Disrupting Politics Part I - For the People by the People

In 1698, 175 Russian men left their military regiment and fled to the capital. After two years of war, the soldiers were starving and had little to show for their victorious campaigns. Back in Moscow, they found sympathizers among oppressed serfs and traditionalists who were upset by the profound cultural changes being forced upon them by their monarch, Peter the Great. As the discontent grew, their rage turned to rebellion, and they plotted to overthrow their ruler. Not surprisingly, Peter the Great quickly squashed the uprising. What is more disturbing is that over the next nine months, he executed over 1,000 men for their failed allegiances, and brutally tortured some 600 more (branding many with iron). Years later, also in his quest to modernize Russia, nearly 30,000 men died in the building of his namesake city.

Yet for all his personal and political atrocities, Peter the Great is widely held as one of Russia's greatest leaders, a man who indeed shifted Russia from traditionalism and slavery to the scientific method and modernism. History is full of such juxtapositions. Many a man or woman in leadership have ruthlessly violated the rights of their people, yet through the lens history, made substantial advancements for their country and their future countrymen.

What then is the role of leaders? This question was a core debate between Thomas Jefferson and Alexander Hamilton as they, among others, debated America's foundations. Jefferson had a deep faith in the ability of the common to rule, while Hamilton felt that rule should come from the educated: those who had the benefit and knowledge of history to avoid pitfalls of the past. We still face this question today, with the Republican Party largely distrusting of large government, and the Democratic Party largely in favor of it.

In the United States, it is easy for us to view the Internet through the lens of the impact it can have on other countries, the recent Arab Spring being a notable example. Yet, it is worth considering what impact the Internet can have on how we rule our own county? Will democracy and modern rule look the same 100 years from now as it does today?

In the following few weeks, I'll be making suggestions as to what this looks like, in hopes to stimulate a broader discussion. My first question is this: what role should we expect elected officials to fill? Is it best to elect officials who we believe to be more knowledgeable that ourselves, and to defer to their judgment on issues that are outside of our understanding? Or is it better for an official to serve as a direct representative of the people?

If the answer is the latter, then the technological implications are broad. In this framework, a representative exists as an "aggregator of wills". Historically, it was impossible to poll the masses to determine their collective will. Yet the Internet changes that. Under the right system, each voice has the ability to "cast their ballot" on issues.

So my first challenge is this: a Senatorial candidate whose platform is to have no agenda, but rather, via online polling (through the likes of Votizen), brings every major issue to the people of his or her state, and votes as the people decide. The role of this individual will be one of an educator: he or she will commit to publishing the facts surrounding an issue, advise what he or she believes the impacts on his or her state will be, and then leave it to the people to decide. Understandably, not every issue can be brought to light: it will be at the discretion of this individual to bring forth what he or she considers to be major issues.

It's important to note that in this post, I am not siding with either Jefferson nor am I siding with Hamilton. I am simply highlighting that we have the opportunity to use technology to "test" a new form of representation. May the outcome determine the victor.

Understanding the fall and rise of Facebook's stock

While the rear view mirror always allows for the most confident commentary, I wanted to offer a few thoughts explaining the"whys" behind the price action in Facebook's stock. I worked on Wall Street for nearly a decade before a series of health problems moved me to resignation, so I thought I'd share my observations.

Facebook stock price, from Google Finance

Popular media aside, the extreme volatility in FB hardly reflects true swings in valuation, nor does it likely reflect investors "forcing" Zuckerberg and Company to strengthen their mobile platform. Supply and demand, as per usual, are the main stars. Valuation is but one contributor to supply and demand. (In fact, studies show that the volatility in stocks is in no way warranted by changes in real valuation). The two other keys to this story are risk-reward and an agent-model portfolio investment.

Risk-reward is market parlance for "how much upside can I expect versus the amount of downside." The more uncertainty involved, the greater the return required by the investor. From a large revenue standpoint, Facebook is still an early player. Namely, if they execute things well, they have the possibility of rapidly growing their revenues (they have largely already succeeded in rapidly growing their user base). However, the question was never "is Facebook worth $100 billion?" Rather, the question market participants ask is "what is the upside at $100 billion market capitalization?" This is a subtle but very important difference. Based on current revenues (and thus price multiples), it was hard to justify a 50% increase in valuation, however, a 50% decrease was by no means inconceivable. In essence, the risk reward wasn't there. Initiate decline.

This decline was further exacerbated by the employees coming out of "lock up." For many, this was a first opportunity to move from being "paper rich" to "cash rich." As the supply of stock waned (employees slowed their equity exits) and the demand increased (more favorable risk-reward), prices stabilized.

We can make a strong case that the recent rebound has been due solely to favorable risk-reward (you could double your money simply by returning to the IPO price), and the lack of insider selling. However, this fails to recognize a third, very powerful aspect: the agent-model of portfolio management.

In the agent-model of portfolio management, investors with cash (often large institutions) pay somebody to manage their money (for a fee). They will frequently evaluate the performance of the manager and reallocate funds to or from the manager given their performance.

The evaluation of a portfolio manager is a funny thing. Quite opposite to trading, where gains are overvalued and losses under-attributed, in portfolio management, losses are over-attributed and gains inder-appreciated. As such, there is a string pull towards the status quo. The prudent portfolio manager will want diversified bets similar to their bogey (the metric, explicit or implied, against which they are compared). Their positions should reflect the larger picture in the global economy, all the while shuffling exact investment amounts to reflect their opinions and biases.

Facebook occupies a unique role: it is, in my opinion, one of the only credible public companies in the social media space. This isn't to slight Groupon or Zynga: rather, their float and scope as too small to be carry a ton of weight with institutional investors. As such, should social media continue to be a real market, institutional investors will need to own at least a bit of it. But those bits add up. Over trillions of dollars of investment capital, even the smallest fraction of a percentage in allocation can make a difference.