Peer-to-Patent: A System for Increasing Transparency
March 18th, 2009 | Posted by innovOpen innovation. Crowdsourcing. You hear about these ideas a lot in the management literature and business press, but it’s surprisingly hard to find examples of them in the wild.
Most of the companies putting these ideas in play so far have focused narrowly on transactional outreach to individuals. They post problems or challenges to the network, and people respond with ideas or answers. Without being too ungenerous, these approaches often resemble ramped-up suggestion boxes. Certainly there is power in suggestions and diverse ideas, but to paraphrase an old song, is that all there is?
We believe there are bigger possibilities. Some of them are now becoming visible in pilot efforts working to mobilize large numbers of motivated contributors and tap into their collective expertise and wisdom.
One of the more interesting of these is an effort conceived at New York Law School by Beth Noveck, a professor there and director of the Institute for Information Law & Policy. This effort, called Peer-to-Patent is run in cooperation with the U.S. Patent & Trademark Office (USPTO). Its target is a system that, if not broken, is certainly buckling under the strain of growing demand and limited resources — the global patent system.
Patent applications in the U.S. alone have doubled in the past 10 years. More than 1 million patent applications await scrutiny, and the backlog is growing. USPTO examiners have roughly 20 hours per patent application to determine whether the application should be granted a 20-year exclusive monopoly. On the other side of the patent application process, patent litigation is on the rise as more and more entities challenge the validity of patents already granted, often citing prior art that had not been considered as part of the original application process. Companies consume large sums in challenging and defending patents already issued.
Something’s got to give. Almost two years ago, the New York Law School began the “Peer-to-Patent Community Patent Review Pilot” in collaboration with the USPTO. This pilot initiative is a milestone since it represents the first significant effort to apply social software directly to the decision-making process of the federal government.
The idea behind the pilot was powerful. Why not provide some leverage to the USPTO patent examiners by mobilizing a broader group of interested parties to research and identify potential examples of prior art? In the context of patents, prior art refers to all information that has been made publicly available about an invention that could be relevant in assessing a patent applicant’s claims of originality—it could be prior patents issued for inventions similar to the one under review, but it also includes published articles and public demonstrations. Overworked patent examiners are generally able to identify prior patents related to an application under review, but it is a much more challenging task to identify relevant articles or demonstrations.
The pilot program was sponsored by an impressive array of institutions ranging from the MacArthur Foundation and the Omidyar Network to a broad range of leading companies like General Electric (GE), Hewlett-Packard (HPQ), and IBM (IBM). It is particularly impressive that direct competitors joined together to sponsor this initiative despite their differences.
Many technology companies were motivated to submit their patent applications for broader public review in this pilot because of the promise that their applications would move to the front of the line in terms of review and decision by the patent examiners. Students at New York Law School were mobilized to help design the program, creating a powerful opportunity to integrate legal training with technology innovation and institutional innovation.
The program instituted a number of innovative approaches to support the public review process. Volunteers are invited to join the process. They could contribute prior art individually, but they are encouraged to join a team of other volunteers to take on the search for prior art on a specific patent application. These teams are provided with a shared online workspace where they could deliberate among themselves regarding a specific patent application’s quality, decide on a research approach, suggest potential places to look for prior art and allocate research tasks.
At the conclusion of the research effort, if more than 10 examples of prior art have surfaced, team participants have to determine the 10 most compelling examples of prior art before submitting their findings to the patent examiner. They do this often by thumbs up or thumbs down voting that yields a stack rank of all prior art submissions.
As a result, the patent examiner receives synthesized views of prior art rather than a much larger list of prior art candidates which might have further increased their workload. The patent examiner also benefits from the annotations provided by the peer reviewers on why the contributed prior art is important. This is a departure from previous rules where third parties contributing prior art were not permitted to provide any commentary with it. The research done by these online teams is not a replacement for the work the patent examiner must do, but it significantly augments the scope of the work, providing even more information to consider as part of the review process.
The program also creatively uses tagging by participants as a way to make it easier to find patents that might be relevant to their area of expertise. The patent applications themselves often use obscure categories that make it very hard to discover relevant patents. The designers of the Web site have employed engaging visualization techniques to orient and integrate new participants into the review process.
After a promising first year, the USPTO decided to continue the pilot for a second year. Since its launch, the effort has attracted more than 2,500 registered participants. Teams bringing together participants from 152 countries submitted nearly 350 items of prior art on 121 applications. Almost three-quarters of the patent examiners involved in the pilot process indicated they would like to see Peer-to-Patent implemented as a regular office practice.
The Peer to Patent process was especially useful in surfacing nonpatent prior art. While only 14% of the prior art references submitted by the inventors themselves covered non-patent literature, 55% of the prior art references submitted by Peer-to-Patent reviewers were for non-patent literature. Of the first 57 office actions issued by the USPTO during the pilot process, 16 rejections showed use of Peer-to-Patent submitted prior art.
