
Are You the Fool at The Table? - cwan
http://steveblank.com/2011/06/17/are-you-you-the-fool-at-the-table/
======
gallerytungsten
I think Steve is on the money with this article. In particular, with this key
proposition:

"The issue is whether the next 100+ tech IPO’s carried by this bubble will be
worth their offering price in 8 years."

Ask yourself that question. We're going to see a lot more IPO action, and 8
years from now, I think many will be gone.

As an aside, I strongly recommend Steve's book "4 steps to the epiphany." It's
the equivalent of a graduate school level course on entrepreneurship.

~~~
hzay
I read the first 40 pages of "4 steps to the epiphany" at
[http://www.stanford.edu/group/e145/cgi-
bin/winter/drupal/upl...](http://www.stanford.edu/group/e145/cgi-
bin/winter/drupal/upload/handouts/Four_Steps.pdf). It's remarkably dense
reading but for someone who was not around during the 2000 bubble, it contains
valuable information about what happened.

------
wolfparade
"There are five types of participants: Smart Money, the Shills, the Marks, the
True Believers and the Promoters." I want this to be the start of action movie
then you get to see each type of character and how the situation plays out.

------
dexen
Slightly off-topic: looking at his graph, I remembered the idea that internet
traffic is fractal-like in time domain.
<http://c2.com/cgi/wiki?InternetTrafficIsFractal>

...because the graph looked just like a fractal fragment to me. That
coincidence, or are stock prices indeed fractal-ish in time domain?

~~~
JonnieCache
_> are stock prices indeed fractal-ish in time domain?_

Guess what Benoît Mandelbrot studied before he started doing pure maths? ;)

EDIT: for bonus points, guess why he fell out with his old friends in the 90s.

~~~
arethuza
Did he suggest that the quants at hedge funds were merely lucky rather than
supremely clever?

[http://liberalironist.wordpress.com/2010/10/08/book-
review-t...](http://liberalironist.wordpress.com/2010/10/08/book-review-the-
quants-part-ii-the-meaning-of-models-statistics-and-social-science/)

[Edit: I have read _The Quants_ it's an interesting book]

~~~
JonnieCache
It's to do with the asian and russian crises of the late 90s, which he felt
showed that the black-scholes models were wrong and inferior to his own
multifractal view of the market. After those crashes, he wrote articles and
books attacking those ideas.

[http://www.scientificamerican.com/article.cfm?id=multifracta...](http://www.scientificamerican.com/article.cfm?id=multifractals-
explain-wall-street)

[http://books.google.com/books/about/Misbehavior_of_markets.h...](http://books.google.com/books/about/Misbehavior_of_markets.html?id=9w15j-Ka0vgC)

~~~
dxbydt
When you model equities as log-normal ie. log(stock price) is normally
distributed, and then use the geometric brownian motion to model the
underlying, which spits out derivative prices using Black-Scholes. The problem
is that normal distribution is thin-tailed ie. 5 sigma events are extremely
rare. So use a fat tailed distribution - which is what Mandelbrot did. He used
a power-law ( Pareto ) distribution because its infinite variance permitted
wider swings in price than the Gaussian. However the simplicity of using a
Normal distribution is what makes Black Scholes so robust. If a thousand
statisticians look at market data over a time window & model it to fit a
lognormal usaing MLE, they'll come up with approximately the same parameters,
so calibration is relatively easy. In fact this is one of the standard
exercises in any MFE pgm - to calibrate a derivatives model corresponding to
underlying data over a time window. With Mandelbrot's Paretian distribution,
calibration is virtually impossible. No two people get the same parameters
given the same data points on a Paretian model. There is quite a bit of
literature on this very topic, in both Taleb's last book & elsewhere.
Mandelbrot points out how given different time windows, the Paretian
distribution can be calibrated to fit virtually anything, but the parameters
will change wildly.

Essentially, given the choice between an inaccurate robust simple Gaussian
model with high predictive power and a supposedly accurate but un-usable
Paretian model, financial engineers choose the former & add fudge-factor
explanations ( eg. the vol-smile ) to augment the data.

1\. [http://blogs.reuters.com/justinfox/2010/10/18/why-
didn%E2%80...](http://blogs.reuters.com/justinfox/2010/10/18/why-
didn%E2%80%99t-people-in-finance-pay-attention-to-benoit-mandelbrot/) 2\.
<http://en.wikipedia.org/wiki/Fat_tail> 3\.
[http://brokensymmetry.typepad.com/broken_symmetry/2009/08/wh...](http://brokensymmetry.typepad.com/broken_symmetry/2009/08/what-
mandelbrot-and-fama-both-got-wrong.html)

~~~
MetaMan
Thank you. I understand things a bit better now.

------
tatsuke95
Mr. Blank makes some great arguments, and I tend to agree with him.

What's fantastic is that we're so recently removed from a bubble (in housing)
that it's entirely familiar. Take his arguments, like the "five types of
participants", and apply them retroactively to that bubble. Perfect fit.

