A successful start-up is about the most inspiring place you’re likely to work, in my experience. If you own the growing company, it’s even better:

• A guaranteed corporate nonsense-free workplace.
• Control of your own destiny.
• The slim but real chance to become a millionaire.

Set against those benefits is the opportunity cost of losing your salary, impacting on your savings strategy.

Crash course in entrepreneurship

One interesting start-up is Crashpadder, a London-based web service that hooks up homeowners with spare rooms with those looking for a temporary bed. It’s potentially cheaper – and friendlier – than a budget hotel.

While all start-up business have big risks, Crashpadder is the sort of clever and affordable idea that’s within the reach of most spare room entrepreneurs. I was curious to know more, and Crashpadder’s Josie Anderson kindly obliged.

Monevator: Who is behind Crashpadder?

Josie Anderson:

Crashpadder is:

• Stephen Rapoport, Founder. Background in entrepreneurship having founded two previous businesses.

• Josie Anderson, Communications Guru. I left John Lewis to join CrashPadder back in January having spent a number of years managing content for various big brands. I previously worked with Stephen at a web start-up and we’ve been close friends ever since.

• Daniel Hill, Technical Wizard. Dan taught himself web-design in order to help make ends meet whilst he became a world-renowned classical music conductor, but proved so good that he was soon running his own agency.

What is the business model?

Guests book rooms online, paying in full for the stay. We transfer 90% of this to the host after the stay has taken place. We also earn a £3 booking fee from the guest.

Where did the idea for Crashpadder come from?

Stephen was in Sydney during the Olympics in 2000. He arrived the day after the opening ceremony and couldn’t find a hotel or hostel room for love nor money. When a bed was available, it would cost many times what he could afford.

He ended up crashing with one of my colleagues and contributing a little towards the rent, which worked out well – and the idea was born.

Homestays are commonplace across Asia, and even the UK in the past. We hope that this fun, friendly and affordable way to stay will come back in vogue.

How was the business started?

Working from the British Library’s IP centre in mid-2008, Stephen got a basic website live and a business plan written before taking it to various Venture Capitalists for seed capital, which was secured from a High Net Worth Individual.

Did you all quit work straight away?

Stephen gave up his job immediately. For Crashpadder’s first 12 months he lived on the income he made by offering his house as London’s first Crashpadder property. After a time, additional funding was secured, which enabled him to draw a salary as well as employ Dan and myself [Josie], both of whom had previously worked for Crashpadder on a freelance basis.

How is the business going, and what are your targets?

The business is growing fast, increasing revenues by 100% every four weeks since January 1st 2010. We have growth targets in place that reflect this strong start, but we recognise that this rate of growth is unsustainable in the long-term.

The next big step will be a third (and hopefully final) round of investment.

What have you found hardest about setting up Crashpadder?

As a totally new model and concept, it was hard to establish the business operations in a way that is both efficient and scalable. Another huge challenge is one of marketing and communications – we have a sea change of public opinion to affect before we can be considered a legitimate accommodation choice for some demographics.

I’m pleased to say we seem to be overcoming both of these challenges.

What’s been most enjoyable, from an entrepreneurial perspective?

Walking to work in the morning, knowing that everything that awaits is self-selected. The intellectual and commercial challenges inherent in start-up life have been amplified by the fact that the business model is new.

Do you think the gold rush is over for Internet businesses, or are there still plenty of opportunities?

There are huge opportunities, more now than ever. The Internet as a public-facing consumer medium is still only 15 years old – hardly out of seedling stage. Furthermore it is developing technologically at a tremendous rate, making more and more things possible. The transition to mobile Internet in particular will throw up countless new opportunities.

Any last words of advice for would-be entrepreneurs?

Stop kicking your heels and jump in – you’ll know within a month if it was the right thing to do.

Read my interview with an iPhone app developer for more on DIY start-ups.

My weekly musings, plus some other good reads.

For the past few weeks I’ve been saying shares are cheap. The FTSE 100 is pricing in another recession, but double-dip recessions are very rare.

It’s true we might stand on the edge of a depression (as Krugman argues this week in The New York Times) but then, we always might. The important point is whether the price you’re paying to bet that we don’t is a good one or not. Economic cycles have never run like clockwork.