These early results are very promising, and they reflect some deep thinking regarding the challenges of mobilizing and focusing contributions from distributed participants. Beth Noveck observes that “these efforts cannot succeed without significant institutional innovation based on a deep understanding of the information required to support more effective decision making and the arrangements that can be most effective in improving decision making across diverse and independent constituencies.”
So, why do many leading corporations support an initiative that appears designed to surface more information to challenge patent applications? In short, Peer-to-Patent offers the potential to deliver stronger, more litigation-proof patents in shorter time and lower cost. By increasing transparency at the outset and surfacing potential issues regarding prior art earlier, this process can preempt very costly litigation down the road. In an important way, Peer-to-Patent becomes a powerful insurance program to mitigate risk of patent challenges.
The early success of this pilot program has led to efforts to engage patent agencies around the implementation of similar initiatives in Canada, Japan, and Western Europe. Noveck anticipates further benefits from the ability to “create a global innovation network uniting patent offices around the world.”
Beyond its relevance to strengthening the patent application process, the Peer-to-Patent pilot offers some broader lessons regarding efforts to harness open innovation and crowdsourcing.
Move beyond individuals to harness the power of teams.
Diverse experiences and perspectives are powerful drivers of creativity, but this potential can be further amplified when diverse participants must collaborate around shared goals.
Move beyond short-term transactions to build more sustaining relationships.
By requiring the formation of teams, this initiative encourages the development of relationships that help to more effectively focus efforts and tap into the diversity of the individuals involved.
Define action points that require negotiation.
Much of the value of this initiative for the patent examiners comes from the requirement that teams reach agreement regarding a short list of prior art. It avoids the risk of an avalanche of input with widely varying quality.
Pay attention to institutional innovation.
Many executives have the mistaken impression that these initiatives are completely self-organizing and emergent. Instead, this pilot and other successful initiatives like it reveal that considerable institutional innovation is required to redefine relationships, roles and decision-making processes across independent entities.
Do not overdefine the collaboration space.
While the designers of this initiative defined the broad relationships, roles and decision-making process required to make this successful, they left considerable room for individual teams to define how they wanted to work together.
Invest to attract and integrate new participants.
These initiatives often succeed or fail based on the degree to which they can create visibility for potential participants to become aware of the opportunities to contribute. Also, this pilot illustrates the power of investing in visualization tools and other mechanisms to rapidly integrate new participants into the discovery process.
Findability is key.
When bringing diverse participants together in broad collaboration efforts, helping participants to connect with each other and to connect with relevant material is a key challenge. As the tagging efforts in Peer-to-Patent illustrate, the participants themselves can be very helpful in these efforts, but they need the tools to encourage and support their contributions.
Google’s Irene Au: On Design Challenges
March 18th, 2009 | Posted by innovFor most people, including its own executives, Google (GOOG) still means search. On both the query page and the results page(s), design flourishes have been legendarily kept to a minimum, with layout decisions based on what will provide the user with the fastest, most efficient service. Nonetheless, engineers and analysts pore over streams of data to assess the impact of experiments with colors, shading, and the position of every element on the page. Even changes at the pixel level can affect revenue.
But as Google products proliferate beyond search, design decisions become more critical if the company wants a coherent brand image. That’s where Irene Au, the company’s director of user experience, comes in. An eight-year veteran of Yahoo! (YHOO), Au has worked at Google’s headquarters in Mountain View, Calif., since 2006, overseeing some 200 designers, anthropologists, ethnographers, researchers, and interaction specialists responsible for the look and functionality of Google’s products.
Au recently spoke to BusinessWeek’s Helen Walters about the challenges of managing Google’s design process and consistency issues raised by Google’s own defiantly bottom-up culture. An edited version of the conversation follows:
How do you describe Google’s approach to design?
More than anything, Google prefers to make design decisions based on what performs well. And as a company, Google cares about being fast, so we want our user experience to be fast. That’s not just in terms of front-end latency—how long it takes the page to download—it’s also about making people use their computers more efficiently. A lot of our design decisions are really driven by cognitive psychology research that shows that, say, people online read black text against a white background much faster than white against black, or that sans serif fonts are more easily read than serif fonts online.
So the decisions are based on data rather than on subjective opinion of what might look good?
A lot of designers want to increase the line height or padding in order to make the interface “breathe.” We deliberately don’t do that. We want to squeeze in as much information as possible above the fold. We recognize that information density is part of what makes the experience great and efficient. Our goal is to get users in and out really quickly. All our design decisions are based on that strategy.
Your role is to ensure brand coherence across a whole host of very different types of products. What are some of the major challenges in doing that?
We have a big culture of being bottom-up and that can make it difficult to get a coherent design experience. There’s a federation of people doing whatever they think is best for their product and not looking out for the bigger picture. We don’t want everything to be dictated and top-down, but we do want to find a balance.
Can you give a specific example?
