SL Advisors'  Instablog

In yesterday's press conference, Steve Liesman from CNBC asked a highly pertinent question of Chairman Bernanke. Steve asked whether the explicit focus on employment meant that the Fed was now willing to tolerate a higher inflation rate than would otherwise be the case. Bernanke answered predictably by noting that the Fed by law has a dual mandate (maximum employment consistent with stable prices). But in thinking about his comments afterwards and the way they've positioned themselves, it seems to be unlikely the Fed will spend any time worrying about inflation until the employment picture improves. Of course there isn't much evidence of inflation anyway, but we are virtually assured, based on his comments, that if or when things do ultimately pick up the Fed will be a long way behind the curve in terms of raising rates. Negative real returns are here to stay for bond investors. Bernanke made the case for real assets yesterday, including gold which we own through our investment in the gold miners ETF (GDX).

Disclosure: I am long GDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

I have watched the endless TV hype about Facebook's (FB) IPO with great interest but from a safe distance. FB is SO not the kind of stock we'd ever invest in - not that anyone should feel dissuaded because over the years we safely avoided Apple and Google amongst others too. So nobody should interpret anything profound - it's just that if we don't understand how they make money we just move on to other things.

Although I'm not a stockholder, I use Facebook to stay in touch with friends and family. I'm not on every day, and many people have more "friends" than me. In fact for a while my total was barely in double digits until my children's friends began to take pity on me and helped me get to a few dozen. The college-age crowd that are the engine for FB often number friends in the several hundred. I am clearly not that popular, but I can claim that my FB friends really are friends.

About a year ago FB e-mailed me to enquire whether I'd like to advertise my business, SL Advisors, on FB. I was surprised. I honestly didn't know FB carried ads. I'd never spent much time considering their business model or how they managed to exist. So much of the internet is free, and FB was just there whenever I needed it without even the occasional NPR-like pledge drive.

Unable to recall a single ad I'd ever seen on FB, I concluded that my own advertising budget could be more usefully deployed elsewhere. And in fact even now I can't remember anything advertised on FB. I do know that GM have stopped advertising there due to poor results, and I also know that Ford are very happy with their FB ads. This probably speaks to the average age of their customers, but in both cases I read about these developments elsewhere and don't know what GM or Ford have actually advertised on FB.

Meanwhile, FB continues to be a fun way to stay connected with friends and family scattered around the U.S., UK and Canada. The price is right, and if advertisers deem it a useful way to spend their budgets they truly don't even distract me. In spite of what economic theory holds, sometimes there really is a free lunch.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The Kauffman Foundation in Kansas City, MI is to be commended for the open manner in which they've shared the results of their own venture capital (VC) investing. In a remarkably candid appraisal that covers twenty years of experience, the authors reveal that much of the conventional wisdom about this area of private equity is wrong. Larger funds reliably underperform smaller ones; fees eat up disproportionate chunks of performance; investors too easily sign up for second tier managers in order to deploy capital that's "burning a hole in their pockets" while top tier funds seem to be the only way to justify the risk (as long as they don't grow too big).

The authors, who include CIO Harold Bradley, note with irony that while venture capital funds search tirelessly for new business models and innovation there has been remarkably little of this in the vc industry itself. Fees of 2&20 with limited transparency around GP compensation have prevailed with remarkably little change. The report also notes that while vc funds demand complete transparency around the financials and compensation of the companies in which they invest, they generally refuse to provide anything similar to their own investors.

Kauffman reports that only 20 out of their 100 vc funds beat a public equity market equivalent by more than 3% (a modest reward for illiquidity) and that half of those began investing prior to 1995. They also find that the "J-curve" (which holds that early negative returns quickly improve as investments mature) doesn't really exist.

In many ways what's wrong with vc investing is similar to what's wrong with hedge funds. Their findings echo my book, The Hedge Fund Mirage. Too much money chasing returns; LPs that don't press for better terms. Poor transparency.

The Kauffman Foundation should be applauded for their open approach to discussing issues that demand more attention. I hope their step forward provokes other investors to similarly examine their own results.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.