Remember Long Term Capital?

In 1994, the smartest guys in the financial trading and academic world got together to start Long Term Capital.  John Meriwether from Liar's Poker fame assembled a stellar group from Wall Street and academia including Myron Scholes (one of the creators of the Black-Scholes option pricing model) and Robert Merton who together shared the Nobel Prize in Economics in 1997.  They raised $1.25b in an instant and that giant sucking sound you heard on Wall Street was LTC hiring the best and brightest minds to its hedge fund.  LTC prided itself on hiring PhDs and other brilliant talent to add to the mystique of the group.  And the hedge fund performed spectacularly.  It used proprietary computer driven models (think sexy algorithms) to find miniscule misprincings in markets and would use leverage and derivatives to exploit those mispricings.  At one point in time, $5b of equity was levered up to a $130b of total assets or bets outstanding. While I won't go into the specifics of the trading model (think high leverage or vacuuming nickels from a train track, it works for awhile but the train will get you one day), they crashed, burned and died in 1998 almost bringing down the global financial markets. The bigger it got, the more risk it had to take on to deliver higher returns.  In other words, it is harder to drive significant percantage based returns on a huge capital base. What also set LTC apart was its culture.  It was one of incredible hubris and arrogance.  Their models were designed by Noble Prize winners and it was unbelievable for them to think that mere mortasl could even understand their models.  They didn't even share their investment trading strategy with their investors.

So what does this have to do with my blog?  I was having lunch with a friend recently who was telling me about some of his dealings with Google over the last year.  As an ex-Wall Street guy, it struck him that some of the meetings he had with Google were like the ones he had at Long Term Capital years ago.  Even when LTC was about to crater, he remembers going to their offices, being sequestered into an off-campus conference room, and not being able to get any information out of them to even help bail them out.  In addition, people would show up and leave during the meeting, take notes, and not even introduce themselves.  Well, it turns out that his meetings with Google over the last year were pretty similar.  While the Google employees were clearly bright and technical, my friend was not sure who the decision maker was and what they actually wanted to do with the company.  In addition, he felt pretty uncomfortable showing up to Google and having to sign an NDA on the spot, and then going into a meeting where people would walk in and out, sit on their laptop and take notes, and not even introduce themselves.  Hmmm-it really does sound like Long Term Capital.  There are other parallels-Google has an appetite for hiring PhDs. is driven by an incredible proprietary algorithm, and is by far the best web company on the street and performing like a rock star.  Like LTC, the bigger and bigger Google gets, the harder it will be for them to drive significant percentage based growth.  In addition, the culture, since it is one driven by engineers, can also be driven by a NIH or not invented here syndrome.  Ultimately, since history always does repeat itself, I hope that Google understands that self-confidence is imperative but hubris and arrogance can kill.  Look at Long Term Capital and the chronicles of its short lived performance in a book so aptly titled, When Genius Failed.  Hell, Microsoft was the same way in the mid-to-late 90s and as time goes by I hear that they are becoming a bit friendlier to startups and partners.  I guess that is what happens when you get your ass whooped by a newcomer.  Hopefully, Microsoft hasn't learned its lesson too late.  And I hope that Google remembers its mantra of Do No Evil as they are going to need partners to continue to grow their business and build great product.

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This post was written by who has written 358 posts on BeyondVC.

34 Responses to “Remember Long Term Capital?”

  1. Chris Yeh Mar 24, 2006 at 6:09 pm #

    Ed,

    I was at D. E. Shaw (the brainy hedge fund that produced Jeff Bezos and a ton of other entrepreneurs) during the late 1990s, and I have to confess that we made many of the same mistakes. Our philosophy was to hire the best and brightest, and to let them figure out a better way to do things.

    Of course, sometimes conventional wisdom is actually correct.

    The difference between D. E. Shaw (which should be listed as D. E. Shaw & Co., L.P. in all official correspondence) and LTCM is that D. E. Shaw (or DESCO as we DESCOites referred to the company) managed to survive the hedge fund meltdown and is now the world’s largest hedge fund. Ironically, I think the near-death experience helped the culture become more open.

    Perhaps it will take a similar near-death experience to force a change at Google.

