3 Problems with the Financial Services Industry

Here are the main problems with the financial services industry as I see it:

1. Broker/Client Interests are NEVER Aligned

You may be asking, “Well if I make more money doesn’t my broker make more money? And isn’t that good for the both of us?”

Theoretically, yes. However, as long as an adviser is paid based on the number of trades you make or the amount of money you keep in your account then he or she is NEVER motivated to do well for you.

They are not paid based on how well your stocks perform – whether or not your account goes up or down they still get paid a commission every single time you buy and sell a stock.

That’s like having a car mechanic who gets paid for the number of times he fixes your car – he’ll just make sure it stays broken for as long as possible and will continue to steal your money!

2. It’s Never About Making You Wealthy

The other thing to realize is that the people who work on Wall Street don’t want you to become insanely wealthy. If that happened then there’s a chance you’d leave them.

There’s a chance you’d stop playing the game.

So why would they try to make you wealthy? Answer: they won’t!

Instead they feed you products like Mutual Funds and Index Funds so you’ll just mimic the market and do average! Not good, not bad, just average.

3. They Always Keep Control

And one of the biggest scams that Wall Street has going for them is that they convince the investing public that investing on their own is dangerous. They convince everybody that in order to do well you need an army of analysts and bankers to tell you which stocks are good and which stocks are bad. Then, and only then, can you profit in the market!

If that were the case then why do most Mutual Funds have a tough time beating the market? And on the flipside of that argument, why does the most successful investor in the history of the world have an office of only 8 people?

Bottom line: There’s no good reason why you can’t do just as well investing on your own if you equip yourself with the right information!

Blurring The Line

As you can see there’s a serious problem in this business – there’s always a clear line in the sand: “you” and “them”. It’s never “us”.

We need to change that and we need to change it fast. We need to come up with a way where you and those you take advice from are sitting on the same side of the table.

The only way that gets done is if we change the nature of the client-advisor relationship – it can no longer be a “one way relationship”, it has to become a relationship of reciprocation, a “two way relationship”. Let me explain what I mean…

As of right now what happens when you buy a stock?

Your broker calls you (or vice versa) and rattles off a couple of stocks – you pick the one that sounds best and you buy it. That’s a one directional relationship – your advisor pushes information toward you.

Now, think about it this way – what if you could sit down at the same table as your advisor and have him teach you his process for digging through stocks?

Well, we know that would never happen due to the reasons we talked about before – if they gave away the “secret sauce” then you wouldn’t need them anymore. If they showed you how to invest, then you could go off and do it on your own.

Well, for most established companies in this industry that logic makes a lot of sense – it wouldn’t be in their best interests to make you a great investor. It would be in their interests to make you dependent upon them.

That's why I'm so excited about what we're doing at TickerHound - we have a distinct advantage here and that’s why our perspective on the situation is dramatically different from most. Our business isn’t predicated upon keeping you (and other individual investors) under our control.

We want to set the information free and allow you to live up to your fullest investing potential!

There are other companies in this space doing the same thing - Covestor.com, CakeFinancial.com, Wikinvest.com - all great companies and all looking to do the same thing: level the playing field so the individual investors out there have a shot at taking their financial futures into their own hands and making better financial decisions today!

Why Buffett Would Never Buy Google

Yesterday on TickerHound.com, a member asked, “Would Buffett really buy Google?”

The question was based on a Fool.com article (click here to read it) that quoted this year’s Berkshire Annual Shareholder Letter where Buffett writes, “It's far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.”

I could see why this led some to wonder – and the Fool.com even wrote an article about it – if Buffett could potentially invest in Google. This made me laugh if for no other reason than Buffett mentions Microsoft in the same sentence…a company he knows intimately (considering Bill Gates sits on Berkshire’s board) but has yet to ever invest in.

But let’s leave that part out of the equation for a moment, let’s just look at the “Google angle” and try to answer the question: Would Buffett really buy Google?

For consistency’s sake, I’m going to analyze this in the exact same way the Fool.com article did:

Is The Business Simple and Understandable?

Definitely!

Google is an ad broker – plain and simple.

