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David's Macro Blog

Analysis and commentary on business, economics, real estate, financial markets, and other fun topics

Over the next five years almost every major product vertical will be rethought to be social. GET ON THE BUS!

The bottom line we found was that you make something social and that rethinks the whole space. The social version of anything can always be much more engaging and outperform non-social versions.

There are just a few amazing business minds in every generation and Mark Zuckerberg definitely is at the top for his generation. His answers are truly amazing for a 26-year-old technologist.

Mark Zuckerberg Interview at Web 2.0 Summit

Quotes

(quotes are Mark Zuckerberg unless otherwise noted)

We don’t really use it (email) that much… because it’s too slow. ..What they (HS student) meant was it’s (email) too formal. – MZ talking to a high school student about what they use to communicate

The approach you’re taking is right; we’ve got to go push the boundaries and figure out where they are, because if we set rules too early we won’t figure it out. We just won’t — we’ll stay in the past. – Tim O’Reilly

I think that in the five years most industries are going to get rethought to be social and designed around people.

A few years in, a couple of engineers at the company branched off and said we’re going to build new products. We got photos, the first version of groups, and events. At this phase, all these projects had the same thing in common; groups of 2 or 3 people competing against whole start ups that were out there… we had these teams of just 2 or 3 people building just over a couple of months very simple versions of these products… but the thing that it had was it was very deeply, socially integrated. You uploaded a photo and it went immediately so that all your friends could see it… and it turned out that that social feature was more important than every other feature put together. And very quickly our photos product became the most used photos product on the web, same thing with groups, same thing with events.

The bottom line we found was that you make something social and that rethinks the whole space. The social version of anything can always be much more engaging and outperform non-social versions.

There have been four game companies that have been built almost entirely on top of Facebook: Zynga, Playfish, Playdom, and CrowdStar.

Games have been the first big vertical to tip, that have gotten completely rethought to be social. That’s actually true on most platforms. On the iPhone and iPad, games were some of the first major things that took off. Even if you got back to the first PC, one of the things that got people to bring PCs into the home were games.

Anything that doesn’t have to be built by us, we’d rather have it not be built by us.

We are a pretty small company, we have a few hundred engineers. (crowd laughter) I think its small.

Over the next five years almost every major product vertical will be rethought to be social. GET ON THE BUS!

There are five values we have and two I’d hammer home right now are: move fast, and be bold – take risks.

Technology companies are interesting because a lot of companies get strong with scale. With Coca-Cola, the bigger it gets, the bigger its distribution network gets, the stronger it is. Technology companies have some scale advantages but also they just tend to get slower. Then they get replaced by smaller companies that are more versatile. One of the things I think about every day is how can I make this company operate as quickly as possible.

A lot of that is about encouraging people to move quickly but a lot of it is just about building out really good infrastructure that enables people to move quickly on top of solid abstractions we’ve built.

Really good people (employees/engineers) have this way of seeking out what is the most impactful position for them to be in.

The lead designer on the project joined us as an intern. We always do these management presentations where interns do these management presentations about what they did that summer. I asked him some questions and he just went off on me and had all these awesome points about why I was wrong on my criticism of his project. I was like this guy’s awesome — we’re definitely hiring him when he graduates.

I’ve made many mistakes running the company so far. Just about any mistake you can think of I’ve made – or will make in the next few years. The Facebook story is that if you are building a product that people love, you can make a lot of mistakes. The lesson from that is focus on building something that people really like and that is valuable.

A lot of enterprise software gets developed from the mindset of a feature checklist rather than what is really good to use.

What social applications have is that they are much more engaging.

The first chapter has been building out Facebook the application, the site people use every day. But long term… will be that the vast majority of the social ecosystem will not be Facebook, but we’ll help those businesses get built… That I think is a bigger long-term opportunity.

