Every Seven YearsJuly 14, 2017
Every Seven Years
Jamie Dimon’s (CEO of JPM) definition of a financial crisis is “something that happens every five to seven years.” It’s been eight since the last recession. As you get old enough to observe cycles, as actual cycles, you begin to recognize the economic time you’re in is a point on a curved line and, sooner than you think, the direction of the line will change. Better or worse.
An asset bubble is a wave of optimism that lifts prices beyond levels warranted by fundamentals, ending in a crash. I promised myself that I’d be smarter the next time. “Next” meaning on the cusp of a pop or recession. So, how do you ID when we’ve entered the danger zone, and should you adjust your behavior / actions?
There are several hard metrics for why we may be nearing full-monty bubble, including things my NYU colleagues spend a great deal of time thinking about, and understand much better. But you don’t need a Nobel to see the similarities between 1999 and 2017. (Btw, NYU Stern has three active Nobel Prize winners… We. Rule. But that’s another post.)
I spend more time thinking about softer metrics that, in my view, signal we’re about to get rocked. Some signals that feel so 99:
— Mediocrity + two years tech experience = six figures. Kids who can code and are two years out of school, who are mediocre, are making 100K+ in the market. What’s worse is they believe they’re worth it. If you can code, yay for you. But if you have no real hard skills or management ability, not recognizing you’re overpaid means you won’t have the funds to avoid your parents’ basement when shit gets real.
— Bidding wars for commercial real estate. Firms investors believe are the next Google, armed with cheap capital, roam the streets of NYC and SF, driving up commercial real estate. They are also competing with the Four (Amazon, Apple, Facebook, and Google), who are leasing super blocks in NYC.
— Gross idolatry of youth. I was invited to The World Economic Forum’s annual meeting in Davos when I was 32, pre-crisis, as internet entrepreneurs were the new masters of the universe. I met with several CEOs who wanted insight from me on business, as clearly I had unique insight. No, I didn’t. I was a reasonably talented 32-year-old, who in any other time would have been making only a decent living. Instead, I was Yoda, lecturing more talented business people on what their firms should do. When the dot.bomb hit, I was 34 and returned to Davos, where I couldn’t get arrested — nobody would meet with me.
When times are bad, people look to grey hair for leadership. When times are good / frothy, people look for youth. Evan Spiegel and Jack Dorsey are incredibly talented young men who have built companies that are likely worth hundreds of millions, maybe even a billion dollars, but not tens of billions. Snap, WeWork, Uber, Twitter — combined worth more than Boeing — are run by talented young men who in their next lives will be vice presidents (optimistic) and really grateful. As a former twenty-something CEO of new-economy firms, I can tell you the greatest asset of child CEOs is being too stupid to know you’re going to fail. Young CEOs pursue avenues that are crazy, that sometimes end up being crazy genius. But most are just too stupid (inexperienced) to be running companies that hundreds or thousands of families depend on for their livelihood. There’s a word for what has likely cost Uber $20-40B in value: immaturity.
If the tech boom continues its run, there’s a non-zero probability a teenager will be the founder / CEO of a $1B+ value tech firm in the next decade. When that happens, we really will be on the precipice of the economic zombie apocalypse. If he or she wears a black turtleneck, treats employees like shit, and sports tattoos, or other accoutrements of youth, society will treat them like Jesus Christ. We now worship at the altar of innovation, vs. character or kindness.
Some other signs of a bubble:
— You can’t get a table at average restaurants
— There’s an Uber for private jets
— Jay Z and Jared Leto are considered thoughtful startup investors
— The food at your company is … good
— A lot of articles explaining why “this time is different” (here, here, and here)
— You’re introduced to remarkably uninteresting tech people at Cannes, who people think are “fascinating”
— Tech CEOs are on the cover of fashion magazines and marrying supermodels
— Founders of tech firms believe it’s their responsibility to put a man on Mars and cure death because … you know, they’re awesome
— Billionaires with undergraduate and graduate degrees pay kids to drop out of college #negligent
— Currencies mined by machines are … currency (I have a better understanding of the chemical underpinnings of a Leonid Meteor Shower than Bitcoin or Ethereum #huh)
— There are CEOs of two firms at once
So, If We’re in a Bubble… What to Do?
