Now for something a little…different…this is my overlong response to an interesting post on short selling over at SramanaMitra.com.  Here’s the link to the original article:  http://www.sramanamitra.com/2009/04/04/capitalism-20-value-creation-vs-value-destruction/#idc-cover

Hi Sramana – Short selling puzzled me for a long time, not least of which because it did seem wrong that people could make money during downturns.  The underlying mechanism of a short sale is the borrowing of the security from an institution that’s currently holding that security as a long-term investment. Short selling would be ‘magical’ if not for this underlying transaction. What always confused me is why institutional holders allow this form of borrowing or even want to lend out the securities they’re holding ‘long’. It actually adds a ton of value, and hopefully I can explain that here.

Two main points:

1) Retail trading accounts that allow for shorting of securities are actually leveraging themselves in order to execute the short trade, which is why many brokers make sure that an account holder is qualified to trade on margin (leverage) before they’re allowed to short. The account holder is borrowing an asset from another entity, and therefore needs to be screened more rigorously than someone simply buying a security.

2) Since the asset is a borrowed asset, it needs to be returned no matter what happens to the stock’s price. This is why the entire mechanism is called a ‘short’ because you can only do it for a short period of time, as opposed to a ‘long’ position, which can be held a long period of time – like Warren Buffet, who likes to hold ‘forever’.

So what happens after this short period of time?

Essentially, whichever entity was so gracious to lend the securities in the first place to the short seller will, according to predetermined rules, initiate a ‘margin call’ – usually when they’re worried that the short seller won’t be able to cover the losses by a sudden price gain. A margin call for a short position won’t ever need to happen though if the borrower (ie – short seller) is able to close out the transaction, either at a reasonable loss or any level of profit.

Short sellers absorb a considerably higher risk by taking their position than long buyers do, because a stock’s price can always go many times higher than it’s currently priced. And this is the part where people usually say that it’s just gambling…because they think that since there’s a lot of exposure to loss above and beyond one’s investment, that it somehow means there is no value-added in the transaction. In other words, it’s not clear that the risk is even worth taking to the casual observer.  This couldn’t be further from the truth.  Short sellers are providing an enormous public service principally because their position on an asset class is so publicly available to anyone – through data sites like ShortSqueeze.com.  If an asset shows up here as having a high short-interest, I’ll be thinking twice before adding it to my long-term buy & hold list.

So where’s the value in that?

Let’s say you’re an institutional money manager who is holding billions of dollars in assets and your legal obligation is to invest it very conservatively. You’re not trying to do anything spectacular like double the money, just deliver for pensioners or fund holders a rate of return that beats both the risk-free rate of return and hopefully some of the major indices by a few percentage points. What is not tolerated in the least is any considerable loss of capital, or volatility in the returns achieved. In this environment, you don’t do anything crazy – no daytrading, no HFT, no shorting, and certainly no margin. Your institution will want to be holding large positions in major companies that are major, stable public companies generating dividends for shareholders or moderate and continuous growth – such as a utility company or a big tech company.

As a major institutional holder of these assets, you’re looking at multi-year strategies and rebalancing your asset holdings on a far longer timescale – this is a good thing, and it’s required to deliver consistent returns that beat the market. You also have a number of costs from acting as a holding company of this kind, and despite being unable to generate high-flying returns from high-frequency trading or trading on margin, you still have plenty of staff and need to meet payroll. So how can you generate a little extra income on the side?

The answer is to become a securities lender. (see the Wikipedia link below)

In this way, you can still say that you are a long-term holder of, say, Microsoft stock because you own the stock and will not yourself, as a money management firm, sell that stock for years. You may in fact only be allowed to buy the stock up on price down-turns given your legal mandates. But lending out stock to people who are willing to play in the short-term space becomes an excellent way to make extra money. Folks who short stocks believe they are spotting something that will cause indisputable downturn in a share’s price.  The institutional guys may see the exact same opportunity…but legally they can do absolutely nothing about it because they cannot legally sell any of their shares – that would be daytrading and have negative consequences.  All an institutional guy can do is sit and hope that their long-term stake doesn’t really go off a cliff, but they cannot sell on impulse if they’ve already made strategic commitments like the one’s I’ve outlined above.