Google apps all look different from each other. As you move from one app to another, the keyboard shortcuts are different, the save model is different. The interaction consistency is not there. For good reason: These were all different startups using different backends. But we’re trying to pull all that together. More and more, these experiences are going to get integrated with each other, or there’ll be reusable components that might be built for applications but also appear in a search experience. It’s becoming increasingly critical for us to have common UIs and common infrastructure.
So practically speaking, how do you go about getting that?
You have to attack it on multiple angles. We have roadshows where we present to teams about Google’s design language and principles. But to some extent a lot of people here don’t care about the principles or the rationale. They just want to know what it should look like. So we’ve been working to document all that and come up with a style guide along with code that can be reused. The best way to create consistency is to share the code.
Do you have management support for your efforts?
There’s top-down support but not a mandate. But middle layers of management are hearing loud and clear from Larry [Page] and Sergey [Brin] and the executives that there should be one way to do things. Inconsistency drives Larry and Sergey crazy. So there’s growing appreciation and awareness and with that comes motivation. As a group, we’re trying to be very opportunistic and pragmatic. The design team has to be a few steps out—we’re designing the target for all the different products to converge towards.
Win Via Inspiration, Not Panic
March 17th, 2009 | Posted by innov“Entrepreneur: the type of personality who is willing to take upon herself or himself a new venture or enterprise and accepts full responsibility for the outcome.” —Wikipedia
In our last article we made the bold proclamation that there has never been a better time to innovate. Look around and you will see that people with an entrepreneurial mindset view the recession in general—and your company’s latest crisis in particular—as their next big opportunity.
So what do you do if you’re ready to fight (beefing up marketing, introducing new products), but your boss is convinced it is time for flight (hunkering down, hoarding cash, letting people go, and delaying or canceling all new products)?
Our advice: steal from the best. No one is better than entrepreneurs at finding opportunities within a problem (or even a full-blown crisis). So borrow some pages from their playbook. Here are three ideas.
1. Take a lot of small bites. Big businesses are designed to create big wins because their costs for launching new products demand it. It is not uncommon for our clients to ask for a $50 million to $100 million return for a single launch. As you can imagine, this type of return comes with inherent risks that are not too popular right now. Consequently (and unfortunately), many large projects have been put on indefinite hold. While we believe this is shortsighted, we understand the cost involved means biting off more than a company is willing to chew right now.
Entrepreneurs can hardly fathom the type of budgets that typically support one of these “mega-projects,” yet they often manage to bootstrap their way to the kind of results these big firms are looking for.
How? The lesson here is less about dollars spent and more about how they digest the challenge. Two words: small bites.
Small bites means:
• Trying 10 ideas in the time it takes large companies to try one.
• Using the Internet to test four different media and creative strategies instead of rolling out an expensive print campaign.
• Trying four different business models at the same time to see which one has legs.
• Doing all of this fast and cheaply.
Small businesses eventually spend big bucks to support an idea, but the idea has been chewed on again and again before they do. The lesson for you: think. What unconventional ways are there to test and improve an idea inside and outside your company’s walls? How can you create momentum before your boss sees your idea? How can you do it before your idea is pitched to your customer?
2. Hit them when they least expect it. When was the last time you thought about taking on a giant? Grainger, the leading global broad-line supplier of facilities-maintenance products, does about $7 billion annually in sales. A few years back, Home Depot (HD) gave Grainger a scare when it spent $3.5 billion to buy Hughes Supply, a direct competitor. By making the move, Home Depot was declaring war.
As one might have expected, Grainger reacted aggressively with public relations and marketing. The counterattack, coupled with the housing market downturn, put Home Depot on its heels. With the threat gone and the market down, Grainger appears to be coasting.
To entrepreneur Matt Kuttler, there is no better time to take a swing at the company. While billions were being spent to buy a Grainger competitor, Kuttler was starting ReStockit.com, which offers a total of 200,000 restaurant supplies, office supplies, electronics, and tools.
“The fact is, it’s usually way easier to compete with large companies than small ones. They are set in their ways—we’re not. We can react. We can test ideas more quickly to better serve the customer. Most businesses are afraid to wake the sleeping giant. That’s where we find the most opportunity,” says Kuttler, whose company is based in Hollywood, Fla., with warehouses across the country. “The Goliaths have bigger problems than worrying about small businesses like mine.”
3. Use the Alpha SWOT Analysis. Typically SWOT— or strengths, weaknesses, opportunities, and threats—analysis is used to identify internal opportunities. Now may be the time to turn a modified version on your competitors.
Imagine the competition as being scared, frozen, exhausted, and weary right now. Now stop imagining, because this is exactly how they are feeling.
Aggressive small business people naturally look for weaknesses during these moments. You can, too, by employing a different kind of SWOT analysis—let’s call it the Alpha Small Business SWOT. Here’s how it breaks down:
S = Sneakiness. How can we do something our most beaten-down competitors would never be prepared for?
W = Will. What would break their spirit right now? What would make them lose faith in their strategy?
O = Offense. What are the top 10 aggressive tactics we can employ immediately that would hurt our competitors the most?
T = Thinking (radically). How can you redefine the marketplace, leaving the competition scrambling to catch up?
