why, despite all rationality, U.S. investors tend to overweight U.S. equities in their portfolios. In a nutshell the theory is this: it sucks far worse to miss out on an investment opportunity that all your friends have scored on, than it does to miss out on an equally profitable opportunity that everyone else missed, too. Put another way, it’s awesome to get richer than your friends, but it’s way worse to get much poorer than them. Thinking of this “peer-relative risk aversion” helps to understand a lot of bubble / momentum dynamics. This, too, would be fascinating to measure, although I can reasonably set a lower bound here of 0.7% skew toward the crowd, which is the “rich friends tax” you pay in incremental house edge at craps by playing the pass line (the “do’s,” where most players play, has a house edge of 1.41%) vs. the don’t pass line (the”don’ts,” almost diametrically opposed to the do’s, where winning earns you enmity and losing earns you jeers from your fellow punters, has a house edge of 1.40%).

There’s also a case to be made that emerging managers hew more closely to the herd because it could be an existential crisis to a firm for its first fund to be a “fourth quartile” performer. Much better for a new firm to post median returns and live to raise more funds, than for it to risk lagging returns on a series of contrarian bets (better, that is, for the firm, if not for its investors, who may in fact be better served by the longer-shot odds). This is, of course part of the “tyranny of IRR,” about which I have another blog entry under preparation.

I wish I could say that understanding, or even measuring, these effects gives you some kind of instant edge in investing. But, alas, this is a perfect example of the occasional frustrating impotence of mere understanding. (I do have some ideas for exploiting this particular case, but those obviously aren’t public.)

Posted in vc | No Comments »

The Washington State 529 Program (GET) Offers an Overlay

March 12th, 2007

Important update:

This was my take on things back in 2007, when it was published.  As of 2010, both my opinion and the math have sharply changed.  I revisit the issue in a new post.

State-administered “529 plans” for education savings are another in the series of tax dodges doled out by the Bush administration (thereby further and regressively lowering the effective rate of taxation on the higher-income people most likely to avail themselves of such dodges). (Sticklers will observe that 529s predate Bush; true, but their extra tax favorability is a post-2001 invention.) On the bright side, they offer quite a good deal if you can find an investment that keeps pace with college tuition (and you don’t need to worry about also beating the tax rake, since 529 gains are tax free when used for qualifying tuition etc.). You do have to nominate a beneficiary when you set one up, but you as the controlling owner can change the nominee at any time to any blood relation (and it can even be yourself).

There are two types of 529 plans: one is like a 401k plan and involves picking a retail investment or mix of assets; I’m sure someone, somewhere has done the analysis to pick out correlates of tuition costs, so if you can find that, maybe you should look at the first form. The second 529 plan is somewhat more interesting. In the second form, the 529 plan is actually selling you “prepaid tuition.” This kind of thing is normally a terrible deal: fronting money for something way in the future is generally a sucker bet, one made against the collected wisdom of armies of actuaries by not-sophisticated-enough retail investors with both informational and scale disadvantages. But I have a few reasons for believing that the Washington State 529 plan (known as the GET: see their web site) offers an overlay in certain circumstances.

1. Each state may offer either or both types of 529 plans to its residents. As it happens, a couple of states that have offered guaranteed tuition programs have run into trouble with the plans being underfunded and unable to meet obligations, according to this article. Although this might raise an alarm in some folks’ minds, to me it says that tuition costs have been rising faster than can be achieved by even the professional money managers hired by state 529 plans specifically to meet that hurdle rate. Therefore, I see it as a sign that tuition is in general an expensive thing to guarantee and that if you can get a reliable guarantee (see below), you are getting the best of it (until or unless a mean reversion on tuition growth rates vs. inflation occurs).

2. Washington’s GET program is (ostensibly) backed by the full faith and credit of the State, unlike other states’ 529 guarantees. In my mind, combined with the evidence of other states’ underfunding difficulties, that means the WA GET is a good bet to get bailed out by the State at some point in the future. (In general, any time you see something other than a plain vanilla bond backed by the full faith and credit of an American government, someone in the government got snookered or corrupted, and the public purse is about to make its counterparties rich: see e.g. the PBGC, the S&Ls, the Federal Housing Enterprises, etc.)

3. The index for the GET tuition price is the most expensive state university in Washington, invariably the University of Washington, located in Seattle, a thriving and growing metropolis which is well positioned to weather many economic threats and therefore in which prices and incomes are likely to remain high enough to induce the University to charge steadily increasing sums for tuition. (Although I certainly don’t think that the outlook for Seattle is monotonically ever rosier, it seems a much better bet than somewhere like e.g. Montana or Idaho, where relatively small disturbances to nondiversified industrial bases could result in stagnation at all state universities.) The University also has competition in town from a number of private schools charging full freight to their students, therefore establishing the viability of increased tuition at UW.

5. The WA GET program has a scam built into its marketing strategy: rich people can buy the tuition units at the “buy-in price” (see below), but they try to sign up poor people for a payment plan where they charge them 7.5% interest on top of the buy-in price. Whether this is morally appropriate or not is a separate issue; the fact that we can spot the fish (and we ain’t it) is good for us.