So if they instead lend out shares to people who want them for testing out their bearish theories, they get to bridge the gap and make money by virtue of their big stash of securities holdings which cannot be sold.

So that’s the value-add for institutional money managers who are under restrictions. What is they end-game value for society or the world at large by all this activity?

Again, the short seller can be right or wrong about the potential price movement, and when they are right they add value to society and enrich themselves in a fair trade. When a short seller is correct that a security’s price will erode, they are essentially making a public statement that the other shareholders must pay attention to:  either “you are all being irrationally exuberant” or “you are not seeing nearly enough danger” – an analyst saying the same thing can never carry the same weight as a short seller, because a short seller’s is actually taking a risk on the outcome of their forecast while an analyst is paid a salary to do research ad nauseam and will experience no significant pain when their research fails to add value.  When a stock is being heavily shorted, it is a very public and useful warning sign to conservative investors that the stock has been scrutinized and may be headed for a fall.

That’s why having the shorting information on a stock is powerful for any sort of investor, and why we should never allow governments to ban the practice outright. Short sellers who are wrong pay dearly for their miscalculation as they can get margin called into oblivion during the infamous ‘short squeeze’ effect.  They do not need to be criminalized for putting their money behind their predictions and absorbing inordinate risk to do so.

Lastly, since price manipulation was mentioned in this debate, let me just say that price manipulation and short selling are two different things.  I’m all for outlawing price manipulation or insider trading schemes, and the SEC’s job is both a difficult and worthwhile one.  Banning short sales on the other hand will only serve to injure the markets, injure investors, and injure employees at any public company that is itching to avoid the heightened scrutiny and hype-busting skepticism that the short selling market generates for public consumption.  There is a very good chance that market crashes would be decidedly harder and more destructive without short sellers spotting their potential in advance, alerting the public via the size of their positions, and then buying back the underlying asset when they take profits.  Unlike the vast majority of investors who have to be pessimistic and sell when they take profits, short sellers are the only optimistic people in the room when taking profits, putting in a bottom and shouting, “This is just getting ridiculous now…the world is surely not coming to an end”  Those buybacks, just like any other buybacks, cause the share price to increase.  Usually the first leg up out of the abyss of a market crash is caused by short sellers covering their shorts, taking profits, and buying back the assets.  In this way, they are actually the leaders or early adopters of almost every stock market recovery.

Here are some references:

http://en.wikipedia.org/wiki/Securities_lending

http://shortsqueeze.com/

http://en.wikipedia.org/wiki/Short_squeeze

http://answers.yahoo.com/question/index?qid=20070815161225AArHZy5

For those in our extended network who don’t already know – SelfReliant has moved!  We’re finally feeling pretty settled in here in Fort Worth, TX.

So for those of you who’ve never been to ‘Cow Town’ – drop us a line and grab a cheap plane ticket out here – we’re happy to host family and friends for a few days.  The Dallas/Fort Worth (DFW) ‘Metroplex’ is enormous and full of things to do – the airport alone is the second largest in the country, and has the same area as Manhattan island!

Not only have we changed locations, SelfReliant is also becoming more focused than before – we are now going to be called ‘The Entrepreneurial Education Company’ – leaving behind the ‘To Learn Deliberately’ tagline for a clearer explication of what SR is all about.

Entrepreneurs are a unique segment of society that have special needs and demands as they attempt to fulfill their visions both non-profit and for-profit.  We’d like to become a company that imparts entrepreneurial skills to clients and evaluates the quality of the learning that entrepreneurs attain while they build their businesses.

