Showing posts with label corporations. Show all posts
Showing posts with label corporations. Show all posts
Sunday, January 28, 2024
Saturday, January 30, 2016
Financial Sarcasm Roundup for 01/30/16
Saturday is supposed to be a slow news day, but it's never too slow for sarcasm.
The US economy probably slowed down in Q4 2015. Business surveys from the private sector are probably more reliable than government figures. Federal agencies have been monkeying around with their methodologies for too long under political pressure to report rosy results. Voters get fed up with ruling elites when official results don't square with daily life. The next administration can do a lot to restore Americans' confidence in government just by reporting honest numbers.
The Zika virus is boosting a few life science stocks. Curing disease is a good reason to invest in drug makers. Day trading a stock with the expectation that disasters will pump a quick profit is immoral, not to mention just plain stupid. There is no assurance that the UN WHO or any other powerful body will hand these companies a contract. Greed and wishful thinking drive dumb investor reactions to headline dangers. There is no drug to cure stupidity.
Hedge funds misjudged the yen. The BOJ invalidated a whole bunch of investment philosophies overnight. I've said before that currency positions are useful mainly as hedges for cash reserves, not pure-play bets. Hedge funds are running out of ideas if they think betting big on a currency is innovative. George Soros made a big currency bet once against the British pound and it worked once. There is no law that says it must keep working. People running hedge funds can work as janitors after the yen bankrupts them.
Xerox is splitting itself. Carl Icahn wins again. I've always admired the guy because he forces companies to do right by their shareholders. He would probably make an excellent US Treasury secretary if Donald Trump wins the presidential election. I would like to see some corporate raiders and deal-makers break up some of the US government's less efficient agencies. Privatizing Social Security and Medicare could work like an insurance company spin-off. I wouldn't buy those split stocks because I've read the Bowles-Simpson reports on those entities' eventual insolvency, but some mutual fund manager is dumb enough to go for it.
Most writers would sign off by saying they hope everyone else's Saturday is going well. I'm not like most writers. I don't care about how your Saturday is going. My Saturdays are the definition of awesome.
The US economy probably slowed down in Q4 2015. Business surveys from the private sector are probably more reliable than government figures. Federal agencies have been monkeying around with their methodologies for too long under political pressure to report rosy results. Voters get fed up with ruling elites when official results don't square with daily life. The next administration can do a lot to restore Americans' confidence in government just by reporting honest numbers.
The Zika virus is boosting a few life science stocks. Curing disease is a good reason to invest in drug makers. Day trading a stock with the expectation that disasters will pump a quick profit is immoral, not to mention just plain stupid. There is no assurance that the UN WHO or any other powerful body will hand these companies a contract. Greed and wishful thinking drive dumb investor reactions to headline dangers. There is no drug to cure stupidity.
Hedge funds misjudged the yen. The BOJ invalidated a whole bunch of investment philosophies overnight. I've said before that currency positions are useful mainly as hedges for cash reserves, not pure-play bets. Hedge funds are running out of ideas if they think betting big on a currency is innovative. George Soros made a big currency bet once against the British pound and it worked once. There is no law that says it must keep working. People running hedge funds can work as janitors after the yen bankrupts them.
Xerox is splitting itself. Carl Icahn wins again. I've always admired the guy because he forces companies to do right by their shareholders. He would probably make an excellent US Treasury secretary if Donald Trump wins the presidential election. I would like to see some corporate raiders and deal-makers break up some of the US government's less efficient agencies. Privatizing Social Security and Medicare could work like an insurance company spin-off. I wouldn't buy those split stocks because I've read the Bowles-Simpson reports on those entities' eventual insolvency, but some mutual fund manager is dumb enough to go for it.
Most writers would sign off by saying they hope everyone else's Saturday is going well. I'm not like most writers. I don't care about how your Saturday is going. My Saturdays are the definition of awesome.
Tuesday, January 05, 2016
Clueless CEOs Irritate Investors
Studying the ancient Stoic philosophers has taught me to take life's complications in stride. Things that used to irritate me don't bother me so much anymore. I am still morally obligated to identify sources of irritation so other investors, who are not as mature or brilliant as I am, can avoid them. Executive pitches to the investing public are one prime source of bother.
