Gut Call Valuation

Look in the mirror and start listing off salaries, starting with the one you would first expect and then start increasing it.

$100,000.  $120,000.  $150,000.  $175,000.  etc.

As soon as you can’t look at yourself without smiling and laughing, that’s where you stop.

That’s the top Quora answer to the question of picking your own salary in a negotiation. See the link for a more complete response from Jason Calacanis.
If you’ve had a hard time thinking of a price, use your gut. Often the seller is happy just to get a response. And you never know…

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The Disruption of DVD Keeps Hellboy 3 On the Shelf

From a Reddit discussion, answering the question: whence Hellboy 3?

It is a question that I myself ask of the world many times, but we have gone through basically every studio and asked for financing, and they are not interested. I think that the first movie made its budget back, and a little bit of profit, but then it was very very big on video and DVD. The story repeated itself with the second already, it made its money back at the box office, but a small margin of profit in the release of the theatrical print, but was very very big on DVD and video. Sadly now from a business point of view all the studios know is that you don’t have that safety net of the DVD and video, so they view the project as dangerous.

Creatively, I would love to make it. Creatively. But it is proven almost impossible to finance. Not from MY side, but from the studio side. If I was a multimillionaire, I would finance it myself, but I spend all my money on rubber monsters.

Let’s assume that Hellboy fans would happily collectively pay enough money into the a pot to get this film made, like they did for the last two. But the existing pipe for that money, DVD sales, is broken. There WILL be another pipe, of course, (kickstarter? a specialty online film channel? who knows) because there is demand and supply that simply need a market in which to transact.

But until that gets sorted out, we have frustrated fans and a frustrated creator.

If you’re a fan, here’s GDT’s idea for Hellboy 3 from the same thread:

Well, you know, we don’t have that movie on the horizon, but the idea for it was to have Hellboy finally come to terms with the fact that his destiny, his inevitable destiny, is to become the beast of the Apocalypse, and having him and Liz face the sort of, that part of his nature, and he has to do it, in order to be able to ironically vanquish the foe that he has to face in the 3rd film. He has to become the best of the Apocalypse to be able to defend humanity, but at the same time he becomes a much darker being. It’s a very interesting ending to the series, but I don’t think it will happen.

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Securitization Doesn’t work

That is, only 18% of U.S. securitization – primarily auto loans and credit card debt – are free from government guarantees! Even at the peak of private-sector securitization in mid-2007 – before the financial crisis grew intense – the government-backed share exceeded 60%.

To put these numbers into perspective, we can look at another part of the U.S. financial system: insured bank deposits. You may be surprised to learn that (again, as of end-March 2014) only $6,094 billion out of $9,922 billion in bank deposits are insured. That is, 61% of bank deposits are government backed (see chart below) versus 82% of securitizations.

This is from here via Arnold Kling.

You can interpret this to mean that securitization does not ‘work’ in the sense that both buyer and seller are better off for having done the deal, else why need the guarantee? You might argue that the market would exist without the guarantee but who can say. If investors are so interested in these payment streams why not just invest on a bank?

I see securitization as inviting investors with very little domain knowledge to take massive risks in a mature market. Is that a good idea? Professional investors know financial markets are always looking for (and finding) suckers. If you want them to do something new, they need a deal they can’t refuse. Why would you give a new entrant such a deal over existing players?

A great question. Without a good answer, securitization is a bad idea.

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Disruption Big Time

One of the metrics in our Shift Index looks at what economists call topple rate – the rate at which leaders fall out of their leadership position. In this case, we focused on the rate at which public US companies in the top quartile of return on assets performance fall out of this leadership position. Between 1965 and 2012, the topple rate increased by 40%.

OK, but the skeptic might reply that this is only about financial performance. Another more significant measure of fall from leadership position is provided by my old colleague and mentor, Dick Foster, who looked at the average lifespan of companies on the S&P 500.  In 1937, at the height of the Great Depression and certainly a time of great turmoil, a company on the S&P 500 had an average lifespan of 75 years.  By 2011, that lifespan had dropped to 18 years – a decline in lifespan of almost 75%.  At the same time that humans are significantly increasing their lifespan, large companies have been heading rapidly in the opposite direction.

That is from this post.

The key summary is something like: more software (and data) plus less regulation keeps making life harder for incumbent firms.

One implication I’ve been thinking about a lot lately is how our is going to transform the insurance industry.

Something like 40% of all insurance premium in the US is concentrated in the most regulated and data intensive marketplaces in the world: auto insurance. The doom of auto insurers as consumer facing businesses could be approaching because of driverless cars. But this could also mean the end of insurance regulation as we know it.

The lion’s share of regulatory attention in insurance is spent on auto. Consumers are forced to buy it and it is expensive so they put pressure on politicians to oversee it. What if it goes away? Will we lay those regulators off? Somehow I doubt it.