I like this map you have up here but my first instinct was that your map’s wrong. Because the biggest part of the map has got to be the uncharted territory. One of the best things about the technology industry is that it is not zero sum…..one of the best things is that we are building real value in the world, not just taking value from other companies.

My Notes

  • Mark thinks of Facebook as a platform for inspired entrepreneurs to rethink whole industries (e.g. movies, music, news) and develop new content and distribution. That’s a huge vision.
  • Facebook’s plan to dominate the internet is to build low-level social media infrastructure that enables entrepreneurs to build on top of it (like Zynga, worth a few billion as of this recording). This is the same as Microsoft’s vision during the PC era. Now Facebook will be able to generate streams of income from these apps in ways Microsoft never could. Scary. Maybe Facebook really is worth over $100 billion (as of mid-2011 when the company is still private).

Could one guy making free education videos in his closet alter the entire multi-billion dollar educational landscape forever?

YES!

Salman Khan left his lucrative hedge fund career in his 30’s to spend full-time making educational videos for Khan Academy. Now with grants from entities like Google, Microsoft, and Kleiner Perkins, his short-term goal is to cover K-12 education in 10 languages.

Khan Academy’s Mission

Our goal is literally to be a free classroom for the world — give a world-class education to anyone anywhere.

Khan Academy’s Motto

Watch. Practice. Learn almost anything for free.

Authors @ Google – Salman Khan

Best Quotes

It’s as though he had more fun teaching me than I had learning from him.

He’s reaching 2 million unique viewers per month, the UC system is reaching 10 times fewer. This is with his own efforts and free hosting like YouTube and AppEngine that let people build incredibly useful things for free.

(In other words, Khan basically disrupted and disintermediated the whole education system)

One thing that happened was teachers started adopting it on their own. We started getting letters from editors saying, “Hey, you’ve already given the lecture so we’re using those to flip the classroom. So instead of me giving the lecture, me the teacher – , I’m assigning your lectures as homework. And then what used to be homework, I’m having the students do in class.” And it’s a very simple concept, but it really changes what a class is all about then. Now all of a sudden, instead of you literally have 30 people silent and completely passive, most of them zoned out, a teacher having to give this one-size fit-all lecture, even a great teacher, they’re losing probably 2/3 of the class, now that happens at home. You don’t have to be embarrassed and rewind something you might have missed, or fast-forward if you are bored, or pause something ten times; you don’t have to interrupt the whole class. And now, when you actually go to class, you actually have all your peers, you actually have the teacher to help you out. And it’s interesting. One thing I had mentioned in the TED Talk, “that’ll work for motivated students, but what about the students who aren’t going to do that?” And I was like, “Well, if you’re not going to do anything at home, period, it’s still better that you’re doing the exercises in the classroom, because that’s, frankly, where you’re doing to do most of your learning and if you didn’t do it, watch the video in the classroom, too. And so the paradigm is where you really learn stuff and where you’re really getting your head around something, you want other people to be around you. When you’re actually tying to solve the problem. But when you’re trying to listen to a lecture, you don’t want people around you. You don’t want people around you.

Our goal is literally to be a free classroom for the world — give a world-class education to anyone anywhere.

The best way to get people to do the homework is just to track it.

How to increase student usage – “gamifying”. Giving badges, points, stars.

The delivery cost is actually zero (cost of the education).

“How do you dance around the issue of copyright?”
“I have a very loose interpretation of fair use.” – SK

A lot of people are not self-motivated because they have these gaps in their knowledge that traditional education can’t address… And if you allow them to re-mediate without feeling embarrassed and they can do it in a game framework and they get points and badges, that actually solves a lot of the actual motivation problem.

There are a lot of studies, double-blind control studies and the learning style is kind of a myth; there is actually good instruction and bad instruction.

I think for everyone in this room, if you were a school teacher, this would be a more fun way to teach. You get to go into a room. You don’t have to prepare. And you get to be a mentor for these students.