Besides, I wouldn’t bank on an economist’s forecast. It might be right, but so might a coin toss. Economists are like bad haircuts – best kept in the past.

If I’m going to be wrong, I may as well be wrong in company. You have to look pretty hard, but there are a handful of us idiots out there.

Here’s Neil Hume in today’s FT:

Valuations are increasingly reflecting a slowdown in economic growth. The 2011 price/earnings ratio for the FTSE 100 is around 8.3 and the prospective dividend yield is 4.57 per cent. That compares very favourably with a 10-year gilt yield of 3.34 per cent.

Analysts are putting through more downgrades than upgrades, which is a reason to be wary of PE ratios – previous collapses in corporate profitability have been preceded by negative earnings revisions.

However, they have also been accompanied by inverted government bond yield curves – where 10-year notes yield less than short rates – and high levels of inventories. Neither are present at the moment.

Here’s David Cumming, head of equities at Standard Life Investments, in CityWire:

Cumming believes the panic triggered by the collapse in Greece has been overdone. ‘The EU has bailed out Greece and that has thrown enough liquidity in the market. Our view is there is enough liquidity in the system. Not so much confidence – but eventually this will come back.’

While he is not hugely optimistic about the prospects for this year’s market, he remains part of a band of specialists, including UBS and Morgan Stanley, that believes the FTSE will jump to around 6,000 points by the close of 2010. ‘That is not being wildly bullish, just based on the assumption we won’t suffer a double-dip recession,’ he said.

Malcolm Wheatley puts the negativity nicely on The Motley Fool:

Early on in my consulting career, I learned to watch out for the ‘blockers’.

Blockers, in short, are people who resist change by pointing out all the reasons why something might not work, and isn’t a good idea — rather than thinking about the reasons why something should work, and is a good idea.

And with the FTSE 100 index now down just over a thousand points since mid-April, the blockers are certainly out in force. I expect to meet at least one in my local this evening, shaking his head and pointing out the folly of investing in anything other than nice, safe deposit bank accounts.

(Update: 14:47 Thanks to the commentators below who’ve pointed out the next comment from Alan Steel is from early June, NOT July. I blame the vino (or rather the after effects!) For what it’s worth, the Baltic Dry is a volatile index).

Here’s Alan Steel, a rare financial adviser who was bullish about the next decade for equities at the market bottom in 2009. He is [ahem – was!] telling clients:

Instead of getting our knickers in a twist over headlines about Dubai collapsing (remember that?), or Greece’s debt triggering a global depression (it constitutes 0.6% of the World’s income), we should pay more attention to the fact the Baltic Dry Index, a function of rising World trade, is up 32% in 6 weeks.

And there are 3.5 billion consumers in Emerging Markets desperate to be better off. That’s a heady combination of high demand, low debt and fast growth.

So our message is still the same. We expected the Summer to be bumpy and that’s why we introduced caution to your portfolios. But by late September, we would expect to be fully invested again in growth assets with the main focus overseas.

Shares are too volatile to be a sure bet in the short-term, but that’s really the point. As investors, we can:

• Either: Relentlessly drip-feed money into the market (probably via an index tracker) and benefit from its ups and downs.

• Or: We can follow valuation to try to buy when the market looks cheap, since we know the economic picture is always unpredictable.

Or we can do a bit of both. Either way, logically you’d buy shares today.

[continue reading…]

Human beings love complexity. There are more complex ways to put it, but as this post makes the case for simplicity let’s start as we mean to go on.

I argued recently that the stock market had fallen lately because it had gone up a lot, fast. We’d got carried away.

“What rot! I don’t subscribe to Monevator to read what my six-year old could tell me! I want to hear about sovereign debt defaults, plunging leading indicators, and a death cross price pattern!”

Okay, nobody wrote that to me but that’s how many people treat the market and economics. Just watch an hour of CNBC for proof.

Now I’m not here to say that markets or economies aren’t complicated. They are true complex systems.

What I do think though is that complex answers are more about fitting our idea of what’s a suitable class of explanation, rather than about being right.

In reality, the best answer to most stock market questions is: “I don’t know”.

