Math, finance, and statistics has always been a hobby of mine . . . unfortunately I was never brilliant enough to make a career out of it. One of the most popular bastardization of statistics is the concept of “long-tail” . . . by now, everytime someone mentions the “long tail” most people’s eye starts to roll . . .

Some people have already heard of Nassim Taleb and his Black Swan theory especially in the quant finance circle. In fact, it was on the NYT best seller list back in April. The recent melt down of the financial ecosystem, helped bring Taleb back into the spot light. Turns out, funds that were advised by Taleb returned over 50% this year.

Taleb’s book argues that history is littered with high- impact rare events known in quantitative finance as “fat tails.'’ As the founder of New York-based Empirica LLC, a hedge- fund firm he ran for six years before closing it in 2004, Taleb built a strategy based on options trading to bullet-proof investors from market blowups while profiting from big rallies.

When most statisticians build models, the outliers that produces spikes in the data are often considered “outliers” and ignored. (doesnt help that most elegant mathematical equations produces relatively smooth curves). So what you get is some sort of smooth model like the common bell curve / normal distribution, Poisson distribution, Pareto distribution (80/20 and/or long tail). Taleb; however, believes that these outlier events has such high impact even though its frequency is low, and as a result they cannot be ignored. In fact they should be EXPECTED. (Fat tail = high “impact” but low frequency). Taleb actually believes most statistics is useless because of its inability to model/predict/take into consideration black swan events.

(Possible) Examples (as I interpret it):

- Mutations which advances evolution
- Certain Wars (start of WWI)
- Natural disasters (Katrina)
- Terrorist actions (9/11)
- Meteor that killed the dinosaur

So what does all of this have to to with anything. Well, its interesting for one. For another, it make me wonder all the things we do as product marketers/managers do to try to load the deck in our favor such as user behavior modeling, customer research, competitive analysis etc etc are really not that “value additive” in the grand scheme of things. That all our attempts to rationalize not just the users, but our customers and the business value chain we are in, into neat frameworks and theories (like what statisticians do with numbers) are really useless when it comes to truly creating a stepwise advancement in our business or user adoption.

Ok, I’ve lost you.

How about this.

The iPhone, Pagerank, TCP/IP, the automobile.

These game changing innovation which created tremendous amount of value to society AND wealth to many many individuals. Are they the result of careful measurement, analysis, modeling, and design (aka White Swan) or are they random & rare stroke of genius and insight by a small group of people (aka the Black Swan)?

Not sure. Not that adding value a step at a time is such a bad thing but it does keep my mind churning at the end of the work day.

Yes that’s me. Its the only freaking reason I *cling* to the Republican party. (you know, like guns and religion) . . . other than the religion of economics, I’m pretty much have nothing in common with the party of G.W. Its about now I’m ready to seek out Ron Paul and his Libertarian buddies (yes, I know he is actually in the Republican party, but I believe Paul is just doing some recon work before going back) but than again, the dude is way too much of social conservative for me anyways.

So this $1trillion bailout has me torn to pieces. Being against the bailout seems to be the most bi-partisan thing to happen during this election year. So there is Krugman on the left putting in his two cents. And bunch of really old white guys from red states I really don’t ever plan to visit conspiring to stage a revolt against GW.

Here is basically how I look at it (don’t scream at me, I know I’m super simplifying what is actually happening). The Republicans is gonna take my money (through a combination of taxes I already paid and mostly through general interest rate increases) and give it to irresponsible banks run by employees making (and made) 10x more than I do in exchange for bunch of over-valued assets. And then the Democrats is gonna turn around take my money too and use it to help pay off the monthly mortgage payments of bunch of dumbass flippers who never paid enough attention in college to learned how to calculate net present value.

I hate them both. My sense of justice can’t take this country any more.

