A sweeping tip of the hat to Barry Ritholtz's guest blogger SilverOz, who was willing to call out the mad (tinfoil) hatters at Zero Hedge on their usual nonsense (emphasis mine):

So Rick/Zero Hedge, unless you would like to argue that the population of the United States also grew by 1.5 million in one month (since that is from the exact same report/revision you quoted), I think both of you should retract your extremely misleading statements about those not in the labor force increasing by over a million in January and simply admit that you are either too stupid or too focused on selling a particular world view to read the data correctly.

Longtime TGR readers will remember that we were willing to burst the ZH bubble well before it was the cool thing to do. If there's one thing I can't stand, it's people who claim to have the ability to tell when others are "lying with statistics," but then turn around and do exactly the same.

The most frightening thing about these reports -- both the initial article and this response -- is how vehemently readers are responding in the comments. It is clear that few of them have any real understanding of the issues, let alone the content of the articles. It terrifies me that articles which are purported to educate are in fact doing exactly the opposite: reinforcing prejudiced, uninformed worldviews and encouraging people not to seek answers themselves, but to rely on unverified secondary sources.

I came across an article on whether or not closing credit card accounts lowers your credit score, which included this bizarre observation:

The addition of new credit card debt also increases your credit utilization, or debt-to-credit limit ratio, on revolving accounts such as credit cards. For FICO scores, this ratio is part of a factor worth 30 percent of your score.

You've paid off your store card debt, which should help to lower your utilization. According to Barry Paperno, consumer affairs manager for FICO, "in addition to making payments on time each month, the No. 1 concern for people with several new store cards should be ensuring that the amounts owed on these cards are as low as possible."

He says the best-case scenario is for store cardholders to pay off their balances quickly to reduce their utilization, which is figured for each card and across all of their cards.

Now, if this were really true -- that is to say, that the marginal utilization of each new card constitutes such a major piece of your credit score that a department store account could hurt you -- then, conversely, you must be able to raise your credit score by opening as many cards as possible and not charging anything to them! These new cards would have utilization scores of zero, presumably moving your credit score as far up as the department store cards drag it down. I think we all know that isn't the case -- though it may have more to do with other variables besides utilization than some nonlinear utilization relationship.

The article isn't completely wrong, however, because the department store cards it refers to 1) typically have an immediate balance and 2) have low credit limits, resulting in high instantaneous utilization. The smart credit card arbitrageur will pay it off the next day in full, capturing the discount and (if you believe it exists) the low-utilization credit bonus.

The most important thing to remember is that missing a payment wrecks your score. Anything else that could potentially lower it, like opening 100 department store cards, has a negligible impact by comparison. Do not go into default and your score will be fine.

This post is not meant to be financial advice. It is, however, common sense.

The title of this NYT article got my attention: Italy Rejects S.&.P. Downgrade.

Why didn't the U.S. think of that?

UBS has announced further details regarding their rogue trading operation. The revelations and their implications are frightening.

The loss resulted from unauthorized speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months. The positions taken were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio. However, the true magnitude of the risk exposure was distorted because the positions had been offset in our systems with fictitious, forward-settling, cash ETF positions, allegedly executed by the trader. These fictitious trades concealed the fact that the index futures trades violated UBS’s risk limits.

I've seen some articles saying that UBS has told us how the fraud took place -- in fact, they haven't done anything of the sort. They've told us what happened, not how it happened. We should be demanding to understand how this was possible.

How can a sophisticated bank's order management system allow the entry of fictitious trades? In my experience, a proper OMS requires some "hacking" -- or an explicit, giant-red-letter debug mode -- to get around the checks designed to prevent a trade without a confirmation.

I don't believe this is as cut and dry as someone entering false trades into a system and walking away -- if that's possible, UBS has much bigger problems than this. This is not just a failure of the front office; this is a failure of the entire risk infrastructure of the bank, of all offices.

I think the telling fact is that the alleged trader, Kweku Adoboli, has something in common with Jerome Kerviel: they were both intimately familiar with the workings of the systems they would later defraud, not as front office users but as middle-office overseers (trade support for Adoboli; compliance for Kerviel).

