‘Black Box’ Method Exposes ASD Sustainability Myth
EDITOR’S NOTE: This is a guest column by “Entertained,” a business person who applies (and relies on) mathematics in his professional life. Apply his “Black Box” method to put autosurf, gifting programs and other “opportunities” to the sustainability test. “Entertained” explains the method and puts AdSurfDaily to the test in this post.
The Black Box Method: Identifying Scams
Many of us have been taught since birth that there’s no such thing as a free lunch, and that if we want something, the best was to get it is to work hard for it. Another lesson from early childhood is the adage, “If it’s too good to be true, it probably is.”
Why, then, as adults, do so many people suspend their disbelief and get ensnared in a variety of scams, ranging from pyramid schemes and chain letters to Ponzi schemes and other High Yield Investment Programs? (These are known as HYIP programs, for short.)
I will present a method here that can be used to clearly identify mathematically unsustainable business models, otherwise known as scams.
People have posed this question: “Why, after all this time, do we still not have SOMETHING in to help us separate the wheat from the chaff when it comes to Internet Businesses and other investment opportunities?” The Black Box Method is the tool to answer that question.
Before investing in any enterprise, it is the responsibility of prospective investors to do their own due diligence, and not rely solely on the advice of friends, colleagues, and relatives (sadly, those connections are frequently leveraged by scammers as part of affinity fraud). Part of the due diligence process is to examine the opportunity for mathematical viability, and the Black Box Method is an easy tool to carry out that analysis.
Mathematical sustainability means that a business can continue indefinitely, i.e., it is a viable long-term enterprise. All scams that I am aware of can be shown to be mathematically unsustainable.
However, short-term unsustainability is not a problem provided that long-term sustainability can be shown (most businesses when starting up go through an initial investment phase that appears to be unsustainable). The key to the analysis is to look at sufficiently long times to see whether or not the business model breaks down.
THE BLACK BOX METHOD
The Black Box Method can be used in many different situations, and can be used to analyze virtually any process or business model. The tool comes from the field of process design and control, and is a standard tool taught at advanced levels in chemical and process engineering. It is also commonly applied in computer science, and in finance, and has been used successfully for decades.
Consider first a complex chemical reactor, such as a catalytic cracker used to break down crude oil into a variety of lower-molecular-weight components, including gasoline. In such a reactor, there are dozens, if not hundreds, of different chemical reactions occurring simultaneously within the reactor.
It is not possible to understand each and every reaction, nor can one track those individual reactions. Instead, the overall process is modeled using the Black Box Method. For chemical reactors, the method relies on the principles of conservation of mass and conservation of energy. Rather than trying to understand all of the chemical reactions that are occurring, we consider the overall reactor system of pumps, reactors, values, etc., as a Black Box.
We cannot see into the Black Box to see the inner details of what is happening, but that is exactly the point. When we apply the conservation principles to the Black Box, examining all of the inputs and outputs, we are able to learn a lot about the system. The oil industry in fact does this, and is able to effectively manage the catalytic cracking process. The key learning is that IT DOES NOT MATTER WHAT HAPPENS INSIDE THE BLACK BOX. All that matters are the respective inputs and outputs.
Similar methods are used throughout the oil refining industry, the chemical industry, and the biochemical industry. The Black Box Method is a well-established tool used to understand trillions of dollars annually of production materials that go into things we use in everyday life.
For the purpose of evaluating business opportunities and investments, we can again use the Black Box Method. Consider any business model. All of the activities of the business model occur within the Black Box. We don’t care at all exactly what happens within the Black Box. All we care about are the inputs and outputs to the Black Box (inputs and outputs to the business). We rely on the principle of conservation of money to do the analysis.
I will use as an example the business model for Ad Surf Daily, which the US Government has alleged is an online Ponzi scheme and was shut down in August 2008. ** Editor’s Note Added Jan. 6: The government says ASD is not “shut down” in a legal sense and is permitted to show advertisements, should it choose to do so. The company has chosen to date not to do so, saying the government effectively shut it down by seizing financial assets amid the Ponzi allegations. **
Various ASD supporters have made various claims since the shutdown of ASD along the lines that “Assistant United States Attorney General Cowden did not understand the ASD business model, nor did Judge Collyer. If they did understand the model, they would recognize what a brilliant business model it really is.”