By using any one of these three techniques, you can assemble an aggressive, simple strategy that will demonstrate you are a fearless visionary. Imagine going into your boss’s office and giving her a pep talk.
Even if you don’t succeed at making your initiatives happen, you will have identified yourself as a person unafraid of a good fight. And the most frightened boss knows that the winning companies are made up of fighters right now.
Inside Project M: The Making of a Supercar
March 16th, 2009 | Posted by innovThe appeal of social media is growing rapidly for the auto industry. Sites such as Twitter, YouTube and Facebook give brands the chance to communicate in a much more direct manner than mainstream advertising allows.
In the best cases these new forms of media are helping brands, and the individuals who work for them, to build relationships and open dialogue with existing customers and potential future ones. While marketing teams lead most companies’ social media engagement, ‘Inside Project M’ stands out for its car design focus, tracking Jason Castriota’s first project as design director of Stile Bertone.
Castriota intended to set up his own design consultancy upon leaving Pininfarina last autumn, until, as he points out, “they [Bertone] made me an offer I couldn’t refuse”.
Part of the appeal for Castriota was the opportunity to realize a dream project, now known as ‘Project M’—a one-off supercar to be unveiled at the 2009 Shanghai Auto Show in April.
Inside Project M follows the build up to this unveil, offering what Castriota calls a “long-awaited foray into the top-secret world of supercar design.” It sees the weekly release of videos on a dedicated YouTube channel and constant updates through a Twitter account, where “@InsideProjectM” engages with the people it is following and those that are following it.
The innovative media project also reflects a changing of the guard at Bertone. “The idea is to become a leader in the consultancy segment; a center of reference,” was Castriota’s comment when we spoke to him recently. Clearly this project is a first step in that strategy, reflecting the ideals of a rejuvenated, more youthful Stile Bertone.
Of Project M’s Twitter popularity (it added nearly seven hundred followers in its first two weeks), Castriota is enthusiastic: “I think a lot of them are completely new—perhaps they’re car-centric, car-passionate people, but previously they didn’t have a relationship or a direct way to interact with such a project. I think that’s what is so interesting about our decision to do this and to use this new medium.”
The project came about after Castriota met Bradley R. Farrell of Kinetic Fin at Pebble Beach four years ago. Farrell directs, films and edits the videos for Inside Project M, and leads the push to build a momentum behind the scheme.
The film crew is an integral part of the project. Farrell emphasizes the importance of content feeling wholly authentic and non-corporate. He believes that right now “social media is the most important piece in building brand loyalty”, yet he advises the many brands currently jumping in to exercise caution: “You have to be able to deliver an authentic message to people… and show their interest is being appreciated, even if it’s the simple thing of giving them pictures of what is going on that you don’t put on your website.”
Is there more to it than this though? Castriota, Farrell and Bertone say they want to create insight into the process of car design and excitement around their project. While social media has its detractors, its immediacy and viral nature make it ideal for engaging a generation some say are growing up to appreciate PlayStations rather more than Paganis.
For a company with such a long and illustrious history, but which last year came so close to disappearing altogether, it could prove a bold and crucial step towards a sustainable future.
Reverse Splits: Fewer Pieces of a Smaller Pie
March 11th, 2009 | Posted by stockWall Street’s $5-and-under club has a lot of new members these days. Almost 10%, or 47 companies in the Standard & Poor’s 500 stock-index, are trading under $5 while three—eTrade (ETFC), American International Group (AIG), and Tenet Healthcare (THC)—are under $1. That’s why more companies are expected to try an old trick: reverse stock splits. Time Warner Cable is slated to complete a reverse-stock-split offering by Mar. 12 as part of its separation from Time Warner (TWX), which should wrap its own reverse split by Mar. 27.
Companies use reverse splits when stocks are depressed as a way to boost share prices while decreasing the number of shares outstanding. Time Warner and Time Warner Cable’s reverse splits involve exchanging three shares for one, which will then trade at a higher price. That means if you own 3,000 shares of either entity, you’d get just 1,000 shares after the reverse split. Naturally, your stake will be worth the same amount, but companies as well as investors place a psychological premium on a higher stock price.
In bull markets, investors often bid up a stock when it announces a conventional split. Conversely, research shows a reverse split is a signal to dump a stock. A 2008 study of 1,600 companies that did reverse splits found the typical stock underperformed the broad market by 50% on a risk-adjusted basis during the three-year period after the action. “Reverse stock splits are a strong indicator the company is going to be a significant underperformer during the near future,” says Jim Rosenfeld, co-author of the study and an associate professor of finance at Emory University’s Goizueta Business School in Atlanta.
In other words, the bad things that are happening to a company cannot be reversed once the stock price is higher, says April Klein, an associate professor of accounting at New York University’s Stern School of Business in New York and another co-author of the study. “It’s usually a desperate move,” Klein says. (Rosenfeld and Klein’s 2008 paper, “Return Performance Surrounding Reverse Stock Splits: Can Investors Profit?” tracked companies from 1962 to 2001. It was co-authored by Seoyoung Kim, a PhD student of finance at Goizueta.)