They knew how to break the machine because they knew how it worked. We talk frequently about the "Chinese wall" between a bank's investing and trading operations. It's time to start talking the one between the front office and everyone else.

The revelation that yet another rogue trader has been pulling the levers at a major bank, this time costing UBS $2 billion, makes me wonder about all the rogue traders we're not hearing about -- the ones who aren't big, stupid or aggressive enough to get caught. It raises serious concerns about the level of risk management and controls at these banks, and who can claim that an institution unable to police itself is worthy of a government's "too big to fail" stamp?

Perhaps banks should start reporting "income from rogue trading" in their financial statements. It would seem naive to presume that it isn't contributing to the bottom line. I wonder, once disclosed, would it be a non-recurring charge?

Is it even extraordinary?

It's amazing what you can see when you refuse to open your eyes -- or need to talk your book. Take, for example, Marc Andreessen's article in the WSJ titled "Why Software is Eating the World." I became skeptical when this line appeared in the introduction:

And, perhaps most telling, you can't have a bubble when people are constantly screaming "Bubble!"

It would seem this is what passes for conventional wisdom in Silicon Valley: utter denial of facts on that grounds that if people recognize them, they can't be true. It's cute, like they're really trying to understand finance but haven't quite got it right. Maybe someone told them that due to efficient markets, if everyone knows something it will be completely priced in. Like anyone with a vested interest, these people have decided that their markets qualify as efficient and so the axiom must hold (or, to the extent that markets are inefficient, it's in such a way that they will profit enormously). Unfortunately, the entire statement represents terrible investment logic, a perversion of the fact that we can not know the magnitude of a bubble except in retrospect. That says nothing about the existance of a bubble. It's critical to remember that we can -- and good investors, by definition, do -- know if there's a bubble before it bursts.

But Marc's statement itself isn't even true. Hardly anyone is screaming "Bubble!" In fact, methinks the technology investors doth protest too much. The most telling sign of all is that the bubble-apologists cry much louder than their accusers! For every journalist who dares write that there is a bubble, two write articles saying that the low current prices of 2011 IPO's prove the opposite.

But onto the real absurdity of the article. Specifically, the very next sentence:

But too much of the debate is still around financial valuation, as opposed to the underlying intrinsic value of the best of Silicon Valley's new companies.

I choked when I read that, having written a post a few weeks ago arguing exactly the opposite. There is no debate about financial valuation of software companies -- they have it. They have way too much of it. On the other hand, what justifies it? Most value investors -- who define holding periods in years, rather than seconds -- regard this industry with skepticism.

Don't worry, though, because Marc provides examples to support his idea.

The first "software company" he mentions is Amazon. This is a confusing choice because it has a P/E of close to 80, and would seem to run counter to his argument that there are "all-time low price/earnings ratios for major public technology companies." Also, it's not a software company. Software services are a growing fraction of their revenue, but Amazon ships physical products to physical people. They have a massive software architecture to support that, and major software projects like the Kindle, but this is not a software company. The recent news that ebook sales are surpassing those of physical books means they are closer to this definition, but still far from it. Not a software company.

Next up: Netflix. Another "software company" that ships physical products to physical people. Yes, they recently rolled out an on-demand service, but its selection remains limited when compared to the physical catalogue. Not a software company.

Next up: music companies. First, Apple's iTunes -- a software product completely devoid of value when not linked to the (only) mobile devices it supports. For all Marc's talk about how Apple is the most valuable company in the world, I wonder if he's thought about how much of that value comes from software. The answer is: very little. His other two examples, Spotify and Pandora, have both failed thus far to show a profit. That hasn't stopped the latter from IPO'ing, however.

Next up: video game companies Rovio and Zynga. No arguments here -- these companies successfully use software platforms to deliver content that people want. Neither of them pushes the state of the art or has any remotely defensible position because their products are commoditzed, but software companies they are.

