Thursday, November 03, 2005

Syntax versus semantics

Recently I had someone contribute some coding changes for my project at work. I had made it clear that I wanted to know all of the things he had changed. He didn't seem willing to do that and for mostly political reasons, I didn't feel I could compel him to give a complete report. So I settled on a compromise: he'd give me a list of "interface" changes.

My idea behind that suggestion was that if he fixed a bug or reformatted some code, I really didn't care too much. But if he changed the way a part of the system operates, I'd like to know the general reasons why. A couple of weeks later, he checked in his code and reported the changes in the interface as he saw it and I started to test the code.

Not surprisingly, something broke. He's an outstanding programmer, but with a large system it isn't easy to make a large number of changes that work right out of the gate in every situation. After digging around for a few hours, I finally discovered the offending code. He had replaced an entire source file with a check-in comment something like, "Replaced with working version." His version changed the semantics of a function call in a way that broke a program in a non-obvious way.

Now, that sort of change is exactly the sort of thing I was fishing for when I asked about "interface" changes. His response was that since the function signature hadn't changed, the interface hadn't changed. And he's correct if we had been talking about syntax. But I don't care about the syntax interface. A compiler can tell me if that changed. I needed to know about semantic changes, which are much more difficult to discover.

Thursday, October 06, 2005

The price of foam

On of the more obscure problems Katrina caused is a shortage of foam used in upholstered furniture. Thankfully, Select Comfort's business model allows them to sell beds now and ship them later, so with careful management it should be possible to avoid lower sales if not fewer deliveries. If the average delivery time goes up only a few days, consumers might not even notice or care.

The principle of supply and demand might cause problems in the long term, however. If foam is in short supply over the next few months, companies that need it will bid up the price in order to ensure they have enough to finish their own products. Until the supply problem is fixed, Select Comfort is at risk of lower profit margins.

Company-specific risks like this are hard to predict unless you have a detailed understanding of the micro-economics of an industry. Even then, the unexpected happens more often the we think. But good companies with solid capital structures and competent management will survive.

Tuesday, October 04, 2005

Capital allocation

The central idea of capitalism is that money is the score-keeper of economic activity. Most people would feel that there are numerous other criteria to judge human endeavors than whether or not it makes money. For instance, artists take pride in creating works that are not commercial, environmentalists oppose companies that pollute, and most people would trade salary for doing what they really enjoy. And if money didn't somehow represent all of those things, capitalism wouldn't work.

Consider labor unions. They demand higher pay and better working conditions for workers at the expense of company profit. Auto workers over the years have virtually guaranteed that US manufacturers will produce more cars than they can profitably sell. In essence the unions have won the battle, since it is Ford, GM and Chrysler who are paying the price, and not the workers. But the war isn't over, and if those companies can't stay in business while paying their wages, all sides will lose.

In other words, money gets converted into what we really value. For organized labor, it gets converted into job security at all costs. Consumers don't particularly care about job security (except their own, of course), but they do care about how much money their car costs. If paying for job security lowers the cost (unlikely) or raises the quality of cars sufficiently, it could be a good use of capital and the companies will thrive.

The problem with the communist systems in Eastern Europe and Russia, was that workers where theoretically valued, but poitical influence was valuable. Over time, the disconnect became unsustainable.

Tuesday, August 30, 2005

More on Canon

This Business Week article includes a quote from the S&P 500 analyst who recently downgraded Canon: "'Canon has been one of the few electronics companies able to maintain double-digit margins, but [Canon's second-quarter operating profit] shows that even Canon isn't immune to price pressure,' says John Yang". The other concern seems to be who might replace CEO Fujio Mitarai, who is 69.

According to's DCF calculator, Canon's current price assumes about 1.5% earnings growth. The article suggests 6 to 7% growth which works out to about $60 an ADR. Given more productivity gains and a return on the company's R&D investment, I think Canon is a good value.

Thursday, August 18, 2005

Writing good error messages

A good error message should say:

  1. What the program was trying to do.
  2. What it expected to have happen.
  3. What actually happened.
This is the same requirements of a good bug report, except that there is no need to show the code used. And actually, the location of the code (source file and line number) should also be included in an error message unless it's completely obvious. This is such a common requirement, many systems include source location automatically:

$ perl -e 'die' Died at -e line 1.

The more difficult thing, surprisingly, is knowing what errors to report. Most system errors should be reported, but not if the code tries to work around the problem.

Wednesday, August 17, 2005

Bad error messages

Error: can not locate file....

What am I supposed to gain from reading that message? Any information at all would help. What file? I know the program must know what file it tried. Why the ellipsis and the "Error: " string? This error resulted from a failed stat call, which normally means the file doesn't exist. But what if it were a permissions problem or a self-reference symlink or the path argument exceeded PATH_MAX? That's why we have errno and strerror.

Fortunately I had access to the source and changed it to:

Can not stat /path/to/file: No such file or directory

The orignal code made this more difficult by using this custom function:

int error_msg(char *error)

I know varags is a pain, but it really does have a place. There is no reason error messages can't provide more than enough information to debug any problem.

Friday, July 29, 2005

What am I missing?

Canon is currently trading at about $49.50 a share, which is just about what ¥5,560 is worth in dollars. (¥112 buys about $1.) Over the past four quarters Canon has earned $3.73. That works out to a P/E ration of about 13. It holds roughly $8.63 a share in net cash and has raised the interim dividend, which strongly suggests the year-end dividend will be raised too. If you use a discount rate of 11%, the current price implies a growth rate of 1.8%. But earnings have grown 20% a year over the past 10 years. My dicount cash flow model suggests the company is worth $100 or so.

Is Canon cheap because it's a Japanese company that faces greater competition from China? Are investors afraid the Yen will rise (or fall) dramatically? Is there some risk Canon executives are running an Enron-style fraud? I just don't understand.

Update (August 5): A Standard & Poor's stock report has one possible answer.

We recently reduced our opinion on the shares to hold, from strong buy, after the company posted second quarter earnings per ADR of $0.82, lower than our estimate of $0.86. Revenues grew by 7%, but gross margins narrowed by 234 basis points compared to a year earlier. Although CAJ's cost structure has improved relative to competitors, its second half guidance indicates that it is not immune to declining selling prices of printers, copiers, and digital still cameras.

