Archive for June, 2006

How Much They Do Understand Is Less Than How Much They Think They Understand, Thus Short

While we believe the trend of humanity, as a whole, is to understand more and more, we believe people have been putting too much stock in their ability to understand things and that this segment of the market is peaking. Recent developments in Global Warming have been hammering this point into our brains, but one need only pick up anything that has macroeconomic analysis or tries to understand the federal deficit, national debt and foreign capital flows to get a sense for our state of Peak Knowing Less Than One Thinks One Knows.

Recommendation: The investing implications of this are both confusing and potentially paradoxical, so we suggest ignoring them lest you create a sucking black-hole of reason. It’s ok to not know something and to admit it, even if you are a climatologist (the latter would probably get you fired from certain financial institutions). It’s even more ok to know that Long or Short Capital understands everything and even has a model for it. We are the exception.

Quotes Entirely Relevant to Investing

Whatever happens, there are always things you could have done better. You score two goals and you usually feel you could have done better. You score two goals and you usually feel you could have scored a third. That’s perfectionism. That’s what makes you progress in life.

-Eric Cantona

Past Quotes Entirely Relevant to Investing

Mr. Market

Every investor loves to believe that he is the second coming of Warren Buffet so I’m never surprised to hear allusions to Buffet’s methods and sayings. At least that was true until I met Richard Ji, a nice, well-intentioned equity analyst at Morgan Stanley. Ji, however, frequently refers to Buffet concepts in his writings covering the CHINESE INTERNET sector. There are many places in which it makes sense to apply ideas like margin of safety but I promise you that the Chinese internet is not one of them. Last time I checked, Buffet didn’t buy tech companies let alone those trading at 4-8x book value.

Mr. Ji helpfully provides a chart explaining the stunningly complex mood swings of Mr. Market.Mr Market Mood Swing

Ji also points out the wild variance in Mr. Market’s willingness to pay 30x at some times for Chinese Internet companies and only 25x at other times.
Mr Market Sentiment

You may want to read some of Mr. Ji’s other work. Here are the actual headlines from some of his most recent reports:

  • “ A 3-in-1 Gourmet Combo Offered by Mr. Market”
  • “Focus Media: ‘Blue Ocean’ Innovator in the Advertising Universe”
  • “ 1Q06: The Second Stress Test for Level 5 Leadership”
  • “Tencent: 1Q06: Firing Up All the Cylinders”
  • “ Inc: 1Q06: Gaining Content Edges in a Harmonious Society”

If you know what any of these titles mean, please email us and let us know.

Long GOOG Pending Release Google Lucy (Beta)

We are reiterating our buy recommendation for Google (GOOG), following their release of Google Lucy (beta). Google Lucy (beta) is the latest in real time girlfriend simulation technology and is run by proprietary algorithms from a single server in Palo Alto. This latest offering is a disruptive technology aimed squarely at displacing women from the heterosexual romantic market.


  • Blond hair
  • Tall
  • Graduate and post graduate degrees from elite Universities
  • Simple attractive minimalist UI
  • Light from above shines on Google Lucy at all times

  • Provides social humping in the convenience of your own plane

  • Improved relevancy compared to Yahoo’s similar offering.

    Further due diligence will occur after we are accepted into the invite only beta.

    Recommendation: We are raising our GOOG price target from “Infinity-1” to “Infinity+Pi” on the grounds that this merger will be moistly secretive.

  • Source:

    Quotes Entirely Relevant to Investing

    On Net Neutrality:

    To me it boils down to this:

    The best employees at Yahoo, eBay, Google, and other major content providers are engineers.

    The best employees at Comcast, Cox, SBC and other access providers are lobbyists.

    For both of these types of companies, everyone else they hire is just good enough to support and monetize the work of their best employees.

    Derek Scruggs

    Past Quotes Entirely Relevant to Investing

    How to Increase the Value of Microsoft (MSFT)

    This report is gratis, Microsoft (MSFT) .

    1. Change your name. Microsoft sounds like something that happens to me after too much El Tesoro Silver in the hot tub. Why not show your strength by fortifying your name with a masculine element, like Hard. To convey that you will no longer be an insular company, one narrowly focused on operating systems, video game systems, office software, server software, photo software, optical mice, keyboards, co-branded television stations, tablet computing, online search, video games, online content and personal finance software, you should consider an element that suggest a willingness to expand your focus more broadly, an element like Macro, which means “more broadly.” Macrohard.
    2. Change the packaging of your products. Very few women buy your products, Mr. Ballmer, and you are missing out on their money, or as we like to call it “the Pink Dollar.” You may assume that the key to attracting the Pink Dollar is to improve the content of your offering or to tailor your content to women. WRONG! Substance matters little to the average female. Focus instead on the superficial aspects. Make all your packaging pink, and have a little bow. They eat this crap up. Something that has worked for us on occassion is to put in a little note that says “Sorry.” You don’t have to specify what you are sorry for. It’s important to note that while it’s tempting to enclose a $100 bill, this will only insult and irritate the average female consumer.
    3. Social networking. You need to start developing your MyFortune500Space page so that it is cooler. AOL (TWX) is never going to be receptive to your advances until your profile is cooler than this.
    4. Start releasing random, barely functional free products. People already have have calendars, finance sites, shareable spreadheets and instant messaging software, etc. Take it up a notch. There are 127mm people who have diabetes. What about digital insulin (beta)? Or P2P lasik treatment? Think of how many people could use something like that. Or what about a robot that gives people hugs for free?
    5. Get it done.