Next up: Pixar. Pixar makes software, sure, but how can they be a "software company"? Their revenue is solely derived from me getting in my car and walking into a movie theatre. Is Toy Story a software product (not a product of software)? If it is, I have to take back what I said about video game companies, because Marc says that "traditional" game companies like EA are failing -- but their products are as much software as Pixar's if not more, since you don't have to leave home to use them!

Next up: Photography. Marc is really starting to reach here -- he's comparing revenue-lacking software sharing companies to a hundred year old photographic film and paper company (Kodak).

Next up: Local companies. Sorry, now he's stretching. Comparing Google to companies like Groupon and Foursquare, whose accounting practices of "earnings before costs" make them the laughingstock of the investment industry.

We're not done: Skype is next, and Marc uses the $8.5 billion price tag to justify his choice (despite earlier claiming that valuations are at an all time low). No mention that the next best bid was half that. Skype is followed by LinkedIn, another 2011 IPO that has a long way to go before demonstrating real success.

You get the idea. The balance of the article argues that because other physical industries like Wal-Mart and oil/gas use software, they represent the triumph of software over more traditional methods.

No one is arguing that software doesn't make things better, more efficient, cheaper. No one is arguing that software isn't growing tremendously as an integral part of modern corporations. But the bubble apologists continue to ignore the actual state of software. Merely mentioning Groupon, LinkedIn, Pandora, etc. doesn't make them successful -- and yet article after article continues to be written about them completely devoid of justifying arguments. Cloud companies like Salesforce trade at ratios of over five hundred times earnings! 

The companies Marc describes -- at least, the successful ones -- could be best described as software-aided companies, or software-centric companies. Most of his choices exhibit strong selection bias, or rose to prominence in hardware before moving to software. Google -- which he mentions as a competitor of the software companies! -- is one of the only good counterexamples.

So here's  my question: where does the hardware to support all this software come from? I'd like to see that company, because they must be doing unbelievably well. Who knows, maybe the next great "software company" will be an infrastructure firm in disguise. After all, if they have a website, they must be in software!

The Justice Department has been looking into S&P for mortgage-related fraud:

The investigation began before Standard & Poor’s cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action. Lawmakers and some administration officials have since questioned the agency’s secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations....

The Securities and Exchange Commission has also been investigating possible wrongdoing at S.& P., according to a person interviewed on that matter, and may be looking at the other two major agencies, Moody’s and Fitch Ratings.

With a hedge fund, all it takes is a shred of suspicion to lose your business. Your investors won't wait for you to be charged with anything; they will leave at the rumor of an SEC investigation. With a completely trust-based industry like credit ratings, I'm curious to see how long the clients last.

After the severe market volatility this past week, a close friend forwarded me the following email that pointed out a curious pattern in the index changes:

Every day this week, the sum of the digits of the Dow's change have added up to 26:
Monday: -634.76 = 26
Tuesday: +429.92 = 26
Wednesday: -519.83= 26
The odds of this must be millions to one!

Needless to say: challenge accepted. I love this sort of problem, because the actual odds are often much more likely than they appear.

How do we go about getting an answer? First, it depends on how many discrete changes we consider. For example, if we examine all five-digit numbers (actually three digits and two decimals) there are 200,000 possibilities, of which exactly 10,560 have digits adding up to 26. That's a frequency of 5.28%, implying a 0.015% likelihood over three consecutive days -- hardly millions to one, more like 1 in seven thousand.

But we're talking about the Dow here, so looking at all five-digit changes isn't quite right -- nor is treating them all as equally likely. I need to make a couple simplifying assumptions now, or we'll be here all day, but my code is attached below so feel free to enter your own values later.

First, we need an appropriate set of changes to consider. Let's say the Dow is (was!) at 11,500, and has 40% annual volatility (I'm roughing the vol off the VIX). The daily volatility in points is therefore 40% * 11,500 / sqrt(250), or about 291. Let's consider any number within 5 standard deviations an eligable change (this assumption won't really matter, as you'll see), which gives us a range from -1455.00 to +1455.00 containing roughly 291,000 discrete possibilities.