Reviewing my notes from financial events I attended in 2015 reminds me of how clueless some CEOs can be. One junior mining company guy was totally guessing at his company's timelines for project development. Where the heck were his updated NI 43-101 reports? I couldn't find them and he didn't have them. He also cluelessly claimed a silver mining credit would reduce the cash costs of production, which is not entirely accurate. Credits may in fact offset cash costs when calculating all-in sustaining costs (AISC), but only process improvements or cheaper inputs (water, power, etc.) can truly reduce cash costs in mining. Changing accounting terms does not make a physical process cheaper or more efficient. Sheesh, that's what happens when anyone other than a geologist runs a mining company. Truly competent mining CEOs understand these nuances.
Inexperienced CEOs think throwing around names of powerful supporters will matter. Those corporate backers and industry legends may have little to no involvement in running the company. They sure do make for nice presentation filler when a company has no earnings, patents, or serial entrepreneur leadership. A prominent corporate partner is useless if they offer weak financial backing or incidental strategic value. Putting an industry legend on a board of directors works when that director is personally advising the CEO every day, not when they drop in once a quarter to review executive compensation.
Aspiring CEOs should have academic and career experience relevant to their company's industry. Geologists should run exploration companies. Computer scientists should run software companies. Medical doctors and biochemists should run drug companies. All of this should be obvious but many investors don't seem to care. Presenting CEOs who can't speak with confidence, or who mumble at crucial discussion points for particulars that drive project success, are really telling me they don't know how to be CEOs.
Presenting a corporate story that depends on someone else's theoretical action just falls flat with me. I have listened to CEOs who claim their business will succeed if only some other government builds phantom infrastructure that does not exist. I hear that all the time in the resource sector. I'll believe the project is viable when the road, power line, or port facility is finished.
I could warn investors to stay away from clueless CEOs until the cows come home. Only a few people will listen. The rest of the investing public craves the seduction of an entertaining story, even if its parts are stitched together from fiction. I'm on the hunt for CEOs who openly lie about their corporate finances so I can turn them in for a regulator's bounty. I have to ignore the others who just want to waste my time.
Reviewing my notes from financial events I attended in 2015 reminds me of how clueless some CEOs can be. One junior mining company guy was totally guessing at his company's timelines for project development. Where the heck were his updated NI 43-101 reports? I couldn't find them and he didn't have them. He also cluelessly claimed a silver mining credit would reduce the cash costs of production, which is not entirely accurate. Credits may in fact offset cash costs when calculating all-in sustaining costs (AISC), but only process improvements or cheaper inputs (water, power, etc.) can truly reduce cash costs in mining. Changing accounting terms does not make a physical process cheaper or more efficient. Sheesh, that's what happens when anyone other than a geologist runs a mining company. Truly competent mining CEOs understand these nuances.
Inexperienced CEOs think throwing around names of powerful supporters will matter. Those corporate backers and industry legends may have little to no involvement in running the company. They sure do make for nice presentation filler when a company has no earnings, patents, or serial entrepreneur leadership. A prominent corporate partner is useless if they offer weak financial backing or incidental strategic value. Putting an industry legend on a board of directors works when that director is personally advising the CEO every day, not when they drop in once a quarter to review executive compensation.
Aspiring CEOs should have academic and career experience relevant to their company's industry. Geologists should run exploration companies. Computer scientists should run software companies. Medical doctors and biochemists should run drug companies. All of this should be obvious but many investors don't seem to care. Presenting CEOs who can't speak with confidence, or who mumble at crucial discussion points for particulars that drive project success, are really telling me they don't know how to be CEOs.
Presenting a corporate story that depends on someone else's theoretical action just falls flat with me. I have listened to CEOs who claim their business will succeed if only some other government builds phantom infrastructure that does not exist. I hear that all the time in the resource sector. I'll believe the project is viable when the road, power line, or port facility is finished.
I could warn investors to stay away from clueless CEOs until the cows come home. Only a few people will listen. The rest of the investing public craves the seduction of an entertaining story, even if its parts are stitched together from fiction. I'm on the hunt for CEOs who openly lie about their corporate finances so I can turn them in for a regulator's bounty. I have to ignore the others who just want to waste my time.