Other supporters have proclaimed Andy Bowdoin a genius for developing a unique, new Internet business model, but acknowledge that it is “so complex, only Andy really knows how it works.” Still others have pointed out that the ASD business model is thoroughly explained in a 105-page document that provides the necessary details (but of course is too complicated for Mr. Cowden and Judge Collyer, let alone the average person, to understand).
It must be noted that scammers try very hard to make their business model seem somehow magical, unique, and complicated. They try very hard to make things complicated enough that a sufficient number of people will not do their due diligence and wade through the complexities but instead will put their money into a program.
In the case of ASD, the money put into the scheme was relabeled as a purchase of “Ad Packs”; these “Ad Packs” were priced at $1 apiece. Members then received “rebates” for viewing online ads of other members (the Ad Packs of those other members) based roughly on the number of Ad Packs that they had purchased. Members were also encouraged to sign up others (friends, neighbors, colleagues, relatives, etc.) to be part of their “downline,” and they received additional “rebates” based on the contributions of their first-level and second-level downline members.
It was very common for members to reinvest their rebates into more Ad Packs, ostensibly in order to compound the earnings that they would eventually receive. ASD would also occasionally offer “matching Ad Packs,” enabling members to get 2-for-1 on the Ad Packs. All of this lexicon and all of these complexities were designed to mislead prospective investors as to what they were really getting involved with, which as this is written is being judged by the government as a Ponzi scheme, much like a number of similar previous schemes such as 12DailyPro and Phoenixsurf.
The ultimate fate of the ASD case has yet to be determined in court, but if history is a guide, ASD will soon follow the path of 12DailyPro. The beauty of the Black Box Method is that we don’t really care about the inner workings of the business model. All we really need to do is look at inputs and outputs, integrated over time.
In the case of ASD, you don’t need to fully understand the workings of Ad Pack purchases and repurchases and multilevel rebates to analyze the business model.
STEPS
The first step in the analysis is to consider the whole business process as a Black Box. We do not need to understand all of the gyrations of the business model in order to analyze it, we need simply to add up all of the inputs and outputs over time into the Black Box and see what that analysis reveals.
Conservation principles state that the inputs equal the outputs plus the change in the state of the black box. Generally we are analyzing steady state processes, or equivalently, viable long-term businesses, which means that the state of the Black Box is unchanging. (Think of the earlier example of the chemical reactor — you cannot indefinitely build up material inside the reactor, so inputs = outputs).
However, over short time frames, the state of the Black Box can change due to fluctuations in cash flow (all businesses experience this day-to-day fluctuation due to fluctuations in daily sales, payroll dates, rent due dates, and a host of other cash flow timing issues). However, in the long term, the Black Box must have a stable state.
I want to re-emphasize that it is very important to understand the idea of adding up all of the components over time. One can achieve any slant on the results by looking at the inputs and outputs over very short periods of time.
Take a retail business that sells watches as an example. The Black Box is the business of selling watches. The inputs are the sales dollars, and the outputs are dollars paid to the watch supplier, dollars sent to the bank account of the store owner (their profit), and the dollars spent to run the business (wages, utilities, rent, etc.).
On any given day, the Black Box analysis can look very good (lots of watches sold, so lots of dollars in the input) or very bad (the day that the watches are paid for, especially if no watches are sold). This instantaneous analysis even applies if EVERY watch is sold at a loss – some days can look like they are good days.
What the store cannot do sustainably is to sell watches at a loss. It is the summation over time that shows this to be the case.
Scammers also make use of short-term sustainability in trying to convince people to invest in their scam. All “good” Ponzi schemes do pay off some of the early participants, otherwise no one would ever invest in them. With ASD, some supporters have stated that “everyone has been paid, so how is ASD a Ponzi?” The scammers use the sleight of hand of paying off early entrants in order to convince a much larger pool of late entrants that the business model is new, revolutionary, AND SUSTAINABLE. However, this is just an illusion. The condition of long-term sustainability is not present, even when the short-term numbers look good.
ANALYSIS OF ASD: THE BLACK BOX METHOD
Now let’s analyze the ASD business model using the Black Box Method. Remember that it does not matter what occurs within the black box in terms of things like purchasing ad packs, reinvesting virtual rebates in more ad packs, etc. All that matters are the cash inputs and outputs. The cash flow balance for the ASD black box is simply
Sum over time of cash flows in = Sum over time of cash flows out.
So, what are the cash inflows?