Yes, I know that the worst thing that can happen is for the bailout to NOT get passed, in which case it will probably hit my pockets books even more. But I do have the RIGHT to be a little pissed off. Why can’t we just revoke the citizenship of these people that are not contributing positively to the GDP and send them off to Australia or something? (didnt the brits used to do that?). Let them try to flip worthless huts in the middle of the Great Victorian Desert instead (the bankers can spend their days “structuring” credit default swaps denominated in camel dungs)

Man I’m pissed. Gonna go short me some financials & treasuries just to have something to root against.

If Yahoo wants to fend off a 60% premium hostile offer, close to the ONLY thing it can do is to buy eBay inorder to make itself so big and the potential hostile merger so dilutive that Mr. Softie would say no thank. Chances of this happening is close to 1%.

If Yahoo + Microsoft does happen, eBay can kiss its chance of being acquired goodbye . . . and thus, it better figure out a plan to turn itself around quickly or the stock price will tank cause there will be no potential acquisitions around to artificailly pump up the stock price. (why the hell did eBay go up 7%? today?). Outside of a merger/acquisition by Yahoo or a straight up acquisition by Microsoft, I really dont see anyone with a modicum of strategic fit with eBay. Google is way way too proud/smug to be interested in a web 1.0 business . . . and even just looking at it financially I dont think there are many companies out big enough to buy ebay at a $30-$40B price tag. (adobe is the only one and thats really farfetched).

Another note. MSFT really saved the stock market today. Instead of crying recession wrt to the Google miss . . . the market was pumped up by the acquisition offer . . . and since most wall street models (quant and fundamental houses) use some sort of comparable valuation model, the jump in Yahoo really help keep the rest of NASDAQ afloat . . . that said, this is a short term thing. . . great time to play short on the market starting monday.

Meg is leaving eBay and handing it off to John Donahoe. It’s big enough news to bring me back to my keyboard to riff some more.

I cant believe the negative press Meg has gotten in the last few month. In the “what have you done for me lately” world of business (and especially tech ) media and punditry. . . you would have thought that Mark Zuckerberg was/is a more successful CEO than Meg. If you look at the numbers its simply not true. I certainly agree with those that Meg had the winds at it back cause of eBay’s business model (network effects) but the 1990’s dot com generation is littered with great concepts/business models with incredibly strong initial traction . . . but failed to live up to its early promise due to incompetent execution . . . friendster, webvan, netscape . . . to name just a few. . .

But enough kissing ass , I do have a few a few honest thoughts about eBay’s challenging future.

John Donahoe: Buyers and sellers have more choices and higher expectations than in 1998, but the guiding principles are the same—the best values, the widest and most abundant selection, and a fun shopping experience. We will make it easier and safer to shop on eBay. The second thing we are going to do is build on this fabulous auctions business that is unique and is the best format for many items.

But we have used an auction approach for fixed price. We are not optimized to get those values in fixed price. Time-ending-soonest makes sense in auctions, but does not surface the best items in fixed price.

In the past 12 month, eBay has been “re-focusing” on the auction business through its TV advertising (emphasizing the joy of winning) and raising prices on stores items to re-emphasis on auction listings and the core marketplace. This new strategy to focus on fixed price is certainly a retrenchment and an admission that the path it had been following for the past 12-18 month was wrong. eBay’s problem (as I had always believed) is driven by a few factors 1) that it owns 100% of the auction market already and 2) google through its search engine has the aggregate inventory of all “listings” which threatens eBay’s position in the market for breadth and selection (and thus as a destination). In the fixed priced context, it means that fixed price (and non-auction) “advertising” is its only growth engine left and that shoring up its core auction business is not likely to deliver the growth so enamored by Wall Street through Google.

That said, we must be in distributed commerce in the future, taking listings for auctions and Shoppng.com and distributingthem to other sites. If they ar not going to come to us, we are going to come to them. We are not at all averse to distributed commerce.

Donahoe: In many ways, our buyers will lead us there. We are making it much easier to bring eBay listings to your Facebook page, Myspace page, and shopping listings to various sites. eBay’s unique inventory offers better alternative [than other sources].

