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Ernst and Young reveals 243,000 credit card numbers. And they call themselves auditors?

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Oops. Ernst & Young just let the personal data and credit card numbers of 243,000 HOTELS.COM subscribers get stolen, via that old standby: a stolen laptop. And these people call themselves auditors, supposedly qualified to judge the accounting integrity of American business? It’s no wonder that hundreds of billions of dollars of fraud have been coming to light over the last several years.

The very fact that the data was stored on a laptop in unencrypted format is criminal negligence.

For those of you who care if your laptop is compromised if stolen, here are a couple of things you can do. E&Y didn’t do them, and now 243,000 of us are paying the price.

The Microsoft solution I don’t trust (but better than nothing)

First, if you use Windows XP Professional, you can right-click a folder and click a little box “Encrypt.” This will encrypt the files so prying eyes can’t get at them. If you suspend your laptop without logging out, however, then a thief can access the files if they resume the stolen laptop, so always log out before suspending. (Or set your laptop to require a password after suspending.)

Personally, I don’t trust Microsoft’s security. They have a 25-year track record of designing highly insecure systems, and shipping those systems pre-configured to their least secure configuration. No matter how much they say that security is now a priority, I can’t imagine that their thousands of programmers suddenly acquired the ability to write secure code after spending their entire careers not knowing how. Furthermore, they’re now creating their own anti-virus products and firewalls. Any company that makes money selling me protection against vulnerabilities they built into their own software isn’t a company I want to trust with my sensitive business data.

The “virtual encrypted disk” solution I trust

I use PGP Desktop’s “Virtual Disk” product. I create a virtual encrypted disk that I must explicitly open and enter a passphrase whenever I boot the computer. It’s a bit more work than Microsoft’s solution, but PGP has a spotless record going back 20 years for having the strongest, most secure encryption available. Originally an open-source product, their algorithms are public knowledge, so the security community can make sure the product is solid.

Anything’s better than nothing

In any event, use something. If you deal with sensitive data, you should never, ever have it unencrypted on a computer that might be physically compromised. Even if you have a password-protected laptop, the disk drive can be removed and read by a thief, so keep the data encrypted on that drive.

E&Y should have done that. Heck, E&Y should never allow an employee to touch a computer that hasn’t been made as iron-clad as possible. (They probably let their employees connect to unencrypted wireless networks while traveling. Conveniently, that lets a thief simply sit in an airport boarding lounge and grab sensitive data out of the air.) You do better. Get secure. There’s no reason to do otherwise.

Walk Left, Stand Right. Creating a culture through action and thought.

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Creating a culture or a community is more than simply spouting values or saying “We’re all in this together.” It’s about adopting a mindset that we can all adopt practices that benefit the group, as well as ourselves. This segment explores community as part of the Riding an Escalator Experience.

(The player embedded in my web page may have trouble playing this segment, so you may wish to download and play the mp3 file.)

Podcast: Play in new window | Download

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Is Google stock overvalued? How would we know?

A friend wrote: “… and I thought Google was overvalued at $150!” She was implying that it must not have been overvalued, since it’s currently selling for so much more. I decided to whip out my amateur finance knowledge and see if she was right.

Disclaimer: I am not a finance jock. My understanding of valuation models is limited to my experience as an investor in startup companies, my MBA finance courses, and my having read all of Berkshire Hathaway’s annual reports, and whatever other writing I can get my hands on from Warren Buffett. (Especially Buffetology by Mary Buffett and David Clark.)

My friend was likely right. Google probably was overpriced at $150. “Overpriced” means its actual value is less than it’s selling price.

Share price isn’t the same as value. Google’s price may be above $150, but its intrinsic value may be lower or higher. Price says nothing about intrinsic value, though the value investing theory goes that over the long term, price will eventually gravitate to intrinsic value. I told my friend, “you can kick yourself for not having speculated, but don’t assume that your instincts were wrong.”