In the course of the past month, a radical and exciting development has been made at SR to crystallize our business plan and begin executing on a very specific strategy.  I’d like to share some of the key points and introduce 2 new members of our startup team:  Nicole Walker and Sepehr Sadighpour.  Their bios will be added shortly to the site, but in order to understand why I’m so excited to bring them onboard, let’s discuss SR’s business model:

Remote Consulting + In-Person Training = A unique recipe for empowerment

A New Kind of Consulting:

1. Skype has changed the way we do business at SelfReliant, and the power of this simple and free tool allows us to offer a new kind of consulting relationship for clients:  a fully remote experience.  We are looking to engage consulting clients that are eager to use Skype with our team, so we can use both webcam and screen-sharing features to have rich client interaction on every project we do.
2. SelfReliant’s network of trusted friends and partners reaches all over the world, but we’re starting our most vigorous test of remote consulting in San Francisco, with the help of my colleague and friend, Sepehr Sadighpour who lives in Oakland, CA.
3. Sepehr will be helping us connect with small-midsize businesses or individuals in the Oakland area that need design, development, or social media marketing work done with the high level of professionalism yet maintain a budget.
4. We have plans to bring on dedicated representatives in the following regions:  Seattle, New York, Philadelphia, Tokyo, and London – just to name a few.
5. SR’s policy for every single consulting contract is to carefully listen to client needs, craft a custom quote, and always include a complimentary Step-by-Step PDF guide at delivery.  In this way, clients will have the ‘keys to the car’ and be able to run and maintain their Internet presence themselves, or hand off the guide to one of their employees.

Hands-On Training with SelfReliant:

1. From our new headquarters in Keller, TX opening in Fall of 2010 and our office in Raleigh, NC, SR will be providing a ‘menu’ of 1-on-1 Training Sessions and Group Seminars that will be delivered in-person to clients.  Within a certain radius of these areas, SR will be offering clients an outstanding value to work with one of our trainers.  Pricing for these sessions will be available on the site shortly.
2. Michael Innes will be SR’s designated trainer for the Raleigh-Durham area, while Carolyn and I will conduct training in Dallas / Fort-Worth.
3. As we build systems for better and more effective hands-on training, we’ll be hiring other trainers who can add unique topics to our total list of offerings.  Eventually, finding the SelfReliant trainer for your area will be as simple as typing in your zip code.
4. Every area offering training sessions will have a dedicated ‘Public Relations Director’ and SR has found its first in Nicole Walker.  Nicole is going to be helping to introduce the Raleigh-Durham area to Michael Innes, and help to promote his training sessions there.
5. If you’re reading this in the Dallas / Fort-Worth area, we are currently looking for someone to assist us in covering that region.  Please e-mail info@selfreliantllc.com with the Subject line “DFW PR Director” for more information.  We can only provide commission-based work at this time, but if you’re excited about Internet technology and training, then we’d love to meet you when we arrive in Texas!

I welcome comments, questions, or criticisms about our business model.  One of the main features of this 2-pronged approach is that it will allow all of SelfReliant’s employees to stay on the cutting edge of technology in the work we do for clients all over the world, and therefore vastly improve the quality of training session we can offer in-person to our local communities.

Thanks for reading, and remember, the web is transforming education and self-directed learning.  If you’re out there “learning deliberately” whether through social media or Wikipedia, keep at it, and share your stories with our team anytime.

Many of you probably don’t know what SelfReliant “is” – and that’s alright, because up until now, I haven’t either.

Transitioning from a successful patent brokerage firm to another model of doing business has been much harder than I imagined, and made for a difficult ’08 and ’09.  2010 is going to be different though, and the move we’re announcing today has the potential to be the start of something really big.