  2. Zoli Erdos Mar 24, 2006 at 11:03 pm #

    Funny, but that’s why I did not invest in GOOG on IPO day…
    I’ve had a few business contacts who were sick of trying to conduct any business with Google; basically the same issues you brought up… people late, in and out of meetings, can’t figure out who the decision makers are ..etc. Business partners found chaos only.
    So armed with all that information I was quite sure GOOG would fall after the IPO… the story of my lost fortune:-(

    But I’m surprised recent experience is similar – I thought they now have enough “adult supervision”. On fact perhaps too much. I forgot if it was Larry or Sergey who recently said he could not get through the HR process and would likely not be hired today…

  3. Peter Mar 25, 2006 at 2:54 am #

    Chris said “and I have to confess that we made many of the same mistakes. Our philosophy was to hire the best and brightest, and to let them figure out a better way to do things.”

    Sounds very Enron-ish.

  4. mr fuckedgoogle Mar 25, 2006 at 3:01 am #

    great post man.. i’m gonna quote you.

    my thoughts exactly. everyone i know who works for google has become an arrogant prick- even the people i knew years ago who were “normal” at the time.

  5. alt Mar 25, 2006 at 7:07 am #

    ehi, one makes a nice comment with a “Liar’s Poker” quotation and gets purged. That s so much “equity in Dallas”, you know what I mean

  6. David Henderson Mar 25, 2006 at 9:47 am #

    Great post. Couldn’t agree more!

    Netscape had the same disease. PhD does not automatically = creative. High SAT scores does not automatically = common business sense. What D- student can’t figure out that it’s a bad idea to have 6 years between product revs. Look at Microsoft they are fast (maybe slow) followers not bleeding edge innovators. Google is turning into the same thing. What was their great business idea again? Oh yeah…Overture ;-) Brilliant!

  7. Solomon Folks Mar 25, 2006 at 7:14 pm #

    Interesting indeed. It also smacks of another company that was once the “darling” of wall street…Enron. While I doubt that Google will meet the same fate as Enron, you have to wonder about a company that you can’t get a real pulse on. No guidance, few revenue generating products, very talented people running profitless teams…sounds Enronish to me.

  8. Mike Mar 25, 2006 at 9:34 pm #

    Comparing Google to Enron is a bit unfair. Enron was criminal; didn’t they intentionally engineer the rolling blackouts in California?

    Comparing Google to a hedge fund… well, hedge funds aren’t criminal, but isn’t the business a little shady?

    Yes, Google is arrogant, but that alone isn’t enough to do real damage to the company. IBM in the late 80′s was arrogant AND complacent — a near fatal combination. Ok, so Google is half way there. :-)

  9. Ed Sim Mar 26, 2006 at 8:35 am #

    I agree, comparing Google to Enron is not the point. Google is a great company and they are doing well. Enron was fraudulent. Google is not. In addition, all hedge funds are not shady. The point is that when you are at the top, hubris and arrogance can kill and I hope Google knows that and remembers that lesson from history.

  10. patrick wilken Mar 27, 2006 at 9:39 am #

    Google might not be shady like a hedge fund, but the massive sellout of stock, the less than open culture of disclosure, and the open problem of clickfraud certainly does not suggest they are above criticism.

  11. Keith Wright Mar 27, 2006 at 1:39 pm #

    I think that one factor that will determine how like Long Term Capital or Enron that Google turns out to be is to what extent they focus on their earnings and stock performance. So far Google hasn’t shown any reluctance to say and do things that freak out investors. Enron and LTC were both doing their best to change the laws of nature to keep up the numbers, but if Google’s focus is just to keep doing cool things that their PHDs emjoy then I think their failures will be much less spectacular. If they don’t try to lie or cheat or find loopholes in the numbers than hopefully they will be able to see it coming when their great super-nerd engineered projects aren’t really performing at the level that investors expect.

  12. Manny Mar 27, 2006 at 3:10 pm #

    To Keith. You say that Google is not an Enron because they seem to do what PhD’s like to do and not cook the numbers.

    Welll.. was Enron ever accused of cooking its numbers BEFORE it blew up? Remember, click-fraud is a SERIOUS issue. A lot of experts say its in the 30-50% range and we keep hearing Google say its a “fraction” of their clicks. Fraction and 30-50% are a big gap. If it turns out that its closer to 30-50%. That’s as close as you can get to “cooking up numbers” for wall street.

  13. Bill T Mar 27, 2006 at 6:58 pm #

    If you walk into a meeting and are handed an NDA to sign (immediately, without any advance notice), the best thing to do is to simply turn around and walk out.

