The Vasa Ship

I apologize for the lack of blogging lately — I have recently been embroiled in a very long and involved exercise involving a very complicated set of analyses to look at where the profits are in the broader technology industry — something which my manager and two partners have jokingly referred to as a Vasa ship.

When I stared blankly back at them the first time they mentioned the phrase “Vasa ship”, they chuckled before “kindly” explaining what it meant.

There was a time (a long long time ago) when Sweden was a great military power (no, I’m not joking). The King of Sweden, Gustavus Adolphus, wanted to create a flagship for his fleet — something enormous and powerful — not only to wave the Swedish flag but to also help bolster Sweden’s Navy which found itself frequently involved in wars with the other great powers of the time. To do this, he commissioned the construction of a ship — the Vasa — which was supposed to be the best and largest of its kind.

Of course, ships take time to build, and before the ship was completed, the King had became aware that the original Vasa design was already outdated by the newest models from England and France. To “keep up with the neighbors”, the King then demanded that his shipbuilders build something even greater — larger sails, better guns, etc. The shipbuilders did the best they could — given that they had already built a reasonable piece of the ship — and remade the ship — bigger and badder.

And of course, like all big engineering projects, this cycle of revision occurred again. And again. And again. Until, the ship became some bizarre, monstrous hybrid of what it was originally designed to do and all the myriad features and designs that the king had wanted in addition — becoming something it was never ever intended to be.

And, of course, on its maiden voyage — the Vasa sank to the bottom of the ocean.

One can hopefully see why I’m not particularly fond of the fact that I am working on a “Vasa ship” — something designed for one purpose, but forced to take on extra weight and functionality that it was never intended to handle. Not only does it suck to work on (having multiple people telling me to add tons of new things — each, of course, “top priority” — to my analysis constantly can be quite harrowing), but it also stands a decent chance of “sinking” and, if history is any judge, of sending its architect to prison.

*gulp*

Farewell Jeremy Knowles

I was very sad to discover online the death of Jeremy Knowles, renowned biochemist and former Dean of Harvard’s Faculty of Arts and Sciences. This is especially poignant for me for two reasons.

The first is academic. Throughout college, I was very interested in the study of chemical biology — the chemistry of living processes. Part of this was due to my fascination with Knowles’ work. Professor Knowles was famous for his studies which bridged our early understanding of chemistry with that of natural biological processes. His work in enzymology helped explain how TIM (triose phosphate isomerase, a critical enzyme in one of the chemical reactions which allow cells to turn food into energy) worked and developed a chemical understanding of how antibiotics like penicillin work and how clavulanic acid helps to fight antibiotic-resistant bacteria. When you’re as big a science dork as I am, that is just endlessly fascinating.

The second reason is a more personal one. A few years ago, my roommate Eric and I had the opportunity to dine with Professor Knowles at the Harvard Faculty Club. There we were, face-to-face with a well-respected intellectual luminary and someone who had tangibly shaped the destiny of teaching and student life at the university. I walked away with a sense of wonder at the man — in one short dinner, he was able to imbue in each of us a sense of awe at his sheer brilliance, and all delivered with such charm that you would hardly know he had been the Dean of one of the world’s foremost academic institutions and appointed a Commander of the Order of the British Empire by the Queen of England.

My heart goes out to Mr. Knowles’ family, as well as to the Harvard community he served so well.

A Baby by Any Other Name…

My dear college friend Cori passed this gem from the Onion along.

Woman Overjoyed By Giant Uterine Parasite

Immediately following a physician’s examination for her menstrual cessation, 37-year-old events planner Janice Crowley told reporters Tuesday that she is “ecstatic” with her diagnosis of a rapidly growing intrauterine parasite.

“I’m so happy!” Crowley said of the golf ball–sized, nutrient-sapping organism embedded deep in the wall of her uterus. “I was beginning to think this would never happen to me.”

Crowley’s condition is common and well-documented, with millions of women between the ages of 12 and 50 diagnosed every year. Studies have shown that while the disorder strikes without prejudice across racial, ethnic, and class lines, it bears a very high correlation with the consumption of alcohol at the time of infection. Although there is a low-cost daily medication available that can prevent the harmful symbiote with 99 percent efficacy, many women inexplicably choose not to use it.