Desperate move or not, reverse stock splits are a sign of dismal stock markets. After the tech bubble burst from 2000 to 2001, 39 companies orchestrated reverse stock splits. Since 2008, 75 companies have already used this cosmetic maneuver, according to an analysis 6,755 companies conducted for BusinessWeek by Thomson Reuters.
Why are companies so concerned about boosting their stock price? Part of it is technical, and part of it is due to the stigma of low single digits. In the past, getting delisted from the major stock exchange was a prime motivator for a reverse stock split, Rosenfeld says. But the New York Stock Exchange temporarily altered its rules this year, giving companies until June 30 to get share prices above $1. In January, the NYSE also temporarily lowered minimum global market capitalization requirements, from $25 million to $15 million. The Nasdaq also has temporarily suspended its listing requirements.
The notion that major institutions must sell a stock if it goes below $10, $5, or even $1 seems to be an urban myth. The largest mutual fund companies, including T. Rowe Price (TROW), say no such rules exist for their funds. At Vanguard Group, “we’ll own the stock as long as it remains in [an index] fund’s target benchmark,” says spokesman John Woerth. And there is no single threshold among the company’s actively managed portfolios, he says.
The Council of Institutional Investors is unaware of rules requiring institutional investors to sell equities when they dip below a certain price. Indeed, that’s the case at major pension funds, such as California State Teachers’ Retirement System (CalSTRS). “CalSTRS has no rule to sell below a certain amount,” according to a spokeswoman.
So that leaves the psychological barrier of a sub-$5 share price, which is a huge one from a confidence perspective, says Anton Schutz, manager of the Burnham Financial Services Fund (BURKX). “People look at low stock prices, and think ‘Wow, this company must be in trouble,’” Schutz says. That’s why some of the megabanks, including Citigroup, (C) may try to engineer a reverse stock split in the coming months, he predicts. A reverse stock split is “financially meaningless, but the optics are better,” Schutz adds.
While reverse stock splits don’t have a stellar track record, shorting companies who complete a reverse stock split is often futile. The short interest in these stocks is “essentially zero” two-thirds of the time in three-year period following the split because broker-dealers don’t have them in their inventory. “You can’t borrow them to sell them short,” Goizueta’s Rosenfeld says. “Even if you expect [the stock price to go down], you really can’t profit from it.”
Young is a Personal Business editor for BusinessWeek .
Tax Tips: Married to Your Business Partner?
March 9th, 2009 | Posted by taxFrom smSmallBiz
SOME HUSBAND/WIFE teams commit to more than just loving each other forever. They also choose to become business partners — taking the whole”for richer or poorer” thing to a whole new level. Luckily, a little tax savvy could
definitely help tip that scale toward”richer.”
But before I titillate you with the gritty details, let me say upfront that this tip only applies to couples living in the nine community property states (Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington or Wisconsin), who run their small business as a husband-wife partnership. If that’s the case, then you’ve probably been filing Form 1065 (U.S. Return of Partnership Income) with the IRS each year to report your business income and expenses. These business tax items are then split between you and your spouse and shown on separate Schedules K-1 from the partnership (one for you and one for your spouse). Eventually, all the numbers from both of your Schedules K-1s are recombined and included on your joint Form 1040. (Anyone who’s done this previously will tell you it’s about as much fun as a root canal.)
But here’s the good news: The IRS says you can treat your husband-wife business as a sole proprietorship for federal-tax-filing purposes. This is thanks to little-known IRS Revenue Procedure 2002-69. The upshot is you can choose to report all your business income and expenses on simple-and-easy sole proprietorship Schedule C (Profit or Loss From Business) which you then include with your Form 1040. Then you can (mercifully) forget about that ultracomplicated Form 1065 and those nightmarish Schedules K-1.
and wait — there’s more! Treating your husband-wife business as a sole proprietorship instead of a partnership could potentially save you thousands in self-employment (SE) taxes every year. Here’s why.
With a husband-wife partnership, both you and your spouse must each file separate Schedules SE for your respective shares of partnership income. Then you must each pay 15.3% SE tax on the first $102,000 of your share of 2008 partnership SE income. If your share of SE income exceeds $102,000, the SE tax rate drops to 2.9%. So if you have a profitable husband-wife partnership, both you and your spouse can each get hit with the maximum 15.3% SE tax rate on up to $102,000 of SE income (total of $204,000). Remember: This is on top of your federal and state income taxes. Ouch.
In contrast, if you treat your husband-wife business as a sole proprietorship, you only have to file one Schedule SE — for the spouse considered to be the proprietor — with your joint return. That means no more than $102,000 of SE income gets hit with the maximum 15.3% rate (any remaining SE income gets taxed at the much-easier-to-swallow rate of only 2.9%).