Now that we have a range of values, we must keep in mind that they are not all equally likely. Larger changes are less probable than small ones. To keep things simple, let's toss a normal distribution over the range, centered on zero, with a standard deviation equal to the daily volatility of 291. The probability of drawing any point x is therefore P(x) - P(x-0.01), where P() is the CDF of our normal distribution. This is a discrete approximation to the normal PDF, binned by each hundreth decimal place (which we assume is the smallest possible change on the Dow).

Ok, we're ready for some calculations. First, there are 14,622 changes in our range whose digits add up to 26. Given that we have 291,000 possibilities, that's a frequency of about 5.02%. Now, for each of those changes, what's the probability of actually seeing it? For this we calculate the sum of the probabilities of each change under our normal distribution. The probability-weighted frequency is 3.83%. Why has the frequency gone down? Because it is easier for digits to add up to 26 with larger numbers (as they have more digits), but changes of those magnitudes are less likely, so on balance the likelihood of seeing a day that adds up to 26 goes down. This is also why the choice of standard deviations doesn't matter, so long as it is sufficiently high: after a certain number of standard deviations (I generally use 5 as a rule of thumb), the probability goes to zero.

So for a given day, with the Dow at 11,500 and 40% volatility, the likelihood of seeing a change whose digits add up to 26 is 3.83%. On three consecutive days, the probability is 0.0056%, or about 1 in 17,000. It's not quite millions to one, but it is interesting nonetheless.

Update: After Pat's comment below, I quickly ran the probability of seeing any number three times in a row, not just 26. It comes out to a very surprising 2.5%! I've updated the code to include this calculation as well.

Below is a brief python script which performs all of these calculations. The digit_sum function can be dramatically sped up using the @memoize decorator, but you'll only see a benefit if you plan on running it more than once. The decorator is commented here so that the script can be executed as-is, but feel free to uncomment it for interactive use. (Specifically, I put the memoize class at the end for clarity -- you need to declare that class first, and then the memoized function. It won't work if the class isn't declared before the function.)

import numpy as np
import scipy.stats as stats

#uncomment the decorator in interactive mode,
#but first declarethe memoize class below

#@memoize
def digit_sum(n):
	#returns the sum of a number's digits
    #ignoring negative signs and decimals
	return sum(map(int, str(np.abs(n)).replace('.','')))

def discrete_prob(x, mean = 0, std = 1, diff = .01):
	#computes the probability of the interval [x-diff, x]
    #under a normal distribution
	prob = stats.norm.cdf(x, loc = mean, scale = std)
    prob -= stats.norm.cdf(x - diff, loc = mean, scale = std)
	return prob.sum()

#assumptions: dow at 11,500 with 40% annual vol,
#looking for days that add up to 26 with 2 decimal places
volatility_in_pts = 0.40 * 11500 / sqrt(250)
critical_value = 26
decimals = 2

#consider 5 standard deviations for completeness
low_change = -1 * round(5 * volatility_in_pts, decimals)
high_change = round(5 * volatility_in_pts, decimals)
#have to round all_changes for numerical issues
all_changes = np.around(np.arange(
        low_change, high_change, 10 ** -decimals), 2)

#find changes whose digits add up to the critical value (26)
possible_changes = np.array(1)

#compute probability of seeing any one of those changes
one_day_prob = discrete_prob(possible_changes,
        mean = 0, std = volatility_in_pts)

#compute probability of three consecutive days
three_day_prob = one_day_prob ** 3
print three_day_prob

#disregard this class unless you are running in
#interactive mode and want to use the @memoize decorator
class memoize:
  def __init__(self, function):
    self.function = function
    self.memoized = {}

  def __call__(self, *args):
    try:
      return self.memoized[args]
    except KeyError:
      self.memoized[args] = self.function(*args)
      return self.memoized[args]

The WSJ is running an article comparing today's second-by-second "iPad inverstors" to the day traders of the dot com bubble. The article's point, near as I can tell, is that volatility makes people worry more about the markets, and that people aren't comfortable without instant feedback.