Wednesday, August 19, 2015
Wednesday, November 19, 2014
The Haiku of Finance for 11/19/14
Share repurchase plan
Lever up just to buy back
Skew earnings ratios
Lever up just to buy back
Skew earnings ratios
Tuesday, September 23, 2014
Monday, June 16, 2014
The Haiku of Finance for 06/16/14
Office flirtation
Sure-fire path to advancement
Style over substance
Sure-fire path to advancement
Style over substance
Wednesday, May 28, 2014
10 Signs Your Coworkers Are Useless
I work by myself, for myself. I do this because the years I spent working with others in a corporate environment revealed to me the depths of human stupidity. Countless instances of thickheaded blunders made me roll my eyes in disgust. I'll boil down the general trends into ten signs that show you where the stupid burns.
1) Your coworkers don't understand the value of money. Financial service sector workers are egregiously bad at managing money. Maybe it's because they're around so much of it every day that they think it comes in an endless gravy train. I remember coworkers who spent money daily at the break room vending machine and the corner coffee shop. That's a five dollar daily habit that blows over a thousand bucks a year. I had another coworker who took a taxi to work every day. I take Muni whenever I go downtown in San Francisco. Her monthly transportation expenses were 20x larger than mine. I achieved financial independence; if you can't figure out why, stop reading right now. You're useless.
2) They worship process over results. This is the sine qua non of government bureaucracies and corporations in oligopolistic market positions, with rare exceptions. Winston Churchill begged us all to look at results sometimes but hardly anyone listens. Cubicle residents would rather wear down the same ruts in the carpet year after year than stop to consider a course correction. Process can be a very comfortable cocoon for the myopic in our species. Getting results often requires making someone uncomfortable.
3) They have no career goals. I remember one gal at "Baloney Goofball Imbeciles" (a major investment management firm, renamed) who took maybe twenty minutes a day to do her job. She spent the rest of the time socializing. Coworkers admired her for being on some kind of "fast track" because she was rotating laterally between easy jobs that paid little and had light workloads. Consider just how lame everyone there must have been if she was their role model.
4) They earn little money. Like it or not, money is a measuring stick of a human's contributions to society. Life isn't fair and sometimes the most ignorant rock stars become multimillionaires. Tough stuff. The rest of us have to prove our abilities in a daily grind. Those who can bust their humps get paid. Those who expand their skills get paid more. People who show little interest in either of those projects will be at subsistence level indefinitely.
5) They save little money. This relates to #4 above. Low-income earners can build wealth through diligent saving and frugal living. High-income earners have an easier time building wealth but even they throw away money on frivolities. I currently know several high earners in San Francisco's social circles who live like there's no tomorrow. If they find themselves suddenly unemployed, they won't have a tomorrow. My former bosses at "Baloney Goofball Imbeciles" would brag - yes, BRAG - about their own empty savings accounts. I stopped listening to them when they encouraged me to spend all of my paycheck just to fit in with the work group. Those idiots had nothing left to teach me.
6) They are ignorant of the world. Intellectual activity brings personal growth. This is a no-brainer for autodidacts like Yours Truly but most people have no brains. Cubicle denizens would rather fill their spare time with rom-com movies instead of independent films, pro sports instead of performing arts, and fashion magazines instead of intellectual journals.
7) They don't know how to operate common work systems. I worked with senior wealth managers at "You and BS" who did not understand how to use the firm's automated tools to construct portfolios, retrieve analytical reports, or create pitch books. Senior supervisors at "Baloney Goofball Imbeciles" with years of experience did not know how to dig into their reporting systems for audit records. I figured all of these things out within weeks of my hiring date. Sticking out like a sore thumb helped get me fired from entry-level jobs. I can't relate to so-called "professionals" who refuse to master the tools of their chosen profession.
8) They waste time. During my first week at "Baloney Goofball Imbeciles" my supervisors took off in the middle of the work day for a three-hour shopping trip. I was left to wonder how these people could say they earned their pay. Other brokers at "You and BS" would pretend to work by eyeballing their wealthy family's money and then take off to go drinking in the early afternoon. Time-wasting losers may think they have earned sloth status with past performance. The only thing they really earn is contempt.