Symptoms of potential uterine blight are wide-ranging and can include nausea, vomiting, constipation, irritability, emotional instability, swollen or tender breasts, massive weight gain, severe loss of bone density, fatigue, insomnia, excessive flatulence, hemorrhoids, vaginal tearing, and involuntary defecation.

“We’re thinking of naming [the parasite] either Robert or Lisa,” Crowley said. “I just couldn’t be more excited!”

Among the many signs that Crowley’s condition is deteriorating rapidly is a frequent compulsion to consume foods in unorthodox and often revolting combinations.

In what will likely be the most painful experience of her life, Crowley will eventually require hospitalization in order to remove the giant entity. There is at least a 15 percent chance doctors will be forced to cut the parasite directly from her abdomen, a procedure that would result in severe trauma and scarring. If Crowley survives the operation, she will have to cope with the minimum 18 additional years of emotional and financial drain that is typically associated with this parasite, as well as irrevocable harm to her toned and relatively youthful body, This includes scarring to her breasts and stomach, and a series of visibly pronounced veins along her thighs and groin.

And yes, Cori is pregnant, which makes this all the more funny.

The Internet = random studies

The internet is full of random gems from people who apparently have way too much time on their hands.

Example 1 – Red Shirts

Star Trek fans around the world will smirk when they hear the term “red shirts.” What it refers to is the practice of various Star Trek series to have random characters (oftentimes those dressed in red uniforms) suffer horrible fates as a result of a series probably being unwilling to kill off one of their stars. After all, somebody has to suffer to make an episode of Star Trek dramatic and interesting (yes, that was sarcasm).

But, just how real is this phenomena? In addition to being a wikipedia entry (which we all know is the true litmus test for what is a real phenomena), this article from The Inside Track (hat tip: Eric) performs an analysis on the red shirt phenomenon from the Original series (the one with William Shatner as Kirk — before Shatner got fat and old) and finds that not only “red-shirted crewmembers died more than any other crewmembers on the original Star Trek series“, but even goes so far as to analyze what caused those deaths (more than half involved beaming down to a planet and 10% of fights involved a red shirt fatality) and what factors were associated with those deaths (apparently, Kirk getting with alien women reduce the probability of death, but if Kirk gets with a woman and gets into a fight, red shirts beware). The conclusion?

“We can reliably improve the survivability of the red-shirted crewmen by only exploring peaceful, female-only planets.“

Example 2 – Ludacris’s Ho’s

Ludacris is one of my favorite rappers — his distinct voice and the sheer oddness of some of his rhymes is a very strange and interesting combination. One of his most outlandish songs is called “Area Codes” and involves Luda (as he sometimes calls himself in rap song) rapping about the hordes of women he has around the world (or as he puts it “ho’s in different area codes”).

Now, while he mentions women in the Philippines, Hong Kong, and Thailand, he mentions specific US area codes — something which appealed to a geography major who proceeded to map out Ludacris’s ho’s:

The conclusions?

• “Ludacris heavily favors the East Coast to the West, save for Seattle, San Francisco, Sacramento, and Las Vegas.”
• “Ludacris travels frequently along the Boswash corridor.”
• “There is a ‘ho belt‘ phenomenon nearly synonymous with the ‘Bible Belt’.”
• “Ludacris has hoes in the entire state of Maryland.”
• “Ludacris has a disproportionate ho-zone in rural Nebraska. He might favor white women as much as he does black women, or perhaps, girls who farm.”
• “Ludacris’s ideal ‘ho-highway’ would be I-95.”
• “Ludacris has hoes in the Midway and Wake Islands. Only scientists are allowed to inhabit the Midway Islands, and only military personnel may inhabit the Wake Islands. Draw your own conclusion.”

The Internet. Can’t live without it.