One thing I hope we can do, in a non-touchy-feely way, because a lot of people say “No grades,” it sounds very touchy-feely. It’s the opposite. We actually want people to master — everyone should be an A+ student. Everyone should have a hundred percent mastery if they really want to get to some future level.

My Notes

  • Khan started out by teaching his cousins. His first video was on division.
  • The cousin’s first feedback was that they preferred him on YouTube than in person.
  • He created a Javascript based website that generated math problems to solve, which included his suggestions. At one point he got too many users and since he was paying $50/month he just turned it off. Bad idea for a start-up!
  • KA model turned costly and time-intensive self-paced learning into a low cost model.
  • KA doesn’t penalize you for not getting it right away by just moving on. You don’t advance until you get 10 questions in a row. Fast learners aren’t held back and slow learners aren’t penalized for the rest of their lives. (Customized economy)
  • Google funded Khan Academy with $2 million, half for translating existing content into 10 languages and the other half to complete the knowledge map: all of K-Calculus (300 modules).
  • How do you help traditionally not self-motivated? Gaming is a huge thing to help them.
  • 3 ways to learn: lecture (video), problem solving, peer interaction

Salman Khan Talk at TED 2011

Quotes

Our model is, learn math like you’d learn anything, like you’d learn to ride a bicycle. Stay on that bicycle, fall off that bicycle, do it as long as necessary until you have mastery. In the traditional model it penalizes you for experimentation and failure, it does not expect mastery. We encourage you to experiment and fail, but we do expect mastery.

(All the Khan Academy courses) fit into this knowledge map.

We can teach everything (every subject to mastery) that can be taught in this type of format (video lesson, computer generated quizzes).

We don’t view this as a complete education, it frees up time. This is the blocking and tackling.

Our paradigm is to really arm the teachers with as much data as possible. Data that in almost any other field is expected if you are finance, or marketing, or manufacturing. That teachers can actually diagnose what’s wrong with the students so they can make their interaction as productive as possible. Now the teachers (and parents) know exactly what the students have been up to, how they’ve been spending every day, how many videos they’ve been watching.

When flipping the classroom, the teacher time is now 100% personal interaction with students. No more lecturing or grading papers. Using technology to humanize the classroom. (paraphrase of long quote)

What’s emerging is this notion of a global one-world classroom. That’s essentially what we are trying to build.

I think you just got a glimpse of the future of education – Bill Gates

Khan Academy on PBS NewsHour

Quotes

I want to do everything, I want to do history, grammar, literally every subject (on Khan Academy).

If the US education system is Waiting for Superman, have we found him?

When did Wall Street become the dumb money?

Why did traders who lost on their bets still earn millions (sometimes tens of millions) in income?

Author Micheal Lewis (Liars Poker, Moneyball, The Blind Side) explains the answers to both of these questions in his best-selling book, The Big Short. He writes so that even his mother could understand the intricacies of the financial system that the wrecked the global economy for the next decade.

The most remarkable thing to me is that individual traders on BOTH sides of the bet (for or against subprime mortgages) got rich while their firms collapsed and taxpayers got the bill.

Watch the C-SPAN interview with Michael Lewis below:

My Favorite Quotes

That the Wall Street firms had become the dumb money at the poker table. Somehow these firms, which used to be the smart money… When I left Soloman Brothers, the last thing you wanted to do if you were an investor, was be on the other side of one of Soloman Brothers trades. There was some zero-sum bet to be made with Soloman Brothers, you did not make it because you were sure to lose money. And what had happened was somehow the firms had become, had turned stupid as institutions, they’d become the dumb money. That made me curious. Something big had changed. The natural question was, who was the smart money? That led me to my characters because they were the smart money.

They didn’t know their own balance sheets. He doesn’t persuasively know his own business.

The whole financial system is organized around a bet.

The minute that the Wall Street firms were in the business of harvesting middle class and lower middle class Americans for their home equity value (via sub-prime loans) and making loans to them against it, there was a natural risk of abuse because just generally in financial transactions people are bewildered.