  14. Glenn Mar 28, 2006 at 5:05 pm #

    I just finished reading the Smartest Guys in the Room (the Enron story) and have read When Genius Failed (about LTCM). I agree that arrogance and hubris are detrimental to any company and if it does indeed continue at Google, will indeed hold it back from achieving its ultimate potential. I’d like to point out the key differences between Google and these two cases. Besides arrogance, Enron also suffered from 1) bad business decisions (probably driven by hubris 2) greed (which led to fraud) 3) huge (if hidden) leverage. Google does not suffer from (3) or (2) in my opinion but may suffer from (1) in the case of its myriad projects run by very expensive engineers. LTCM was a little different. There was no fraud involved, but instead they suffered from too much focus on theory and not enough on reality. Ultimately they were done in by a “three standard deviation” confluence of events which looking in retrospect would not be that uncommon. Perhaps if they had accepted their mortality earlier as the events unfolded, they would have been able to salvage the fund and been a great success story in the end.

  15. Erik Mar 28, 2006 at 5:55 pm #

    The most pathetic thing about GOOG’s hubris is how unwarranted it is given the quality of most of their products.

    Search is good (but easy to game).
    Froogle is pathetic
    GMail is a mixed bag, it certainly is beta
    Video store is bad
    Finance is flashy (no pun intended) but thin
    News is mediocre
    Maps are good (but their directions are weak)
    Blogger is terrible
    Earth is good

  16. Chris Yeh Mar 30, 2006 at 4:23 pm #

    Not that I’m a hedge fund guy, but what exactly is shady about them?

    There are a few bad apples that commit fraud, but hedge funds are no different than any other asset manager in principle.

    In practice, I think that much of the anger towards hedge funds is because the people who run them make too much money.

    Most people don’t think it’s fair that someone who doesn’t actually build anything of value can make vast quantities of money and live like a rock star.

    An old professor of mine once said that he could tell if someone was going to go to jail based on how much the press covered his or her compensation package. If the person made an obscene amount of money, they were going down.

  17. Andrew Fife Apr 2, 2006 at 6:07 pm #

    It’s too bad this discussion got so sidetracked with the Enron comparison, which in my opinion is totally false. How many successful companies don’t display at least some form of arrogance? Other than arrogance I see no meaningful parallels between Google and Enron.

    I do agree with Erik. Google’s hubris is unwarranted because they don’t really have any products that are both great and unique. In fact, I use Blogger, hate it and plan on switching soon.

    I believe that Google is another case of right place right time, just like Hotmail, Netscape and Skype. There’s hardly anything for entrepreneurs to learn from these companies and their founders have yet to prove that they were anything more than lucky. Google’s most valuable asset is clearly its brand. Google’s search technology may be ‘better’ that MSN or Yahoo, but the results don’t really produce noticeable differences to the average consumer, which is where Google generates all of its revenue.

    I also totally disagree with the notion that Google is somehow better position to succeed (or even avoid failure) simply because they have a lot of phds in house. Web 2.0 is not about deep technology, but rather creating communities. Furthermore, marketing are and sales are what drive great companies, not technology. I realize many engineers will take issue with this statement, but consider the example of Windows and Linux. Windows is a great brand and (arguably) a weak technology. Linux is an impressive technology and weak brand. Alternatively, look at ipods… amazing marketing, totally unreliable products that break all the time but they still sell like hot cakes.

    So tying this back into Google’s hubris, their value is in their brand, but I just can’t find anything genius about a funny sounding name and search box with a clean layout on a webpage.

  18. heavyonthechevy Apr 5, 2006 at 6:02 pm #

    Yeah I must agree. I think the LTCM vs google comparison is false. LTCM failed b/c they were 99.99% right, but decided it was worth the gamble to structure it such that if the .01% happens, they’d go out of business.

    Well, the .01% happened, and everything unraveled b/c of their leverage. Unless you are saying that google has the same sort of problem with leverage, I don’t think any subsequent unravelling would be comparable.

    Google may be arrogant, but the situation (esp in terms of leverage) is completely different. Its one thing to be arrogant and blow up in a few days b/c of russia defaulting and interest rates going haywire temporarily, and another to be a product company that is being arrogant.

    Its hard for google to blow up in several days like LTCM did

  19. Jim Collins Apr 5, 2006 at 11:38 pm #

    What happened to LTCM was the equavalent of being struck by lighting twice. They’re doing great now.