1) Real “Ad Pack” purchases from new and existing members (subsequent Ad Pack “purchases” with rebate credits don’t count here — they only occur inside of the Black Box and so don’t matter. All that matters are REAL cash flows into the black box).
2) Revenue from advertisers that pay to advertise on ASD’s web sites (the “major advertisers” alluded to by ASD supporters). The evidence so far is that this amount is zero or very small. If it were large, ASD could easily have the Ponzi charges dismissed.
3) Initial or ongoing capital investments by the company founders or venture capital investors. Did Andy Bowdoin start ASD with, say, $100 million of his own cash? No proof one way or the other, I suppose, but no one has seen the audited books of ASD. (One of the benefits of being a private, solely owned company).
4) Other revenue from sales of products (again, no evidence for any significant revenue from this source).
So, it appears very likely that ALL of the cash inflows come from member ad purchases. The government alleges this in their filings, and ASD has yet to deny this allegation (or provide evidence to the contrary).
What are the cash outflows?
1) Rebates to members.
2) Operating expenses (salary/benefits, utilities, rent, etc.).
3) Profit to ASD and hence sent to ASD’s bank accounts (which has been determined to be only Andy Bowdoin’s personal bank accounts).
Another condition of the ASD business model is that ASD kept 50% of all revenue for the operation of the company and for the profit for the owners. So now the steady state Black Box equation above simplifies to:
Sum of cash flows in = Sum of rebates to members (50%) + Sum of funds kept by ASD (50%)
The inevitable conclusion is that over a period of time, only 50% of the money paid in by the members gets redistributed back to the members. Let me repeat: The collection of members in total only gets half of their collective input money back over time.
This is very different that what the majority of ASD members were expecting, and were led to believe. The promoters of ASD pitched 125% return on your “Ad Pack purchases” as a minimum return (and higher with matching Ad Pack offers as well as downline commissions), couched in the statement “but your returns are not guaranteed,” all the while touting how many members were making money and claiming that everyone is getting paid.
Thus the Black Box Method shows that the actual return to ASD members is 50% of what they put in (in other words, the AVERAGE member would lose half of their investment), while the promoters were claiming 125%, demonstrating that ASD is not sustainable mathematically over time.
How many people would have joined ASD if the promoters had said, “Give us $1,000, and we’ll give you back $500 and keep $500 for ourselves?” Not very many, I would guess. How about if they would add, “You can get back more than the $500, but we still get our $500? Anything else that you get over $500 means that someone else will lose more than $500.”
Well, guess what, folks? That is exactly the ASD business model.
This is of course based on two key assumptions. The first is that the owners are unwilling to put immense amounts of their own cash into the business for a very long period of time, and no one actually does that without a clear long-term payout. The second assumption is that there is no other significant stream of cash flows into the company other than ad purchases by members (old and new). One possibility would be if a national advertiser, such as if P&G, were willing to spend millions per month advertising on ASD and not be interested in the rebates that every other ASD member was hoping for.
Large advertisers are not that naïve. If ASD was real, they’d want the “rebates” just like every other member. There is no evidence thus far that any revenue stream of significance existed for ASD other than member Ad Pack purchases. If there were, it would have been a simple matter for the attorneys for ASD to present such evidence in front of Judge Collyer and get the whole matter dismissed. They didn’t even try this obvious approach.
For sure, in ASD there were individual “winners” (early entrants who essentially took the money of the late entrants) and individual losers (late entrants generally), but still the “average” member will only get 50% of their initial investment back.
WHAT WOULD MAKE ASD SUSTAINABLE?
We can also use the Black Box Method to show how much revenue from external sources is needed in order to achieve minimal sustainability. For ASD this is quite simple. Assume that ASD gets 50% of all revenue. Also assume for simplicity’s sake that we can ignore the first and second level downline commissions. Let’s just stick with the 125% rebate. The BB output is now allocated as:
1) 125 parts of the total revenue input to the Black Box paid to ASD for expenses and profit.
2) 125 parts of the total revenue input to the Black Box paid back to members.
The inputs to the Black Box are:
1) Member ad pack purchases of 100 parts.
2) External revenue from (say) major national advertisers of X parts.
It is easy to see that X = 150 from the fact that inputs and outputs must balance. Thus, for minimal sustainability, ASD needs 1.5 times as much revenue from outside sources like national advertisers than it generates from net member ad pack sales (remember, repurchases with “rebate money in the bank” don’t count).