Here's the breakdown of Canon's revenue by segment for Q2, 2005:

Sales by product                Q2, 2005   Q2, 2004  Change (%)

Business machines:
  Office imaging products      ¥ 292,716  ¥ 284,938     +  2.7
  Computer peripherals           285,445    269,890     +  5.8
  Business information products   25,316     28,119     - 10.0
Cameras                          219,241    190,108     + 15.3
Optical and other products        89,755     77,313     + 16.1
-----                          ---------  ---------     ------ 
Total                          ¥ 912,473  ¥ 850,368     +  7.3
=====                          =========  =========     ======

The problem is that the three biggest segments are also becoming lower margin bussinesses according to S&P. For instance, operating profit on Business Machines sunk from 21.3% to 19.7%. Worse, Canon had originally projected an increase to 22.7%. Cameras, meanwhile, earned about 17%. Optical and other products had operating profits in the single digits. So margins are clearly a concern.

The bottom line is that Canon is a premiere company is several tough industries. If they are going to keep up earnings growth, they're going to have to steer costumers to higher margin products (color copiers and printers versus monochrome, and SLR cameras versus point-and-shoot). Also, Canon has to be on the lookout for new products like its flat-screen TV initiative. Canon has benefited from the recent shift from film to digital cameras, but that shift will eventially run out of steam. When it does, I'm confident Canon will be ready for what's next.


The three companies I bought for my IRA share a common tactic—selling at low margin in order to win high-margin sales later on. Select Comfort sold a bunch of discounted beds to Radisson this year. In exchange, Radisson is using the Sleep Number bed to promote its hotels on TV and thousands of its guests will have a chance to try it out. Hopefully this will translate into sales at high margin Select Comfort stores or direct sales as people learn more about the product.

Canon (and other printer manufacturers) sell printers at very low margins in order to gain customers. They make much higher profits by selling "consumables" (paper and ink). While it is possible to buy generic brand consumables, they don't tend to produce the same quality as the name brand and don't really save all that much.

Oracle is quite willing to offer deep discounts on new licenses. (Even as low as free if the rumors are true.) But that's fine, because customers tend to use Oracle's software for many years and pay a steady stream of revenue to continue licensing the software and get support. Essentially the continuing revenue more than makes up for discounts at the front-end. Even better, most applications purchasers will also by Oracle applications servers and databases at a standard price.

In each case, it's best to think of the discounts as an investment rather then a cost. Like grocery stores advertising great deals on strawberries and steak in order to draw customers to the store to buy milk and eggs, these companies discount in order to bring in higher margin business. Ultimately the hope is to use discounts to increase earnings over time.

Thursday, July 28, 2005

Busy week for my investments

Select Comfort, Canon and Raytheon all reported earnings this week. I don't have a fundamentally different view of any of the companies, but it seems the market reacted fairly strongly.

Wednesday, July 27, 2005

Fear of uncertainty

Looks like investors of Select Comfort were nervous about the possibility of an earnings disappointment. It would have been a great time to buy. Meanwhile, Canon also reported earnings last night and it's stock price barely budged.

Monday, July 25, 2005

GE mentality

Joel Spolsky just wrote an article about how software companies make money. Basically, since there is no incremental cost to shipping more software, only the top supplier of a certain type of software can survive. If you aren't number one, you can't sell enough to make back the costs of hiring a bunch of developers to create your product.

That's why it's so encouraging to me that Oracle's Larry Ellison has embraced the GE mentality: "the belief that businesses must be, or become, number one or number two in their marketplaces." Oracle already has the number one possition in database, but they needed to buy PeopleSoft in order to remain or become number two in certain applications.

Monday, June 27, 2005


Every now and then you discover something surprising in ordinary things. This weekend I started making Rosemary-Olive Oil Bread from Nancy Silverton's Breads from the La Brea Bakery. When I was ready to shape the boules, I decided to reread the description since that step never seemed to work right. In the past, I'd assumed the boule (French for ball) was rolled like a ball of clay. But the directions are clearly refering to a horizontal, twisting motion. I couldn't understand how this was going to work, but this morning I tried it.

Needless to say, the twisting technique worked beautifully. And the bread is delicious.

Friday, June 17, 2005

The one that got away

I just got an email from a co-worker about his son's "matriculation from elementary school". (I'm not 100% that's the right usage. From the definition I read, it sounds like you can't matriculate from something.) It's impossible to describe the image that sprang to my mind. Mostlikely any image you think of would suffice.

Tuesday, June 14, 2005

Is Wal-Mart exporting jobs?

I just watched a Frontline episode about Wal-Mart that suggested the company is forcing companies to manufacture in China. It's a complicated issue but one comparison the show made is clearly faulty. The focused on a town in Ohio that used to be home to a television parts manufacturer that was forced to close because of Chinese price competition. Meanwhile, a Wal-Mart opened up. Obviously the Wal-Mart jobs paid much less and offered none of the benefits of the manufacturing jobs. It would clearly be a huge step down for those people.

But why would anyone make that transition, except to stay in their hometown? In contrast, millions of Chinese workers are leaving their agricultural communities to the new industrial cities on the coast in order to get better jobs. They make nothing compared to what they could make here, but substantially better than what they could do at home. This is the same process America went through nearly two hundred years ago.

I imagine most people who lost jobs to China found equivalent or better jobs, or just went into retirement. They might have moved, or pursued more education, or done something less interesting, but I'd be surprised if too many had to work at Wal-Mart. The contrast is stark, but not really meaningful.

The real irony is that people who buy cheap, Chinese-made TVs from Wal-Mart can spend more money on other things, like contributing to PBS programming. It's a bit of a stretch, I suppose. On the other hand, we bought our TV at Wal-Mart and this summer we started a Netflix subscription so that we'll have something to watch on it. Other people pay for cable and buy TiVos, or but DVDs at Wal-Mart. Surely some of our collective disposable income is creating jobs in the US.

And it's not like stopping Wal-Mart would keep the high-paying manufacturing jobs here. Wal-Mart's an easy target, but every retailer is involved with cutting costs by importing from China. The real problem, if there is one, is that Americans have gotten used to the idea that full employment is it's own goal. Franklin Roosevelt said it best: "No Country, however rich, can afford the waste of its human resources. Demoralization caused by vast unemployment is our greatest extravagance. Morally, it is the greatest menace to our social order." If you focus on the last sentence, employment seems to be a birthright, but the first sentence makes clear the productivity cost of unemployment. If the Chinese can make TV parts cheaper and better than we can, we need to find ways to be more productive.

Monday, June 13, 2005

Joy's old Palm m100

During my vacation to the East Coast last month, I had some time to read The Psychology of Everyday Things. The book make lots of really great points about how designers have failed users in a wide variety of everyday things, but I was especially struck by the author's desire for a device that very strongly resembles the PDA. Since the book was written in the late 1980s, the cheap, powerful, simple, connected devices that so many people rely on, didn't exist.

Joy stopped using the Palm m100 she got free when she bought her UCLA class ring. I'm not sure why, but I think it got replaced by her cell phone. At any rate, it's been sitting in our desk drawer. So I bought a few more researchable AAA batteries and started using it to see what all the fuss is about.