There were lots of cases where the nature of the loan was sort of disguised from the person who was borrowing the money. Teaser rates should be criminal. You essentially talk someone into taking a loan out that has an artificially low rate for the first couple of years so it looks very tempting. Then it skyrockets after two years.

There were 3 trillion dollars of loans there were dubious [referring to sub prime and alt-A]

But then seeing this explosion of lending again in this beast he (Steven Eisman) thought he slayed back in the 90’s, the sub-prime mortgage lending business and he says this is all going to blow up again, this is going to end badly because I know how this business is done. It’s a sinister business.

Interviewer: “So the $180 billion taxpayers dollars that went to AIG then went to Goldman Sachs (and other Wall Street firms) to pay off bets?”

ML: “Yes, yes, yes – for bets”

Interviewer: “Why did Hank Paulson and Ben Bernanke want to pay off the gambling debts of AIG?”

ML: “Because all the other Wall Street firms were on the other side of (AIG’s) bets and if AIG didn’t pay off then those firms would have experienced losses. For example Goldman Sachs lost on its bet to Michael Burry, but they thought they were just brokering the bet between Michael Burry and AIG so they paid off Michael Burry and they are out of pocket. They want to get paid by AIG, or they have a $13 billion loss. Paulson and Bernanke are thinking, if we don’t make the Wall Street firms whole, they will collapse, the market is not going to believe they’ll survive. And they would have all collapsed.”

Interviewer: “Who got hurt?”

ML: “Not the Wall Street firms. The rest of the country got hurt by what the Wall Street firms had been doing the last five years, generating this frenzy of finance where finance shouldn’t have happened.”

This was to me, my revelation. First, that the financial system had organized itself around this bet. And second, no matter which side of this bet you were on, you STILL got rich personally. Your institution might have lost huge sums of money, but you yourself got rich.

The only social purpose I had in writing the book was, I thought if I could explain this to people, they’d be outraged. And they need to know.

Derivatives are meant to redistribute the risk in an intelligent way.

None of those people in Davos made a lot of money betting against the subprime mortgage market. If they really understood it, that’s what they would have done.

Michael Lewis on his personal profession of book writing:

The interesting thing that I do is learn about something and communicating it in words.

Notes

Credit Default Swaps is the mechanism created in 2005 to bet against the subprime mortgage market. CDS is like an insurance policy and costs a couple percent per year.

CDS quickly became a way to bet against mortgages, instead of just an insurance policy against your own bonds defaulting.

Subprime mortgage bonds are pools of loans. Most were betting the bonds would pay off, just a few were betting against it – they were the smart money who ran the numbers, not just looking for commissions and transaction fees.

The unit selling most of the CDS was AIG FP (AIG financial products group). They used AIG’s AAA rating to sell insurance but reserved no capital against losses.

Municipal bonds are supposed to be one of the safest investments, especially for small private investors saving for retirement or using the interest income for their living expenses. Unfortunately states and other local municipalities have borrowed more money than they can pay back.

Wall Street analyst Meredith Whitney says muni bond failures (i.e. a default on the bond obligations) are inevitable. The analysis by her and her team concluded there just isn’t enough income to pay back the principal and interest on all $3 trillion worth of muni bonds.

60 Minutes – State Budgets Day of Reckoning with Meredith Whitney

Meredith Whitney Predicts Billions of Dollars of Muni Bond Defaults on CNBC Squawk Box

Local governments have to decide, “do I default on debt investors or my constituents.”

Paraphrased: The federal government will have to bail out the states that have to bail out local municipalities. Will Texas citizens want their taxes used to pay off bonds for a water treatment project in Illinois?

Whitney on Bloomberg

Legally taxpayers are required to make up any shortfall in pension funds. Legally everyone’s going to be required to pay higher taxes.