Michael Innes has been a friend since middle school, when we met through the never-dull exploits of our mutual contact at the imaginary startup called Rejgond Inc.  I’m not sure where the name came from exactly, or what it means, or even what we were going to do with it – but in middle school and high school, it didn’t matter a whole lot.  But as Michael said, “While the girls play ‘house’ – the boys played ‘company’”

First off, let me say that Michael is actively looking to relocate from Seattle to Raleigh, and is staying here with us in Brier Creek in order to manage his job hunt.  Michael was trained at the University of Washington as a User Experience Designer and has prior experience with Microsoft.  I invite you to visit his portfolio website at http://eptin.net to get an idea of some of his previous work.  If you have a full-time position for Michael, please get in touch with him right away.  But even you have a small project or short contract, you will now be able to contract with SelfReliant to get a slice of Michael’s time and expertise.

This is all a part of SelfReliant’s re-launch.  Working with Michael, we’ve re-imagined SelfReliantLLC.com and will be making the new site available shortly.  As I mentioned above, 2010 will be the start of a new company:  we are now officially a small and talented team of consultants, looking for clients who want to move their ventures onto the web.  Whether you want to ‘activate’ a robust social media presence (me), build an iPhone application (Carolyn), or conduct professional user experience testing (Michael) – our team can bring you or your company to the next level.

And what sets us apart?  The same thing that always has:  our focus on education.  Unlike consulting companies that you may end up becoming dependent on, the SelfReliant team is committed to the idea that in order to add the most value, we’ll always give you an opportunity to facilitate your own learning.  If you don’t care about web design, graphic design, open source software, social media, etc… just tell us, and we’ll deliver great results for you or your company, and then move on.  But if you want to take your personal learning to the next level so you won’t need us in the future, we will always offer an array of training products:  1-on-1 tutoring, group seminars for your employees, or custom e-books for your future reference.

SelfReliant’s unique educational philosophy will remain intact – and come into play here as well:  the best learning experiences occur when you are actively involved, making mistakes, being surprised by outcomes, and taking risks.  For the other entrepreneurs reading this, you know that any venture provides a constant experiential learning opportunity. You are all self-educators, and we are here to help you on your journey – encouraging your creativity and ambition.

Working with the SelfReliant team in order to further your online learning will remind you of the famous Yeats quote:  “Education is not the filling of a pail, but the lighting of a fire.”  Receiving training from Carolyn, Michael, or myself – or any future members of the SelfReliant team – will always feel like the guidance of a mentor, who is interested in catalyzing your learning on your terms.  Becoming self-reliant isn’t something you can learn from a textbook or lecture – it’s a skill set that the best entrepreneurs use and develop every day, as they find themselves constantly dealing with new and ambiguous challenges.  SelfReliant will always be your partner in the development of that skill set – if you want our help and guidance.

If not, then remember that we are first and foremost professional consultants, ready to help you complete your online projects at a price that fits your budget.  We already have a significant portfolio as a team, and we’re eager to show you our stuff.  Email us today for a quote or more information:  alex AT selfreliantllc.com

The debate about social media today goes something like this:

• Social Media Fanboy:  Your PR departments have missed the cluetrain and generate inauthentic corporate jargon-laden technospeak that doesn’t connect to the needs of individual people!
• Guy Who Still Reads Newspaper:  Your social media sounds great, but only a specific demographic uses it, it’s leaky and liability-prone for a big organization, and sometimes editing content is really, really, important – have you seen the comments people leave on YouTube?

And so it goes…  This argument is playing itself out in many institutions, corporations, and even small businesses.  Part of the issue in corporate and institutional social media adoption is that it has to be mapped onto sales so some sense of ROI can be calculated for those who need proof.  It’s an interesting argument to listen to, and even to engage in, because both sides have valid points.  Here are the two most valid points I see:

1. Pro:  Social media is informal and low-risk enough to generate relationships that are customized, genuine, and authentic
2. Con:  Traditional media models generate a predictable product that due to its cost absolutely has to be answerable to its readers, who will demand a certain level of quality

It will always be true that if you start out as a self-hosted blogger and end up with a job offer to work for TIME magazine, that you’ll have moved up in the world of reputation, prestige, and probably salary (although for some bloggers who make a LOT of money, this wouldn’t be the case).  Even the wealthy blogger elite, who mix traffic-generating content with clever product promotion to produce their value for retailers, would probably agree that a big book deal from a major publisher or a 6-figure job offer at a major new company would be a significant achievement.  So that sums up the debate, and why it’s interesting, well-balanced, but very often…confusing – because social media is such a context-dependent and niche tool, and traditional mass media has always been, well, for the masses.