Some observations:

  • It's a pain to carry around. I wouldn't have done it at all except that my job forces me to carry a cell phone now, so I carry a messenger bag to work to hold the phone and I throw in the Palm too.
  • It works better than the Yahoo Messenger alarm for keeping track of meetings and appointments if only because I carry it around more.
  • The time doesn't get updated when I do a synch with my desktop. Surely this is an option on newer PDAs. Actually, a built in GPS or cell phone would solve this too.
  • It's great to be able to synch with Yahoo address, calendar and todo lists.
  • I don't bother using Graffiti or the popup keyboard if I can help it. It's easier to enter things on my desktop. Of the two, Graffiti seems to be the winner once you get over the learning curve.
  • Games are a bit slow, but that is a function of the device's age more than anything else.
  • All-in-one devices (phone, GPS, PDA, camera, etc.) will have a definite advantage for the average person.
  • I have to be sure to enter meeting times as soon as I get an email. Otherwise, I'll miss them.

"Not dead yet!"

Ok. I haven't posted anything in forever, but I've got some good excuses:

  1. New job responsibilities
  2. Two and a half week vacation
  3. Two year old son
  4. Writer's block
  5. Perfectionist streak
  6. Bad hair days
  7. Lost an hour to Daylight Savings Time
  8. Too busy trying to find HTML way to reverse order of lists
  9. Embarassed by the complete lack of new posts
  10. Been reading not writing

Tuesday, April 12, 2005

"Nano, nano"

Before it's even sold one TV, Canon and its SED Inc. joint venture with Toshiba has been sued for violating a patent license. Nano-Proprietary, Inc. owns a patent for the process of producing SED screens, but sold a royalty-free license to Canon back in 1999 for $5.5 million. That probably looked like a good deal back then, but given the potential revenues Canon is likely to get from using the license, it doesn't look so good now.

My inexpert and shallow reading of bits of the contract suggests that Nano-Proprietary will lose the suit and Canon will be able to produce SED TVs royalty-free. Canon has spent a lot of money on R&D and invested heavily in its subsidiary, so losing the license could be very costly. Therefore, it is possible that Canon will settle to avoid negative publicity and delays in the product launch. Ironically, Nano-Proprietary's very weak case increased the probability of pursuing legal action. There is very little to lose except legal fees and a remote possibility that some court or settlement could grant the company extra revenues.

Lawsuits like this one are the bread and butter of IP companies. Since a patent has a limited lifespan (unlike copyrights, which seem to be continually extended for Disney's sake), owners of patents are compelled to either develop them into products (as Canon has done) or license them at the best possible terms (as IP companies do). Sometimes patent holders sell the license too cheaply because they undervalued its potential, over-estimated its appeal, or simply were desperate for the revenue. In this case it seems Nano-Proprietary hoped that other companies would pursue SED technology and Canon would be motivated to sign an exclusive license. Its only recourse now it to attempt legal blackmail à la SCO Unix. This is just one cost of doing business for IP companies.

As a Canon shareholder, I don't think this is a huge problem. The worst case scenario would be a per unit royalty that would add to the overall cost of SED screens. More likely would be an extra lump sum payment to cover Toshiba or maybe to make the license exclusive. Most likely, this will only result in legal costs.

Wednesday, April 06, 2005

Why I bought a raft of index funds

My wife recently opened her first IRA (tax time you know), and I opened a 529 plan for Joshua. Since we didn't have much to invest, we were somewhat limited to a handful of options. Commissions would eat up too much of the investments if we tried to buy individual stocks and most mutual funds require $3000 initial deposit.

For Joy's IRA, we opened an account at USAA, which is where I have my IRA account. The best choice was USAA Extended Market Index Fund which tracks the companies that trade on US stock exchanges that are not part of the S&P 500 index. It's top holding is Berkshire Hathaway, which owns The Pampered Chef (and Dairy Queen and Gieko and Sees Candy and ...)

For Joshua's 529, I opened an account with the New York program. It has the advantage of low fees and a relationship with Upromise. California's plan has higher fees and no extra tax advantage. I've spread the investment evenly between the Vanguard Total Stock Market, Growth, Value, Mid-Cap, and Small-Cap Index funds.

I'm not as happy about the group of index funds as I would have been a few years ago because I think we are in the beginnings of a bear market when holding the market in general won't work as well as it did in the 1990s. (Read Thoughts from the Frontline for some reasons why this might be true.) But there are some very powerful advantages to indexing: low fees of course, but also low turnover. John Bogle, father of indexing, points out that high turnover costs more in taxable accounts and that commissions are a hidden fee paid by the funds shareholders. This is why I use turnover and fees when I pick actively managed funds.

Wednesday, March 30, 2005

Consumer confidence and the long-term investor

Yesterday evening, I noticed that Select Comfort had ended the day down about 5%. It wasn't obvious what had happened—there was no company news that day. But after a little while I remembered that the Consumer Confidence Index had taken a little dip for the second month in a row. This is a poll of consumers that is supposed to indicate how likely they are to spend money over the next six months. Theoretically, if consumers feel good about their current financial situation and their immediate futures, companies that sell directly to them will experience strong sales. This is especially true for makers of "big ticket" products such as Select Comfort.

If consumers are really less likely to buy mattresses over the next six months, we can expect a couple of less than stellar quarters. If this is the beginning of a recession, it could be more like two years of disappointment. So investors have good reason to worry—especially if they are going to need cash sometime soon. Short-term bonds will be considerably less volatile.

But I have a lot longer time period to consider. I bought Select Comfort because I beleive it will outperform the market over the next 10 to 15 years. I wouldn't be too surprised to own both a Select Comfort mattress and Select Comfort stock in 20 years. If I'm correct, I don't think a bad quarter or two will hurt all that much.

Tuesday, March 29, 2005

It pays to vote

When I got Canon's proxy for the 2004 annual meeting, I read that the company wants to add an item to their by-laws:

The objects of the Company shall be to engage in the following business: ... (8) Manufacture and sale of pharmaceutical products

Today I found out that Canon is hoping to sell DNA chips which can be used to diagnose patients. From the press reports, it sounds like Canon will be able to use bubble jet technology to print the chips, which could cost far less then current methods. If successful, these products could help doctors arrive at more accurate diagnoses and researchers understand the genetic code.

While this is exciting news for investors, there's really no way to know how much future earnings this might generate. Most likely this will never account for more than a few percent of sales and may never become profitable. But it's fun to imagine Canon becoming a bioinformatics company at least in part. Certainly it suggests that Canon's R&D department is functioning well.