APPLYING 3 DIFFERENT VALUATION TECHNIQUES TO GOOGLE:

P/E (price-to-earnings) analysis: Google is currently at $377, with a P/E of 63. That means it will take 63 years for Google to earn back the price of the share you buy. A P/E of 18 is more reasonable (Walmart is at 17, for instance, Microsoft at 18). If Google falls to a realistic valuation (as it’s certain to do over 63 years), this would be about $101/share (377 / 63 * 18 = $107), which is less than the $150 my friend mentioned.

Warren Buffet “bond coupon” valuation: Google produced its historic high $5.68 of fully diluted earnings per share this year. So you are buying a share that produces $5.68 each year. A perfectly safe investment (a T-bill) returns 5.12% a year, so to get $5.68 in earnings from a T-bill, you could buy $111 in T-bills and generate a risk-free $5.68/year.

So paying more than $111 for a Share of Google is a poorer choice than buying a T-bill, unless you think Google will do far better than $5.68/year over time. Note that because Google is riskier than a T-bill, you should actually expect it to cost less than the T-bill, to compensate you for the risk.

Will Google do better than $5.68/year over time? With 215,000,000 outstanding shares, they need to add $215MM to the bottom line to increase earnings per share $1. That’s a big number. So I’m not holding my breath. But let’s assume they can do it…

So let’s look at a third valuation, where we do assume Google will increase its EPS every year.

NPV valuation: Google’s earnings grew 13% last year. A discounted cash flow assuming $5.68/year of earnings, growing 13%/year for 15 years produces a valuation of $141 per share, still below $150. (And that’s assuming sustained 13% growth in earnings, a tough feat. Also assumed: 5.12% T-bill discount rate, and rates have been rising recently…)

CONCLUSION: Google probably is overpriced at $150, relative to its intrinsic value. Due to branding, hype, and general investor irrationality around tech stocks, it’s likely to sell at far more than intrinsic vaule for a long time.

INVESTOR IMPLICATION: Buying Google at current price levels is speculation, not investing. (At least, not value investing.)

– Stever

Finding the beliefs that trap us

My recent Harvard Business School Working Knowledge column discussed how we’re trapped inside our beliefs. It even got mentioned on the Boston Globe BLOG. I say that “thinking outside the box” means thinking outside your beliefs.

But this is just darned hard to do! It’s not natural to sit around analyzing yourself to figure out what your beliefs are, so you can think outside them. And reading stuff written by people with vastly different beliefs isn’t likely to help you think outside your box unless you can suspend your beliefs pretty deeply. (I know, I was just reading a newspaper editorial, gritting my teeth the whole way through. “I can consider this with an open mind,” I futilely told myself.)

So instead of identifying beliefs by challenging them, let’s take another approach. Here are a bunch of beliefs I’ve encountered in clients and friends that hold people back from doing the things they most need to do. Notice that some of these beliefs are polar opposites. Indeed, the same belief can limit one person while freeing another. It depends on each person’s situation and their other beliefs as well.

Ponder this list. If any of them seem familiar, stop a moment and do a thought experiment. Ask yourself, “what would I be doing, who would I be, how would I act if I didn’t believe this?” Then imagine that different-You going through a typical day. The goal here isn’t to change your beliefs, just to step outside and test the waters.

Beliefs about yourself

  • I’m successful.
  • I’m a failure.
  • I deserve what I’m getting.
  • I don’t deserve what I’m getting.
  • I can do anything I put my mind to.
  • I don’t have the degrees/certifications/recognition to do it.

Beliefs about customers

  • Customers buy the lowest-priced product.
  • Customers buy the highest-quality product.
  • We must give all customers great service.
  • Our customers are [insert your demographic here]

Beliefs about competitors

  • We have no competitors.
  • We have lots of competitors.
  • Company X is our competitor. (Are Google and Microsoft competitors? Why? or Why not? Are they even in the same business?)
  • We are better than competitor X.
  • We are cheaper than competitor X.
  • Competitor X is a threat.
  • Competitor X is not a threat.

Beliefs about who we are and what we’re capable of doing.