Bank Financial Statements are Toilet Paper

I’ve posted before about my skepticism towards financial statements in general. This problem is compounded when dealing with financial reports from financial services companies, making them about as useful as toilet paper in times of financial turmoil (except that toilet paper is softer — which makes these financial reports even less useful than toilet paper I suppose).

The reason for this is that the business models of these financial services firms are highly dependent on something I’m going to call “non-real” assets — instead of converting raw materials and labor into a product (intellectual or physical) to sell, they depend upon price movements in financial markets, on credit risk, and on leverage (borrowing other people’s money). Now this is not an angry tirade that the financial services industry is worthless (somebody must think what they’re doing is worthwhile if they’re paying them so much) but merely my illustrating that the assets and holdings a financial services claims to have are oftentimes illusory by virtue of the fact that these firms make money by watching these assets and holdings change market value.

This distinction between “real” and “non-real” is difficult to make given that “real” companies also have to deal with similar issues (e.g. a steel company’s holdings will be worthless if we all stop using steel), but I believe it’s a useful tool to understand the current credit crisis. In a nutshell, the financial services industry is reeling from broken markets, debtors defaulting like crazy, and creditors calling in loans and being reluctant to make new ones. As a result, the profit engine for the industry has come to a sudden and sputtering stop, orders of magnitude worse than what you would expect just by looking at their financial statements from last year.

This problem — that investors can’t really gauge what a financial service company is doing through official financial documents — is made even worse when you consider that one common tactic banks have used in recent years is to create Structured Investment Vehicles (SIVs), a practice which is tantamount to creating new companies who’s sole purpose is to invest the money of the parent bank but with little public scrutiny. This arrangement lets the bank make risky investments “off balance sheet” — or, in other words, make investments which don’t show up anywhere in official financial reports unless, as has been happening recently, the investments suddenly become worthless.

As Marc Andreessen aptly points out (hat tip: A. Phan), “Remember Enron? Imagine Enron times a hundred.“ 

Given the IMF’s recent estimate that the subprime crisis will destroy $1 trillion of value, that means we are talking about nearly $200 of market value destruction for every single human being on Earth.

The solution? I’m not sure. I have doubt over how much “better” accounting standards can help thwart problems like the current credit crisis. Different accounting standards may help address the issue of off-balance sheet SIV holdings, but they can’t change the underlying fact that financial services firms make money from forces/factors which fundamentally make financial statements less useful. They also can’t prevent swarms of people from knowingly taking large risks. The only guidance from this is to be very wary of what you read — just like you can’t make money off of a tech company that has no product, you also can’t make money off of a financial services company that is holding worthless illiquid assets, no matter how much they claim on their balance sheet.

Door number 2?

One of the classic examples of un-intuitive probability is the Monty Hall problem whereby an individual is presented with a choice of three doors — behind one is a prize and behind the other two are nothing. After the contestant selects one door, he is shown one of the other two doors which hides nothing behind it. The contestant is then given a chance to change his/her mind. The question is: should the contestant change his mind?

Many people who are faced with this problem oftentimes see the choice as irrelevant — reasoning that they have even odds between the door they have currently selected and the remaining unknown door. This, however, is the incorrect answer. The optimal strategy is to switch. (You can test this yourself if you don’t believe me)

The simplest explanation I’ve heard (courtesy of this New York Times article, hat tip: A. Garvin) for this is that the probability of winning the prize if you don’t switch is 1 out of 3 (the probability that you guessed right the first time). On the other hand, the probability of winning the prize if you do switch is 2 out of 3 (the probability that you guessed incorrectly the first time — in both cases where you guess wrong, the other incorrect door will be shown meaning that switching will get you the right door).

The NYT Article I linked proceeds to talk about economist M. Keith Chen’s use of this simple toy case to debunk a large swath of psychology experiments around the concept of cognitive dissonance (that people forced to choose between things they are indifferent between will rationalize that they actually preferred what they wound up choosing) by pointing out with this test case how the initial choice changes the odds involved in subsequent choices.

Very interesting, very well done, and I think most people would agree it casts a new light on much of the theory behind cognitive dissonance.