Off topic: it’s amusing to also note that the most prolific buyers of advertising on tv are auto makers and auto insurers. We are a society obsessed with cars.

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When Investment Costs Nothing

Larry Summers’ latest talk is hitting the blogosphere (here’s Tim Taylor and here’s John Cochrane). A quote from Summers’ talk that both Taylor and Cochrane highlighted is one that gets me to thinking, too:

Ponder that the leading technological companies of this age—I think, for example, of Apple and Google—find themselves swimming in cash and facing the challenge of what to do with a very large cash hoard. Ponder the fact that WhatsApp has a greater market value than Sony, with next to no capital investment required to achieve it. Ponder the fact that it used to require tens of millions of dollars to start a significant new venture, and significant new ventures today are seeded with hundreds of thousands of dollars. All of this means reduced demand for investment …

And here are two graphs:

Who knows what the long run effect of cheap investment and lots of profits is on the economy as a whole. But the marginal R&D project is data driven and data tools and data itself is often free. Next to free, even today’s rock bottom capital equipment prices look astronomical.

And this strikes close to home. I’m leading a research project that could result in a massive improvement in risk management models for non-Hurricane storms for US insurance companies and using not an ounce of proprietary tools or data. Except for my time and that of a few of my colleagues, which we apply only when higher priority work doesn’t present itself, the R&D budget is literally zero.

And yet we shall reap substantial profits from this project if it comes off. I say this is glorious but maybe the technocrats are freaking out.

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Michael Bay’s Playland

You can admire what he does without really enjoying it, and two hours and 46 minutes of pulverized architecture is a lot to endure. But in every Michael Bay movie there are at least a few moments of inspired, kinetic absurdity. Late in “Age of Extinction,” a giant spaceship hovering over Hong Kong, equipped with some kind of magnet, sucks up a lot of vehicles — buses, trucks, fishing boats, ferries, whatever — and drops them onto the city below. I could not tell you exactly why, because it doesn’t matter, but the sequence is both exciting and revealing. It reminds you what these movies are really about: a boy at play, reveling in the creative and destructive power, and the glorious uselessness, of his own imagination.

That’s AO Scott. And it was almost enough to get Tyler Cowen to see the movie. A feat.

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Actuaries Get a C+ For Professionalism?

That was the intentionally shocking opening remark from Sheila Kalkunte at the CAS course on professionalism I attended this week (one of the last hurdles to clear for my ACAS). Professionalism in this context means a lot of things but for my purposes we can take it to mean doing your job competently and honestly. A bad grade here strikes home.

So who gave us the C+ and why? Having got all our attention she changed the subject, going through a fairly boring explanation of the process of the discipline hearings at the ABCD. Maybe she felt (maybe correctly) that we were all feeling pretty smug about ourselves and we needed some cold water. Fine, but what exactly is the problem? I approached her after her talk to get the real story.

First, the ABCD covers ALL actuaries, not just P&C actuaries. The real whipping boys right now are the pension actuaries who are getting swept up in the approaching annihilation of state public finances from underfunded pension liabilities (see this podcast if you’re interested).

Sheila was quick to point out that when she started in her position 8 years ago it was casualty actuaries that had the bullseye painted on their chests. This coincided with the final stages of a hard market so it’s understandable that the public was very upset with increases in premiums associated with the cyclical upswing. Perhaps we can say that normally we sweep most problems under the rug but when some degree of incompetence coincides with real costs people start pining for pounds of flesh.

The other driver is regulators. Sheila mentioned that she has attended meetings with regulators who were visibly and vocally angry about the work they receive from actuaries in rate filings. Lots of swearing, apparently. It’s ironic that the most vocal of these ‘shouters’ were apparently also actuaries who, through this behavior, were violating several precepts of the professional code themselves (act with courtesy and first contact the actuary you have a problem with directly before complaining formally to the board).

The key here is that when regulators get angry, they respond with more regulation. The threat that Sheila felt was approaching was formal government regulation of the actuarial profession which up to this point is entirely self-policing*. Sheila didn’t shed much more light on the substance of the regulators’ complaints. Perhaps, not being an actuary, she didn’t fully understand the core problem. She understands the phrase “shitty work”, though, so she’s spreading the word.

So there’s a regulatory relations problem, here, and I’m pretty irritated that I didn’t know about it and that that the CAS isn’t doing anything about it, as far as I can tell.

*I didn’t realize this and it blew my mind. Maybe this is why the profession doesn’t require some specific university degree like every other profession I know of. When government is charged with regulating a profession is their first instinct to send it to the universities? It costs something like $5,000 to become an actuary (plus all the hours of studying). It would cost SO much more if we required a degree as well. As someone who would have been denied access to the profession if this were the case, I get a cold feeling in the pit of my stomach at the thought.

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