Consumption results from production, not the other way around

I recommend reading this column from Steve Horowitz.  It reminds me of this post of mine on wealth and where it comes from.

Here are some key sentences from Horowitz’s article:

One of the most pernicious and widespread economic fallacies is the belief that consumption is the key to a healthy economy.

…we only have the power to consume if we have produced and sold something in order to acquire the means to engage in consumption. Starting the analysis with consumption assumes one has already acquired means.  Contrary to that analysis, wealth is created through acts of production that rearrange resources in ways people value more than alternative arrangements. These acts are financed with savings that come from households refraining from consumption.

Folks often skip right past the true source of consumption and skip right to the consumption. They mistake consumption for wealth. Wealth first had to be created somewhere.

Even the wealth acquired by rent-seeking bureaucrat was created somewhere merit-worthy before being directed into his pocket.

The health of the economy isn’t economic activity, rather it’s value creation. There’s an old saying   that what matters most can’t be measured, but what can be measured will be managed. We measure economic activity with GDP. That’s not value creation. Much damage has been caused trying to manage GDP.


Small businesses are dead capital

Often, when I’m reading a Forbes article and I think to myself, “This is a darned fine article,” I look at the byline to find it is another good article by Daniel Fisher.

That happened recently while reading, How the Government is Helping Hedge Funds Make Billions off IPOs.  This paragraph caused me to glance at the byline:

Hedge fund managers can thank Congress and the SEC for the opportunity [to buy early stakes in companies before they go public]. Some call it “regulatory arbitrage”: well-meaning but inherently flawed laws such as Sarbanes-Oxley that were designed to protect small investors from the next Enron have imposed such heavy costs on public companies that many private ones are delaying their initial public offerings. Venture capitalists, employees and early investors who want to sell out have little choice but to sell their shares to lightly regulated funds, which can buy stock in the next IPO at a steep discount to what retail investors ultimately will pay.

Innovation has a lot of headwinds these days. Most of it caused by (to borrow Fisher’s words) ‘well-meaning but inherently flawed’ ideas.

But I find the well-meaning and inherently flawed ideas around investing in small businesses especially annoying.

In this country you can easily sign up for an online brokerage account and buy and sell slivers of ownership in thousands of publicly traded companies on the various stock exchanges for as little as $4 per trade, with some assurance that the presence of the Securities and Exchange Commission has lowered your chances of being defrauded.

You can just as easily make personal loans to people who need cash now using

You can donate money to loan to small businesses and create jobs (and make money). Well, at least you get a bracelet with that one.  Or you can lend money to entrepreneurs all over the world. You can also donate to individuals who need help funding the creative projects like a large tortoise that looks like a trading post.

But, if you want to invest with entrepreneurs here at home, it’s not so easy. You need to know somebody who wants to start a business. Or know someone who knows someone. Or you need to know a venture capitalist. Start-up investing is an opaque network of angel investors and venture capitalists.

This, folks will tell you, is for our own protection because there will be too many con men out to get you to invest in their bogus company.

But, I’d rather make it easier for everyone to invest in start-ups and let the market develop solutions to help people from being defrauded. The SEC currently makes trading equity in unregistered companies very difficult. This basically makes small businesses dead capital. and use simple approaches to limit your risk.  First, you lend in small amounts to individual borrowers — for example, $25 — and you can diversify across many borrowers. So, if you lend to one deadbeat who doesn’t repay you, you’re not out your life savings.

Second, these sites act as an SEC and rating agency of sorts by qualifying borrowers and setting appropriate interest rates based on credit risk. works with organizations that administer the loans with the entrepreneurs with full disclosure on that organization’s track record.

We could use the Prosper/Kiva/Kickstarter models bring start-up and small business capital alive. A similar service could act as registration agent of sorts and market maker to connect investors and business owners and allow users to invest as little as $5 directly with entrepreneurs.

Why not? I’d rather invest directly in an entrepreneur with a chance, even if it is ever so slight, of getting a return on that investment than donate it with the assurance that I won’t.

Online Dividend Reinvestment Plan Investing?

Here’s an idea: + Dividend Reinvestment Plans (DRPs)

There are some online accounts for DRPs, but what I’ve seen so far are clunky.  It seems like there’s potential to retail the idea.

If anyone knows of anything that I’m missing, please let me know.

Crowd source venture capital, please

I read this Wall Street Journal story about a Silicon Valley startup, Loyal3, with great interest.  This paragraph describes its business model:

Loyal3 has created an online app that would let companies sell, or even give, shares of stock directly to the public, with no brokerage fees, through a website or on Facebook, in increments as small $10. Small investors wouldn’t even have to buy a whole share. Loyal3 would let them buy and sell fractions of a share.