Actually this news is potentially negative as well. Copy machines, printers and digital cameras are increasingly competitive and low-margin products, in which Canon has remained one step ahead of everyone else. But as airline investors know, being number one isn't always rewarding. So Canon is compelled to find new products (such as flat-panel screens and portable printers), which is a riskier strategy than the cost-cutting that marked the last ten years.

For the next five years, the company is beginning phase three of its "Excellent Global Corporation Plan". Now, it will focus on "Healthy Expansion". Investors can dream that the phrase is quite literal.

Monday, March 21, 2005

Signing J. D. Drew

I was thinking this weekend about the Drew signing and I wondered how much the Dodgers expect to pay for each win. For teams with limited resources (everyone but the Yankees), a major goal of acquiring players is to minimize the dollars spent per win. Actually, as Doug Pappas pointed out, the goal is to minimize the marginal dollars above the league minimum per "marginal win". To do better than last year, the Dodgers must spend less than $1.8 million/marginal win. Drew is earning $11 million with the Dodgers, which is $10.7 million more than the league minimum. Therefore, the Dodgers are getting a bargain each year Drew nets more than 5.9 marginal wins.

Baseball Prospectus says that Drew added about 10 wins above a replacement player last year, which would translate into a "fair" salary of about $18.7 million. In 2002 and 2003, he added only 3.7, which would be a hair below $7 million. In his six full seasons, Drew has averaged 5.3 WARP, which would be worth about $9.8 million. According to the Win Shares method, Drew was worth about 11 wins last year, 4 the year before and 5 in 2002. The methods more or less agree given that Win Shares don't adjust for marginal value.

Below is a table listing the "fair" salary in millions of dollars if marginal wins are worth $1.8 million plus $300,000 for the league average:

Year Age   WARP  Salary
1998  22    1.3     2.6
1999  23    2.7     5.2
2000  24    4.6     8.6
2001  25    7.1     9.8
2002  26    3.7     7.0
2003  27    3.7     7.0
2004  28   10.2    18.7
And here is a peek into the future:
2005  29      ?    11.0
2006  30      ?    11.0
2007  31      ?    11.0?
2008  32      ?    11.0?
2009  33      ?    11.0?

Ultimately the contract depends on what gets filled into those question marks. If we assume Drew has two years like 2004, the Dodgers will get a phenomenal value, but will probably loose him to another team. If Drew has typical seasons, the Dodgers will be slightly overpaying, and will probably keep the rest of the contract. If Drew gets injured, they better have their insurance paid up. It's the first and third scenarios that cause the biggest concerns.

Clearly this is a good contract for Drew, since he's guaranteed $55 million and has an option for more. But it doesn't mean that it's bad for the Dodgers. In particular, the team seems willing to take on some of the risk of losing Drew to injury in exchange for the possibility of two great years or five good years.

Actually, it's possible they could get four great years. The option may only be exercised at the end of the 2006 season, so if Drew misses part of that season to injury, he wouldn't be likely to find a better contract no matter how good he might be in 2005. On the flip side, he might blow his knee the first week of 2005 and be dead weight on the payroll for the next five years.

I think it's misleading to think of the option as more or less the same thing as an option in the financial sense. For one thing, the Dodgers are getting a non-monetary return on their investment. Sure, if Drew helps the Dodgers to win some games, it will help them sell more tickets, concessions, and advertising. But the effect is indirect. A great year might help the Dodgers win the World Series, which would make the contract exceptionally valuable, even if Drew was a bust after that. Another difference is that there is no market for player options. The only way to benefit from it is to exercise it or use it as leverage to renegotiate the contract.

Wednesday, March 16, 2005

I'll come in again.

Besides market share, total market, and new markets, a company can also grow revenue by raising prices. This of course is why it's good to be a monopoly. There is a limit to how high Microsoft can set prices, because eventually people will get fed up and leave for something cheaper. Another way for software companies to grow is to release new versions, which works for a while. But if there is any way users can continue with the old software or switch to a cheaper option, they will when they notice how often upgrades come along.

For a long time, Microsoft didn't have to worry about people refusing upgrades, since they ended up buying them each time they bought a new computer. And Microsoft could justify raising the price by adding features like web browsers, music players and CD burning software. Recently it has been harder to do these things because of court rulings that limit Microsoft's use of its monopoly.

One advantage Oracle has is it's subscription model. Rather than charging customers to get the latest version, Oracle gives it to everyone who has a support contract. Microsoft is slowly working toward that system with institutions, but it will take a much longer time with individuals.

The basic point remains: Oracle still has more room for growth than Microsoft.

Friday, March 11, 2005

The difference between Oracle and Microsoft

A companies revenue may grow in three ways: the total market may increase, a company's market share may increase, or it may begin operating in new markets. In its early days, AT&T had a monopoly on telephone systems, so the focus was on increasing the size of the telephone market by installing more lines. Coke and Pepsi have fought over a relatively constant pie. Berkshire Hathaway has become a huge company in part by buying companies in a variety of markets. Raytheon made its name (literally) in vacuum tubes and then diversified into microwaves and missile systems.

For most companies, total market size is outside of their control and expanding to new market, either organically or through acquisitions, is risky. So one of the most reliable indicators of future growth is the increase from one year to the next in market share. This is especially important in industries where it is possible to establish a long-term advantage which isn't impeded by growth. For instance, Wal-Mart has built a strong reputation on being the low-cost leader in nearly everything it sells — an advantage that won't quickly disappear. In fact, its growth helps it put price pressure on the companies that sell to Wal-Mart thereby increasing the advantage.

Some industries resist monopolies. For instance, restaurants must carefully balance growth with the danger of over saturating the market. I know people who would gladly eat every meal at McDonald's, but most of us prefer variety. It's no surprise that there are only four Spago locations, but ten times as many "Wolfgang Puck" cafes. These businesses scale with difficulty.

Software is an industry that scales very easily. More customers mean more developers, which means more features, reliability, and performance, which virtuously cycles into more customers. Incremental costs are vanishingly small. Bigger is better in nearly every way. Which brings us to Microsoft, the biggest, richest company in an industry that rewards success like no other. When I was considering buying Oracle a few years ago, I worried most about Microsoft. It seemed to me that with all its cash, brand recognition and legions of developers, no software company could be safe. Oracle had held back the tide in the database market, but for how long?

The final chapters have not been written yet, of course, but I think Oracle will continue to have better growth for years to come. Think about the ways that a company can grow: market share, market size and new markets. Currently Microsoft has 85% of its core "client operating system" market. The market is growing, but not at the same rate as it did during the 1990s when most families bought there first computer. It's difficult to know how successful Microsoft will ultimately be in some of its newer endeavors, but many of them are not strictly software (Xbox, MSN, hardware, etc). The recently instituted dividend serves as a clear signal that Microsoft doesn't know what to do with all the cash it generates.