Further, those national advertisers would need to choose to NOT want the rebates that the members get.
When ASD was shut down, $93 million was seized from the private accounts of Andy Bowdoin. This all came from member Ad Pack purchases, according to the government. In order to be sustainable, at a minimum ASD would need $140 MM in external profits in order to cover the liability of the $93 MM in Ad Packs at 125% rebate.
THE MADOFF CASE
In principle, the Black Box Method can be used to analyze the sad story of the Bernard Madoff Ponzi scheme. The result would be the same, however.
Madoff promised to deliver a high rate of return on investments placed with him, rates that exceeded the typical equities portfolio but not by a great deal. On paper, he “delivered” those high rates of return.
In practice the Black Box analysis would be a very difficult thing to do, mainly because of the lack of transparency with respect to the investment models of Madoff. Another trick used by scammers is to “keep secret” their proprietary business models. Doing so prevents individuals from being able to perform their due diligence analysis. The keys to the longevity of the Madoff Ponzi are:
1) No transparency as to the actual working of the investment model, i.e. insufficient disclosure of what investments Madoff made on behalf of his investors. This prevents a careful Black Box analysis.
2) Rates of return that are not wildly out of line with normal market returns (as opposed to ASD, pyramid schemes, HYIP’s etc.). This very attractive, but still “believable” rate of return enables the Ponzi scheme to last for a very long period of time and get very big. Obvious Ponzi’s such as ASD, and the emerging Ad View Global, cannot last for very long nor get big (relative to Madoff). Let’s classify the Ponzi schemes into Fast Ponzi schemes and Slow Ponzi schemes.
3) Madoff mostly had large investors and foundations for his clients. These investors are more of the buy-and-hold persuasion, and so did not frequently request money out of their investments. Rather, they were content to read their monthly statements, watching their investments “grow”, and occasionally taking out small amounts. Fast Ponzi schemes, on the other hand, rely on large numbers of small investors.
So, there you have it. The Black Box Method is an irrefutable measure of the sustainability of any business model or enterprise. Apply it to any opportunity you encounter. A simple case study, left to the reader, is to analyze a Gifting program. pyramid scheme or chain letter (the now-common “Gifting” programs are just very simple pyramid schemes — and illegal).
The sums of the cash flows must balance into the Black Box and out of the Black Box. If they do not balance, the opportunity is a scam. One important corollary to Black Box sustainability is that it does not matter, more or less, when you invest in the opportunity.
People who urge you to “not miss an opportunity” and to “be sure to get in early” are likely to be recommending a scam. Also look at the inputs to see where the money you expect to make is coming from. Is it coming from real business value creation? Good . . . Is it coming from other members money? For virtually all scams, this is where the payout is coming from.
Of course, scammers will use any term to further their scam, including the term “black box”:
http://www.timesonline.co.uk/tol/comment/columnists/dominic_lawson/article5375732.ece
[snip]
“experts ask why no one has been able to duplicate similar returns using the [Madoff] strategy. The strategy and trading, he says, are done mostly by signals from a proprietary ‘black box’ system.”
[snip]
“Those fund managers who bought into Madoff’s claim that he had a black box whose secrets could not be disclosed were scarcely less foolish than those who fall for Nigerian internet scams.”
Something that has been puzzling me is, if these fund managers are licensed and regulated by the SEC/FSA/ASIC/other regulator, could they be prosecuted by investors to retrieve the funds invested? If the SEC etc were found to be negligent in not enforcing the regulations, could the government(s) be liable for the losses?
There’s more on “investment black boxes” here:
http://www.nytimes.com/2008/12/21/opinion/21rich.html?_r=3&em
“In the investment world “black box” is tossed around to refer to a supposedly ingenious financial model that is confidential or incomprehensible or both. Most of us know the “black box” instead as that strongbox full of data that is retrieved (sometimes) after a plane crash to tell the authorities what went wrong. The only problem is that its findings arrive too late to save the crash’s victims. The hope is that the information will instead help prevent the next disaster.
The question in the aftermath of the Madoff calamity is this: Why do we keep ignoring what we learn from the black boxes being retrieved from crash after crash in our economic meltdown? The lesson could not be more elemental. If there’s a mysterious financial model producing miraculous returns, odds are it’s a sham — whether it’s an outright fraud, as it apparently is in Madoff’s case, or nominally legal, as is the case with the Wall Street giants that have fallen this year.