This eBay listing widget as an “ad unit” concept is not new. In June of 2006 it announced its AdContext program which used to be located at “http://affiliates.ebay.com/ads/adcontext/” - if you click through these pages no longer exists. No sure what happened but it was certainly in Beta for a while but never released publicly. Did the company lose focus? Did the company not have the technical chops to create a contextual advertising algorithm? If it didnt work as a business, why does parading it out again (re-treading an old idea) make it better this time? And lastly, why did it take so long?

Donahoe: In payments, we are enabling faster checkout and easier payment on thousands of Websites off of eBay. In reputation, we think that reputaion is something we can increasingly outtake.

Whitman: We wonder if there is a way to embed reputation into Paypal. Is there a way to travel across the Web with your Paypal wallet and some other aspect of reputation?

Reputation . . . this is a huge opportunity for Paypal . . . but something that also took YEARS to bubble up to the executive ranks. eBay cannot continue to rely on consultants to filter out the latest “trends” and re-package it in digestible powerpoint speak for any idea to be relevant. Bill Gates recognized this early and had a team of recently out of college “technology advisors” (aka geeks) to keep him grounded and abreast of the latest changes. eBay’s executive team must learn to be the same . . . in many ways the most junior people (usually cause they are younger) at eBay was most ahead of the the times. In the end, people making the decision cannot rely on data spoonfed to them in a powerpoint, they need to write a blog, try to get 500 friends on myspace, play vampire/werewolf on facebook, learn RoR, go on a WoW raid, and adopt a penguin - to become a consumer of technology in it purist form (dirty, aimless, useless, emotional - completely non strategic) as to be able to not just absorb information and data - but challenge it and form opinions based on a holistic understanding of all the trends thats happening in the internet - not just the topic at hand.

eBay took an “impairment” charge for the Skype acquisition today of $900M . . . its totally hilarious how people that do not really understand accounting & finance are interpreting this action.

First of all, here is a technical definition of impairment charge. In short, when Company A buys Company B. Any amount of the purchase price above what the book value of Company B is put onto the balance sheet as goodwill. That goodwill is charged as a deduction from earnings every quarter for up to 40 years (something like that).

By reducing $900M from the goodwill of the Skype transaction, eBay is taking that one time hit this current quarter while decreasing its future goodwill amortization amount in earnings.

Couple important back of the envelope calculation first. . .

Skype was bought for $2.6B in 2006. The earn out ended up being $530M. Not taking into consideration time value of money, the total acquisition cost was around $3.1B.

Skype is doing about $90M a quarter. Conservative projection would be that Skype is on track to about $500M in revenue for the forward 4 quarters. Given that these are probably high margin revenue (p2p means no hardware cost), I would give the company a conservative revenue multiple of 10x. (aQuantive was bought for 7.6x revenue multiple - a much lower margin business). The resulting number would be that Skype is probably worth around $5B TODAY.

Ok, so eBay probably overpaid for Skype 2 years ago. But today Skype is certainly worth more than that acquisition price. So the question than becomes, why is eBay taking $900M impairment charge?

hmm . . . thus goes the intrigue . . . . if you guys noticed, eBay stock price started down after the news, but actually went up afterwards. For the fundamental investor, the explanation would be that Skype as a failure is already priced into the stock price. I, on the other hand, believe in the power of market manipulation investor relations . . . i.e. eBay got on the phone with institutional investors after the announcement and detailed the rationale of the write down and the going forward financial strategy for the company. The mutual funds must have liked what they heard and bought up the stock.

I don’t want to insinuate anything but write downs are a well-known financial engineering instrument. . . it has absolutely nothing to do with admiting failure or not on an acquisition. The “when” is much more important than the “why”.

I’ll say this. eBay WILL exceed earning estimates for the next 2 quarters. Either they are so confident of the future to take this hit today OR . . . . . . (click here for research)

From Long Short Capital - the “Llama of Lame.”