I have a suggestion for the WSJ: A decade ago, you championed day-traders as the New Investors. You were wrong. Don't make the same mistake.

More importantly, stop writing about the trading activities of people who aren't involved in finance!

The article profiles five individuals with the following jobs: public-relations executive, advertising strategist, website editor, comedian and real estate consultant. I have nothing against these people, but why would anyone pay attention to their investment ideas? Does the website editor go polling financial analysts every morning? Does the comedian run his jokes by his broker? I fail to see the relevance. I'm sure the Journal would like us all to believe that "anyone can do it!" because that's great for their subscriptions, but this is ridiculous. If I opened a car magazine and saw the recommendations of some bond trader, I'd throw it away.

I'm sure if these people were offering legal advice we'd recognize it as ludicrous, but we seem to have no problem accepting financial advice from just about anyone. The truth is that this is because it's very hard to separate skill from luck when it comes to investing. Careers have been made (and lost) on that principle. But I don't understand why most people err on the side of "skill" rather than "luck" when evaluating someone else's ability.

Nonetheless, the article tries to use these people to demonstrate some "good" principals (I hope you can hear the sarcasm dripping off those quotation marks). For example, one man says "I'm just a regular guy who started the month with a 401(k) balance, and am trying to make sure it's still there next month." His solution: day trade volatile markets on his lunch break! Please, do NOT follow his lead. If you want your 401(k) to survive, then set it and forget it (at least for a few weeks). You run a greater risk of harming it through active trading, especially since 401(k)'s are generally invested in mutual funds, not individual stocks, which can only be traded after the close. So how are you day trading in the first place? The bottom line is: 401(k)'s are multi-decade investments. If your strategy depends on the hour or minute in which you execute a trade, then you're doing it wrong.

And it gets worse:

Andrew Clark, a 30-year old, real-estate consultant in Birmingham, Ala., sold about half of his Apple Inc. stock on Monday morning after it opened 3.2% down. During a client meeting, he missed a brief rally when the stock went up 1.7%.

"I would have bought those back at that point," Mr. Clark says. "If you aren't glued to these movements, you miss so much."

So just to be clear: AFTER it fell 3.2%, he sold. AFTER it went up 1.7%, he would have liked to buy back in. In other words, even though the stock only was down 1.6% over two days, he would prefer to have lost 2.4% (effectively, half of his shares losing 1.6% and half of them losing 3.2%). You could argue -- and he probably would -- that this is actually rational behavior, because he sold when it wasn't clear whether or not the stock would stabilize. Therefore, it's easy for us to say in retrospect that he should have stayed in, but if it had kept going down he would have looked really smart. But that's wrong -- if he genuinely wanted to get long the stock when it was down 1.6%, why didn't he really want to be long when it was down 3.2%? If that single gain of 1.7% was sufficient to tell him that the stock was going to continue upward, then the man is a brilliant investor beyond any I've ever encountered. I think it's much more likely that he committed a common investment fallacy: sell low, buy high.

I've mentioned many times a theory that financial bubbles accompany any expansion of the investment universe. Day trading (and its more recent cousin, mobile trading) epitomize that trend. A few weeks ago, a colleague of mine sold his portfolio when his cabbie started giving him unsolicited stock tips. Just because everyone should invest does not mean everyone can invest. It's about time we stop trying to perpetuate that myth and focus more on real financial education. Investing is a very serious business with real potential for significant loss, not a hobby.

So if you find yourself wondering if you should call your friend in advertising for financial advice, just stop.

Frankly, if you find yourself wondering if you should call your broker, you should also reconsider. His objective may be your commission, not your wealth.

And if your first thought is to call your lawyer, I'm afraid you may have larger problems than we can address here.

Standard & Poor's is the Al Capone of modern financial markets.

For many years, we went along with their protection racket: we paid the firm, and they made sure we knew which investments were safe. They got involved in politics, spending incredible sums to lobby the government for support, and eventually were mandated into perpetuity -- American as apple pie. Like Capone, S&P claimed it were simply serving the public interest: "All [we] do is supply a demand."

