Hedge Funds Liquidating but Retail is Buying

A solemn crowd gathers outside the Stock Excha...

A solemn crowd gathers outside the Stock Exchange after the crash. 1929. (Photo credit: Wikipedia)

This is something that I have been talking about recently. It is a sign that:

[1] portfolio managers are taking their profits early so they can post good results at the end of the year

[2] the professionals are moderating their stock market positions because they see trouble ahead while the retail buyers are jumping in out of greedy desire to make a lot of money in what they think will be a continued rally — a ‘slam dunk‘ attitude — a legendary bad sign …

BofA Merrill Lynch equity strategists report data on what their clients are doing in the U.S. stock market on a weekly basis.

Last week, BAML’s hedge fund clients unloaded the most stock since 2008, while institutions and retail clients were net buyers.

 
Something strange is happening in the economy and the stock market. I remember the words of my first Wall Street boss, William K. Beckers — one of the big Wall Street names back in the 1920s and beyond. He was the floor broker on the NYSE for Spencer Trask & Co. and watched Morgan, Giannini and other leaders of banking and industry come on to the floor, buying to support their stock prices. In his office he had framed a fading piece of ticker tape that read the volume and “October 29, 1929 Good Night” 
 
He always said about the 1929 market crash: we all knew something was happening, we just didn’t know what it was going to be.
 
In the 40+ years that I have been watching the economy, the equities markets and the fixed-income markets, I have never seen anything that compares to what is happening now. I confess I don’t know what is going to happen, but things have reached a point where it is clear there is something on the horizon. We will find out what it is, and it doesn’t appear likely to make life any easier for anyone.
 
Again, as you plan for next year, consider some contingency planning.
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Funding is not the problem …

It’s the first day of the new business year and reality is overwhelming. Where to start?

If you are thinking about starting a business …

The first thing to do today is start writing down your ideas. I suggest getting a cheap composition book, sitting down with a cup of coffee, and just writing down things you can do that people will pay you for.

What are your areas of expertise?

You don’t have to know how to program software or build a dynamic website – I know outstanding people who can do that for you.

You don’t have to know how to figure costs and estimate earnings – I know outstanding people who can help you with that.

You don’t have to have a lot of money in your pocket – I know people who can show you how to bootstrap the development of your company.

Are you beginning to get the picture? The real truth is all you need is a good idea. 

There are always ways to make your business idea happen. You don’t have to be an expert on everything – there are plenty of people around who can give you true insight and information based on experience and knowing the marketplace.

One thing I have learned during my nearly 20 years of startup and small business consulting is that the most successful entrepreneurs realize they can’t do it all themselves so they develop an idea and find good people to help them start their enterprise.

Don’t let the mere fact that you don’t have million$ stop you from planning your business.

There are ways to get a business launched on its own earnings and then build it out as money comes in. It all starts with providing a product or service people will buy. It doesn’t have to be a unique or revolutionary offering. In fact, investors are looking to fund good basic companies that provide a better way to do ordinary things. So, if you have a good idea for how to improve something basic, write it down and start thinking about how you can put your idea into action.

A good example of an improvement on something basic is Papa Murphy’s Take n’ Bake Pizza. This company provides all the wonderful things that its luke-warm delivery competition provides, but Papa Murphy’s charges lower prices, which are important in this economy. Not only that, the company doesn’t have the cost of expensive pizza ovens and high electricity bills so its profit margin is probably higher. Its fresh ingredients and the ability to choose the toppings  certainly make it my choice over frozen pizza, and if I heat it up at home, it is hot on my table – not sort of warm.

Sometimes a business breakthrough is made by simply changing how the product or service is presented. Mike Diamond Plumbing became “the smell-good plumber” and is probably the first call I would make if I needed a plumber. Why? I remember the “smell-good” part. Not that I have ever had a dirty plumber answer my service call … but it sure sounds better to call a smell-good plumber.

Finding something to improve a basic business and marketing it properly is a great way to get started without the big investor money.

Another thing: Take advantage of expertise. If you have never started a business, call people who can give you good advice. It will save you lots of time, money and disappointment later.

Your Seed Round is not your first funding

I find I am running into the same conversation over and over again with entrepreneurs. I am not sure why, but I know its source: wishful thinking.

Let me just be clear about this, wishful thinking is an important part of the entrepreneur personality. It is what drives us all to do things that our friends and family think are crazy. Nevertheless, properly applied, wishful thinking creates great companies.

Here is the problem: You are highly unlikely to get funding, strategic partners or advisers if you don’t have any skin in the game.

All the work you do at the drawing board putting your idea together and all the work you do running around taking meetings and making contacts is worth very little in the eyes of investors, strategic partners, advisers and even attorneys, accountants and other service providers if you don’t have any of your own money in the project or money invested by your friends and family.

The reasoning behind reluctance to work with startups with no FFF (Friends, Family & Fools) money is the perception that the entrepreneur has no moral commitment to making the project work. So many entrepreneurs simply lose interest, get hired somewhere or get too discouraged to proceed. No investor or strategic partner wants to take on that risk. The thinking is that, if you have taken money from the people closest to you, there is a great personal incentive to stick with the project and somehow make it work. It also gives the impression that the people who really know you don’t think you are a good investment – so why would an outsider think you are a good investment.

I know now-successful entrepreneurs who lost their houses, wives, cars, friends and made their families very unhappy while building their companies. They believed so strongly that their ideas were bound for success that they begged, made promises and did anything else they could to get money to develop those ideas until they could get seed funding.

Your seed round is not your first funding.

Your Friends & Family round is your recommendation to Seed Round investors. It looks bad if you can’t get anyone who knows you to invest a few thousand dollars in your business idea. Often, these people also want to see that you have sacrificed your lifestyle and savings to build your company.

Set aside your pride and get out there begging your family and friends for money. It doesn’t have to be much money – some can only afford a few hundred dollars. A thousand dollars is good. Five thousand or more, fantastic! That money allows you do hire consultants, attorneys, accountants, take trips, build prototypes and anything you need to do to prove your concept and prove your willingness to take your idea all the way.

If you are not willing to hit up friends and family, or if they all smile and politely decline, it is time to re-consider the wisdom of your idea and the impression you are making on the people around you.