Wall Street’s black boxes contained derivatives created out of whole cloth, deriving their value from often worthless subprime mortgages. The enormity of the gamble went undetected not only by investors but by the big brains at the top of the firms, many of whom either escaped (Merrill Lynch’s E. Stanley O’Neal) or remain in place (Citigroup’s Robert Rubin) after receiving obscene compensation for their illusory short-term profits and long-term ignorance. ”
The Black Box Method is exactly that, a method for testing a process. However the term has been corrupted in order to support financial fraud, legal and illegal.
Entertained - congratulations on your new found fame as the oficial expounder of the Black Box test and how it works (or better said doesnt work) with autosurfs
Hi Tony,
Thanks for the share. As to fund managers being prosecuted, investors already are beginning to file lawsuits. Individual investors and some universities are among the early plaintiffs. New York University, for example, lost $24 million.
What’s truly morbid about this scam is that some fund managers were charging fees, ostensibly for due diligence, and were getting magnificent sums for directing money at Madoff. The obvious claim against them was that due diligence wasn’t actually possible, given Madoff’s alleged secrecy.
Another thing that leaps off the page is that lots of investors didn’t know Madoff was managing their money. Managers appear to have taken their rake, relying almost exclusively on what appears to be fictitious statements.
Participants could not track individual trades within their accounts, for instance, and there appears to have been very little or no real-time access to real-rime information. The evidence of “success” was mailed on monthly paper statements.
It’s amazing, but “due diligence” on the part of some fund managers appears to have consisted of “I got paid” — or, more precisely — “My clients told me they got paid.”
That’s really no different than what happened with Ad Surf Daily and other autosurfs. People just plow money into Ponzis based on claims of “I got paid,” which are omnipresent in autosurfs and are used to sanitize the business model and quiet objections.
One fund reportedly had more than 50 percent of its $15 billion worth tied to Madoff, raking in colossal management fees over the years.
The key issue is going to be the level of due diligence and professional advice dispensed to earn those fees. In the early stages, it looks as though some of the funds did nothing other than trust Madoff to earn the rake.
Thanks for your note.
Patrick
Hello Alasycia!
Very pleased to see you here.
Patrick
The misuse of the very legitimate term “black box” with regard to investment fraud is in no way accidental.
The legitimate need for “due diligence” has suffered a similar fate at the hands of ‘net fraudsters, as have such terms as “fully licensed” and “like”
After all, who would doubt the sincerity of a business owner who encourages and even provides hints on how to perform “due diligence”?
Who could deny that an Autosurf is “like” a social networking site or “like” a young Microsoft?
And ASD was indeed fully “licensed” to carry on business.
Hi littleroundman,
The language surrounding autosurfs would make Lewis Carroll choke: An “investment” is not an “investment”; it’s an “advertising” purchase.
And “due diligence?” Well, that usually translates either to “I got paid” or “I read reports about people getting paid” or “It’s my feeling you’ll get paid, especially if you get in early enough.”
I saw one person promoting MegaLido by waving a stack of money and claiming that an “offshore” location translated to prudence and safety.
Unofficial reports suggest as many as 27,000 people joined MegaLido, which was pushed heavily by some ASD members in the aftermath of the cash seizure.
They traded on EVERYTHING: the alleged “offshore” location; a “cure” for ASD losses; antigovernment fervor; the importance of portfolio “diversity; and individual expertise as an autosurf “professional.”
This game requires a wink and a nod, but the government called the bluff in the ASD case: Go ahead and show the ads, the government implied in its court filings. Let’s see how excited the wink-nod crowd will be if Bowdoin starts running off a backlog of 50 million ads, one painful $1 click at a time, without paying rebates.
Some of the folks sponsored a Kool-Aid campaign, saying they wanted to articulate their point of view to Bill O’Reilly of Fox News. But O’Reilly would have creamed anybody who tried to spin ASD on the “no-spin” zone, which insists on the precise use of language.
Say, for example, an ASD member would have made the claim on O’Reilly that he had performed due diligence. No way O’Reilly would let a due-diligence claim stand unchallenged.
Even if a person doesn’t like O’Reilly or disagrees with his take on things, one must acknowledge he asks pertinent questions, especially when the imprecise use of language is in play.