    Private Equity in Everything

    I was eating in a pizzeria the other day, run by a family of Greeks, when I spotted my opportunity.

    The people who don’t understand private equity think it’s just a matter of finding and buying X Corp*, levering up X Corp, doing a recapitalization to take a dividend 6 months later, underperforming, doing another dividend recap 6 months later, canceling your sponsor fees while doing a third dividend recap, then taking X Corp public while paying for Czech models to be taught how to count your money in French. But it’s about that and so much more. It’s about VALUE, and looking for value everywhere.

    I perused the menu and listed the normal core competencies of a towny Greek pizzeria. Large Cheese pizza $9.95. Pepperoni pizza $10.95. Baklava $3.95. But then it struck me, buried under layers of sub-offerings, their calzones were horribly underpriced at $4.50. The basic cheese calzone was not dissimilar in caloric content, cheese density or sauce metrics from a small cheese pizza, yet it was priced at a 20% discount and placed in a non-strategic location on the menu. The spinach and cheese calzone was a higher margin product with tangible value-add to the end consumer through its superior health content.

    I could see that it would be a slam dunk to realize value if I could get Nikos to spin off his non-core calzone assets; I would only have to properly structure the deal and wait. Unfortunately, I could also tell from the look in his eye that he wanted me to take on his spanikopita assets as well. This was obviously a dicey proposition. Spanikopita were difficult to market and historically a more labor intensive product that had little pricing power. But they were, in fact, tasty.

    I decided I could take on the spanikopita assets, but only if he offered me an exclusive negotiating window. I was not going to let another investor swoop in and eat my pie after I had gotten this far, both in terms of my time and due diligence. Nikos consulted Constantin and had no problem granting this. I started putting out feeler offers of 4.5-5x EBITDA, and could sense that these Greeks were not financially savvy enough to understand fully how to extract value from their calzone assets and how much smarter I was than they were. A quick call to Bank of America and I had already gotten backing for 2.5 turns of senior secured leverage, and 2 turns of subordinated debt; I could practically smell triple digit levels of IRR. They accepted on the spot.

    Another succesful day in the delicious life of private equity.

    *X can be any noun, verb, conjunction, article or random combination of letters that may or may not be an entity which produces anything or even exists. It just doesn’t matter.

    Initiating New Risk Premium

    The wicked smart economists at Marginal Revolution have made a critical breakthrough, improving the CAPM model commonly used by financiers.

    The Capital Asset Pricing Model specifies that the expected return on an asset is a function of the market rate of return plus another factor (“Beta”) for the covariance of that asset with the market portfolio. The intuition is that pro-cyclical assets are riskier and thus they must give you higher expected return. But I don’t buy the whole Beta bit, especially not for equity markets:

    For risky equity assets in the United States, my preferred economic model is simple. Expected return equals seven. That is my model, “Seven.”

    Here at Long Or Short, we don’t generally use CAPM due to our proprietary – and superior – 126 factor model. However, we sometimes use CAPM to see what the plebes are thinking and, in such cases, we will use a Beta of 1 and Expected Return of 7.

    Quotes Entirely Relevant to Investing 06-04-2006

    Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.

    -Milton Friedman

    Past Quotes Entirely Relevant to Investing

    Quotes Entirely Relevant to Investing

    Banker hoes L-O-V-E Udon noodle soup because it’s just like them: An emaciated, white, bland peace of Tofu, surrounded by other Udon sisters waiting to be gulped down by someone with a severely suppressed palate.

    -Anonymous from The Leveraged Sell-Out

    Past Quotes Entirely Relevant to Investing

    Long the Peter Crouch Experience

    6’7″ English footballer Peter Crouch is heavily oversold by English fans who discount his fantastic nambly-pambly running style, his stork like touch and his dance moves. We expect that his contributions to England’s World Cup 2006 cause will put pressures on the shorts and launch Crouch to new highs on the strength of the broad-based global appeal of his classic dance moves, which have not been matched since John Roberts’ son busted a move at the White House (Click for related report, I’m Long Supreme Justice Dance Parties).

    Due Diligence:

    Watch the first video from slightly before the halfway mark, then follow with the second video.

    Recommendation: Peter Crouch embodies long, and we recommend accumulating as much of him as possible. Concurrently, we recommend placing a trailing stop on your position, due to potential intermediate term volatility.