  • We can accomplish goal G with resources R. (Often manifests after a layoff, as workforce is reduced but goals aren’t.)
  • We have the capability to do H.
  • We have the best programmers/manufacturers/documentors/operators/logistics in the world.

Beliefs about the future

I’ve chosen some of the hot topics that tend to be argued strongly from belief. Amusingly, most of the below beliefs have measurements and research available, but virtually none of us know about it (except as it is selectively cited by our favorite already-believes-with-us pundit):

  • We’ll have plenty of oil for the coming decades.
  • We’ll run out of oil in X years.
  • Economic health will lead to happier lives for us all.
  • Political party Z will win the next election.
  • We can pollute without having any really bad effects on the world.
  • If we spend more on schools, we’ll have better-educated kids.
  • Fixing education isn’t just a matter of money.

Beliefs about the world

  • Everything is politics. People are motivated by pure self-interest. I have to manipulate them to get what I want.
  • Everything is family. People are motivated by altruism. I can do good and appeal to their better nature to get what I want.
  • We have to see what the trends are, then act.
  • If we act first, we can shape the trends.
  • Life is a meritocracy. Rewards come to those who work hard.
  • Life is all about luck. Rewards have very little to do with working hard.
  • Taxes are bad. Period.
  • Taxes are the contribution we make to live in a country that provides common services.
  • Social problems should be solved by government.
  • Social problems should be solved by markets.

So why does it matter, anyway?

Your beliefs control what you do and don’t attempt in the world. If you believe you’re a bad negotiator, you’ll never put yourself in situations where you have to do difficult negotiations, so you’ll never go up the learning curve. It will become a self-fulfilling prophecy.

Your beliefs also determine the options you generate when you want to try something new. If you truly believe that Wal-mart is an invincible competitor, for example, you won’t even consider business options that would pit you head-to-head against Wal-mart.

And lastly, your beliefs determine what you pay attention to. They determine what you measure. If you believe customers are out to cheat you, you’ll invent things like software activation(1). If you believe customers are honest, you’ll likely create a tighter relationship with your customers because you’ll naturally engage in trust-building activities.

So now that you’ve tried on a few different beliefs. Here’s a final question to ponder: what could you measure or pay attention to that would let you know if the new belief you tried is better, worse, or as effective as your current belief?

Just a thought…

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(1) Software activation is a potential disaster for customers, but software companies don’t care.

Busy, but boy… word gets around

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A friend just pointed me to this post on the Boston Globe where I’m being referenced. In this world of the Blogosphere, information moves fast! Shortly after posting my BLOG entry on oil and gas prices, I got a phone call from the PR agency for a major oil company asking about the entry. Cool stuff.

All that said, BLOGging takes time! And I’m already writing a column, recording podcasts, relaunching my web site, and, oh, yes, running a business. So my apologies. At least during client work and the like, BLOGging may not be as frequent as I’d like.

Next steps are to BLOG more and learn to start linking to other Blog posts I like. But meanwhile, I’m also going to be appearing on NBC Nightly News early next week, discussing overwhelm and coping with the information deluge.

So hang in there. I’ll find a way to write on a more regular basis.

What if politics were organized around process, not positions?

Ever notice how people don’t change their minds? Even when confronted with compelling evidence against their position, they cling to their position and emotionally shred the evidence rather than face the notion that their beliefs are wrong. As one high-ranking political player told me, “the world is too complicated to worry about whether policies produce the desired effects. Politics is simply about seeing your beliefs put into law. Period.”

I found this a very depressing position. And no matter what his beliefs, I don’t want this man making decisions that affect my life. Unfortunately, he’s in a position to make many, many such decisions.

I’m committed to a process of inquiry, discussion, and (unscripted!) debate about our goals and about which policies will actually reach our goals. So rather than “Liberal” or “conservative,” I call myself a Political Functionalist. You can read my draft Political Functionalism Manifesto here.

(Comments and flames appreciated, though only if they are in the spirit of inquiry and discussion.)