Meanwhile, banks were all too happy to pay for AAA ratings, without which they could not distribute their moonshine products.

Then, in 2007, it all started to come apart. Supposedly safe securities began blowing up, harming innocent citizens. The ratings were revealed to be a sham and the bank pipelines dried up. Even the government finally turned on S&P. No one took the firm seriously anymore.

But now we've learned that S&P was merely biding its time. Desperate for attention and chastised by the institutions it helped build, the organization lashed out at its attackers. We've just witnessed the Valentine's Day Massacre. Where is our Eliot Ness?

The most interesting thing about yesterday's market action was the behavior of the Treasury market:

It rose.

If the market collapse was really about investors reacting negatively to the United States' new, lower credit rating, why on earth would replace their stocks with a direct investment in that very same government? We can only know as much as the markets reveal, and here are the facts: (1) People sold stocks in a panic. (2) People bought Treasuries in a frenzy. This does not seem like behavior consistent with a lack of confidence in the United States.

It is, however, a paradoxical consequence of modern portfolio theory. Let's say the universe consists of two possible investments, A and B. A is a very low-risk investment; B carries higher risk. Investors allocate their funds among A and B, creating a portfolio with some desired expected risk and return characteristics. Now, news arrives that A actually carries slightly more risk than investors had previously anticipated. The rational reaction is to sell B and buy more A. Why? Because when A was "downgraded," the investment portfolio became riskier. A is still less risky than B, so the only way to restore the portfolio to its previous risk levels is to increase the allocation to A.

But there is a problem with this model: A's price will fall on the news, ceteris peribus, further compounding the allocation issue. If it falls sufficiently, the buying activity will be fierce enough to drive it even higher than it was originally. But in that case, the expected return on A will be necessarily lower than it was originally, and the risk of holding it even higher than at the time of the downgrade. Investors may end up worse off as a result.

Thanks to the time difference, I went to bed last night thinking the markets had stabilized, but woke up to learn that the United States -- the unassailable risk-free issuer -- had been downgraded by S&P.

This is embarrassing -- on S&P's part.

As we all recall, S&P was blamed squarely for contributing to the financial crisis of 2008. Just a few months ago, a Federal commission concluded that "the three credit rating agencies were key enablers of the financial meltdown....This crisis could not have happened without the rating agencies."

And my, how the tables have turned. S&P had its hand on the throat of the government -- and squeezed. The largely semantic downgrade from AAA to AA- is, in truth, no more than a shot across the bow, a reminder of the agency's power. It's a childish demonstration, a minor revenge against a chastising government. But somehow in its excitement, the agency failed to consider the impact of the downgrade. Sure, there are ways around all the contractual issues but the fact remains: the U.S. government does not have a AAA rating. What, then, does it take to have a AAA? If the ability to literally print money doesn't do it, what does?

You would be mistaken if you thought the debt ceiling mess was the reason for the downgrade. No, it was merely a fortuitous event that aligned public opinion with S&P's desired action. It was a catalyst, not a cause. For the true motivation we have to look no farther than the same self-serving attitude that consumed the rating agencies in 2008.

This entire debacle is so idiotic that I struggle to write sensibly about it. There are few more blatant demonstrations of immaturity than S&P has shown with this little power gamble. In their haste to show Washington who's boss, they actually made a mistake of $2 trillion!

But then again, what investors are actually taking them seriously?

There's a headline making the rounds this morning that caught my eye because it seemed preposterous: "Apple Stock Helping the Alaska Permanent Fund More than Oil." It's everywhere, but the original instigator seems to be this USA Today article.

