_______________________________________________
- THE FRIDAY LETTER -
(emailed weekly,
from Gilder Publishing,
for friends and subscribers)
_______________________________________________
| http://www.gilder.com/ | Issue 364.0/November 14,
2008
SIGN-UP A FRIEND FOR FREE!
HEADLINES:
- The Week / Economic Crisis: The Right Time for 'Disruptive
Innovation'?
- Friday Feature / The Meltdown of the
Quants
- Friday Blogger Bonus / The
Entrepreneur Opportunity in Downturns
- Readings /
The Week / Economic Crisis: The Right Time for 'Disruptive
Innovation'?
Knowledge@Wharton (11/12/08): While globalization has witnessed the decline of U.S. dominance in
manufacturing, energy and even finance, one thing had long been presumed
unassailable: Good old American ingenuity.
Now it appears
that's not safe, either. China, whose industries have been envied in the West
more for their tenacity than their ingenuity, has established a multi-year
framework to become more innovative and, therefore, competitive. So has
Singapore. Finland is merging its top business school, design school and
technology school to create a multi-disciplinary "university of
innovation" next year.
Council members
of the National Academy of Sciences and the National Academy of Engineering
have "expressed concern that a weakening of science and technology in the
United States would inevitably degrade its social and economic conditions and
in particular erode the ability of its citizens to compete for high-quality
jobs," according to a 600-page report from the National Academies
published in 2007 and titled, "Rising Above the Gathering Storm."
The wild card
these days is what will happen to innovation -- the advance of progressive
ideas in science, technology and business -- now that the world economy is in a
tailspin. The conventional wisdom might suggest that business, government and
academia will be less willing to embrace the risk-taking and short-term
costs that come with the territory of innovating.
Yet Paul J.H.
Schoemaker, research director for the Mack Center for Technological Innovation,
suggests that, for some companies, the economic crisis can actually provide an
innovation platform. "The crisis has multiple impacts," Schoemaker
says. "Loss of revenue and profit will at first instill a cost cutting
mentality, which is not good for innovation. But if the patient is bleeding you
need to stop that first. Then, however, a phase starts where leaders ask which
parts of their business model are weak (and perhaps unsustainable) and that, in
turn, can lead to restructuring and reinvention."
He also cautions
against too much caution -- over-reliance on incremental innovation versus
transformative, or "disruptive," innovation. In innovation circles,
the two have come to be differentiated as "little i" and "Big
I" innovation. "The largest gains in business come from more daring
innovations that challenge the paradigm and the organization," Schoemaker
says.
The
Business of Being Disruptive
While
"disruptive innovation" has enjoyed office buzz-phrase status for
only about a decade, the idea is quite old: Austrian economist Joseph
Schumpeter had it in mind when he borrowed the phrase "creative
destruction" to describe his theories of how entrepreneurs sustain the
capitalist system.
So just how does
an entrepreneur or business go about being "disruptive?" How does one
convince investors or top brass of a radical idea's worth…?
Read on:
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2086
|
The Gilder Telecosm Forum To
learn how to join this powerful network of talented, tech-savvy investors and
thinkers online daily to debate, discuss, and decode new and emerging
technologies and share valuable and actionable investment advice, visit www.Gildertech.com today. |
Friday Feature / The Meltdown of the
Quants
John Rutledge, Rutledge blog (11/10/08): Interesting NBER
working paper by Khandani and Lo, What Happened
to the Quants in August 2007?: Evidence from Factors and Transactions Data,
in which the authors attempt to trace the capital market blackout to its
source.
As you know from the blog and
my recent book, Lessons
from a Road Warrior, I believe that the academic finance community
(including all those guys with Nobel Prizes for inventing so-called modern
portfolio theory and the dreaded Black Scholes theorem) deserve a certain
amount of the credit for the capital market meltdown. We have trained an entire
generation of finance students that correlation coefficients are facts of
nature, like Boltzmann’s constant, are gifts from God; they are not. Based on
this presumption, they crafted elaborate securities based on the assumed
stability of historical statistical relationships, like houses built on sand.
Moral of the story–correlations are always temporary.
I presented an alternative
framework for looking at risk and return at several business schools in recent
weeks. The students liked it; the professors not so much. For more on this,
read Keynes’s warning against the misuse of probability theory in the last
chapter of A
Treatise on Probability or Prigogine’s elegant collision operators in The
End of Certainty.
Abstract: “During the week of
August 6, 2007, a number of quantitative long/short equity hedge funds
experienced unprecedented losses. It has been hypothesized that a coordinated
deleveraging of similarly constructed portfolios caused this temporary
dislocation in the market. Using the simulated returns of long/short equity
portfolios based on five specific valuation factors, we find evidence that the
unwinding of these portfolios began in July 2007 and continued until the end of
2007. Using transactions data, we find that the simulated returns of a simple
marketmaking strategy were significantly negative during the week of August 6,
2007, but positive before and after, suggesting that the Quant Meltdown of
August 2007 was the combined effects of portfolio deleveraging throughout July
and the first week of August, and a temporary withdrawal of marketmaking risk
capital starting August 8th. Our simulations point to two unwinds - a
mini-unwind on August 1st starting at 10:45am and ending at 11:30am, and a more
sustained unwind starting at the open on August 6th and ending at 1:00pm - that
began with stocks in the financial sector and long Book-to-Market and short
Earnings Momentum. These conjectures have significant implications for the
systemic risks posed by the hedge-fund industry.”