Opera Mini 4.1 Beta

I’ve previously posted about my love for the Opera Mini browser as a great alternative to the Blackberry default browser, citing faster browsing (via Opera pre-caching and then compressing requested web pages) and a better UI as big reasons. More recently, they’ve added additional features to the newly released Opera Mini 4.1 Beta, including:

• searching the current page for text
• even faster browsing experience
• autocomplete URL box
• ability to save pages and other files for offline viewing

All this and more in the demo video below:

They Do Things Differently in Japan

As I’ve mentioned before, my current client is a large tech company who is asking us for strategic guidance. It is no wonder, then, that I have spent a fair amount of time looking at the major Japanese tech companies who, at times, seem to have a stranglehold over the global technology industry.

These companies are very interesting and very distinct from most American corporate models for a number of reasons.

The first is they tend to be organized as enormous monolithic conglomerates. A company like Sony manufactures way more than just Playstations, they also manufacture LCDs, home appliances, and even sell financial service! And this is not atypical. Most of these corporate entities are huge umbrella companies overseeing several enormous and seemingly un-related divisions. Epson, in addition to making printers, are also in the business of manufacturing semiconductors, corrective lenses, and watches! Japanese companies also tend to be very stubborn about selling off divisions, even going so far as to retain majority share ownership even if they do “sell off” divisions!

While there are some Western companies organized in this fashion (GE comes to mind), it is usually accepted in the West that management’s ability to maximize the potential of completely separate businesses is oftentimes severely limited. This “business principle” explains two interesting phenomena. First, it shows why businesses divesting themselves of poorly performing divisions oftentimes improves the financial position of both the parent company AND the spun out group (management can better focus on one core business rather than several). And secondly, it underscores how mergers & acquisitions oftentimes fail — diversify your business too much, and you spread your management’s ability to drive performance too thin.

The other very quirky thing that I noticed about publicly traded Japanese companies almost universally is that their annual reports always have a section in the front which is basically an interview with senior management complete with “candid” photos like this one with Epson President Seiji Hanaoka.

The interviews are usually soft-ball questions (“you are so awesome — why is that?”) fielded to smiling executive (“because I think my losses aren’t so bad this year!”) who are sitting in front of either some blurry, beautiful looking scenery (like Mr. Hanaoka above) or in front of some display with their products or in some cushy corporate lounge spot like with these happy Sony execs.

It almost makes you think that working in Japanese company is a non-hierarchical, fun, easy-going environment where you can still go home and see your wife.

With that said, it should be remembered that despite my good-natured joking, these companies are major powerhouses in the technology industry (just how important is that American work-life balance?) and that the quality of information and insight in their annual reports (and some would argue their corporate performance) do not suffer as a result of these quirks. If anything, it suggests that they take their jobs very seriously.

Credibility Problem

By now, most people have heard about the crisis which befell Wall Street firm Bear Stearns, which suffered from what was essentially a bank run as a result of doubts about its ability to weather the credit crisis. The result was a dramatic loss of shareholder value — Bear Stearns’s stock price plummeted from around $100/share in early 2008 to around $30/share on March 14 to $2/share on March 16, which in turn led to the somewhat controversial move by the US Federal Reserve to extend an enormous line of credit to help JP Morgan acquire the flailing bank.

Suffice to say, Bear Stearns is not a bank to be looking up to right now.

Which makes this article from Reuters (hat tip: A. Phan) titled “Bear Stearns cuts Citigroup, Bank of America 2008 share view” that much more amusing:

“Bear Stearns cut its 2008 earnings estimates for Citigroup Inc and Bank of America Corp to reflect anticipated write-downs and higher credit costs.”

While, I am of the opinion that the Federal Reserve made the right choice (shoring up the financial markets by preventing one disaster from ballooning into a much larger one), that what happened to Bear Stearns is more a product of herd psychology than an underlying problem with Bear Stearns’ fundamentals, and that plenty of smart analysts still work there, I think after the past month, Bear Stearns has no business bad-mouthing other financial companies.

Unless of course, they’re making the “takes one to know one” argument here…

Consulting in Four Words?

Not sure I agree with this, but it’s still amazingly funny. (Hat tip: D. Chu)