6. The big catch to the WA GET is the difference between the buy-in price and the pay-out value (the bid-ask spread, if you will). For the past few years, that has looked like so:

Year Purchase $ Purchase YOY % Purchase CAGR
1999 $35.00 NA NA
2000 $38.00 8.57% 8.57%
2001 $41.00 7.89% 8.23%
2002 $42.00 2.44% 6.27%
2003 $52.00 23.81% 10.40%
2004 $57.00 9.62% 10.25%
2005 $61.00 7.02% 9.70%
2006 $66.00 8.20% 9.48%
2007 $70.00 6.06% 9.05%
Year Payout $ Payout YOY % Payout CAGR
1999 $33.75 NA NA
2000 $35.19 4.27% 4.27%
2001 $36.42 3.50% 3.88%
2002 $38.64 6.10% 4.61%
2003 $45.31 17.26% 7.64%
2004 $48.63 7.33% 7.58%
2005 $51.81 6.54% 7.40%
2006 $55.05 6.25% 7.24%
2007 $58.80 6.81% 7.19%
Year Purchase $ Payout $ Payout Ratio
1999 $35.00 $33.75 96.43%
2000 $38.00 $35.19 92.61%
2001 $41.00 $36.42 88.83%
2002 $42.00 $38.64 92.00%
2003 $52.00 $45.31 87.13%
2
004		 $57.00 $48.63 85.32%
2005 $61.00 $51.81 84.93%
2006 $66.00 $55.05 83.41%
2007 $70.00 $58.80 84.00%

Observations on these numbers:

  • 2003 saw a big bump in tuition and hence in both purchase price and payout values. This jibes with 2002 news reports of the same.
  • The payout ratio (payout $ / purchase $) has been declining steadily, but has recently hovered around 84%.
  • That said, WA GET is raising the price of purchase by 9% annually, while tuition has been increasing at 6-7% annually. If these two don’t converge, the payout ratio will get worse.
  • This supports a 6-7% tuition increase rate, especially because that makes the 7.5% interest on the payment plans accretive to GET’s situation.

7. The time-lag spread between purchase and payout makes sense only if you assume that college costs rise faster than the rate of return you can make elsewhere, adjusted for tax treatment. Assuming a fairly conservative 5.25% risk free rate and a 28% tax rate, the line crosses with 7% annual rising educational costs after about 6 years:

Years Held After-tax return risk free GET Return GET to risk-free %
0 $70.00 $58.88 84.11%
1 $72.65 $63.00 86.72%
2 $75.43 $67.41 89.37%
3 $78.36 $72.13 92.05%
4 $81.45 $77.18 94.76%
5 $84.69 $82.58 97.51%
6 $88.11 $88.36 100.29%
7 $91.71 $94.55 103.10%
8 $95.49 $101.17 105.94%
9 $99.48 $108.25 108.82%
10 $103.67 $115.83 111.72%
11 $108.09 $123.93 114.66%
12 $112.73 $132.61 117.63%
13 $117.62 $141.89 120.63%
14 $122.77 $151.82 123.67%
15 $128.18 $162.45 126.73%
16 $133.88 $173.82 129.83%

As you can see, given these numbers, it doesn’t make any sense to buy units for a teenager. You’re just going to get hammered down by the time-lag spread if you hold less than 6 years before redemption. Of course, it gets a lot worse if risk-free interest rates rise a lot compared to college tuitions, or if you’re paying more than 28% in tax.

However, if you think that college tuitions will maintain their higher growth rate relative to the risk rate, and if you can hold for well over 6 years, then you should strongly consider buying tuition in the GET. Why do this if you can get a higher return in a normal 529 in, say, the stock market? Well, remember that you need to beat UW’s tuition growth rate, and do so without a great deal of volatility. I’d be surprised if normal 529 plans let you use sophisticated tools like options to hedge against volatility.

I, like numerous others, believe that we’re entering a period of increased market volatility, and that if you can offload the risk of matching investment returns that are linked to a tax-free, inflating expenditure requirement to a full-faith-and-credit backed State obligation, you should seriously consider it.

Serious risks in this strategy include the possibility that Washington state politics will result in tuition increases that do not track inflation. Also, general mean reversion in higher education could threaten this strategy. I don’t think that there’s a lot of risk from falling behind a big run-up in equity prices that sustains for 15 years without a concomitant rise in inflation and tuition, but if equity returns beat my expectation and whoop up on tuition increases, you could stand to lose relative to a more traditional asset allocation. Also, waiting is not advisable; the bigger the gap between the purchase price and payout value, the longer you have to spend invested to catch up to risk-free.

Of course, remember that WA GET isn’t something you invest in for strict performance; it’s a way to cover a known expenditure requirement with lower risk. As far as I can tell, for periods well over 6 years (and ideally ~ 18 years, since you can purchase GET units naming yourself as a beneficiary and then transfer them later to your as-yet-unborn children), WA GET makes good sense.

Posted in finance | 16 Comments »

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