It looks like nobody bothered to read (or understand) the Fund's actual returns. First of all, the Alaska Permanent Fund collects a portion (25%) of Alaskan mining/oil royalties and invests them. Every year, a portion of the Fund's income is paid out as a dividend to every Alaskan citizen. So right off the bat, oil doesn't "help" the Fund at all. It provides investment capital, not investment income. But if we do want to consider its contribution to the Fund's growth (after all, the headline number is that the Fund crossed the $40B mark for the first time), we can: the APF received about $786 million from oil royalties in 2011 (31.18% of $2.52B). The value of the Fund's Apple stock on June 30, 2011 was $207 million. Already, the discrepancy should be clear -- the incremental contribution of oil royalties to the Fund's assets was almost four times the market value of its Apple investment, let alone the Apple investment's profit.

And let's have a close look at that Apple investment -- most articles report that the Fund's top holding and top performer are both Apple. But that's not entirely true. The performance numbers can be calculated because the Fund reports the market value and cost of its investments, but cost is a historical basis, not cost at the end of 2010. Therefore, calculating returns on that basis doesn't tell us anything about 2011 gains, only lifetime (unrealized) gains. It also excludes any realized gains, which wouldn't show up in the report at all. The Apple number, in particular, must be across many years because the average purchase price is $118, a level the stock hasn't visited since April 2009. So, Apple may be the fund's top unrealized lifetime holding, no argument, but tells me nothing about how it did in 2011.

Some of the articles report with apparent glee that the Apple shares outperformed those of Exxon (and its "messy old-economy product") -- but that's not entirely true either. Exxon shares returned considerably more than Apple in FY 2011 (6/30): 43% vs 33%. The Apple investment gave the Fund a slightly higher dollar return, but that's just because the Fund owns more of it. On that basis, the Fund could put $30 billion in T-bills and call it the top performer because the dollar return of those few basis points of interest would overwhelm its top stock's dollar return. It's factually correct - and good for marketing - but let's not be deceived. I believe, by the way, that the references to Exxon are what the article writers are using to make their "outperformed oil" arguments, not the royalty contribution. Again, in dollar terms, I can't argue with that -- Apple gave the fund $3 million more than one oil company in 2011, but I still think the analogy is ridiculous. Firstly, there's more oil in the portfolio (#9 is Chevron), and more importantly $3 million is three-quarters of one-hundredth of one percent of the Fund assets, or one-half of one-tenth of one-percent of the Fund's 2011 return. Talk about splitting hairs!

The fact is, the Fund is extremely diversified. Apple, it's largest stock position, accounts for just seven-tenths of one percent of the assets. But if we must beat this dead horse, let's at least beat it completely:

• Is Apple the Fund's largest stock holding? Yes.
• Is Apple the Fund's top stock performer, in percent? No -- Exxon, at least, outperformed.
• Is Apple the Fund's top stock performer, in dollars? Maybe -- I didn't bother calculating 2011 returns for every stock.
• Did Apple contribute more to the Fund's return than Exxon? Yes.
• Did Apple contribute more to the Fund's return than oil? No, assuming "oil" includes any oil company in the portfolio.
• Did Apple contribute more to the Fund's growth than oil? Not even close, assuming "oil" includes any oil company in the portfolio plus oil royalties.

Jason Calacanis writes:

Sad to see Demand Media getting crushed in the market.

Demand Media is a content farm (in every negative sense of the word) which (by some accounts) was crushed by Google's most recent "Panda" update that was aimed at removing junk spam Demand Media from search results.

So to put this tragedy in perspective, have a look at DMD since IPO:

Do you see that dip at the far right? The tiny little negatively sloped segment? Yeah, that's what Jason is so upset about. Forget that these investors have lost 53% in six months (or only 37% off the IPO price of $17), that's irrelevant. Talk about missing the forest for the trees!

But Jason inadvertently brings up an interesting point -- yesterday was the first day that company insiders were allowed to sell shares since the IPO. So at first glance, today's selloff screams "Thank God I can finally divest from this awful company!"

But that's not quite right. Yesterday's volume was not extraordinary; in fact, the stock was actually positive until 3pm, when it headed decidedly south (for an amusing take on that, see here). So what we really have here is a massive and sudden absence of demand for DMD shares, causing the price to collapse. In other words, this was investor-driven, not insider-driven.