So which would you prefer: up to $204,000 taxed at 15.3% or no more than $102,000 taxed at 15.3%? Assuming you prefer the latter, simply treat your husband-wife business as a sole proprietorship instead of a partnership — starting with your 2008 return. Do this by filing Schedule C with your 2008 Form 1040 and by ceasing to file a separate partnership tax return on Form 1065. This simple drill could save you thousands in SE tax for 2008 and similar amounts each year in the future.
However, don’t make this move without checking with your tax adviser about the other tax implications — including the impact on your state-tax situation (if any). In most cases, however, there won’t be any adverse side effects.
Who qualifies: The taxpayer-friendly rules in Revenue Procedure 2002-69 are limited to unincorporated businesses owned exclusively by husband and wife as community property under applicable state law (with no other owners in the picture). If your husband-wife business fits this description, you have the government’s official blessing to follow the tax-saving advice in this article.
The Real Reason Stocks Are Falling
March 9th, 2009 | Posted by stockMonday was another down day for the market, with the S&P 500 index falling 1% to another 12-and-a-half-year low of 676.53.
There’s been a lot of talk lately about the Obama administration and the stock market, some of which I’ve contributed to. But let’s not forget there are strong explanations for the stock market slide beyond politics.
The stock market took Friday’s dismal jobs report in stride, probably because investors were already expecting nasty data. But it was a terrible report nonetheless. Warren Buffett said Monday that the economy has “fallen off a cliff.” Economists who studied the report are now lowering estimates for the rest of the year.
Like Deutsche Bank’s (DB) Joseph LaVorgna. He lowered his estimate for third quarter GDP from zero growth to a 1.5% decline, and fourth quarter from positive 1% to negative 0.5%:
The unemployment rate, which we previously expected to rise to 8.7% by year end and peak at 9.2% in Q1 2009, we now see rising to 10% by year end with a peak of 10.5% by the middle of next year. Although, given the fragile state of the economy, particularly the Big 3 automakers, we worry that the unemployment rate could top 11%.
So much for the economists. What about the other side of the trading floor, where the technicians are huddled over their charts?
You can read for yourself today’s take by Schaeffer Investment Research’s Todd Salomone. It won’t cheer you up. He writes:
A bottom will occur when there is a lack of interest in attempting to call a bottom, or there is a belief that a bottom is nowhere on the horizon. Unfortunately, we are still not seeing the despair that is usually found at major market bottoms.
Some analysts believe the S&P 500 could stop falling at the 600 level, which Salomone writes:
…would represent a multiple of 12 times earnings, based on estimated earnings for the SPX of $50. One has to wonder if anyone can call the bottom based on valuations, as future earnings estimates are questionable at best. Moreover, why a multiple of 12?
An article in Monday’s Wall Street Journal, “Dow 5,000? There’s a Case for It,” looks at the various scenarios for earnings and what they mean for stocks:
Looking solely at valuations, namely price relative to earnings estimates, the S&P at 500 isn’t necessarily a wild stretch. The current 2009 earnings estimate for S&P companies is about $64 a share, down from about $113 last April, according to S&P. Goldman is now predicting $40, having cut its forecast from $53 in late February. Bank of America Merrill Lynch estimates $46 a share, and Citigroup is predicting $51.
The S&P 500 had a forward price-to-earnings ratio of 11.3 in the bear market of 1974 and 8.5 in 1982. “Put a multiple of 10 with estimates of $40 to $50 a share and the S&P comes out at 400 and 500,” the WSJ writes.
For the record, stocks are now trading at September 1996 levels, and in the 12 months before September 1996 the S&P 500 earned $39.40 per share. That was a trailing P/E of 17.
In my opinion, investors won’t get much from wading into all this discussion about valuations, technical indicators and market sentiment. Except perhaps a headache. All the numbers and historical comparisons just add to the confusion, especially when this year’s earnings are mysterious at best, as are future growth prospects which help determine P/E.
Market chatter about politics in Washington is interesting because policy choices may affect earnings or the economy. However, exactly how that will happen is hardly clear, and partisanship and ideological prejudices make reliable predictions hard to find.
So, at the risk of stating the obvious, I’ll try to boil down my take on the market:
Compared to expectations, the economy is getting worse, hand in hand with the outlook for corporate earnings. So, the stock market is moving lower.
The stock market could rally temporarily for any number of reasons (i.e., technical factors, valuation arguments, policy changes). But no rally will be sustainable until the economy and earnings prospects stabilize.
BANKS TO CHALLENGE INSURERS ON TAX-SAVING PRODUCTS TURF
March 4th, 2009 | Posted by taxBy Niranjan Bharati
Publication: The Economic Times
Commercial banks are planning to aggressively market their tax-saving products such as fixed deposits and equity-linked saving schemes (ELSS), as they look to counter the insurance sector, which is increasingly positioning its products as investment tools rather than risk covers.
Tax-saving products have
for long been the preserve of the insurance sector and the banks’ increasing interest in the segment is set to increase competition for consumers’ savings.