Kids think complex

Our bias towards trusting complex solutions seems hardwired from birth.

I spent part of this week at Culture Evolves, a conference in London organised by The Royal Society. Anthropologists, sociologists, and various other –ologists discussed whether ideas and language evolve in a similar way to genes.

One session highlighted ‘over-imitation’ in children. The gist was that as kids we learn by imitating other people, but – unlike chimpanzees, notably – we’re sometimes prone to copying redundant activities, too.

Derek Lyons spoke about this research. It involves training four-year old kids to ignore witless adults, and then recording how the kids later extracted a prize from various toy-based puzzles:

Derek found that if just given the puzzle without adult guidance, the kids set about finding the quickest way to extract the prize.

However if kids first saw an adult doing dumb things like waving feathers, removing pointless struts, or tapping a box with a pencil before opening the door to the prize, the kids copied the redundant acts, too.

It seems that kids who first see an adult solve the puzzle are assuming the toys are more complex than they appear – that there must be hidden mechanisms that explain why these seemingly dumb actions are required:

• If researchers joined two toys together with a section of pipe and did dumb things on one before taking the prize from the other, the kids copied them.

• If the pipe was removed – disconnecting the two set-ups – the kids correctly assumed the adult was wasting time on the other toy, and went straight to the one with the prize.

Importantly, we continue to over-imitate as adults.

For example, if you don’t know anything about cars and you watch a mechanic check various parts of your engine before topping up your oil, there’s a good chance you’ll perform the same needless checks when you fix the oil yourself.

Similarly, if you’re an investor and you read or watch apparently informed market pundits, you’ll soon believe the FTSE fell by 0.2% because German government bonds are rising in reaction to saber-rattling in Iran, or similar nonsense.

Before you know it you’re trading noise like everyone else.

Dumb money is smart money

As investors, we should try not to assume that complicated products or explanations are always required, let alone superior.

Financial markets are complex systems. They are analysed by well-paid and clever-sounding adults who read charts, follow company results, and insist that investors should put 10% into palladium futures or Korean bonds.

Mostly we’d be better off ignoring them and sticking to a very simple plan. But it takes real understanding to appreciate that clean, cheap products in investing are usually better than expensive and complicated ones:

• I think new investors should just split their money between a drip-fed tracker fund and cash for five years. Financial advisers push for complexity to generate higher fees.

• Active funds are more popular than index trackers, even though trackers have been proved to outperform most managers. It’s hard to trust dumb tracking.

• Asset allocation is a very imprecise art. The easiest thing to do when you’re ready to move beyond the cash/tracker combo is to pick a simple ETF mix and rebalance annually. Complex financial models will suggest you need 3.653% of your money in this or that. You don’t.

• Complexity guarantees nothing. Many absolute return funds failed to deliver in the 2008 downturn, despite their complicated (and costly) strategies.

• Banks love to sell structured products because few customers understand how they work. (They’re actually based on derivatives).

Academics have even discovered that High Street savings accounts and mortgages are made deliberately more complicated to confuse us!

Takes one to know one

Perhaps you’re immune from favouring complexity, but I doubt it.

I’m financially literate, yet I still pick shares with a proportion of my portfolio. It increases the time dedicated to investing at least ten-fold, and the jury is still out on whether it will make me richer. The academic evidence says it won’t.

True, I claim I do it for fun. But there are other challenging things I could do for fun instead. I could become a cultural anthropologist, for instance, which on the evidence of the conference I attended is interesting and involves a lot more attractive women than share investing. (Give me a break – I’m recently single!)

In my experience, most people who get into the markets eventually buy some shares or active funds. Even if they know better.

K.I.S.S.

The real cardinal sin is to invest in something you don’t understand instead of a straightforward product that you do.

A great example are income investment trusts, which fluctuate with the stock market like any other shares, but have a very good track record of delivering a growing income over time.

People wary of the stock market shun these trusts, and instead buy expensive pseudo-bonds that deliver a crappy return and too frequently blow-up or result in a miss-selling scandal.

Other examples of over-complication include foreign currency mortgages, guaranteed equity bonds, and bundled life insurance products.

Shun them all, and keep it simple, smarty!