  20. Ed Sim Apr 6, 2006 at 7:42 am #

    Once again, this post has nothing to do about financial leverage or fraud. The comparison I make is on culture, arrogance, and hubris and how that can be damaging. It can also lead to supreme overconfidence which can ultimately lead to one’s downfall as well.

  21. David G Apr 6, 2006 at 1:11 pm #

    What a fantastic post; investors would do well to heed this advice & some-one should do a research study that corelates a firm’s “personality” to its (long-term) return on shareholder’s investments.

    Another GREAT case study in this problem is Amazon.com. They’ve made the press a few times recently for their arrogance and rudeness (see the TRU verdict and Vogels vs. Scoble blogging debate). The AMZN stock’s recent performance, like GOOG’s (this year) is far less than spectacular. I worked there until mid ’04 & by the time I left, I would regularly see the bad attitude of its execs resulting in poor decisions & burned bridges –> in an arrogant company, management quickly gets to the point where they no longer see the value of “win-win” contracts – it’s this attitude that results in the “scorched earth” approach to negotiating that’s so prevalent these days.

    One could argue that Wallmart’s diminishing returns could have also been predicted by merely listening to their vendors’ accounts of dealing with retail’s original bully.

    My Mom taught me that “pride comes before a fall” – she was right. A business’ success today depends more on its external partnerships than it has ever before in history. Ignore this issue at your expense!

    Thanks for writing!

  22. Christopher Clay Apr 11, 2006 at 1:03 pm #

    On the last comment read “Good to Great”. Although not an all inclusive study quite interesting.

  23. josephgrossberg Apr 11, 2006 at 10:44 pm #

    “In addition, the culture, since it is one driven by engineers, can also be driven by a NIH or not invented here syndrome.”

    NIH at Google? Are you kidding me?

    Look at all their acquisitions; they like others ideas so much that they don’t just copy them — they want the entire company.

  24. award tour Apr 15, 2006 at 6:40 pm #

    BillT made the comment…

    “If you walk into a meeting and are handed an NDA to sign (immediately, without any advance notice), the best thing to do is to simply turn around and walk out.”

    Though I agree in principal, isn’t that exactly what Gary Kildall did when IBM showed up at his door?

  25. Paul Elosegui May 24, 2006 at 4:42 pm #

    Nothing deceives like success

  26. monkeyspice Jun 9, 2006 at 12:51 am #

    does anyone here know how to read an income statement? GG’s has a 25% NET margin which means 35% pretax. anyone with finance 101 under their belt knows that’s mighty fat. they pay their bills, their search is the best on earth (no one is perfect, even google. but they are the best right now) and they provide a service people deem valuable to pay for (targeted traffic). this is a real business. trading little pieces of paper between related parties is not.

    arrogance? probably. but with a 25% margin, you couldn’t get me out of bed to even take your call if I was Google.

    Most other companies take decades to get anywhere near GG’s revenue #s and never even come close to getting margin #s like that.

    just sayin

  27. Richard Oct 4, 2007 at 9:56 am #

    I’m increasingly impressed with google’s arrogance – so much so that my home page is now another search engine… and, in truth, it works pretty damn well. Nobody is irreplaceable IMHO.

  28. Engineered Stock Investing May 5, 2008 at 2:05 am #

    Make sure that any investment system you use is free of bias. If the purveyor of an investment system has a clear interest in a specific market or industry (oil industry, telecommunications, or precious metals for example) then his recommendations may well be slanted toward his industry.

Trackbacks/Pingbacks

  1. Mikhail Ledvich's Blog - Apr 6, 2006

    A bit too smart

    I really enjoyed reading Ed Sims post Remember Long Term Capital? About a hedgefund that he described as one of incredible hubris and arrogance. Their models were designed by Noble Prize winners and it was unbelievable for them to think …

  2. Genuine Incorporated - Apr 6, 2006

    Pride Goeth Before a Fall

    Ed Sim on Google (via):
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  4. SortiPreneur - Apr 7, 2006

    Is Google the New LTCM?

    I recently read When Genius Failed, so I found it interesting that Ed Sim compares the current hubris at Google to what was going on at Long Term Capital Management in 1998.I was having lunch with a friend recently who

  5. Schadenfreunde - Apr 7, 2006

    Comparing GOOG to LTCM?!?

    Pseudo-Intellectual alert!!! here. OMG, I had to force myself to read this mind-numbing drivel… ok, I won’t be too hard on this. He’s comparing the PhD nobel laureates that made a huge bet on interest rate convergence in international financial markets,

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