So when we bring social media and all its accoutrements together with higher education, accreditation, intellectual property, and neuroscience – how might these tools become the catalysts for fundamental change – and what might yet stay the same?  First we have to tackle the question of how do we learn on social media?

The Answer:  Better than ever before!
The Reasons:

• Education has always been about third-party content absorption mediated by social relation to a mentor or guide. Back when the only ‘textbook’ was the Bible in Latin, the feeling of personal removal from content must have been considerable.  But the monks and seminary teachers mediated interaction, reflection, and yes – rote memorization – with this “third party” content in order to train more monks, preachers, etc…  Content that commands social credibility will generally tend to become the subject matter of educators – and this is why education is inescapably a political and controversial topic – because the battle over content is deeply enmeshed with our value systems and ideals.
• Social media does the same thing. Generally, there are sources of information and content, and there are the people that mediate our interaction with that content.  The brilliant thing about social networking tools, is that our entire day’s worth of content can be mediated by a group of friends, relatives, or people we trust.  Twitter has become my daily directory for cool articles to read and sites to visit – and when someone tweets useless garbage, I unfollow them so I can get just the best stuff each day sent to Echofon or Tweetdeck.
• Mentors must be trusted. Trust is such an important part of the equation that it shouldn’t even be thought of as a standard ‘variable’ to be optimized.  Trust is more about what binds you both to your personal beliefs and values, and why those beliefs and values resonate with other people.  The more something sounds like truth, or at least meshes with a cultural meme that you happen to subscribe to, the more it will be trusted.  Trust can be abused, but I don’t think it can be ‘manufactured’ effectively or morally.  It’s not something to optimize – most of the time we just know it when we see it.

That’s really more of the ‘why’ – social media does work as an educational tool, but it isn’t a bullhorn – as much as administrators and professors want to believe that it’s just a channel to push out their message and assignments to students – it’s not.  The real learning and education is happening on Twitter because of serendipitous conversations between total strangers.  This same incredible learning happened for me time and again in the virtual world of Second Life.  Becoming acquainted with someone new, trustworthy, and interesting has never been so easy.  You can seek out mentors for yourself in a way never before possible.  Most of these ‘mentors’ help others for free, because they want to start relationships or help someone join a particular community – they are not paid teachers or administrators working anywhere that would be even remotely described as an educational institution.

So how do we improve educational outcomes in a world where everyone’s become a teacher and everyone’s become a student – and sheisters run wild promising to help you learn how to become a millionaire by buying their $49.99 ebook?  At SelfReliant, we refer to this sort of education product as ‘crap education’ – and despite the great usefulness of Google for scam avoidance, people seem to continually believe that behind the paywall of the ‘crap educator’ is a treasure trove of knowledge that can only be found for a hefty fee.  This is what we refer to in economics as ‘information asymmetry’ – and in more common parlance as ‘let the buyer beware’.

Well, for generations we’ve had a quasi-governmental nonprofit system for closing the information asymmetry gap in the world of education – and it’s called accreditation.  What we’re seeing now emerge is a new economics of accreditation, wherein the organic and informal learning happening on social media platforms – most of which never occurs with the professorial set, but rather between peers, friends, family, or thought leaders – needs to be codified by a more open, flexible, and innovative accreditation infrastructure.

