Stocks Are Collapsing, and I Am Pumped

Oct 16

In: Economics, Personal

The stock market is correcting, and I’m actually upbeat about it. Market volatility creates buying opportunities.

Stocks are dropping and bond prices are rallying, as nervous investors rush to U.S. Treasuries. All this will lead me to sell high and buy low in our retirement accounts. I’ll watch the markets, and once they hit a trading range, I will sell bonds and buy stocks. Finance folks call that “rebalancing.”

Rebalancing after the 2008 stock market collapse led to a doubling in value in a few years in our kids’ college savings accounts. Once the market free fall stopped, we decided to allocate some savings into 529 plans for our children. We didn’t know it at the time, but we invested the money just a week after the equity markets bottomed out and then proceeded to rally back. Total luck.

I’ve written previously here about how I follow an investment strategy outlined in a book written by the Yale endowment manager, David Swensen. He argues that non-institutional investors should stick to low-fee index funds and follow an asset allocation strategy. He recommends rebalancing periodically. In fact, the Yale endowment rebalances every day.

Studies show that asset allocation accounts for 85% to 100% of your public-market returns. So, it isn’t about whether you should buy HP stock over IBM. It instead is about how much you put into stocks vs. bonds. And, rebalancing episodically to maintain that allocation forces you to buy low and sell high.

I follow an allocation of 70% stocks and 30% bonds with both U.S. and non-U.S. components in each, designed to match the global indices’ mix. Here are the specific funds (I use Vanguard) and allocations:

Equities, 70% total
U.S. Total Stock Market Index: 50%
Emerging Markets: 4%
Developed Markets Index (this is non-U.S. and excl. emerging markets): 16%

Bonds, 30% total
U.S. Total Bond Market Index, 24%
International Bond Index, 6%

I find Swensen’s strategy to be awesome: it is simple, low-cost and effective. With so much going on, I don’t have a lot of time. His strategy lets me focus on other things in my life.

Over time, I’ve learned that my decision-making capacity is limited. And, I’d rather focus my energies on those areas in my life that matter most: my family and my role as an enabler of entrepreneurship.

I used to think that VC was about investing. I’ve since come to realize that it is that, but something else: being a fiduciary. Entrepreneurs and investors trust us to do the right thing. They’re asking us to show fidelis.

My 37-Trout Outing

Oct 13

In: Fly fishing, Personal

They say life is about showing up. Well, when my alarm went off this morning at 4.30 am, I certainly didn’t feel like getting out of bed. It was dark and cold outside, and the bed felt just too comfortable and warm.

It’s a public holiday today for Columbus Day in our part of the country. My plan was to fly fish.

After much mental debate, I did get up, pack my gear, and drive to a local river. My expectations were pretty low. The last time I fished this particular river, I worked hard all day and landed just one fish. Another angler with whom I chatted didn’t catch anything all day.

So, as I started to wade into the mist-covered river this morning, I mentally resolved to be happy if I didn’t catch anything. Just enjoy the time to be outside. Be grateful for the hall pass my wife gave me. It was a very beautiful autumn morning, as the sun started to rise, the tree leaves ablaze in orange, pink and brown colors.

I was feeling pretty good.

Then, I caught a nice rainbow trout on my third cast. “There,” I said to myself. “You’ve caught a fish. Now, everything else is upside.”

Well, today, I ended up catching 37 rainbow and brown trout. It’s an all-time record for me. I did catch 15 fish in a day many years ago and that was a blast. Today, I hooked probably closer to 45 or so (I lost count), but I did land into my net and safely release 37.

What a day. I couldn’t believe my good fortune. An epic day which I will remember the rest of my life. And, here’s the weird thing: I didn’t see anyone else catch anything.

I’m glad I showed up at the river.

A Long Way from Brooklyn

Oct 12

In: Family life, Personal

(Google Street View)

(Google Street View)

I was at the grocery store this Sunday morning when it opened. I’ve done this on many Sundays over the years. The store is quiet, and many of the workers are still stocking the shelves. I’ve become friendly with a few of them, since there’s time to chat amidst the quiet activity.

One of them is an immigrant from Malaysia. He grew up in a small village. The Malay and Indonesian languages are 90% the same, and so, we often chat. He shared with me today, with great pride, that his son just started at Noble & Greenough, an awesome school, and received a full scholarship.