This is exactly how I feel about the current rate cut . . . that Helicopter Ben is raining worthless money on the “poor and huddled” masses of wall street while the rest of the country suffers the effects of stagflation in the not too distant future. America’s inability to take the bitter pill will turn the economy into the mess that was Japan in the 90’s.

I would wholesale copy and paste the entire post if I could, but that wouldnt be right . . . just click over the read it . . .

You suck. You don’t have a backbone and as a result you are slowly and very surely making our country and our currency irrelevant. Usually the masses rebel and bring down great empires but luckily for us democracy fixed that problem. Unfortunately, democracy can’t fix how lame and fickle you are and so you will be our ruin.

1) Inflation isn’t 2% like your pathetic CPI ex-Food & Energy says it is.

2) Grow a spine you slimy invertebrate

3) You’re lying to yourself if you think we still have real GDP growth in this country.

It’s like a company doing a 5 for 4 reverse stock split every year and claiming to have 20% eps growth, you haven’t changed the earnings just the units those earnings are measured in. The rest of the world is telling you our country is worth less by massively selling our currency and you still naively think we’re growing value - I feel like I’m at a gathering of the flat earth society or in Zimbabwenomics 101.

eBay just launched an application on Facebook called (unimaginatively) eBay Marketplace. As of now, there are only 250 people on the app so I’m guessing its only in beta. Otherwise just by encouraging the employees to get on, it would have a huge number of users.

There are a few cool features. For one, you can actually “push” an eBay item to your friends’ watch list. For another, you can solicit comments from friends on items you are looking to bid on. All very cool. . . I was surprised a third party app hasnt been launched to do exactly the same and make some money off eBay affiliate program (damn, another item crossed off my crazy idea to-do list).

Another thought is that Facebook has it’s own “marketplace” application which is somewhat competitive with this ebay app. Wonder what they will do. Speaking of conflict of interests, given that Rock You’s “super wall” has become such a big hit, it is inevitable that Facebook enhance the its own “wall” application to allow embeded codes. . . When that happens, I wonder if people are going to start screaming the usual “extend and embrace” MSFT-ish rants about Facebook stealing ideas from its api partners.

Not letting eBay off the hook either, why hasnt eBay’s own social networking app “My World” been given the same the same functionality? My World is a 2001 implementation of a social network . . . ie more like friendster than myspace (win on personalization) or facebook (win on relevance).

Analysts in the advertising industry have been debating for ages why it was critical for Google to build out its non–search properties. One of the most commonly stated reason has been that these additional products can help Google improve its search engine AND its advertising network (both via personalization) by creating a deeper and more consistent behavioral profile of its users (via a login + cookie rather than cookie alone back in the age of Google search)

Well, 3+ years later, Google is seen marching towards that vision pretty unapologetically and brilliantly.

In the mean time, Yahoo sat on its ass and squandered the goldmine of data that it has gathered from its users since 1996. For whatever reason (panama? privacy concerns?), Yahoo not only did not build out its off site ad network, it also failed to leverage those user data to do a better job for its internal display ad targeting. Obviously, simply using SmartAd within Yahoo is a no brainer, the real power would only come after Yahoo has successfully build out its network and Yahoo could track user behavior across the web.

Man, what a waste.

(BTW, the real-time generation of display ad copy and design for targeting purposes is actually pretty cool)

Marc Andreessen’s blog is surprisingly great for non-tech related topics.  Its already raised to the top 10 feed in my feed reader in short couple of months.  Anyways, with the Blackstone IPO all over CNBC this morning, it got me thinking about how LBO funds differ from traditional investments.  I have tons of useless and never applied finance/asset management education . . . so this post by Marc really resonated with me. The most important part is:

What part of the excess return over the S&P 500 index that you are expecting to generate is due to your use of leverage (debt)? Does this indicate that the public companies that you plan to buy are underleveraged? The finance theory of leverage is that a company should take on debt until its cost of that debt is greater than the returns it can generate from that debt — what happens to your model and projected investment returns if public company shareholders and CEOs figure this out and add more debt before you are able to buy them? Further, if what you are really doing is leverage arbitrage versus the S&P 500, why can’t I just buy an S&P 500 index position myself and leverage it up by purchasing call options and get the same result for a fraction of the fees?