I thought it might be a step toward crowd sourcing venture capital. has made it possible to crowd source loans.  I think crowd sourcing startup equity investments would be another good idea.  Essentially, to have a Shark Tank that you don’t need to be a billionaire to participate in.

I’m no expert, but I believe SEC regulations do not make this easy, or maybe even possible, mainly to protect small, unsophisticated investors like myself from being bamboozled by snake oil salesmen.

As I read on in the Wall Street Journal article, I realized that Loyal3 wasn’t the of equity investing.  Rather, it’s a bit more like a, looking to fill a specialty niche in the investing market for small investors and for companies wanting to give out stock as a marketing campaign. A while ago, I believe you could buy shares in beer maker, Sam Adams, from the boxes of its 12 packs. Loyal3 basically helps with that.

I wish we could crack the crowd sourced venture capital nut.  Given low-interest rates and equity investments that do not seem all that diversified anymore, it would be nice to have another market for our investments.

And, with lotteries and casinos where you are almost assured to blow your money, I don’t buy the argument that we need to be protected from snake oil salesmen.

We shouldn’t have to donate to create jobs either.

A crowd sourced venture capital market might produce a few jobs and a few products and services that make our lives better in the process, as well as give investors access to early stage, higher reward (and admittedly higher risk) investing.

Felix Dennis Tidbits

Here are a few final bookmarks from Felix Dennis’s How to Get Rich.  I highly recommend the book, even if you don’t wish to get rich.  It’s easy to read and contains a lot of wisdom that can help you in various parts of your life.

On luck, first-mover myth and tunnel vision (p. 142):

The only truth about luck, good or bad, is that it will change.  The law of averages virtually guarantees it.  And here, I think, is one difference that separates me from my “unlucky” friend, whom I shall call Albert.

By moving so adroitly and so swiftly from one thing to the next, Albert does not place himself in the way of luck.  He is too much in love with the green, green grass just over the hill.

Then again, Albert is more intelligent than I am.  But there is a downside to all this intelligence and imagination.  He thinks a little too much before he acts.  He weighs the options too carefully. He is capable of imagining defeat.

So while he is clever enough to want to minimize his risk by switching to yet another new and uncontested marketplace, he leads himself into uncertainty. And into error.

Uncontested markets are usually uncontested for a reason. Nature abhors a vacuum and if no one else is contesting a market, it may well be that no such market exists.

There are other differences between Albert and me.  He is a great believer in partnering and share options and employee profit participation.  …in Albert’s case, this division of the spoils is undertaken in the minutest detail, long before there are any profits whatever to share.  Albert believes they encourage his coworkers. But such arrangements are immensely time-consuming and a distraction from the tunnel vision necessary to become rich in the first place.

On negotiation and politics (p. 149):

If you are overly fond of haggling, my advice is that you quit thinking about making money the old-fashioned way and consider becoming a politician instead.  That way you can rob and plunder your fellow citizens year after year without risking your own financial security or capital–you bastard. (By the way, please get used to people thinking of you as a bastard.  After all, it’s what nearly everyone thinks of politicians, except themselves).

On management (p. 150):

All great companies, all well-run organizations, need great managers and great staff.  That much, at least, is pretty obvious.  You forget it at your peril.

But the acquisition of of managers who can bring a sense of mission to even mundane tasks, who can identify potential candidates, nurture late bloomers, fire dullards and whiners and adapt to changing circumstances–that searching, identifying and nurturing is not about negotiating.  It’s about setting an example of true meritocracy in a company where nepotism hasn’t a chance and where those who wish to succeed are given every opportunity and encouragement to do so.

Black Swans at McDonalds

Nassim Taleb wrote a book named The Black Swan: The Impact of the Highly Improbable.  As you can tell from the title, a Black Swan is what Nassim calls a highly improbable event.  He asserts that these events are highly improbable, not predictable and they drive much of what goes on around us.

Many successful companies and products are the results of Black Swan events.  As much as we’d like to think that there are formulaic ways of building successful companies, there isn’t.  The best formula is lots of experimentation.  The successful companies are the one experiment that works out of many.  We just never really see the many because they die off before we ever take notice.

Many successful companies get their innovation wrong after they’ve become successful.  They try to innovate from the top down.  That is, high level management sit around at HQ thinking it’s their jobs try to dream up the next big thing.  They forget where they started. Continue reading

How Are GM's Shares Going to be Distributed?

This morning, I received this enjoyable e-mail from a friend who would like to be known as Raoul Lufberry (more on that name later).