Summary

There are two sides to the equation: income and expenses. The Great Recession reduced income, which exposed the muni bond issue. Governments borrowed more money than could be paid back with a reasonable margin of safety given fluctuations in the economy and tax revenue. Note on the second video Whitney agrees with PIMCO’s Bill Gross, who says “states” won’t default but municipalities below the state level probably will default or restructure.

One of the biggest drivers of annual expenses is obligations to retired government workers. This issue will continue to grow as more retirees draw income and medical benefits from all levels of government.

SEAL Team 6

SEAL Team 6


SEAL Team 6, whose existence has never been officially acknowledged, is the group of men who entered Pakistan and killed Usama Bin Laden at his home. They are just like the super quiet helicopters used to fly into Pakistan undetected, just 1 hour from its capital city.

Vanity Fair has an excellent article with excerpts from a book by former SEAL Team 6 member Howard E. Wasdin. The whole article is worth reading, but here are the highlights.

On the first morning of indoctrination into BUD/S, we had to do the physical screening test again… That evening, the SEAL instructors stood before us and introduced themselves. At the end, Lieutenant Moore told us we could quit if we wanted to by walking outside and ringing the bell three times.

“I’ll wait,” Lieutenant Moore said.

I thought the lieutenant was bluffing, but some of my classmates began ringing the bell.

The O-course helps prepare a man for that kind of work. It has also broken more than one trainee’s neck or back — climbing over the top of the 60-foot cargo net is a bad time to lose arm strength. Much of our training was dangerous, and injuries were common.

A number of the race horses were the biggest crybabies. They’d probably been No. 1 much of their lives, and now when they had their first taste of adversity – BUD/S style – they couldn’t handle it.

Losers would pay with their flesh — it pays to be a winner.

Our boat climbed up the face of the wave. I saw one of the other boats clear the tip. We weren’t so lucky. The wave picked us up and slammed us down, sandwiching us between our boat and the water.

As the ocean swallowed us, I swallowed boots, paddles, and cold seawater.

I realized, This could kill me.

Drown proofing

Drown Proofing

We arrived at the pool located at Building 164 and stripped down to our UDT swim shorts. An instructor said, “You are going to love this. Drown-proofing is one of my favorites. Sink or swim, sweet peas.”

I tied my feet together, and my swim partner tied my hands behind my back.

“When I give the command, the bound men will hop into the deep end of the pool,” Instructor Stoneclam said. “You must bob up and down 20 times, float for five minutes, swim to the shallow end of the pool, turn around without touching the bottom, swim back to the deep end, do a forward and backward somersault underwater, and retrieve a face mask from the bottom of the pool with your teeth.”

The torment continued throughout each day — push-ups, runs, push-ups, calisthenics, push-ups, swims, push-ups, O-course — day after day, week after week. We ran a mile one-way just to eat a meal. Round-trip multiplied by three meals made for six miles a day just to eat!

We did squat thrusts, eight-count bodybuilders, and all manner of acrobatic tortures until the sand rubbed our wet skin raw and nearly every muscle in our bodies broke down. It was my first goon squad — and the only one I ever needed. I may die on the next timed run, but I ain’t doin’ this crap again.

As my upper body hung over the valley in the V of my homemade trouser flotation device, I felt relief. I had been so concerned about drowning that I had forgotten how frigid the water felt. Now that I wasn’t drowning, I started to remember the cold.

In psychology this belief is called self-efficacy. Even when the mission seems impossible, it is the strength of our belief that makes success possible. The absence of this belief guarantees failure. A strong belief in the mission fuels our ability to focus, put forth effort, and persist.

“All of you have to swim 50 meters underwater. You’ll do a somersault into the pool, so no one gets a diving start, and swim 25 meters across. Touch the end and swim 25 meters back. If you break the surface at any time, you fail.”

Our world is a meritocracy where we are free to leave at any time. Our missions are voluntary; I can’t think of a mission that wasn’t.

Related:
Discovery Channel: BUDS Class 234