Denying the next bubble is futile. They exist; always have, always will.

~~~
abrenzel
Not just a housing bubble but a bubble in the exact same industry sector as
well!

Of course, a bubble is fundamentally a gross mismatch between future
expectations and actual returns. That's why there's no learning from the past,
and why it's always "different this time."

More importantly, bubbles don't occur in a vacuum. The 1990's tech bubble
wasn't just because the internet was new, and everyone thought it was going to
be great. The 1990's also featured low interest rates, the repeal of Glass-
Steagall, and other loose policies conducive to asset bubbles. Sound familiar?

Such policies force money to chase yield, which means risk. As it does so, the
market sends false signals about the true value of its companies, which
reinforce themselves until some "Black Swan" event reveals the imbalances. In
2008, that event was the fall of Lehman Brothers.

As I noted below, if the national government continues to tighten its fiscal
and monetary policy, then this bubble will be over before it really began. If,
however, the government reloosens after the end of QE 2, it will most likely
be full steam ahead.

------
wccrawford
Interesting article, but I found a contradiction:

"Smart Money" ... "but they don’t hype it, talk about it or fan the flames."

"Promoters" ... " they are a small subset of the Smart Money" ... "They loudly
tell the Marks and Shills that everything is just fine, enticing them to buy
into the bubble,"

Promoters can't be a subset of Smart Money because Smart Money doesn't talk
about it, but Promotors talk about it very loudly.

For a couple years now, I've been looking at the market and trying to figure
out how to take advantage of the trends. Be 'Smart Money' in other words. I
don't think I have the financial sense to make it happen, though.

~~~
Shenglong
I think what he meant to say, is that the _Smart Money_ typically does not
talk about it or hype it up. However, there are exceptions - and _promoters_
are those exceptions. Perhaps he's making a moral value call, saying how most
good investors aren't actively _trying_ to screw the public?

~~~
wccrawford
That could be. The words 'in general' would have fixed the contradiction.

And I don't think he's making a moral judgement... There are plenty of reasons
to keep quiet about good investments that are all over the moral scale.

------
natural219
The full second part of the Economist debate was linked (with Horowitz's
response), if you're interested:

<http://news.ycombinator.com/item?id=2665389>

------
kenjackson
_“the size and scale of these new markets have never been seen before; some of
these applications and companies will reach billions of customers, generate
unprecedented revenues and profits,”_

Statements like that always come with bubbles too. They are necessary, but not
sufficient. The old dot com bubble was all about a new economy that defied
standard valuations -- so you couldn't apply historical models to new these
new "internet companies".

------
jdp23
For those who have been following the Economist debate, I'm curious who you
think is getting the best of it so far?

------
Aloisius
Wait, Steve is making the argument that the bubble only exists for new tech
companies? Considering there only a handful of IPOs of social/web/mobile/cloud
companies, how exactly will this supposed bubble form?

None of these stocks has done well. The market has corrected or is correcting
all of them. If there is a bubble and we are on the upswing, it is the least
impressive bubble ever.

~~~
abrenzel
I think a lot of conventional analysis of investments is looking more foolish
than usual because the market isn't keying off what people think it is. Three
major things have dominated market movements since the 2008 crisis:

1) Rock-bottom interest rates (and a depreciating dollar) 2) Quantitative
easing 3) Enormous deficit spending

All of these things, through mechanisms both simple and complex, have driven
money into equities and speculative investments such as start-ups.

While interest rates will remain low for quite a long time and deficits will
no doubt continue, QE2 expires at the end of the month. Additionally, the
proportion of the deficit is moving away from stimulus into structural
spending such as Medicare. The natural response by the major market players is
profit taking. Hence, the IPOs at bubble-like valuations (LinkedIn, Pandora,
etc) are running into the teeth of a "smart money" evacuation of the stock
market.

If the Fed and government overcome political pressure against further loose
policy (always possible if the economy continues to weaken), then I imagine
the LNKDs and Ps of the world will pop back up to the eye-watering valuations
they attained at the time of their IPOs.

If national fiscal/monetary policy continues to tighten, then the bubble will
have been ended before it really began. In which case, LNKD and P will
continue to decline, and I would not be surprised to see some of the other hot
properties like Zynga delay their market entries. The market for VC funding
will also become substantially tighter.

------
athst
Getting a little tired of "former entrepreneur" professors like Steve and
Vivek playing the wet blanket in tech. It's too easy to be negative,
especially with the first dot-com bubble so fresh in our minds. It's a lot
harder, and more rigorous, to be positive in a frothy market. You have to be
smart about it, but you still have to be in it.

~~~
cosgroveb
It's harder and more rigorous to follow the herd in a "frothy market"?

~~~
athst
It's not about following the herd - it's about being where the herd is
(because that indicates there is something big there) but choosing your bets
carefully and controlling what you can control. I think it's too easy for
these people to throw everything out altogether like we should all just go
home and not even try.