Meanwhile, Oracle controls about 40% of the database market. Picking up market share may be a struggle, especially since customers are reluctant to switch once they have made a purchase. But Oracle enjoys all of the advantages that the biggest enjoys in the software industry. Microsoft is still far behind technically and in terms of brand. There are fewer barriers to overall growth in the server market than the client side, since growth depends more on business needs than on new PCs. Finally, Oracle has already seen success expanding into new markets with products that are closely related to its database product. PeopleSoft will help tremendously, simply by bringing in more customers.

Monday, March 07, 2005

Mono-linked chains

Warren Buffett just released his annual letter to shareholders, which explained the results of Berkshire Hathaway in 2004. He commented on a $579 million loss in a zinc mining loss:

Our failure here illustrates the importance of a guideline — ­ stay with simple propositions —­ that we usually apply in investments as well as operations. If only one variable is key to a decision, and the variable has a 90% chance of going your way, the chance for a successful outcome is obviously 90%. But if ten independent variables need to break favorably for a successful result, and each has a 90% probability of success, the likelihood of having a winner is only 35%. In our zinc venture, we solved most of the problems. But one proved intractable, and that was one too many. Since a chain is no stronger than its weakest link, it makes sense to look for —­ if you'll excuse an oxymoron —­ mono-linked chains.

This is such a good analogy. I also think it reflects an investment philosophy I didn't know I held until now. My first (and one of my favorite) investments was Oracle. Over the years, it has taken some huge, bet-the-company risks. But in every case (at least from what I remember reading Softwar) the risks have involved one, key variable. For instance, each of the complete software rewrites (which are very risky) pivoted on having a better product at the end of the processes and little else. Time and again Larry Ellison bet Oracle the company on Oracle the database. Buying PeopleSoft, in fact, will have been a successful risk if Oracle manages to move a wide variety of applications onto a single database schema.

Select Comfort is also a one-link chain: the adjustable airbed. Like Oracle, the company has focused on one, big idea — the hedgehog approach. Since Sleep Number beds can fold into a handful of boxes, they are shipped directly to the customer. Since most people aren't familiar with the idea, Select Comfort stores, commercials, QVC shows, and the website are geared toward showing how the beds improve a person's quality of life. Since the beds are made to order, customers have a range of choices about which controls, mattress covers, air pumps, pillow tops, sizes (including the Grand King (80" x 98") designed for 6'11" Kevin Garnett), and foundations. There are any number of things that can go wrong, but as long as it's possible to sell high-quality air mattresses, Select Comfort is probably going to do alright.

Raytheon is moving in the direction of being a single link. It used to sell everything from microwave ovens to Patriot missiles. At some point, this made sense — microwaves used to be high-technology. Lately, Raytheon has been selling off or ending businesses that don't fit into the government contracts umbrella. Increased dependence on one customer might seem foolish except that the customer is schizophrenic. It still has too many links, but at least management has learned its lesson from the diversification adventure.

I have a harder time justifying Canon on the "one-link" criteria. I'm tempted to say optics excellence, but one of Canon's biggest revenue streams is printer ink. Fujio Mitarai, Canon's CEO, says, " Canon was built on the foundation of original innovative technology." But I think Canon's success is due to a uniquely Japanese ability to mold thousands of employees to a single philosophy. Many of Canon's investor relations documents describe the idea of "kyosei", which is translated "living and working together for the common good". If so, the risk is that this bubbly optimism might fail to produce new and better products at a reasonable expense.

Maybe it's naive to think that Canon has really implanted kyosei into its culture. But look at this quote in a press release of the death of Sony's founder:

"Mr. Ibuka has been at the heart of Sony's philosophy. He has sowed the seeds of deep conviction that our products must bring joy and fun to users. Mr. Ibuka always asked himself what was at the core of 'making things,' and thought in broad terms of how these products could enhance people's lives and cultures.
Or this quote from the Toyota Forklift division:
At Toyota facilities around the globe, "kaizen" is a word mentioned frequently. The word means "continuous improvement" and is a key factor in Toyota quality. Kaizen has been incorporated into the Toyota Production System driving our engineering and manufacturing teams to constantly improve our lift trucks. It also drives our service personnel.

Coming full circle, Berkshire Hathaway is a horrendously complicated company rivaled only by GE. Any attempt to evaluate the company would require intimate and detailed knowledge of a company that sells everything from candy to catastrophic re-insurance. Ultimately, Berkshire investors are risking their investment on the philosophy described in the Berkshire "Owner's Manual".

Thursday, March 03, 2005

If at first you don't succeed...

I've been playing around with PerlTeX, which is an ingenious little system to typeset beautiful documents with the power of Perl. I was inspired to use it because I wanted to illustrate various interest rate calculations without having to do a lot of work updating numbers. For instance, how much will $1000 be worth in a year if it earns 5%? And in two years? And in 5? What about if it earns 6% compounded monthly? None of these is hard individually, but it's tedious and error-prone to do the work by hand.

TeX is the premier typesetting system for mathematics, but it is worthless for performing calculations. I spent several hours trying to work out how I might coerce its macro system to print the result of 365/21. PerlTeX lets me write macros in Perl, so I could calculate Future Value (FV) thusly:

  $_[0]*(1 + $_[1])**$_[2];


But this doesn't work:

because ".05/12" isn't evaluated. Next I tried a very simple command:
  eval qq{@_};

but this turned out to be hopeless since TeX refused to expand \perleval first. (This might be a solvable problem, but I really don't want to know more than I already do about TeX macros.)

I knew I was on the right track, but I had to sleep on it (and take a shower), before I could hit upon the solution. I needed to do even more in Perl and only make TeX do typesetting:

  sub FV{
    $_[0]*(1 + $_[1])**$_[2];

\perleval{FV(1000, 0.05/12, 12)}

\perlinit is never called directly. It's sole purpose it to load definitions into the Perl namespace when PerlTeX starts up. \perleval does the work of evaluating Perl expressions. This is my original solution turned inside out.

Now I wanted to round to the nearst cent and add a dollar sign:

\perleval{sprintf '\$%.2f', FV(1000, 0.05/12, 12)}
But TeX swallowed everything after the % as a comment. At this point, the answer was clear:
  sub dollar_fmt {sprintf '\$%.2f', $_[0]};

  sub FV{
    $_[0]*(1 + $_[1])**$_[2];

\perleval{dollar_fmt FV(1000, 0.05/12, 12)}

Thursday, February 24, 2005

Lowest common denominator

Microsoft recently released anti-spyware software which some people see as an anti-competitive move against several small companies that were selling spyware removal tools. I remember the Netscape saga as well as the next guy, but I think what Microsoft has done is (for once) good for the public at large.