Check out John Rutledge’s blog:
http://www.rutledgeblog.com/
__________________________________________
Friday Blogger Bonus / The Entrepreneur Opportunity in Downturns
Tom Ryan,
RetailWire blog (11/10/08): Writing in Business Week, Vivek Wadhwa,
Wertheim Fellow at the Harvard Law School, cited several advantages for
start-ups during recessionary periods. These include less competition as many
"me-too" companies go out of business, as well as lower costs for
retail estate, equipment, materials and even people. Recruiting becomes easier
as many people get laid off. Finally, there's less pressure to expand.
"You can conceive of
better products, test them carefully to make sure they work and meet customer
needs, and experiment with different business models," wrote Mr. Wadhwa.
He noted that although
funding is tougher, money for start-ups often comes from personal savings or
borrowings from friends and family.
More debatable is whether
entrepreneurs become more counted on as sources of innovation during downturns
due to a tendency by corporations to cut back on R&D as well as the more
bold projects that require longer paybacks.
Writing in Forbes,
Rich Karlgaard noted that companies born out of the seventies included
Southwest Airlines, FedEx, Microsoft, Genentech, Apple, SAS Institute and
Oracle. He believes the tough conditions at the time - high taxes, inflation,
political turmoil, bearish stock market - drove bright young people into
unconventional careers.
"Picture Bill Gates in
the 1970s, with an SAT score of 1590 and a burning ambition," wrote Mr.
Karlgaard. "What existing jobs could possibly have satisfied young Gates?
Wall Street was a sleepy place back then. IBM was a blue-suit, white-shirt workplace.
Bell Labs stimulated the brain but offered little adrenalin. Entrepreneurship
was where it was at."
Also writing in Forbes,
George Gilder, a venture capitalist and founding fellow of a conservative think
tank, said a similar situation occurred out of dot.com "bubble" in
which companies like Google and MySpace emerged to "take all the chips and
establish a new Internet economy."
Looking furthest back, David
Silverman, author of Typo: The Last American Typesetter or How I Made and
Lost 4 Million Dollars, pointed out that Motorola, Hewlett-Packard, Xerox,
Ryder, Unisys, Texas Instruments, Revlon, Converse, La-Z-Boy and
Interstate Bakeries were all born in the Great Depression....
Read on:
http://www.retailwire.com/discussions/sngl_discussion.cfm/13360?
__________________________________________
Readings /
Wi-Fi for Your Car (video)
http://online.wsj.com/video/mossberg-on-wi-fi-for-your-car/CD6FA745-1434-4FBE-B520-0EB530CD5509.html
The Age of Entanglement
http://www.berkshireeagle.com/ci_10975287?source=most_emailed
Event Helps Tech Firms Find Funds
http://www.sanluisobispo.com/business/story/525161.html
Qualcomm Pushed Beyond Cellphones
http://online.wsj.com/article/SB122646599469620261.html
Share Your WiFi With the Neighborhood
http://howto.wired.com/wiki/Share_Your_WiFi_With_the_Neighborhood
The New Liberalism: How the Economic Crisis Can Help Obama Redefine the
Democrats
http://www.truthout.org/111108D
Black Silicon
http://www.technologyreview.com/energy/21611/?a=f
__________________________________________
Friday Letter Editor: Mary Collins George / mcollins@gilder.com
ADVERTISING INFORMATION
The Friday Letter is mailed each week to more than 40,000-plus
subscribers and friends of Gilder Publishing, including industry leaders,
financial professionals and individual investors. For information about
advertising, contact Lauren Klopacs at lklopacs@forbes.com.
PLEASE NOTE: The appearance of an advertisement in the Friday Letter
does not indicate an endorsement for the product and/or service by George
Gilder, Gilder Publishing LLC, or the Friday Letter staff.
FEEDBACK AND PROBLEMS
For technical problems, or to send letters to the editor, please
e-mail info@gilder.com.
MAILING ADDRESS
Gilder Publishing, LLC
ATTN: Friday Letter
291A Main Street
Great Barrington, MA 01230
_______________________________________________
The Friday Letter is published weekly for subscribers and
friends of Gilder Publishing. If someone you know would enjoy it, please feel
free to forward a copy.
Gilder Publishing makes the Friday Letter available for free. To
help defray some of the costs of producing this information on a weekly basis,
we will from time to time be sending you offers from companies we think you'll
be interested in. These offers will not come more than once a week. If you do
not wish to receive this related information, please opt out of this process at
the link below and we will not share your name with companies outside of Gilder
Publishing.
To SUBSCRIBE please visit http://www.gilder.com/
To UNSUBSCRIBE please go to http://www.gilder.com/fridayletter/unsubscribe.php
Trouble subscribing or unsubscribing?
Email info@gilder.com
http://www.gilder.com/unsubscribe/specialproducts.php
To SUBSCRIBE please visit http://www.gilder.com/
To UNSUBSCRIBE please go to http://www.gilder.com/fridayletter/unsubscribe.php
Trouble subscribing or unsubscribing?
Email info@gilder.com
_______________________________________________
Copyright 2008 Gilder Publishing LLC