“Earlier, we were not very aggressive in marketing our tax-saving products as major investment tools. But now we have to devise new strategies as insurance companies have modified their marketing techniques,” said a senior official with the State Bank of India (SBI), who didn’t wish to be named.
At present, tax-saving fixed deposits constitute a very small portion of a banks’ total deposits, accounting for 1-3% of total deposits. Not all banks currently sell ELSS products, which are yet to gain popularity among investors.
At least three other state-owned large banks – two based in Mumbai and one based in Delhi – are also planning to adopt new marketing strategies to promote their tax-saving instruments as better investment options.
Banks will look to highlight differences between their tax-savings products and those offered by the insurance sector to push their products. Returns from fixed deposits and ELSS products are not linked to customers’ ages unlike the life insurance products, where they are linked to an individual’s age and insurance companies typically charge older people higher premiums.
“We would like to bring this and many other factors to the prospective investor’s notice while marketing our product,” said an official at a Mumbai-based bank.
A senior official of the other Mumbai-based state-run bank said his bank was hiring specialised staff for advising prospective investors on the various tax-saving products it had to offer.
Meanwhile, life insurance companies, including market leader Life Insurance Corp, ICICI Prudential, Max New York Life and MetLife, are promoting their products as major investment tools rather than mere insurance schemes, with some of them offering up to 10% annual return on investment.
“Traditionally, life insurance has been viewed as an instrument for both stable returns and risk cover. The recent market volatility has brought the stable ‘investment’ aspect of insurance to fore once again,” said MetLife managing director Rajesh Relan.
The Ever Inventive Saul Griffith
March 4th, 2009 | Posted by innovSaul Griffith first garnered attention as a graduate student at the Massachusetts Institute of Technology Media Lab in 2002, when he developed a machine that could mold prescription eyeglass lenses on demand for just a few dollars a pop. The technology is now being developed by Optiopia, a company he co-founded to serve the estimated 2 billion people around the world who don’t have access to professional eye care.
But Griffith didn’t stop there: Since earning his PhD in 2004 the inventor and entrepreneur has launched or helped to launch no fewer than seven companies, has been inducted into the National Inventors Hall of Fame, and in 2007, at the age of 33, won a “genius grant” of $500,000 from the MacArthur Foundation. “Saul is a brilliant engineer,” says Peter Diamandis, chief executive of the X Prize Foundation, who has tapped Griffith as an adviser. “He is grounded in reality but has the breadth of vision to help design and implement the future.”
While most scientists go deep but narrow, focusing on one subject or problem, Griffith is ecumenical, following his curiosity and his conscience wherever they take him, and then digging deep into the issues that grab him. After graduating from MIT, he moved to San Francisco and co-founded Squid Labs, with the aim of doing consulting and contract work that would finance the internal technology projects. Ultimately, Griffith and his three co-founders decided that the world didn’t like incubators, so they shuttered Squid Labs and spun the most-promising projects into free-standing companies.
They staffed the startups by tapping their network for technically skilled people and funded them with a mix of angel money, venture capital, and grants (Thanks John D and Catherine T!). Those companies include Howtoons, a popular series of comic books that teach kids about science; Instructables, an open-source Web site of do-it-yourself projects with almost 900,000 unique users; and Potenco, a startup developing ways to charge electronic devices using human power. “I need to be thinking about a few things at once,” Griffith confesses. “I think it actually helps because you’re cross-fertilizing yourself.”
Griffith is a product of his childhood in Sydney, Australia. His father is a textile engineer and his mother is an artist, and he and his sister grew up making toys and printing presses for his mother in his dad’s home workshop. (Griffith’s sister went on to found Griffin Kiteboarding, a leading maker of kites and other gear for the extreme sport, and Griffith has helped with design and development.) “It was an incredibly fertile environment,” he says, then adds with a laugh: “When I left Sydney to come to the Media Lab my father was worried. ‘What if MIT doesn’t have a lab as good as ours?’ he asked me.”
Griffith’s current lab—a 20,000-sq.-ft. space in an old air traffic control tower in Alameda, Calif.—is a tinkerer’s paradise, complete with laser cutter, CNC machine, 12-ton press, and one of every hand tool and screw. (See Griffith’s video tour of the studio here). And it’s close enough to San Francisco Bay that Griffith and his decidedly unnerdy crew can go kiteboarding in the afternoons.
These days Griffith, who is married to an American woman and lives near San Francisco, has turned much of his attention to global warming and the need for radical changes in the way we consume and generate energy. Last year, he co-developed WattzOn, a personal Web-based energy audit that people can use to calculate their energy consumption. And in 2006 he founded Makani Power, an innovative wind-power startup, also in Alameda. It’s a promising direction: In the U.S., energy generated from wind increased 40% in 2007 and another 50% in 2008, according to the National Renewable Energy Laboratory.