Here are just a few things I’ve done online in which I feel I learned something:

• Met people in India, Germany, and Australia using Second Life – got to practice my German a bit and have a number of conversations about life in those countries.
• Every form of content imaginable has been forwarded to me by thought leaders on Twitter I follow.  Some of them work at universities, but even then, I’m not paying to go to their school and enjoy the benefit of their tweets.  Most of my internet browsing now starts and ends with my tweetstream.  Are some of these people my mentors?  Hellz yeah.  Do they even know who I am?  For the most part, not really.
• Have you ever needed a detailed video tutorial on almost anything?  I have, and I use Youtube and other online video providers to find great educational content.  If it looks like they’ll produce more, I’ll ‘subscribe’ to their YouTube ‘channel’ for free.

Sure, sure, this is great stuff if you have a thirst for knowledge somehow encoded in your DNA, but in the case of the 99.9% of kids who seem to just want to hang out online and play Flash games, how can I say the Internet is a useful educational tool?  Many kids who do try to find relationships online end up relating to BAD people – people who at the very least will scam them or teach them things that are patently false.  So the monolithic educational establishment is left shaking its head in disgust.  How can we stop these Facebookers, these digital hoodlums with their ubiquitous mobile phones going off during lecture?  When will the insanity end?

So the insanity isn’t going to end – as you’ve probably already guessed – as preservers of the established order and status quo, you’re not going to be able to supplant Facebook and Twitter with textbooks and letter grades – adoption rates are too high among young people, and it is academia that will have to adapt this time – not students.  This is not just a temporary uphill battle for educators – it will be a multi-decade phase transition – a struggle to redefine the soul of academia by reinventing academic credit, so it maps better onto this wave of organic learning that’s being catalyzed by Internet and mobile technologies.  Some call it edupunk, some call it project-driven learning, informal learning, self-driven learning, etc…  Just to be different and overly verbose, I call it online microenterprise self-education, a mouthful to be sure.

One final note about educational technology, and then I hope I’ll be able to get some critical feedback to this first of many blog posts here on the new SelfReliant site. Educational technology or edtech is at a crossroads, at least from what I can tell, because there are two different sets of priorities in play when ‘edtech’ gets built and deployed.  Those two are, in no particular order:

• Institutional Needs
• Learning Outcomes

Companies like Blackboard that make elaborate and commercial ‘learning management systems’ or LMS’s are primarily responding to the first need – what does the professor need to be able to do in the course of doing their job?  How can an online tool assist with their day-to-day tasks?  They do not ask the question, “Is the job professors are doing every day ineffective and failing to produce learning outcomes”  Institutional needs and priorities trump the measurable learning outcomes piece time and time again.

What’s happened is that social software has allowed some motivated individuals to hyper-charge their own learning and to find cheap, high-quality mentors at high speed – and so for them, Internet apps are these extraordinary platforms for personal growth and learning.  Finding better ways to measure these learning outcomes and then assess their rigor and intellectualism in their natural, extra-institutional habitat, is the future of learning.  While the Blackboard, Moodle, and Sakai LMS’s have all self-selected on the basis of faculty and administrator approval, what we see is that the winners in social media are again and again self-selecting based on raw learning outcomes.  What’s happened is that the institutions have decoupled from learning outcomes – only now are they beginning to realize that the value they add is more and more in a role of assessment, review, and credentialing.  By completely stopping the waste of time that is the classroom environment, truly forward-looking intellectuals could massively widen their impact on students by becoming objective third-party accreditors of the best and brightest conversations being codified out there in the blogosphere and twitterverse.

So if you got this far, I hope you’ll drop me a note and comment!  This blog is going to eventually turn into a book – and if you have something interesting to say on this topic, then you may end up in it (with you advance permission given of course).  I’ll try to get your comments approved as quickly as possible so we can get a robust dialogue going.  Please also excuse the newness of this WordPress site – I’ll be modding it all and uploading our logo header shortly.