That’s the ONE thing some ASD members never understood. Senators, House members, reporters, inspectors general — all of the people members turned to for support — would not let claims go unchallenged. Just because an ASD member “feels” it true, doesn’t make it true.
Any government official or reporter would insist on fact over feeling if they were going to stick out their neck for ASD. ASD members couldn’t possibly have given satisfactory answers to questions because Bowdoin is the only one who knew the precise truth about the books and internal operations.
No audited financials ever were published, making every single claim of members’ due diligence having been performed specious. It wouldn’t pass the giggle test in the halls of Congress, let alone the newsrooms of TV stations and newspapers.
Thanks for your note.
Patrick
Tony H.,
Thanks for a couple of great posts and interesting links. As you point out in your second post, the Black Box Method is “only” a powerful process analysis tool. The investment black boxes of derivatives, Madoff’s Ponzi, CDO’s etc. do share one thing with the Black Box — opacity. Hiding what is really going on is the “key” to the investment black boxes. The process analysis tool has the opposite effect — to bring to light the realities of what is going on.
It will be very interesting to see how the ripple effects of the Madoff situation evolve. WHo ultimately will be liable? Will the folks who were paid “investment returns” by Madoff have to pay those returns back? Will a receiver be appointed and be empowered to get those funds back (as with a couple of obvious Ponzi’s recently)? Lynn Edgington has stated that the evolution and proecution of the case and its fallout will be “like walking on eggshells in combat boots.”
As mentioned in the original article, “Black Box” is also used in computer science, and this is where I am more familiar with it. As a method of testing processes it is a legitimate method but it has it’s faults. One being, that in order to fully test a process, every combination of all values of input need to be tested against all values of output. This can be time consuming and is often not viable. It is a good method of demonstrating that a process has been modified to a specification for those that do not understand source code.
The opposite of Black Box testing is White Box testing - where the process itself is examined and using mathematical concepts it is proved to be correct. Or source code is examined & manually stepped through and understood. I suppose in the financial world this would translate into understanding and demonstrating the underlying investments.
It seems to me that the NY Times article above is advocating “White Box Testing” - examine exactly what these “derivatives” contain, and how they work, and how much goes as bonuses to the money managers.
Did Madoff’s investments pass the Black Box tests? I don’t know if they did, but the likes of the SEC and highly paid investment managers should have been testing them. And the fact that no White Box testing was possible should have been a flag - coloured red. Another interesting Madoff article is here:
http://www.istockanalyst.com/article/viewarticle/articleid/2909080
On the second page:
“I wonder how many feeder funds really understood or backtested options collar strategies or questioned the positive performance of the strategy in periods when it should have done poorly.”
I read that as “understand the process” - White Box.
Of course, ponzi schemes such as ASD, CEP, 12 DailyPro, PIPS, GINS, etc, all fail the tests no matter what colour the box is. The numbers don’t add up and the process is hidden.
Tony,
Great Post! You are correct with respect to the limits of the Black Box Model. In the petroleum/chemical industries, there is no need to test EVERY possible input, but perhaps this isn’t so for computer science. For instance, in running a catalytic cracker, one would not need to consider as a possible input a dump truck of iron ore. Rather, the possible inputs are limited to reasonable possibilities, and then the conservation principles work (the conservation principles would work with the dump truck of iron ore as well).
It would seem that Madoff’s investments as a stand-alone could well have passed the test, unless he made some atrocious leveraged investments (like a lot of the financial institutions did on sub-prime mortgages and related derivatives. However, I’d guess the overall the Madoff entity would not pass the Black Box test. He funneled off sufficient funds both for himself and even for his investors to cause this to be so. That output stream would not be balanced by sufficient input streams.
You are absolutely right about the need for transparency. Hard to imagine the level of trust required to place $$ millions with Madoff when all he says is “trust me” with respect to his investment strategies. The White Box approach allows one to test for scenarios, and ideally to assess the risks involved in the various hedging and leveraging schemes. The White Box approach is more suited to dynamic situations, and therefore risk analysis, whereas the Black Box is more of a sustainability test of a steady state business process.
Entertainedd, I have read and thoroughly appreciated your writings as I’ve run across them on various forums. The black box analysis is a prime example of the value you’ve added to the dialogue about ASD, and I’m grateful you’ve articulated it in an understandable way.
I’d never heard of autosurfs and I didn’t have knowledge of the black box concept at the time I was pitched on becoming involved with ASD in June, 2008. However, as a self-employed business owner for 40+ years before retiring, it wasn’t too difficult for me to see that ASD was at best a bad idea - and at worst a scam.