Windows is lowest-common-denominator software. Everyone uses it including people who can't afford a system administrator. It is a waste of time and talent for these people to spend more than a few hours a year fixing their OS. For years I would have long phone conversations with my dad to solve his computer (read Windows) problems. And I could count on spending an afternoon trying to fix things every time I came home from college. Fortunately, a combination of his understanding and Windows usability has eliminated those duties. But I still have to help my grandparents set up their email. And help my in-laws get rid of viruses and spyware.

I have a dirty little secret. I don't know what I'm doing either. My entire professional life and much of my personal life has been spent working on computers and it took me a few weeks to upgrade to Windows XP. Moments after I installed it the first time, my computer was invaded by a virus (MyDoom I think) that caused it to reboot every time I connected to the Internet.

Things would be worse if Linux were the LCD OS. I'm glad that I don't have to remove spyware for Joy's sister anymore. She can just run Microsoft's anti-spyware software. It would be better if Windows security wasn't as loose as a prostitute, but failing that, at least Microsoft is starting to give out medicine and vacines.

Friday, February 11, 2005

Financial Red Flags

The guy I share an office with at work sells candy and Coke out of his desk and a little refrigerator. (My managers obviously don't read Joel on Software.) I know that he has a very loose accounting system, but I thought it would be amusing to imagine what sort of things he might be on the lookout for if he did keep track. Obviously revenue and earnings would be high on the list. If he found out he was losing money or fewer people were buying stuff, he might get concerned. These are basic, but how might he notice the trends earlier? What red flags would warn him of trouble?

My coworker buys his wares when they go on sale at the grocery store and sells everything for 50¢. His profit margin depends exclusively on how much he pays for the stuff he sells. If the grocery store raises prices or people buy more of the expensive items, his margin would go down. If he raised his prices, his margin would go up, but his sales might go down. So changes in margin over time are danger signs.

The office store's best selling item is Diet Coke. As it turns out, diet sodas go bad over time because the sugar substitute breaks down. Most of the time, this isn't a problem because people buy the stuff almost before it gets cold. But suppose there was a big sale at the grocery and some of the best customers went of vacation for a few weeks. It's possible some of the Diet Coke could go bad and have to be thrown out. On the other hand, if inventories got low and our office had a bunch of late meetings, the store might lose sales because it runs out. Inventory changes are potential problems.

Most people pay as soon as they buy from the store. A few people put in extra so that they don't have to deal with paying a few hours later. But some people run a tab or use IOUs. Unfortunately, people aren't always honest, sometimes forget how much they owe, or leave the company before repaying. These risks increase as the amount owed increases. On the other hand, if my coworker forced people to pay as they go, he might lose some sales, so changes in receivables (either increases or decreases) are worth investigation.

Suppose my coworker decided to buy a bigger refrigerator. Since the business doesn't make enough to pay for one out of its cash flow, he'd have to borrow money. In and of itself that isn't a bad thing, but it would be important to monitor how big an impact the new equipment and new debt is making on the sales and earnings. Big spending projects, especially those that involve adding debt, should be watched closely.

All of these are extremely simple to monitor in public companies, just by reading the most recent quarterly report. The mainstream press rapidly reports earnings and sales, but rarely digs much deaper. But simple danger signs like this can warn of trouble a quarter or two in advance. I plan to go over all the companies I directly own to see what signs or trouble they might have.

Wednesday, February 09, 2005

Why Google isn't worried about Microsoft

I was look for information about the Blaster worm and I found a link labeled: What You Should Know About the Blaster Worm and Its Variants. Google says that there are 248 links to that page. But if you follow it, you read, "We’re sorry, but there is no Web page that matches your entry. It is possible you typed the address incorrectly, or the page may no longer exist."

I found that the correct link is, which is only different in the extension. When you search Google for "What You Should Know About the Blaster Worm and Its Variants", the third entry is a Microsoft page that has the correct link. On MSN, the bad link is listed first.

Why did Microsoft decide to move things around like that? If this were the only example, I'd assume it was an oversight or something. But as long as I can remember, the Microsoft website has been "a maze of twisty little passages, all alike." Ultimately it says to me that Microsoft still doesn't understand the Internet and probably never will.

Why I bought Select Comfort

For our first bed, Joy and I bought a expanded queen Sleep Number mattress and foundation from Select Comfort. I think you can guess where I'm headed. Our bed has performed flawlessly. My sleep number is 55 (0 is the softest and 100 is the firmest) and Joy's is about 35, we never would have found a conventional mattress that would have worked for us. When Joy was pregnant, she could adjust so that she had good support, but still be comfortable. I sometimes have a sore neck, but it goes away if I make my side a bit more firm. (I set it softer if I have sore shoulder muscles.)

At the time, I looked into buying Select Comfort stock for my portfolio. Peter Lynch talks about how much effort people go to buying things like pantyhose, microwaves and cars, yet they throw money at companies they don't understand or research. He suggests people would be better off buying shares of the companies that make the products they buy. If I had followed that advice, I would have had a four-bagger or more. But I was worried about both our bed and the company. Now I feel pretty comfortable about both.

At the time, Select Comfort was a "penny stock", which hovered around $5. It also was owned in large part by a St. Paul Venture Capital that had bought the bed maker and turned it around. Eventually it would want to cash out, and I wasn't comfortable with what it might do to shareholder value. In fact, in May 2003 Select Comfort had a secondary offering at $13 a share which diluted shares significantly. (Oddly it didn't hurt the price of those shares. I suspect that I wasn't the only one waiting to see what the "exit strategy" would be.)

Meanwhile, I heard that one of my cousins had bought a Select Comfort bed that he replaced a little while later. I don't know the details, but it made me wonder if getting an air bed was really such a good idea. Traditional mattresses, whatever their weaknesses, just seem more "solid" than air-, water-, and foam-filled mattresses.

Time corrected my view of these factors. My bed works great and I don't see why other people won't have the same sort of experience. I think the VC has done most of its damage. (Though in fairness, it really did turn a failing company around.) At the same time, Select Comfort's remarkable advantages are becoming more clear. It control's most of its distribution channels, it avoids holding much finished inventory by direct shipping products to the customer, and it has a unique and growing brand name. Unlike its department store and showroom competitors, Select Comfort needs only a little mall storefront to demonstrate a handful of models. On average each locatation generates over a million dollars in revenue per year. I recently noticed their logo on the Extreme Home Makeover TV show.

I bought Select Comfort on Feb. 9, 2005 at $19.95 a share.