Don’t start a company. I’ve founded, or co-founded, nine firms. The factor most strongly correlated to success or failure? When they were started. The successful firms were launched as we were coming out of recessions (1992 and 2009). People, real estate, and services are all much less expensive. My Chief Strategy Officer at L2 joined us, in (2009), and has been the secret sauce of our success, as her offer from a consulting firm was delayed (see above: recession), and my offer of $15/hour was her best option. Note: she makes substantially more now.
Companies started in boom times, struggled. The people our firms have been able to attract in boom times (1998, 2006) were mediocre, as great people were killing it elsewhere. In addition, cheap capital served as a hallucinogen for the viability of our products and services in the marketplace. Right now, stick with a big company who, if you’re good, believes you’ll leave for Pinterest if they don’t pay you well.
If you’re a startup, or any firm for that matter, raise money as if you won’t be able to for a while. If you are raising $1M, raise $5M. In general, you want to raise money when you don’t need to.
Don’t go to business school (will catch heat for this one). Business school has become the domain of the elite and aimless, or a place to take refuge from a recession. If you’re doing well at a good firm during a boom time (now), stay put.
I don’t want to give financial advice, but will discuss what I’ve done in 2017. In sum:
Or at least assets I don’t expect or want to own for at least ten years. If you’re young, your money in the market can survive gyrations (difficult to time the market). But if you’re an entrepreneur or find yourself sitting on assets that represent a large portion of your wealth, I’m comfortable saying, while this may not be the best time to sell, it’s most certainly not a bad time to sell. We sold L2 this year, as market dynamics trump performance, and, while I was confident about the firm’s prospects, we are eight years into a bull market and due, even overdue, for a correction.
Despite well-publicized examples of people who made billions with extreme concentration of their wealth (Bezos, Gates, Zuckerberg), assume you are not one of these people and pursue one of the truisms of investing / accreting wealth: diversification. If you’re fortunate to have one asset (stock, a house) run up so dramatically that it represents the (vast) majority of your wealth, get as much of that asset liquid as possible. If there is pressure not to sell, ask yourself if the people (board, investors, market, media) pressuring you are already rich, and ignore them. Most times I’ve had a substantial runup in one of my assets (usually stock in one of my companies) and not pursued liquidity, the market steps in and diversifies for me via a crash in the value of Prophet / Red Envelope / CSCO. You want to be the arbiter of diversification, not the market.
I’m 80% in cash, which most reasonable financial managers will tell you is stupid. Even if it’s stupid, it doesn’t get near the medal podium of stupid things I’ve done (like turning down $55M for my first firm at 32, which was doing $4M in revenues; being 100% in tech stocks, etc). So, there’s that. Every time the bubble popped, I wished I had dry powder (lots of it), as the market becomes the anti-corollary to Snap — good companies at low valuations (Williams-Sonoma at $5/share, Apple at $12, etc.). I’m willing to give up gains, as I so badly want to be on the right side of the street when the recession hits this time. Note: again, smart financial advisors will tell you to always be in the market. I just can’t help it … mattress time.
We anchor off how we look when we’re 37 (mental image of our looks regardless of being 50, 60, or beyond). Every time I look in the mirror it’s a mix of horror and fascination at all the fucked-up things happening to my body. Backfat … who’d have known? Anyway, we tend to anchor off of the good times, and believe that is normal. No, it isn’t.
Humility and Solace
It’s key, if you’re doing really well, to realize that much of it isn’t your fault — you’ve been swept up in a boom. This humility will result in your living within your means and preparing you financially and psychologically for the next card. And when the next part of the cycle shows up, and it will, you can take solace, as (again) it’s not your fault, and you aren’t the idiot the market claims you are.
Life is so rich,