9) They are just plain dumb. There is nothing snobby at all about judging people at least partly on IQ scores and other objective measures of intellect. Smart people are job creators in a knowledge economy. Dumb people are a drag on productivity. Anti-intellectual coworkers belong in low-income occupations at the bottom of society yet somehow they work their way into cubicles and corner offices. Cleaning up their messes, editing their typos, and covering their errors is for masochistic suckers.
10) They lack personal integrity. I thought about listing this first but decided to leave the best for last. Losers can find excuses for lying and cutting corners. Karma eventually catches up to destructive people. Trying to change a sociopath is always a waste of effort. I put as much distance as possible between myself and liars once someone reveals their first instance of lying.
If you work with people who regularly exhibit these behaviors, it's time to find some new coworkers. If everyone in the company acts this way, the stock may be a good short candidate. There's always a better job somewhere else. If the world runs out of better jobs, there's always self-employment. Life is too short to spend even one working day with useless excuses for human beings.
1) Your coworkers don't understand the value of money. Financial service sector workers are egregiously bad at managing money. Maybe it's because they're around so much of it every day that they think it comes in an endless gravy train. I remember coworkers who spent money daily at the break room vending machine and the corner coffee shop. That's a five dollar daily habit that blows over a thousand bucks a year. I had another coworker who took a taxi to work every day. I take Muni whenever I go downtown in San Francisco. Her monthly transportation expenses were 20x larger than mine. I achieved financial independence; if you can't figure out why, stop reading right now. You're useless.
2) They worship process over results. This is the sine qua non of government bureaucracies and corporations in oligopolistic market positions, with rare exceptions. Winston Churchill begged us all to look at results sometimes but hardly anyone listens. Cubicle residents would rather wear down the same ruts in the carpet year after year than stop to consider a course correction. Process can be a very comfortable cocoon for the myopic in our species. Getting results often requires making someone uncomfortable.
3) They have no career goals. I remember one gal at "Baloney Goofball Imbeciles" (a major investment management firm, renamed) who took maybe twenty minutes a day to do her job. She spent the rest of the time socializing. Coworkers admired her for being on some kind of "fast track" because she was rotating laterally between easy jobs that paid little and had light workloads. Consider just how lame everyone there must have been if she was their role model.
4) They earn little money. Like it or not, money is a measuring stick of a human's contributions to society. Life isn't fair and sometimes the most ignorant rock stars become multimillionaires. Tough stuff. The rest of us have to prove our abilities in a daily grind. Those who can bust their humps get paid. Those who expand their skills get paid more. People who show little interest in either of those projects will be at subsistence level indefinitely.
5) They save little money. This relates to #4 above. Low-income earners can build wealth through diligent saving and frugal living. High-income earners have an easier time building wealth but even they throw away money on frivolities. I currently know several high earners in San Francisco's social circles who live like there's no tomorrow. If they find themselves suddenly unemployed, they won't have a tomorrow. My former bosses at "Baloney Goofball Imbeciles" would brag - yes, BRAG - about their own empty savings accounts. I stopped listening to them when they encouraged me to spend all of my paycheck just to fit in with the work group. Those idiots had nothing left to teach me.
6) They are ignorant of the world. Intellectual activity brings personal growth. This is a no-brainer for autodidacts like Yours Truly but most people have no brains. Cubicle denizens would rather fill their spare time with rom-com movies instead of independent films, pro sports instead of performing arts, and fashion magazines instead of intellectual journals.
7) They don't know how to operate common work systems. I worked with senior wealth managers at "You and BS" who did not understand how to use the firm's automated tools to construct portfolios, retrieve analytical reports, or create pitch books. Senior supervisors at "Baloney Goofball Imbeciles" with years of experience did not know how to dig into their reporting systems for audit records. I figured all of these things out within weeks of my hiring date. Sticking out like a sore thumb helped get me fired from entry-level jobs. I can't relate to so-called "professionals" who refuse to master the tools of their chosen profession.
8) They waste time. During my first week at "Baloney Goofball Imbeciles" my supervisors took off in the middle of the work day for a three-hour shopping trip. I was left to wonder how these people could say they earned their pay. Other brokers at "You and BS" would pretend to work by eyeballing their wealthy family's money and then take off to go drinking in the early afternoon. Time-wasting losers may think they have earned sloth status with past performance. The only thing they really earn is contempt.