So, to my complete shock I wake up this morning to find GM has filed for Chapter 11. I wasn’t aware there were enough people left in that organization to type out, copy, and mail an official document, much less one that should probably be spell checked.

Then I find out that both the governments of Canada and Ontario are both involved. I don’t know what the Canadian word for bankruptcy is, but I’m sure they’ve figured it out.  After all, when you head south in Detroit, you end up in Canada.  Now, both literally and figuratively.

But, what I really want to know is, when do I get my proxy materials.  I was just informed that I am now a proud shareholder in a company that I have avoided investing in for the entirety of my life, until this moment.  Somewhere Markowitz is rolling in his grave, but wait, he is only now figuratively dead.  Anyway, how are the shares going to be distributed?  I suggest a system where every individual tax filer receives shares based on their share of total IRS personal income tax receipts.  In this way, 1% of taxpayers would own more than 40% of the outstanding shares.  My guess is that there would be overlap with the 10% stake owned by the now-fleeced bondholders (who until this morning owned 54% of the company), so those in society with a profit motive could potentially have a majority of voting shares. This could be just the type of governance a turn-around situation like this could use.  And for this reason, it will never happen.

Maybe I could just have that headless chicken from South Park vote my shares.

To say the American people own GM is funny.  Owners usually have a say in how their business is run.   Thanks Raoul for making the truth entertaining.

True Measures: Would You Buy It? Edition

A local news programs has a “We Try It Before You Buy It” segment.  They buy a new product, ask someone to test it out and report on what they liked and disliked.

The segment ends by asking the tester whether they would buy the product or not.  Like Reichheld’s question (would you recommend us to a friend?), this is a simple, effective measure of truth.

Often, product testers seem to like the product but then say they would not buy it.

Deciding to buy is a value judgment where we instinctively weigh the benefits of what we get against the value of what we give up.

Many people assume the value judgment is simply weighing the product benefits against its price, but there’s much more to it.  There may be several factors that are as important or more important than price.

What’s interesting is that most people can’t articulate these other factors.  They may only be vaguely aware of them.  I figured this out by thinking about my own buying decisions.

F or example, I wondered why I usually buy gas from a station further from my house (station 1)  than a station that I would normally prefer (station 2).  The answer wasn’t price, since the price was always the same at both stations.

There are two factors that cause me to go to station 1.  First, due to traffic patterns, station 1 is safer for me to get to.  Second, I’m cheap and health conscious and I found that I would tend to buy more junk from station 2.  Going to station 1 solved that problem.

How I value what I receive in exchange for everything I give up to get it (not just price) is called value proposition.  Very few people understand it.  Very few managers understand it.  Some do.   I like to invest in companies with managers who do.

Good quote

I lifted this quote from English philosopher Herbert Spencer from an excellent article by Walter Williams:  “The ultimate result of shielding men from the effects of folly is to fill the world with fools.”

How to run a business part 2

More golden nuggets from Philip Fisher:

By this time, I had learned enough to know that, no matter how attractive, such matters [great business opportunities] by themselves were not sufficient to assure great success.  The quality of the people involved in a company was just as critical.  I use the word quality to encompass two quite different characteristics.  One of these is business ability.  Business ability can be further broken down into two very different types of skills.  One of these is handling the day-to-day tasks of business with above-average efficiency.  In the day-to-day tasks I include a hundred and one matters, varying all the way from constantly seeking and finding better ways to produce more efficiently to watching receivables with sufficient closeness.  In other words, operating skill implies above-average handling of many things that have to do with the near term operation of the business.

However, in the business world, top-notch managerial ability also calls for another skill that is quite different.  This is the ability to look ahead and make long-range plans that will produce significant future growth for the business without at the same time running financial risks that may invite disaster.  Many companies contain managements that are very good at one or the other of these skills.  However, for real success, both are necessary.

Business ability is only one of the two “people” traits that I believe is absolutely essential for a truly worthwhile investment.  The other falls under the general term of integrity and ecompasses both the honesty and the personal decency of those who are running a company.

Like the previous passage, it sounds like common sense.  But, if it is common sense, then why is it so difficult to find in practice?  Why aren’t more companies trying to ensure they have good operations, good strategy and highly trusted people?

This can apply to any organization.  Look at sports.  Are these qualities not present in many organizations that achieve long-term success?  Which of these qualities are lacking in the not-so-successful franchises?  There’s usually at least one.  Sometimes it’s operations, sometimes it’s strategy and sometimes it’s integrity and sometimes its a combination. 

For anyone looking for a good investment or management book, I highly recommend Philip Fisher’s Common Stocks and Uncommon Profits and Other Writings.