But Griffith and his staff of 30 engineers believe that wind can play a much bigger role in the energy revolution if they can harness the more powerful winds 1,000 to 3,000 feet up, which contain more energy per square foot than any other renewable source. They are developing wing-shaped kites to do just that. “Conventional turbines only work up to 200 feet, but capturing a small fraction of the global wind energy at higher altitudes could be sufficient to supply the current energy needs of the globe,” says Griffith.
Capturing energy from high-altitude wind is far from easy. The biggest challenge is efficiently transmitting that electricity back to Earth. But Griffith, who has raised $15 million from Google.org and others for the venture, is confident, both about Makani’s ability to develop a cost-effective new wind power technology and about the broader potential for meeting the challenge of climate change.
“Saul combines a scientist’s notion of what’s possible, with a low tolerance for conventional wisdom,” says Andrew Zolli, a futurist and curator of the Pop!Tech conference, an annual conference about technology and ideas and one of several high-profile events where Griffith has spoken. “Give that man a lever long enough and he’ll change the world—or the lever.”
Don’t Let a Good Crisis Go to Waste
March 3rd, 2009 | Posted by innovThere has never been a better time to innovate. However it takes an entrepreneurial mindset to see that what most people view as a crisis is actually an opportunity for you to pick a battle you can win.
When everyone else is taking flight, it’s the perfect time for you to stand and fight because the odds are in your favor.
In 1915, Walter Cannon published his seminal work on acute stress response. (Anybody under acute stress right about now?) His theory basically states that all animals—including humans—have evolved to deal with stress in one of two ways: We stand and fight or we run like crazy in the opposite direction.
In the current economic crisis, larger companies have taken flight. They are hunkering down. Hoarding cash. Letting people go. Delaying (or canceling) all new projects.
But entrepreneurs are behaving differently. They are seizing what they see as an historic opportunity to reinvent themselves, their businesses, and many times, the industry in which you are currently hiding, uh, competing in. Consider:
• Matt Kuttler, known for building a promotional products business, is reinventing the way small business supplies are purchased at ReStockIt.com;
• Rick Jamaison, known for building accounting businesses, is bent on creating the greenest brake pad company at ABS Friction;
• Marty Renkis, known for building an online training company, is bent on reinventing digital, wireless security systems at SmartVue.com.
And proving that you don’t even have to go far afield to find new opportunities:
• Brad Handelman, known for being the largest manufacturer of bowling bags, is now putting any high resolution image you want on bowling pins and balls at Ontheballbowling.com
These are not just dreams. They are ideas that were quickly turned into multimillion-dollar businesses by people who saw a need, had an idea about how to fill it, and experimented until they got the formula right. Does that sound like your company today?
Probably not. But it should. In times like these, entrepreneurs should be your role models because no matter what is happening in the economy, they constantly ask “what if?” They are constantly examining—and reexamining—opportunities most of the people in your company will overlook.
It isn’t surprising the entrepreneurs listed above, and thousand of others, are responding to the recession this way. Adaptability is the hallmark of a great entrepreneur, no matter what you may have been taught in school.
Anybody who has taken a business class has been told something along the lines of “The secret to success is a good business plan.” The only thing this statement proves is that your professor has never run his own business.
Find an honest entrepreneur and she will tell you she has changed directions so many times that her business has little in common with the initial plan—if there even was a business plan in the first place. The point isn’t that business plans—or the annual plan you prepare for your company—are worthless. On the contrary, they are an excellent way to envision, create strategy, raise funds, and test ideas. But sometimes—like now—sticking with the plan is the worst thing to do.
Mike Michalowicz is a serial entrepreneur who embodies the flexibility and vision many large companies lack. But he does not attribute his success to hard-line traditional business planning; in fact, his approach is the polar opposite. Mike launched his first company, Olmec Systems, with the intent of selling computers and training to law firms, but Michalowicz quickly discovered an unmet need in supplying proprietary information to hedge funds, so he changed direction and became a national player before selling the firm.
His second company, PG Lewis & Associates, also followed an unexpected path. He formed PGLA with the intent of delivering computer forensic services to large corporations, only to find a tremendous need in criminal investigations. Yet again realigning his company to service an unexpected niche, PGLA achieved national prominence within three years and was subsequently acquired by a Fortune 500.
Today, Michalowicz, the author of The Toilet Paper Entrepreneur, is the CEO of Obsidian Launch, which advises small business entrepreneurs on how to grow healthy businesses fast, even in this challenging economic time.
“We can all learn from entrepreneurs,” Michalowicz told us. “They are early adopters. They are innovators. They are risk-takers. While so many established businesses are in a frozen state of panic, entrepreneurs are trying new ideas.”
Entrepreneurs know that freezing up, running away, or laying low just aren’t options that will work for them. They would rather fail spectacularly than sit still and have the market do it to them.
We aren’t advocating spectacular failure. We are advocating that you take some risks and stop acting like a Nervous Nelly.
Want some good news? Talk to an entrepreneur. Want big ideas? Talk to an entrepreneur. Want someone to tell you to grow up and stop crying? Talk to an entrepreneur.
Next time, we’ll talk about how to convince your boss to put these ideas into practice.
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