9) They are just plain dumb. There is nothing snobby at all about judging people at least partly on IQ scores and other objective measures of intellect. Smart people are job creators in a knowledge economy. Dumb people are a drag on productivity. Anti-intellectual coworkers belong in low-income occupations at the bottom of society yet somehow they work their way into cubicles and corner offices. Cleaning up their messes, editing their typos, and covering their errors is for masochistic suckers.
10) They lack personal integrity. I thought about listing this first but decided to leave the best for last. Losers can find excuses for lying and cutting corners. Karma eventually catches up to destructive people. Trying to change a sociopath is always a waste of effort. I put as much distance as possible between myself and liars once someone reveals their first instance of lying.
If you work with people who regularly exhibit these behaviors, it's time to find some new coworkers. If everyone in the company acts this way, the stock may be a good short candidate. There's always a better job somewhere else. If the world runs out of better jobs, there's always self-employment. Life is too short to spend even one working day with useless excuses for human beings.
Thursday, March 13, 2014
The Dunning-Kruger Effect On Wall Street
The Dunning-Kruger effect afflicts most of humanity. Statistically speaking, a big chunk of the human race is average to below average in ability. These people overestimate their abilities and underestimate the abilities of those who are truly skilled. Evidence that these people populate Wall Street and corporate C-suites is plentiful.
Studies of portfolio managers prove that the vast majority do not outperform benchmark indexes. Check out the SPIVA scorecards for actively managed funds. Their report titled "US Mid-Year 2013" reveals that most actively managed funds across all cap sizes underperformed their benchmarks during multiple time periods. There were a few exceptions for international small-cap funds and some fixed income funds. Investors who count on those exceptions to persist will be disappointed. Vanguard's "The case for index-fund investing" report from April 2013 shows the persistent cost and performance advantages of passive investing over the long term. The evidence against active money managers is overwhelming. Active money management is untenable as a credible profession.
Money managers are just plain dumb. I've met some of them at finance events. They talk to me just long enough to steal my ideas because they have no ideas of their own. These people have no business calling themselves skilled, highly qualified, superior, or any other such unearned term. They do so anyway and investors keep handing them money. Active portfolio managers are exemplars of the Dunning-Kruger effect. The ones at the top of mutual fund companies and hedge funds-of-funds are probably also exemplars of the Peter Principle. Analysts who made a few lucky calls one year on their favorite stocks don't necessarily have the broader perspective to manage a fund exposed to multiple sectors.
The record of managers in C-suites is just as bad as Wall Street's performance. Big-shot CEOs love the headlines they get when they gobble other companies in M&A transactions. They have no empirical justification for such pride. The HBR blog in March 2011 noted the very high failure rate of M&A deals. Knowledge@Wharton noted in March 2005 that M&A deals fail due to poor due diligence, post-merger integration problems, and other factors. Top executives are paid to understand these forces before they commit to deals. A lot of them obviously understand very little when they go hunting for acquisitions. I can just imagine a Peter Principle investment banker trolling CEOs for deal flow, promising glowing media coverage of their acquisition prowess.
I'll disclose that I haven't been able to outperform any broad benchmarks myself for several years. Outperformance isn't my objective given the immense price distortions central banks have generated in asset markets. My objective is to outlast the finance professionals who will eventually be ruined by their faith in any of the pumped asset markets. I also haven't acquired any companies, so I can't compete with the swinging dealmakers who throw money away on dumb buyouts. A lot of the C-suite people may be Dilbert Principle promotees who couldn't handle the company's basic work. How these people got promoted in finance and corporate life isn't up to me. I'm only concerned with staying away from them so their Dunning-Kruger overestimations don't harm my life.
Studies of portfolio managers prove that the vast majority do not outperform benchmark indexes. Check out the SPIVA scorecards for actively managed funds. Their report titled "US Mid-Year 2013" reveals that most actively managed funds across all cap sizes underperformed their benchmarks during multiple time periods. There were a few exceptions for international small-cap funds and some fixed income funds. Investors who count on those exceptions to persist will be disappointed. Vanguard's "The case for index-fund investing" report from April 2013 shows the persistent cost and performance advantages of passive investing over the long term. The evidence against active money managers is overwhelming. Active money management is untenable as a credible profession.