Here is the thing, the returns for LBO funds (like Blackstone) looks great compared to the S&P500, but its actually (somewhat of) an illusion.  A large percentage of LBO fund return is from borrowing money to purchase equity which creates an amplified return on a smaller base of actual cash investment.  (think getting a mortgage to buy a house and the price of the house goes up).  Thus you and I can actually mimic blackstone by simply borrowing money to buy the SP500 without having to pay the 30-40% "carry" on the investment profit that LBO funds ask for.  Average joes, regularly borrow money to buy houses,  the same can be done for the index. The only problem is that its (very much unrationally) much much easier to borrow against real estate than it is equity. (that is also why we have a real estate bubble right now).

So the harder question to ask is that what ever fund you buy into (including the Blackstone IPO) are they 30-40% better than what you would get through a simple margin purchase of the index? My guess is that only the top 10% of LBO funds will be worth it (including Blackstone) but most of the other funds are just juicing return by taking on more risk . . which you and I can do pretty easily without paying someone to wear

$3,000 Zegna suit, $400 Turnbull & Asser shirt, $80 Pantherella cashmere socks, $900 A Testoni alligator loafers, $5,000 Omega watch, $500 Gucci cufflinks, and $150 Hermes tie

I love wall street humor

This is a big weekend for the eBay seller community because of eBay Live in Boston. Its a huge bash . . . and generally lots of good feelings all around (sprinkled with some encouraged honest venting as well). Well, it looked like Google planned to crash the party and got the heisman . . .

I remember in 2005 Alibaba pulled the same stunt and gave away mp3 players at a hotel suite next door to the convention center. (sad to say I didnt get one but not because I didnt try! . . . ) Not sure if it was effective at all except it helped expose the poor quality of no name chinese made mp3 players.

I believe eBay and Google still have a detante as far as open warfare, but this is still a crack in the facade. We now know what are the first few cards each side will use when open warfare starts . . . Perhaps Google gently provoked eBay just to see what eBay’s first move might be (brilliant!).

I certainly hope that eBay has all the scenerios planned out (actually I’m pretty sure they have given how meticulous the whole place it) cause the first card they showed Google is certainly a face card and you have to save your better cards for the end. If open hostility does happen, it wont be pretty for everyone. Google probably knows exactly how much revenue they would loose which not only includes direct spendings but also the incremental bids eBay’s ubiqitous adword program generates. eBay on the other hand probably knows all the transactions Google helps drive from NATURAL as well as PAID search as Google will likely blacklist the entire eBay site from its index as the last resort.

If they do so (wipe ebay.com from its index), the act will no doubt be labled and considered “EVIL.” For quite a long time, Google has pointed to the integrity of its organic search results as something they will not compromise for its own interests. (eh. . . ex China ). As bad as this action will be for eBay, long term, it might be even worse for Google as it will forever have to throw away its “do no evil” mantra and come to the self-realization that they too are willing compromise the user’s experience and interests to win at all cost . . . MSFT lost its ways in the early 90’s when it started down this road . . . and it is still trying to rehab that image despite almost a decade worth of PR and hard work.

Hubris . . . this need to “win” against the competition despite all else. . . has and will continue to be the downfall of the mighty.

Another random thought, I took a college class a long long time ago on nuclear warefare/politics and the principles of MAD - Mutually Assured Distruction during the cold war. Using game theory, the logical Nash equilibrium would predict both parties will not provoke eachother ONLY IF both sides remain equally likely to destroy each other if conflict breaks out. So ironically the best course of action for BOTH eBay and Google would be to not only continue to maintain the status quo but also to INCREASE the mutual dependency of both companies - raising the stakes if you will. And thus, coopetition is not only a product of the wierd dynamics of the technology industry but the LOGICAL and RATIONAL thing to do!