How did I come to this conclusion?
1. Consider first the math:
The presentation boiled down to this. “I, Andy Bowdoin, through ASD, will take your money, keep half for myself, and give you back 125% of what you gave me.”
That’s the equivalent of saying, “Give me a gallon of milk. I’ll keep half a gallon and give you back five quarts.” On its face that’s clearly not mathematically possible. No sophisticated black box analysis needed; 5th grade math does the trick.
2.Consider next the claim that major national corporations were supposedly advertising on ASD, thereby theoretically supporting the math above:
This too, is an unsupportable claim. No business owner would, over the long term, redirect money from a profitable aspect of a business (advertising revenue from large companies) to support a money-losing aspect of the business (125% rebates to individual advertisers).
Entertained, your black box analysis is elegant. However, the “gallon of milk analysis” was enough for me to say “no thanks” to the ASD scheme.
All of this so-called ‘black box’ theory is interesting. But there was another underlying and very serious flaw in ASD. Internet sales are generated when the customer initiates a search and visits a site because they have specific, focused interest in it’s content. And if we’re dealing in the truth, that sale usually only comes after the customer has come back to the site and spent considerable time debating, thinking it over, engaging in due diligence. Andy, when you set up your early mobile phone stores, how many new prospects came in and made a purchase within 10 minutes of entering your location the first time? Human beings don’t do that. They tend heavily to ‘nibble’ like bass before they strike.
There’s almost NO likelihood of any sale from the mental masturbation of ‘ad surfing’. It’s ridiculous on it’s face. Andy, you knew that all too well when you set up your ‘genius model’.
Hi Pat,
Thanks for sharing your “gallon of milk analysis.” Man, the analogy took me out of my office and put me four-square at the carnival of my boyhood. I almost could hear a fast-talking barker say, “Step right up! Give me a gallon of milk. I’ll keep half a gallon and give you back five quarts.”
One of my famous family stories is about the time I got ripped off by a carny. The game was to toss dimes about 10 feet onto a small table with a glass cover. Under the glass was currency of various denominations. If your dime stayed on the table — on top of a $50 bill, for example — you won the $50 bill.
Almost all dimes bounced off the glass-covered table, which probably was slightly pitched to minimize to the extreme any chance of the dime sticking.
But my dime landed and stuck perfectly over a prize-winning bill. The guy scraped it off quicker than you could imagine and ultimately denied it had landed at all, let alone on a bill.
This happened when I was a young boy, and I’ll never forget it. Your “gallon of milk”analogy took me right back to the day.
Thanks for sharing.
Patrick
Hi, Patrick;
That’s an interesting story! And it brings to mind an image of a carney barker making the “gallon of milk” pitch, which is funny! No one would believe that pitch, but people stood in line for hours to give their money to Andy/ASD at the ASD rallies! In effect, he was a carney barker at a county fair making the gallon of milk pitch! Amazing!
Bottom line: Perhaps the black box analysis (or possibly the “gallon of milk analysis”) should be required reading before people are allowed to invest in anything!
Hi Pat,
The rallies . . . money collected by volunteers, a decidedly unusual thing. But the incongruities didn’t end there. The most vivid image, to me, was people standing in line by the hour to purchase “advertising.” And people spending large sums, perhaps leaning heavily on lines of credit or even taking out second mortgages, to qualify for matching bonuses from a company that had no targeting capability.
One of the things I remember from watching videos from the rallies was how uncomfortable some people became when they realized somebody was taping them, perhaps for a YouTube video. There also were instances of people who seemed to be making calculations in their heads — not about how much money they would make, but whether the scene itself made any sense. They were processing doubts while waiting in line, and some of them rue not exiting the line before paying and going home. Look closely enough at some of the videos and you’ll see looks of concern.
Take care, Pat.
Patrick
THINKING OUTSIDE THE BLACK BOX METHOD
Hi Patrick,
I’m outnumbered on this site, but here’s the other side of the coin, for what it’s worth:
Interesting theory, riddled with holes. First, you state that ASD was “shut down,” actually a FACT the US Attorneys would disagree with.
It’s interesting you apply the same principle to ASD’s biz model, ‘too complicated to understand’ as with the Black Box method, ‘no need to understand all the processes.’ Good going, Patrick.