We can talk about their technology all we want – and believe me, that’s what makes their ability to broker ad dollars so effective – but at the end of the day, the way the company makes 99% of its money is by putting publishers and advertisers together.

That’s a pretty plain vanilla business to me (regardless of all the sophisticated search technology they have on the backend).

Do They Have Favorable Long Term Economics?

I’m going to skip this for a moment and come back to it at the end. You’ll see why below.

Is Management Candid and Competent?

I’d have to give the affirmative answer on this one as well.

The founders, Larry Page and Sergey Brin, both have the better part of their net worth’s tied up in Google stock. That means management’s interests and the share holders’ interests are certainly aligned – something Buffett always looks for in a company he’s buying.

And in terms of candor and competence – their execution speaks for itself and if you’ve read Google’s annual reports and even their S-1 filing, you’d know that they’re candid and up-front about how they manage their business.

So this item gets checked off the list as well.

Is The Price Right?

Here’s where we run into problems…

Buffett’s brilliance isn’t based on the fact that he knows how to value an asset…I know a lot of folks who can value an asset.

My father knew exactly what we should pay for our home when I was a kid.

I could tell you right off the bat how much I’d pay for new car.

In fact, Finance 101 teaches people basic asset valuation models – more specifically, Discounted Cash Flow analysis.

The ability to value an asset isn’t difficult…you just plug some numbers into the equation and you get your value.

The difficult part is making sure the NUMBERS themselves are the right numbers.

So now you’re probably asking, “How do we know if the numbers we’re using are correct?”

Well, you’ll never be able to tell if the numbers are EXACTLY correct – you’ll have to use your best judgment (and even then you’re probably going to be off, and that’s why in Ben Graham’s infinite wisdom he taught Buffett – and thousands of other value investors – to apply a “margin of safety” approach to business valuation…but that’s another story).

But here’s the caveat (and this goes back to the “Does the business have favorable long term economics?” question)…according to the Fool.com article, because the internet has favorable long term economic characteristics, and Google is by far and away the leader of the internet pack at the moment, they assume that Google will therefore have favorable long term economic characteristics as well.

But that just isn’t so…the tech sector is predicated upon the process of creative destruction. Companies must find new and innovative ways of doing things or they’re destined to become obsolete. I mean, how many times have we seen this happen in the last 10 years?

To argue that Google will ALWAYS maintain a competitive advantage in a space that changes by the hour is foolish (no pun intended).

That’s why Buffett only invests in mature companies that compete in mature industries. It makes the tough part of business valuation (using the right numbers) much, much easier.

So to answer the original question as simply as possible, would Buffett ever buy Google?

In my opinion...Not anytime soon!

Click here to leave your answer to this question.

Integrating user feedback...

Today we launched our new and improved TickerHound design!

Well, the design isn't very "new", it's just been updated a bit based on all the feedback we received from the TickerHound community over the last 10 weeks.

From the get go we told ourselves that we wanted to build a site that our users absolutely LOVED to visit. Our goal was to create the iPod of financial education sites - and no, I don't mean it would play music when you visited, I mean that we wanted the user experience to be so damned compelling and so pleasurable that every visitor felt like the site was built just for them.

So in order to do that we knew we'd have to be in constant communication with our members. We knew we'd have to actively solicit feedback from and actively LISTEN to what they were telling us.

Now, when requesting feedback, it's very easy to take the stuff you want to hear and throw out the rest. I believe it's what psychologists call the "confirmation bias" - you tend to only pay attention to the data that supports your predetermined hypotheses. Being that this predisposition is hardwired into our brains, we knew we had to be OVERLY conscious of it and integrate it into our decision making process on a regular basis.

So as we worked with our design team over at nclud, LLC. (great guys, super talented, I highly recommend them) we would constantly revisit older feedback surveys. We would reexamine data we originally tossed out and we'd revisit features we decided not to add - some of them stayed in the trash can, others ended up on the site.

The point being - while you can't take every single suggestion from every single member, you are doomed to failure if you don't actively examine and reexamine what your users are telling you. Those who fail to ACTIVELY LISTEN will die!

Ok fine, I'm being a little over dramatic here but the point is still the same - listen to your members and they will help you succeed.

