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How far ahead do you plan?

As I write this, oil prices topped $78. In January of 2005, gas was selling for around $1.75/gallon. Now, it’s over $3.

For any business that depends on transportation or petroleum, we just doubled that line item.

Are you assuming this is a temporary spike, and ignoring it? Are you factoring this into your long-term planning? How long-term? Are you assuming prices will keep rising or will fall?

I’m betting that most people are treating this as a new set level. But the assumptions you make about the future, and the time horizon of those assumptions, will lead you to vastly different conclusions and actions.

So choose wisely. Choose thoughtfully. And it may even make sense to do some scenario analysis, a decision tree or two, and facing unpleasant realities. You might event want to look at data, rather than just thinking wishfully (or pessimistically, for that matter). You might be surprised.

Buggy whip manufacturers got blind-sided when the world shifted to automobiles. Don’t let yourself be blind-sided because you aren’t paying attention to where the world is heading.

Motivate each person according to their values!

A friend just sent me this link about how to be a Technical Lead. It is written for technical people by a technical person, but it really applies to anyone running a company that depends on technologists.

Especially note “Mistake #2,” which discusses motivation. One of the most common things I’ve found is managers who don’t take the time to find out what is motivating to their particular people. They assume that everyone wants the same recognition they do. Or they assume everyone thinks a football outing is the be-all-and-end-all of bonding.

This is important stuff! Over time, you can demotivate someone by consistently “rewarding” them with things they don’t appreciate. One engineer used to bust his butt working late, putting in heroic efforts to deliver an over-scoped, under-funded project on time. A gift certificate to Computer World, a new laptop (cost: $1000) or a few days off would have made him happy and appreciated. Instead, he got a public award and notice at the next all-company meeting. Big mistake. It turns out he had been raised that pride is a sin. Far from motivating him, public notice felt like a slap in the face.

This story ends poorly. The engineer left, feeling unappreciated and angry at management that “didn’t care” and was “just going through the motions.” His managers were puzzled at his seeming indifference to their recognition. And it cost the company several hundred thousand dollars to replace him, not to mention get his replacement up to speed on the project.

The solution is simple: take the time to find out from everyone around you what makes them feel appreciated. If they say, “Gee, I’d love a flat-screen TV,” remember that. If they say, “Gee, I love spendin time with my family,” remember that, too (a family week at Disneyworld is cheaper than you think). Then show appreciation by doing something that the recipient will appreciate.

Make Your own Luck – a great guide for decision-making under uncertainty

I just finished Make Your Own Luck by Eileen Shapiro and Howard Stevenson. What a great book!

My background is in engineering and science, then business. As an engineer, I really liked that there’s a “right answer.” Or at least, there are clear wrong answers (the bridge will collapse if we make it out of tissue paper, period). In business, things aren’t so easy. Most situations have too many factors to identify, let alone consider deeply. Shareholders interact with managers who interact with technology and customer service people and engineers and operations and … it’s tough to know how to think about all this.

Make Your Own Luck lays out a 12-step process (hmm…) for taking risks. Some of the steps sound simple: Know your big goals before you begin, so when you make bets in your life, you’re betting on what you actually want. Sounds obvious? Yeah, but in my own work with executives, I’ve found that people easily lose sight of their real goals(1). The power from Shapiro and Stevenson’s approach comes from having a rigorous checklist to consider when making risky bets.

Some of their tools help evaluate risks that I’ve never known how to tackle. For example, the authors reject the conventional wisdom that “reward requires risk,” and give us “prediction maps,” a tool for identifying low-risk, high-reward opportunities. Simple, elegant, and practically useful.

Their other big new tool is “uncertainty grids.” Uncertainty grids let you quickly test your plans against combinations of uncertainties to realize whether you’ve unconsciously anchored yourself to a single scenario, or whether your plans can survive multiple uncertain events.

The writing style is fun, with thought experiments between the chapters, a final chapter of scenarios to analyze using the 12 steps, and haiku or other verse at the start of each chapter. I found it a pleasant change from the overly heavy style of most substantive business books, and it was an easy read cover-to-cover that did justice to its excellent content.

I heartily recommend the book. Go check it out!

– Stever

(1) Being a professional, of course, I never, ever lose sight of my own goals. *grin*

Ernst and Young reveals 243,000 credit card numbers. And they call themselves auditors?

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Oops. Ernst & Young just let the personal data and credit card numbers of 243,000 HOTELS.COM subscribers get stolen, via that old standby: a stolen laptop. And these people call themselves auditors, supposedly qualified to judge the accounting integrity of American business? It’s no wonder that hundreds of billions of dollars of fraud have been coming to light over the last several years.

The very fact that the data was stored on a laptop in unencrypted format is criminal negligence.

For those of you who care if your laptop is compromised if stolen, here are a couple of things you can do. E&Y didn’t do them, and now 243,000 of us are paying the price.

The Microsoft solution I don’t trust (but better than nothing)

First, if you use Windows XP Professional, you can right-click a folder and click a little box “Encrypt.” This will encrypt the files so prying eyes can’t get at them. If you suspend your laptop without logging out, however, then a thief can access the files if they resume the stolen laptop, so always log out before suspending. (Or set your laptop to require a password after suspending.)