Yes, ASD principals regret not having ideal witnesses who could properly convey biz model and outside revenue sources. Fed. raiders and prosecution too had egg on face, as evidenced by their premature allegations and ignorant lines of questioning, thus the Judge’s recent suggestion of arbitration or mediation.
Your oversimplified percentage comparisons are based arbitrarily on real time. Keep in mind average “rebate” expiration was 4 1/2 months, with no time limit needed, or promised. So there goes the mathematical theory. By the way, what about the addt’l approx. 15%, earmarked for events/contests/reserve! “Repurchases… don’t count.” ? What do you mean? It’s the same $, that comes off the total purchased.
Would large advertisers waste their time securing rebates? Some perhaps, but the simple fact of volume - exposure to 100,000+ members was Plenty of incentive. Also, ASD ads had inherent value. One I referred to ASD received continuous calls for her biz, due to enhanced Google rankings, unachieved thru “mainstream” online advertising!
Lastly, NO business is guaranteed sustainable in the short or long term. All are thus, by definition, Ponzis. And no one has dared to genuiniely address my National Debt and Social Security “double standard” question, let alone the Govt’s endorsement of LOTTO, a sure loser for virtually all participants! Again, ‘let him without sin cast the first stone.’
Ty, ASD Supporter
Hello Ty,
It must be hard being you with respect to this issue — and I’m not being flip; I’m being sincere.
The “Social Security” Ponzi argument and the Lotto comparison are red herrings, Ty. That’s why I don’t spend much time trying to refute your assertions. They are immaterial to the ASD issue. You may want them to be material, but they’re not. ASD never will get a drink from that well in court, which is why its lawyers haven’t argued the “Social Security” case.
Ty, it goes without saying that some people — the person you referred to in your post, for instance — will receive some value for advertising on ASD, lack of targeting notwithstanding. Again, though, that’s not the issue. The issue is whether Andy Bowdoin was selling unregistered securities and running a Ponzi scheme. Even the prosecutors viewed ads on ASD. Its ability to deliver ads is not the legal question, which is why ASD is permitted to this day to show ads if it makes that choice.
Your argument that all upstart businesses are Ponzis is, well, meritless. It reminds me of an argument that I read from an ASD supporter who insisted that, if ASD had a revenue stream of as little as $1 independent of ad sales, it was not, “by definition,” a Ponzi. That’s just absurd.
Meanwhile, the “Let him without sin” argument is just a diversion. It’s nothing more than a talking point that can’t pass intellectual scrutiny. If it had any merit in court, any defendant in any case could use it successfully. Externally, all debate on all issues that occurs in newspapers or on websites, for example, would come to an end under your “Let him without sin,” catch-all standard.
Another thing: The government views Ponzi’s as illegal, whether it’s a flameout Ponzi or a slow-motion one. It is immaterial that the average rebate time was four and a half months. The government addresses your argument directly in the forfeiture complaint, something I’ve previously mentioned to you.
There still is a chance the government could experience some egg on its face in the ASD case, but I haven’t seen it yet. It’s just fanciful thinking that ASD scored some points at the evidentiary hearing. Without presenting a single witness, the government scored a clear win. Your theory that the judge is advocating arbitration or mediation because of points ASD scored at the hearing is just more fanciful thinking. It’s standard operating procedure and has nothing to do with the strength or weakness of either side in the case.
Contrary to your assertions, “Entertained’s” Black Box mathematical argument has not vanished as a result of the particular nature of the alleged ASD Ponzi. It’s just more fanciful thinking, Ty.
You do make a good point that the government would dispute ASD was “shut down.” I’ll go back and look at “Entertained’s” guest post to make sure that section is clear.
Ty, honestly, your arguments fail because they’re external to the facts. I truly do understand that some ASD members are clinging to hope. At the same time, I think it does a disservice to ASD members to introduce deflections and red herrings into the debate. It’s already a bitter pill to swallow for many people, and disingenuous arguments only add to the bitterness. It’s my hope that very few people are clinging to fanciful thoughts. Facts are the only things that matter.
Regards,
Patrick
UPDATE: I added an editor’s note to “Entertained’s” column to clarify the issue of whether ASD was “shut down.” In essence, the government says ASD is permitted to display advertising without paying rebates and therefore is not “shut down.” From ASD’s point of view, the government seizure of assets tied to ASD had the effect of shutting down the company.