The other thing we had to remember was that sometimes our members will tell us more through their actions than their words. For instance, when I saw that we were getting a higher percentage of user activity per day on older questions (questions not on the first page of the questions list), I knew we had to add more numbers to our pagination scheme (it used to be 3, now it's 9).

We also relied HEAVILY on our Google Analytics data - yes, we're cheap, we use Google Analytics. Here's a perfect example:

One of the goals with the redesign was to increase the amount of time visitors spent on the site. It's not particularly low or anything but it'd be great to get it higher (obviously). So I examined the pages that have gotten the highest exit rates over the last 8 weeks. Then I used Google Analytics to track the visitors' paths through the site until they hit the high-exit pages.

It turns out that the pages they exited on tended to only be the 2nd Question page they visited (these are the pages that contain the full question and the associated answers - if any). And they would tend to exit more often than not if it was a question page that didn't have an answer yet (seems intuitive but it just didn't occur to us until we examined the data).

So now we reworked the code for displaying the "Related Questions" in the right-column of the Question pages. Now, the top 2 "Related Questions" will be questions that have at least 1 answer.

While we don't have a lot of data yet, it's clear from early tests that our strategy is paying off in terms of "page views per visit" which I feel will ultimately translate into more time spent on the site.

We'll be adding more features throughout March and we've also made it a company mission to add 2 new features (that have been requested by our users of course) each and every month.

We might not be the sharpest tools in the shed, but we want to be the best LISTENERS on Wall Street!

Muncipal Bonds...

Should we be buying General Obligation muni bonds en masse, right now?

The failure rates on GO bonds, historically speaking, are so small that it's highly unlikely that an investor with a diversified muni-bond portfolio would experience a catastrophic loss of capital. On top of that, Warren Buffett just created an insurance company for the sole purpose of insuring these bonds. Typically companies like Ambac would insure muni bonds, but they've got themselves into a fine mess now.

So for Buffett, this is a lay up. He gets to insure low risk bonds that he'll probably never have to pay off and in turn will collect a nice revenue stream from the insurance premiums in the interim...so if the Oracle is in it, I've got this gut feeling that I should be too.

I really can't see any state governments letting any large municipalities default on their debt, especially given the current economic climate.

I don't think I'd go near any revenue bonds right now, but anything backed by the full faith and credit of a city I lived in would be just fine by me.

Stock Chart Widgets...

Had a great talk with Paddy Mullen tonight. Paddy is the founder and developer of ChartWidget.com - a dynamic JavaScript stock charting system that is still in development, but is already an amazing product. Think Google's stock charts, minus the flash requirement.

If anybody is looking to add some sleek charts to their site with a tight UI, I highly recommend checking out ChartWidget.com and dropping Paddy an email.

Stock charts are definitely something we'll want to integrate into TickerHound in the very near future - and in all likelihood, we'll be using a solution from Paddy.

BarCampMoneyNYC

While there are college courses already being dedicated to developing social networking and Facebook apps, there's very little in the way of structured data or information on how social media is affecting the online financial services industry.

So here is the deal...everybody and anybody who is involved in Financial-Tech (e.g. software engineers, entrepreneurs, UI designers, investors, rubber-neckers, etc.) is cordially invited to the first BarCamp associated with the convergence of finance and technology...BarCampMoneyNYC!

Unlike the recent O'Reilly Money:Tech conference, this little conference of ours will be based on the BarCamp format. All attendees will also be presenters...yes, that means you either have to present or participate in the presentation. But don't be "scurred"...we're all here to learn, teach and help one another navigate these unchartered waters.

TickerHound and a number of other NY based financial-tech start-ups and industry veterans will be in attendance. I'll post more details as we get closer to the event, but just so you can mark your calendars now, here's the 411:

BarCampMoneyNYC Event Details:

Date: April 12, 2008
Time: 9am - 5pm
Venue: Wilson Sonsini Goodrich and Rosati, 1301 Avenue of the Americas (between 52nd & 53rd street), 40th Floor.

What is BarCamp?