Thursday, February 03, 2005


I reran my fund screen for the options in my 401(k) at the beginning of the year:

 					Non-Load Adjusted Returns
Investment Name                         1 Yr	3 Yr	5 Yr	10 Yr	LOF
---------------                         ------  ------  ------  ------  ------
Excelsior Value & Restructuring Class I	19.68%	--	--	--	32.86%
Fidelity Equity-Income Fund		11.29%	6.21%	4.31%	11.94%	13.19%
First Eagle Overseas Inst CL		22.10%	24.97%	16.88%	--	16.78%
T. Rowe Price Small Cap Stock SHS	18.77%	10.48%	10.91%	14.51%	13.74%
Vanguard PRIMECAP Fund Admiral Class	18.47%	7.28%	--	--	9.51%

S&P 500® Index Fund			10.86%	3.69%	-2.12%	12.09%	13.30%
Raytheon Stock Fund			31.78%	8.68%	10.83%	4.11%	8.81%

There aren't 10 year returns on some of these funds because they've added fund "classes" which merely change the fee structure. In each case, the expenses have gone down, so I'm not complaining. All of these funds (except the Raytheon fund) have long-tenured managers. Here is the performance (from Morningstar) of the base funds:

Excelsior Value & Restructuring		15.84%	10.86%	6.42%	17.33%	--
First Eagle Overseas 			20.90%	24.88%	17.02%	14.74%	--
Vanguard PRIMECAP Fund 			10.08%	6.24%	0.89%	15.24%	--

In an ideal world, I could just pick the best fund (probably the Value & Restructuring Fund), put all my savings in it and forget about it until I'm nearing retirement. The problem with that idea is that it is risky. Of all the funds listed, the safest is the S&P 500 index fund. It has the lowest fees, turnover, volatility, and the longest management tenure. The only major risk it has is market risk. If there is a catastrophe (either financial, like the 1987 crash, or not, such as the September 11 attacks), the fund would lose money. Of course, all the rest of the funds would probably lose money too. On the downside, the index fund has a lower return than the other options.

Probably the highest risk (and certainly for me) is the Raytheon stock fund, since it only invests in one company. Everyone who invested in Enron (especially in Enron 401(k) plans) knows how this is risky. Of course, there is a potential for disproportionate returns. An individual company might find ingenious new ways to make or to lose money. Or in Enron's case both.

Mutual funds only need to hold about a dozen uncorrelated stocks in order to eliminate the risk of owning too few stocks. (Most own many more.) But fund holdings are always related in some way or another. A small cap fund could do poorly in years when small companies in general are doing poorly. Or a fund could make a series of disastrous decisions. Or it could defraud its shareholders. Or it could slip into mediocrity. In any case, it doesn't hurt to spread your bets if you think you have several good options.

The upshot of this is that after years of being invested mostly in the S&P 500 Index, I'm going to add First Eagle Overseas and Vanguard Primecap to my 401(k).

Tuesday, February 01, 2005

Privately-held companies

One of the annoying things about investing is finding good-looking companies that are privately-held or otherwise unavailable for investing:

It can be difficult to find out who owns these companies, but the best place to start is Hoovers, which is owned by Dun & Bradstreet. Of course there is no way to know if these companies would actually make good investments. For instance, I was pretty excited about Google until I saw how much people paid in the IPO. Build-A-Bear Workshop looked pretty good until just before it went public and had to release it's finances. But these private companies look like solid businesses that could be very profitable to own.

I've done business with all of the companies listed in one way or another, and they all impress me. Except Ikea and Lego, they started in Los Angeles. I feel like I would have an edge when it comes to evaluating them. Mostlikely, few of these companies will go public, but I'm ready for them!

Monday, January 31, 2005

Defensive Win Shares redux

Back in August, I suggested that the Lo Duca's defense might be overstated by defensive Win Shares. One test would be to see if his defense remained stable from the Dodgers to the Marlins. As it happens, he had 5.3 defensive Win Shares in LA and 1.8 in Florida. That's over 779 2/3 innings verus 413, which works out to 0.00680 WS/inn. vs. 0.00436. So it would appear that Lo Duca benefited from the Dodgers good defense.

Unfortunately, this is a really small sample. It's easy to imagine a catcher slowing down over the season and becoming less effective, which is just the reputation Lo Duca has. A better study would include lots of trades with catchers moving from bad defensive teams to good and vice versa. This still might not be enough.

The other way to look at the effect of the trade would be to compare team defense before and afterwards. The data isn't really available, however. (At least not without doing a lot of work.)

Thursday, January 27, 2005

Open source risk for Oracle?

One of the things I worried about when I bought Oracle was "What happens when someone makes an open source version of their products?" I mean, why would anyone pay $149 a user for Oracle Database Standard Edition One, when they could get PostgreSQL free? Assuming they have the same functionality (which they don't), the answer is the cost of changing database software. Joel Spolsky has an excellent article explaining why companies might support open source software even to the point of paying developers to work on it. You should go read that article if you promise to come right back.

More informed? Good. Ok, Oracle is happy to have, for instance, open source file systems that are optimized for running their database. And it probably doesn't bother them too much to have open source "Application Servers", like JBoss, even though they offer a competing product. That's because they want complements to be cheap so they can charge more for their core product: the database. So why aren't they more worried about open source databases such as MySQL and PostgreSQL?

It's clear that Oracle has lowered their price on the very basic versions of the database in response to not just open-source products, but Microsoft and other low-cost providers. At the high-end, there has been price pressure on Enterprise Edition as well, but that doesn't have much to do with open source. Obviously Oracle would love to charge more for low-end products, but they aren't making the big money on small customers. Selling to small customers is a bonus (especially if they eventually become big).

From a strictly technical point of view, PostgreSQL is the only real open source competitor to Oracle. Unlike MySQL (and most commercial database systems), Oracle uses multiple versions of the data stored in the database, which means different applications can change and access the database at the same time without bring it to a standstill. On top of this base, Oracle has designed a system to spread the database across a cluster of computers. PostgreSQL doesn't yet have this ability, but it is only a matter of time before someone will make it happen.

In the meantime, Oracle is trying to diversify away from reliance on the database product, which is the purpose of buying PeopleSoft/JD Edwards. If you read SEC filings of many different companies, you've probably noticed charges labeled "SAP" that occur over the course of several quarters. Huge software/process upgrades like this are the market that Oracle is trying to tap into, and open source software is a compliment for these systems. This is doubly so if Oracle manages to build up it's outsourcing business.

As was brought out in the anti-trust trial, most of the applications companies buy are not all that difficult to duplicate. Basic accounting and human resources functions can be found in any number of products. More difficult (especially if not built on Oracle's database), is moving all of a company's information into one place. Vastly more difficult than that is creating a structure to hold all the data of any particular organization.