He says that he tells his children to work hard, that he doesn’t want them to end up stocking shelves at a grocery store. He says that he brought them back to his Malaysian village a few years ago, to show them his roots.

I’ve done something like that.

Some years ago, during spring break, our family spent time in NYC. On the way home, we went to Brooklyn, where my parents, my sister and I lived, after first arriving in the Bronx, after we emigrated. It was then, and still is now, a rough part of town.

We drove by our old apartment building (see photo up top). We drove slowly along the streets, adjacent to the sidewalks on which my sister and I used to walk to and from school. We then went to Mass at a run-down Catholic church where I received my First Communion. Next to the church is Holy Cross School, the low-key parochial grade school my sister and I attended. It’s basically a really old building surrounded by asphalt:

(Google Street View)

(Google Street View)

“Wow, Dad,” one of my children said. “I can’t believe you grew up in this neighborhood.” Our nice suburb is a long way from Brooklyn. My kids’ schools are a long way from Holy Cross School.

Honestly, the seven years we spent in Brooklyn were pretty tough. My mother was very unhappy, caring for children on her own while not speaking the language and while my father worked long hours. My sister remembers a fair amount of racism from other kids, which I thankfully don’t recall. We had little money. There was a profound sense that we didn’t “fit in.”

Moreover, it was while at Brooklyn that my mother started to experience some very serious health issues, almost dying quite a few times. Those years comprise a crucible period for our family. I still feel deep sadness when I recall those years, even as I type this.

But, it made us stronger and gave us opportunity. Staying in Indonesia would have been worse, given the persistent and often violent discrimination against people of ethnic Chinese descent (more here).

Thankfully, we moved out of Brooklyn to California. Later, for me, Yale College. I’m so grateful to my alma mater, for it changed my life. I’m so grateful to some high school teachers, who encouraged me to think broadly about college. They let me dream of opportunities I never knew were within reach. My college-app process was pretty basic. I applied to colleges sight-unseen. Thankfully, it all worked out.

It has been a long way from Brooklyn.

How to Make Money: Concentrating Risk

Oct 7

In: Economics, Entrepreneurship, Technology and VC

Eric and I have been emailing this morning about a blog post on seed rounds (here) and how they’re getting larger. As the number of Series A check-writers has remained flat at best (and, down in some sectors) it’s forcing seed-stage companies to prove more momentum before they can raise a new round. So, they’re getting longer seed runways.

We’ve been seeing this trend in the marketplace the past few years. There just seems to be a “natural limit” as to how many companies can be funded. Whether that’s due to a cap on available VC dollars or the number of boards a VC can manage (my theory and a prior post on that here), it is what it is.

All this reminds me of two things.

First, it’s important to know the difference between a cycle and a trend. For example, a few years ago, seed investing exploded. VC firms were hiring associates to manage seed programs and there was furious check-writing from VCs, seed funds, and angels. Then, that stopped. There was a huge abundance of inventory, more than the Series A market could handle. Mortality rates soared.

Fast forward. Most VCs killed their official seed programs, although they still seed on occasion. Seed funds that had momentum greatly increased their fund sizes (needed in order to get more ownership, which drives fund returns) and, thereby…became VCs. Angels have been more selective.

In other words, the explosion of seeding was a turn in the cycle. There had not been a lot of seeding for a while, and the market filled the void. Then, there was “too much” seeding and the brakes were clamped down. The same pattern happened in 1998 and 1999, when seeding blossomed. The markets shut down in 2000 and 2001.

Second, wealth comes from concentration. As one of our investors, who manages billions of dollars, says: “You create wealth with a concentrated portfolio, and you protect it afterwards with a diversified one.” It’s a reflection of the CAPM theory in finance, and one that argues that risk and returns are correlated.

For entrepreneurs, that means starting a series of companies in a career, knowing that you won’t bat 1.000 but that one should be a significant outcome. In other words, you can ride many horses as a founder, and when you find one with momentum, ride it for as long as possible, as it may be the best horse you’ll have (prior blog post on that here). When you look at a successful founder’s track record, there will normally be one enormous hit–and, that’s it. It’s why we encourage our founders to shoot high and go public, if your company has the momentum.

