Byrne's Eye View

The Berkshire-Hathaway Annual Chairman's Letter is out. Highlights include:

• Buffett tying his five-decade record for due diligence: he bought Coca-Cola fifty years after buying six-packs of Coke and selling them individually, and now he's purchased Marmon fifty years after a bizarre tax-arbitrage deal that involved exchanging stock certificates for cocoa bean futures.


• More derivatives trading: Buffett sold 15-20 year puts on stock indices, and has made money betting on the Brazilian Real over the US Dollar.


• All successors are selected. I wonder what the CEO market would say about that.

I'm in the middle of Thomas Schelling's The Strategy of Conflict, a collection of essays on Game Theory. One thing he points out is that negotiators can get better results if they have less freedom: if you're buying a house and you would be willing to pay $500,000, but have signed some sort of binding pledge not to pay more than $400,000, you're in a great bargaining position (as long as your binding pledge puts you somewhere above the minimum price at which the other party sells).[1]

What I wonder about is why this isn't more popular. Imagine if a buyout shop took control of some union-dominated company in a debt-finance acquisition, and explained to the negotiators that because of the interest payments on debt, the company would have to cut labor costs 20% or go under. Suddenly, by weakening their capital structure, they've strengthened their bargaining position. Of course, the benefit here goes straight to the former shareholders, rather than the new owners. One possibility would be a situation in which the new owners bid, say, $1 billion for a company they own 20% of, but finance that transaction mostly with debt. They only get a small fraction of the total benefit, but they do benefit, and someone owes them a favor. My question is:

a) Why is this not the most popular justification and strategy for LBOs -- that by depriving companies of capital, they force unions to capitulate to any reasonable demand?

or

b) Is this how people made money borrowing at double-digit rates to pay a 30% premium for an assortment of companies in declining businesses? Hm.

[1] Schelling uses this example, but his book was written in the 60's, so the prices he uses are $16,000 and $20,000. Even if he ended up paying the $20K, I sure hope for his sake that he got the house.

Yesterday's WSJ had a brief article on the Minneapolis Grain Exchange, which is going pretty crazy -- wheat prices are up about 350%, volume (in contracts traded) is up almost 50%, and prices for seats on the exchange are soaring. Just in case the stock market hadn't noticed yet, I looked up every brokerage I could think of to see if any had a major presence in Minneapolis, and might end up owning a chunk of the exchange if it went public or was sold to CME.

The closest I could find was MF Global, whose head of commodity research was heavily quoted in the article. MF, unfortunately, was too big a company for the wheat thing to be anything but a blip. Or so I thought. This has to be the best market-timing in history: on Wednesday morning, the Journal publishes an article about how great the wheat market is doing. It cites exactly one public company as a major player in the market. That very morning, someone at the company loses $141.5 million trading wheat.

A fund partially owned by Merrill Lynch now owns a large part of Merrill Lynch. So let's say Merrill reports a good quarter, so the fund's fees go up, so Merrill's next quarter improves, so... I still don't see how anyone can avoid this feedback loop once the level of cross-ownership is high enough.

A while ago, I suggested that banks employ an 'ombudstrader', who would make the financial decisions the bank suggested, and whose own financial circumstances would illustrate just how wise those calls were. This isn't that, but it's a start: Bank of America's chief investment strategist has become one of their traders. I can almost believe that this isn't a cynical ploy to gain investors' trust, because most of the people who listen to sell-side analysts and 'strategists' are probably not the ones who track hirings and firings at investment banks.

Notice: about half of my readers seem to be programmers or at least familiar with programmer jargon. The other half are not. I'm trying to compromise between not boring the first and not annoying the second.

Paul Buchheit claims that "If CPU speed doubles every 18 months, then [Javascript] in 2007 performs like C in 2002." Since C is chosen for performance and Javascript chosen for features (it's what makes Gmail and Google Maps a lot more usable than their precursors), this basically means that people can slap together slow-running programs now and expect them to be as usable as carefully hand-crafted, ultra-efficient applications -- within a couple years. Then consider this interview with science fiction author Neal Stephenson:

My thoughts are more in line with those of Jaron Lanier, who points out that while hardware might be getting faster all the time, software is shit (I am paraphrasing his argument). And without software to do something useful with all that hardware, the hardware's nothing more than a really complicated space heater.

A third data point: In Founders at Work, Paypal cofounder Max Levchin talks about how one challenge with his Palm-based cryptography startup was that a particular operation took about two seconds -- and he had to make it look like his program was doing something, because otherwise two seconds of nonresponsiveness would be annoying.

In light of what Levchin said, I think I can divide interactions with computers into three categories:

1. Things that happen basically instantly, like a character appearing on the screen when I punch a key.


2. Operations like Levchin's decryption, or copying a file, or starting up an email client -- things that take just long enough for someone to notice that they're tedious.


3. Anything that gives you time to get up and have a cup of coffee: rebooting, compiling, installing new games, transferring CD- to DVD-sized chunks of data around, downloading media.

I suspect that advances in computer speed mostly show up in shifting things from one category to another: drawing a picture on the screen might have taken a lot of effort thirty years ago, but now it happens instantly and is the basis for our interactions with computers; opening a web page was in Category 3 for me for a while; click the link, go do something, come back in a few minutes to see if it's loaded -- now it's in Category 1. Anyone designing a new operating system can make a couple tradeoffs: should booting up take 55 seconds instead of 60, or should wobbly 3D windows be something that happens right away rather than after a couple seconds of choking? In every case, the radical improvement is noticeable, so it's what wins. But the 'radical' improvement just means changing how we do an activity we already do -- the really radical stuff is a lot riskier than the shift between categories.

As long as that's true, we should expect new operating systems to give us faster, more accessible glitz, not profound changes in how we use computers. Paul Buchheit can now do in a browser what he would have had to do on a desktop in 2002. But that just means that, after half a decade of exponential increases in computing power, he's doing the same old thing.

In this otherwise decent essay on the end of the glossy annual report (blame Sarbox), I find:

In general, Stenitzer thinks annual reports should always contain financial highlights with percentage changes, an 11-year financial history because it allows investors to cal­culate a 10-year compound annual growth rate, some breakouts for the segments within divisions of the company, and forward-looking informa­tion that really gives a sense of what management thinks. Yet in the Sarbanes-Oxley era, such candor is increasingly rare.

Eleven years of history are crucial, because a ten-year earnings-growth history is the best. Sound familiar?

Nigel Tufnel: The numbers all go to eleven. Look, right across the board, eleven, eleven, eleven and...

Marty DiBergi: Oh, I see. And most amps go up to ten?

Nigel Tufnel: Exactly.

Marty DiBergi: Does that mean it's louder? Is it any louder?

Nigel Tufnel: Well, it's one louder, isn't it? It's not ten. You see, most blokes, you know, will be playing at ten. You're on ten here, all the way up, all the way up, all the way up, you're on ten on your guitar. Where can you go from there? Where?

Marty DiBergi: I don't know.

Nigel Tufnel: Nowhere. Exactly. What we do is, if we need that extra push over the cliff, you know what we do?

Marty DiBergi: Put it up to eleven.

Nigel Tufnel: Eleven. Exactly. One louder.

Marty DiBergi: Why don't you just make ten louder and make ten be the top number and make that a little louder?

Nigel Tufnel: [pause] These go to eleven.