Friday, January 14, 2005

Your 2005 LA Dodgers

I recently finished Win Shares, so I got curious how the new Dodgers compare to the old Dodgers. First, the additions:

Player         Team   POS    Bat  Pitch Field  ExpWS    WSP   WSAA Total
J Drew         ATL    OF    29.4    0.0   4.8     17   .986     17    34
J Kent         HOU    2B    15.9    0.0   7.4     16   .711      7    23
J Valentin     CHW    SS     8.4    0.0   6.1     13   .551      1    14
R Ledee        PHI    OF     4.7    0.0   1.1      3   .819      2     6
D Lowe         BOS    P      0.2    5.4   0.0     10   .272     -5     6
P Bako         CHC    C     -0.2    0.0   1.6      4   .166     -3     1

That works out to be roughly 28 wins. Now, here's what they lost:

A Beltre       LAD    3B    31.2    0.0   6.1     18  1.031     19    37
A Cora         LAD    2B    11.9    0.0   5.1     14   .622      3    17
S Green        LAD    1B    13.7    0.0   2.4     18   .438     -2    16
J Hernandez    LAD    2B     7.5    0.0   2.3      7   .741      3    10
S Finley       LAD    OF     7.1    0.0   2.0      7   .673      2     9
S Finley       ARI    OF     6.7    0.0   2.9     12   .399     -2     9
J Lima         LAD    P     -1.1   10.6   0.0      8   .583      1     9
R Ventura      LAD    1B     5.3    0.2   0.7      5   .681      2     6
B Mayne        ARI    C      0.4    0.0   1.0      3   .242     -2     1
B Mayne        LAD    C     -1.4    0.0   1.4      3   .000     -3     0
H Nomo         LAD    P     -1.1   -5.4   0.0      4  -.808    -10    -6

That's 38 wins (or 36 if you give the Dodgers credit for losing Nomo). I included Finley and Mayne's stats with the Diamondbacks because if they had stayed Dodgers and contributed the same in 2005 as they did in 2004, the Dodgers would be beneficiaries of the entire season's statistics.

WSAA is a Hardball Times stat (Win Shares Above Average) that tries to correct for players who get a lot of playing time and some Win Shares, but hurt their team overall. The new additions increase wins above average by about 6 and the guys who are leaving add about 4. The discrepancy is largely due to guys like Shawn Green, who added 16 win shares but was expected to contribute 18. In other words, this off-season has been largely about replacing players who contribute less then they should for players who contribute more. The two biggest exceptions are Beltre and Lowe.

To quantify that a bit more, the new players were expected to get 63 win shares and actually got 84. The old players were expected to get 99 win shares and got 108. That works out to 0.667 Win Share rate versus 0.545. Assuming players do about the same they did last year, the new Dodgers should be a better than the old.

Here are the players who haven't moved (as far as I can tell):

C Izturis      LAD    SS    18.2    0.0   7.1     20   .642      6    25
M Bradley      LAD    OF    13.1    0.0   4.4     16   .537      1    17
E Gagne        LAD    P     -0.1   16.1   0.0      8   .979      8    16
J Werth        LAD    OF    10.5    0.0   1.6      9   .683      3    12
O Perez        LAD    P     -2.3   14.6   0.0      9   .659      3    12
J Weaver       LAD    P     -0.8   12.6   0.0     10   .573      2    12
G Carrara      LAD    P     -0.1    6.7   0.0      3  1.025      3     7
D Sanchez      LAD    P      0.2    5.7   0.0      4   .671      1     6
W Alvarez      LAD    P     -1.3    7.2   0.0      6   .491      0     6
K Ishii        LAD    P     -1.3    7.1   0.0      8   .356     -2     6
Y Brazoban     LAD    P      0.0    4.5   0.0      2  1.187      3     4
O Saenz        LAD    1B     3.8    0.0   0.3      3   .660      1     4
J Grabowski    LAD    OF     3.3    0.0   0.5      5   .398     -1     4
E Dessens      LAD    P     -0.1    1.7   0.0      1   .775      1     2
D Dreifort     LAD    P      0.0    2.2   0.0      3   .321     -1     2
M Kida         LAD    P      0.0    0.7   0.0      0  1.482      0     1
B Penny        FLO    P     -2.4   10.6   0.0      6   .662      2     8
B Penny        LAD    P     -0.1    0.8   0.0      1   .639      0     1
D Ross         LAD    C     -0.5    0.0   1.6      5   .103     -4     1
R Myers        LAD    P      0.0    0.3   0.0      0  1.482      0     0
J Flores       LAD    3B    -0.1    0.0   0.0      0  -.276      0     0
M Venafro      LAD    P      0.0    0.3   0.0      1   .295      0     0
A Perez        LAD    2B     0.1    0.0   0.1      0   .161      0     0
T Wilson       LAD    C     -0.2    0.0   0.1      0  -.356      0     0
S Stewart      LAD    P      0.0    0.3   0.0      1   .191      0     0
J Thurston     LAD    2B    -0.1    0.0   0.0      0  -.062      0     0
C Chen         LAD    OF    -0.6    0.0   0.2      0  -.879     -1     0
B Falkenborg   LAD    P     -0.1   -0.7   0.0      1  -.481     -1     0
E Jackson      LAD    P      0.2   -0.6   0.0      1  -.143     -2     0
H Choi         LAD    1B     0.1    0.0   0.3      2   .090     -2     0

The still-Dodgers had 146 Win Shares and were expected to get 125. When you add in the new players 84, you could estimate that the Dodgers will get about 77 wins. Ultimately, the Dodgers need to distribute more playing time to more efficient players in order to improve in 2005.

And for completeness, here are the guys traded during the 2004 season:

P Lo Duca      LAD    C     10.1    0.0   5.3     10   .735      5    15
P Lo Duca      FLO    C      4.6    0.0   1.8      6   .557      1     6
D Roberts      LAD    OF     9.1    0.0   1.4      7   .722      3    11
D Roberts      BOS    OF     1.4    0.0   1.0      3   .452      0     2
G Mota         LAD    P     -0.5    8.6   0.0      4  1.057      4     8
G Mota         FLO    P      0.6    2.3   0.0      3   .546      0     3
J Encarnacio   LAD    OF     6.1    0.0   1.6     10   .394     -2     8
J Encarnacio   FLO    OF     4.1    0.0   1.2      5   .522      0     5
T Martin       LAD    P      0.0    1.2   0.0      2   .352     -1     1
T Martin       ATL    P      0.0    1.2   0.0      1   .460      0     1