BarCamp is an international network of user generated conferences — open, participatory workshop-events, whose content is provided by participants — often focusing on early-stage web applications, and related open source technologies, social protocols, and open data formats. For more information, visit http://en.wikipedia.org/wiki/BarCamp and barcamp.org

About BarCampMoneyNYC

BarCampMoneyNYC 2008 is an ad-hoc gathering for the people who work in, cover or seek to revolutionize the finance industry to share and learn in an open environment. It is an intense event with discussions, demos, and interaction from all attendees. It costs nothing to attend, but there is a price: all attendees must lead a discussion, give a demo, a session, or help with one. For more information visit, http://barcamp.org/BarCampMoneyNYC

BarCampMoneyNYC Sponsorship Information

BarCampMoneyNYC is a free event to attend. In order to keep the event free, organizers rely on sponsorship from businesses. Sponsorship donations will be used for food, t-shirts and miscellaneous expenses incurred during the hosting of the event. Sponsors of $500 or more will have their logo added to our t-shirt. All sponsorships will receive signage at the event, and collateral at registration desk. For additional information contact BarCampMoneyNYC organizers.

We already have an impressive roster of attendees, so if you'd like to come, participate and meet some of the movers n' shakers in this industry in New York.

Google Ads - The Real Story

So the talk of the tape last week was obviously Google (Nasdaq: GOOG). The Mountain View search giant has been on a downward spiral since the end of last year and showed no signs of letting up now.

In fact, the stock is down over 33% in 2 months alone – that’s over $70 billion dollars in shareholder value completely wiped out in a matter of weeks.

Last week was no exception – after a negative report came out from web traffic reporting company, comScore, Google’s stock slid from $505 on Monday down to $471 by the close on Friday. That’s a decrease of over $10 billion in market value in a single week based on a single report.

I can’t begin to tell you how many news articles and blog posts I read that had the, “See we knew Google’s success couldn’t last forever”, feel to them. The basis for this insightful, albeit untimely conclusion: the comScore report. On a side note: I bet the vast majority of the analyst and editors behind those articles were probably the same people who predicted Google would go to $800 per share only 3 months earlier.

In any case, the real issue here is the comScore report.

Was it accurate?

Did the media draw meaningful conclusions from it?

Were the conclusions accurate?

Nobody seemed to bother asking those questions – well, if they did, those weren’t the folks getting all the publicity last week. The only articles making the front page or the “most popular” lists were those calling for Google’s head on a platter, so to speak. So let’s fast forward to the end of the week when comScore published a post on its blog that pretty much read, “Oops, we might’ve given you the wrong impression”.

My favorite excerpt with respect to the report:

“The information triggered a flurry of reactions in the media and the financial community that centered on two concerns: 1) a potentially weak first quarter outlook for Google, and 2) an indication that a soft U.S. economy is beginning to drag down the online advertising market.

While we do not claim that these concerns are unwarranted, we believe a careful analysis of our search data does not lend them direct support.”

If you’d like to read the entire blog post, click here.


The basic gist of the blog post was that while total click-throughs may have been down, it was due to a conscious effort on Google’s part to eliminate ineffective ads. Meaning, there was less opportunity for clicks because Google was proactively displaying less ads, thus increasing the dollar return on the ads that were displayed.

Bear Sterns’ analysts aside, I think most folks realized that this report was overblown – at the end of the day, 3rd party data doesn’t mean everything…money does. And according to many Google clients, some of whom I know personally, Google is still their primary advertising solution and they’re seeing more and more money from the company each month.


Check out this report from Alley Insider which talks about one of the larger ad buyers on Google and why they’ll continue to use Google as one of their primary marketing tools:

Ad Buyer: No Slowdown In Search Or Google

All in all it was a rough week for the company and the stock may not be out of the woods yet, but there’s a valuable lesson to be learned here: It pays to do your own homework!

That’s why I was so happy to see a few TickerHound.com members ask questions on this exact topic…one of the recent questions: “What will happen to Google now? Is the selloff going to continue, or has it bottomed out?”

Click here to weigh in on the situation.

While I couldn’t tell you when Google’s stock will be on the rise again, I can say for sure that this company isn’t going to be another “dot bomb” sob story. I’m definitely a long term bull on this stock.