Personally, I don’t trust Microsoft’s security. They have a 25-year track record of designing highly insecure systems, and shipping those systems pre-configured to their least secure configuration. No matter how much they say that security is now a priority, I can’t imagine that their thousands of programmers suddenly acquired the ability to write secure code after spending their entire careers not knowing how. Furthermore, they’re now creating their own anti-virus products and firewalls. Any company that makes money selling me protection against vulnerabilities they built into their own software isn’t a company I want to trust with my sensitive business data.

The “virtual encrypted disk” solution I trust

I use PGP Desktop’s “Virtual Disk” product. I create a virtual encrypted disk that I must explicitly open and enter a passphrase whenever I boot the computer. It’s a bit more work than Microsoft’s solution, but PGP has a spotless record going back 20 years for having the strongest, most secure encryption available. Originally an open-source product, their algorithms are public knowledge, so the security community can make sure the product is solid.

Anything’s better than nothing

In any event, use something. If you deal with sensitive data, you should never, ever have it unencrypted on a computer that might be physically compromised. Even if you have a password-protected laptop, the disk drive can be removed and read by a thief, so keep the data encrypted on that drive.

E&Y should have done that. Heck, E&Y should never allow an employee to touch a computer that hasn’t been made as iron-clad as possible. (They probably let their employees connect to unencrypted wireless networks while traveling. Conveniently, that lets a thief simply sit in an airport boarding lounge and grab sensitive data out of the air.) You do better. Get secure. There’s no reason to do otherwise.

Walk Left, Stand Right. Creating a culture through action and thought.

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Creating a culture or a community is more than simply spouting values or saying “We’re all in this together.” It’s about adopting a mindset that we can all adopt practices that benefit the group, as well as ourselves. This segment explores community as part of the Riding an Escalator Experience.

(The player embedded in my web page may have trouble playing this segment, so you may wish to download and play the mp3 file.)

Podcast: Play in new window | Download

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Is Google stock overvalued? How would we know?

A friend wrote: “… and I thought Google was overvalued at $150!” She was implying that it must not have been overvalued, since it’s currently selling for so much more. I decided to whip out my amateur finance knowledge and see if she was right.

Disclaimer: I am not a finance jock. My understanding of valuation models is limited to my experience as an investor in startup companies, my MBA finance courses, and my having read all of Berkshire Hathaway’s annual reports, and whatever other writing I can get my hands on from Warren Buffett. (Especially Buffetology by Mary Buffett and David Clark.)

My friend was likely right. Google probably was overpriced at $150. “Overpriced” means its actual value is less than it’s selling price.

Share price isn’t the same as value. Google’s price may be above $150, but its intrinsic value may be lower or higher. Price says nothing about intrinsic value, though the value investing theory goes that over the long term, price will eventually gravitate to intrinsic value. I told my friend, “you can kick yourself for not having speculated, but don’t assume that your instincts were wrong.”

APPLYING 3 DIFFERENT VALUATION TECHNIQUES TO GOOGLE:

P/E (price-to-earnings) analysis: Google is currently at $377, with a P/E of 63. That means it will take 63 years for Google to earn back the price of the share you buy. A P/E of 18 is more reasonable (Walmart is at 17, for instance, Microsoft at 18). If Google falls to a realistic valuation (as it’s certain to do over 63 years), this would be about $101/share (377 / 63 * 18 = $107), which is less than the $150 my friend mentioned.

Warren Buffet “bond coupon” valuation: Google produced its historic high $5.68 of fully diluted earnings per share this year. So you are buying a share that produces $5.68 each year. A perfectly safe investment (a T-bill) returns 5.12% a year, so to get $5.68 in earnings from a T-bill, you could buy $111 in T-bills and generate a risk-free $5.68/year.

So paying more than $111 for a Share of Google is a poorer choice than buying a T-bill, unless you think Google will do far better than $5.68/year over time. Note that because Google is riskier than a T-bill, you should actually expect it to cost less than the T-bill, to compensate you for the risk.

Will Google do better than $5.68/year over time? With 215,000,000 outstanding shares, they need to add $215MM to the bottom line to increase earnings per share $1. That’s a big number. So I’m not holding my breath. But let’s assume they can do it…

So let’s look at a third valuation, where we do assume Google will increase its EPS every year.

NPV valuation: Google’s earnings grew 13% last year. A discounted cash flow assuming $5.68/year of earnings, growing 13%/year for 15 years produces a valuation of $141 per share, still below $150. (And that’s assuming sustained 13% growth in earnings, a tough feat. Also assumed: 5.12% T-bill discount rate, and rates have been rising recently…)

CONCLUSION: Google probably is overpriced at $150, relative to its intrinsic value. Due to branding, hype, and general investor irrationality around tech stocks, it’s likely to sell at far more than intrinsic vaule for a long time.

INVESTOR IMPLICATION: Buying Google at current price levels is speculation, not investing. (At least, not value investing.)

– Stever