But why would investors suddenly sell? The lockup expiration shouldn't be a surprise -- it's public knowledge. It should have been priced in all along. Maybe not, though -- it's so hard to conceive of rational investors owning this stock that it's equally difficult to give them the benefit of rational analysis. Let's suppose that a news article about the lockup came out - and then was finally noticed by one large holder, who changed behavior accordingly. Then someone else notices, and pretty soon the herd is in a stampede. To be honest, the best evidence for this is Jason's G+ post, which is otherwise completely unwarranted.

But the thing about rational investor analysis is that it doesn't matter what reasons I can or can't come up with -- the facts are this: the stock of a terrible company happened to fall closer to its fair value ($0?) on the same day that its insider lockup expired. This attracted the attention of an individual, who for some reason gave it more weight than the stock's long term collapse, furthering the degree of attention paid to the myopic event. I must assume that there is a rationale (rational or irrational) for this behavior; to be frank, I don't really care what it is.

Jason's remark about DMD is quite bearable -- without such armchair analysis I'd be out of a job -- but the balance of his post, on how cruel Google was to change its algorithm at the expense of DMD (and, by extension, his own company Mahalo.com) is just ridiculous. Specifically:

The Google Panda Update was handled horribly by Google, which crushed hundreds of good companies without warning. Google has to take more responsibility for how they deploy big changes.

For someone whose past marketing pitch has been that algorithmic search engines are subject to manipulation, complaining that a refinement of the algorithm constitutes bad behavior is insane! After all, if companies legitimately deserve their search result rankings, then they shouldn't change much in the aftermath -- only if they achieved them through manipulation/optimization in the first place would there be repercussions. Caveat: you have to assume, and I do, that Google is interested in improving their product with any algorithm refinement, particularly one so publicized and welcomed by the community.

Because of this, I'm forced to perform my first Google+ "uncircle" (truthfully, as much as I love G+, "unfriend" is a much more satisfying verb). I just don't have time to waste with this kind of nonsense. I award you no points, and may God have mercy on your soul.

I love this video from Derek Sivers, founder of CD Baby:

Click here to view the embedded video.

Attend a startup conference and you'll find that people there seem to believe that the mark of a successful company is the amount of money it's raised, not the amount of money it makes. Naturally, by this metric, Color is the greatest company in the world (spoiler: despite $41 million in the bank, it bombed). It shouldn't surprise anyone that Techcrunch, a recent AOL acquisition that has somehow managed to pass itself off as an authority on such matters, gushed about the company when that number was disclosed.

I have to imagine that the trend of comparing valuations arose because it was difficult to boast about negative earnings. The truth is, there's nothing wrong with negative earnings - in the absence of arbitrage, a startup's upfront cost should be greater than its early profits. But it's not just startups - even mature companies that still attract the Techcrunch set (read into that what you will) are reporting bogus "earnings before costs" numbers, as Dealbook reports.

Is there a rationale for valuation comps? Sure, since it's a measure of how much value a company has created. Strike that: it's a measure of how much value a company has convinced a small set of investors that it has created. So when we compare valuations, we're really comparing the perceived ability of venture capitalists to properly measure and allocate capital according to value. I have yet to see any evidence for that ability. Outside a few lottery tickets, venture firms tend to lose money -- and anyone with a true finance background can tell you that a positive track record characterized only by a few outliers is garbage. A recent update to Cambridge Associates' venture capital index revealed that the median return to venture investors has not been positive since 1998. That seems beyond absurd to me -- especially because the IPO bubble wouldn't end for two more years! The very best funds have averaged less than 6% IRR's, and those were launched in 2001 -- in other words at the bottom (one might speculate by chance rather than by design).

Derek's video is poigant because it cuts to the chase: you either have a good idea, or you don't. An efficient market will allocate capital accordingly. But in the current funding bubble, capital is being over-allocated to under-thought ideas. Valuation has become more important than value -- a textbook bubble. As if to force the point home, most of the links I found to this video came from Techcrunch-esque blogs who missed the "good idea" point and instead used it to argue that people should start companies because "it's easy and free!"

For further details, please see my recent post.