For VCs, it is about having good ownership levels in companies and allocating dollars into winning companies. A high-volume seed strategy can be a great way to source investments for the Series A and beyond, but fund returns nearly always are based on a few winners in which you have high ownership. It’s about, therefore, a very concentrated portfolio on a dollars-weighted basis.

Owning small pieces of a bunch companies gives you a diversified portfolio, and most likely, low returns for the fund. As a famous seed fund founder told me as to why his next fund was much larger: “We had a $100MM exit. And, it didn’t move the needle on our fund because we owned so little.”

There’s no free lunch.  Returns come from risk and the ability to manage away that risk. It means a concentrated portfolio, which requires a strong stomach and mental toughness in both entrepreneurs and VCs.

So, if you’re an entrepreneur who is raising money and having a hard time finding it, just remember that you’re playing a 20-year game. Your current company may or may not work out. But, with perseverance, one in the future should. Or, if your company is “killing it,” enjoy the moments and try to build a company that’s built for the long-term. It may be the best horse you’ll ever have.

The Value of ‘Good’ Dopamine

Oct 4

In: Brain hacking, Fly fishing, Personal, Philosophy


One my children asked me about what causes cigarette addiction. I didn’t know, and so, I did some online research. The short answer: dopamine. Nicotine creates the release of dopamine (more here).

Dopamine is one of those magical neurotransmitters. It creates feelings of pleasure and well-being. You feel great and self-confident when dopamine is plentiful. It can come from positive activities (accomplishing a difficult goal, exercise, sleep, having a community, etc.) or negative ones (e.g., addictions to drugs, gambling, etc.).

All this made me think of what you can do via “brain hacking” to increase dopamine in positive and healthy ways. As I think more about it, here are mine, in no particular order:

  • Venture capital: I love what I do. It is challenging, fun and never-ending. There’s no set formula you can master, and every day requires effort and focus. It is something you can never tame. A VC is famous one year, and then, has a string of horrendous losses. It is a humbling avocation. But, I practice venture capital with great partners, who also value what I want most in a job: high professional standards, personal authenticity, and a no-B.S. culture in which we work as a team. I’ve noticed something about our weekly partners’ meeting: there’s laughter at some point during each one. Could be a joke, a self-effacing comment or a funny observation. I think it’s awesome that we enjoy spending time together.
  • Exercise: I work out every morning. My business partner, Eric, does so, too. On the rare occasion that I cannot exercise, I’m pretty crabby by 3 pm. So, I’ve learned to give up sleep when necessary to exercise.
  • Fly fishing: It is very challenging. I’ve been doing it for some years and continue to learn and practice new techniques on new waters. I recently started to make my own flies. On my most recent outing, it was fun to catch 18″ trout on homemade flies smaller than a dime (see photo up top). I got a big kick from that! Honestly, I’m proud that I can hit an unfamiliar river, analyze it, and catch big fish. It has taken many years to get to this point.
  • Friends: I feel very grateful to have some close friends. I meet with a group of them every other Friday in an informal discussion group. We do social events, too, such as golf, couples dinners and pub night. Next week, we’re going out for a big steak dinner. I’ve written in the past (here) that it is common for men to have many business acquaintances but few close friends. I know that I’m lucky. It is a soothing and warm feeling when we get together.
  • A coach: Serendipitously, my friend Anne Mitchell last year was starting an executive coaching practice and asked if I would be her first beta customer. I agreed and it was a tremendous six-week exercise.  Since then, our families have become close friends, and I’ve gotten to know her husband, Jeff, who is awesome. Anne and I recently caught up. It continues to be a very valued and valuable friendship.
  • Life mentoring: Every four to six weeks, for 15 years, I have a meeting or call with Fr. Philip Merdinger. He asks me how life is going. He has tremendous advice on how to live life in a way that is grounded. He helped me sort through some difficult decisions such as: navigating health issues in the family, deciding whether to quit my job and try to start a new VC firm, and working through the joys and challenges of parenting and family life. I have a profound feeling of well-being after we chat. I this past summer was asked to speak at Fr. Philip’s retirement party, and it was a very rewarding accomplishment. The talk went over well, which was important, as he means so much to me.

So, that’s my list. What do you do to boost dopamine?