Money managers are just plain dumb. I've met some of them at finance events. They talk to me just long enough to steal my ideas because they have no ideas of their own. These people have no business calling themselves skilled, highly qualified, superior, or any other such unearned term. They do so anyway and investors keep handing them money. Active portfolio managers are exemplars of the Dunning-Kruger effect. The ones at the top of mutual fund companies and hedge funds-of-funds are probably also exemplars of the Peter Principle. Analysts who made a few lucky calls one year on their favorite stocks don't necessarily have the broader perspective to manage a fund exposed to multiple sectors.
The record of managers in C-suites is just as bad as Wall Street's performance. Big-shot CEOs love the headlines they get when they gobble other companies in M&A transactions. They have no empirical justification for such pride. The HBR blog in March 2011 noted the very high failure rate of M&A deals. Knowledge@Wharton noted in March 2005 that M&A deals fail due to poor due diligence, post-merger integration problems, and other factors. Top executives are paid to understand these forces before they commit to deals. A lot of them obviously understand very little when they go hunting for acquisitions. I can just imagine a Peter Principle investment banker trolling CEOs for deal flow, promising glowing media coverage of their acquisition prowess.
I'll disclose that I haven't been able to outperform any broad benchmarks myself for several years. Outperformance isn't my objective given the immense price distortions central banks have generated in asset markets. My objective is to outlast the finance professionals who will eventually be ruined by their faith in any of the pumped asset markets. I also haven't acquired any companies, so I can't compete with the swinging dealmakers who throw money away on dumb buyouts. A lot of the C-suite people may be Dilbert Principle promotees who couldn't handle the company's basic work. How these people got promoted in finance and corporate life isn't up to me. I'm only concerned with staying away from them so their Dunning-Kruger overestimations don't harm my life.
Tuesday, February 11, 2014
Wednesday, July 31, 2013
Wednesday, May 29, 2013
Innovation Premium Metrics Go Beyond Guesswork
I'm all about new metrics in business, so long as they're based on solid criteria. I welcome discussions of the "innovation premium" for companies that create great solutions. I must suggest that using NPV based on forecasts of future project cash flows is probably not valid for more than a year or two. The future of any product line is unknowable outside of those few sectors with strong barriers to entry and high switching costs. The unique thing about innovation is that it springs from a pool of intellectual capital that a company has spent time cultivating.
I believe other metrics are more appropriate factors for inclusion in an innovation premium. I'll name a few.
Number of patents filed. The US Patent and Trademark Office has a searchable database of patents filed by year. The search results offer breakdowns by organizations. Find the top patent-generating corporations in America to see who's serious about committing capital to applied research.
Size of IP portfolio. This is related to the number of patents filed, but some companies can build their IP portfolios through acquisitions. IP portfolio management is a cottage industry serving companies who elect to outsource the tracking and fulfillment of things like trademark registration payments. Some companies may wish to keep the size and nature of their portfolios close to the vest.
Size of R&D budget. Good luck getting a company to discuss its hottest research openly. Read a public company's financial statements to get a glimpse of how seriously they take R&D. No way is a privately held company going to reveal their budget. Reverse engineering their budget by reviewing their appearances at conferences may lead to a wild guess.
Number of new innovations launched. This is probably the real bottom line for a company aspiring to the top ranks of innovation. The total number of new products announced in a year is not the only metric. Old products can get new features. Counting this category means separate weights for the number of new products, number of upgrades, and number of new features for existing products. Innovation gets stale if it doesn't get to the market.
There's my criteria rundown for an innovation premium. In each factor, a larger number (more patents, bigger budget) means more innovative power. I do agree that an innovation premium is not necessarily a valuation premium. Railroads rarely innovate but Warren Buffett prefers them to technology stocks. Investors who paid a valuation premium for the most innovative dot-com stocks in the '90s learned the hard way that innovation is not the only requirement for successful execution.
I believe other metrics are more appropriate factors for inclusion in an innovation premium. I'll name a few.
Number of patents filed. The US Patent and Trademark Office has a searchable database of patents filed by year. The search results offer breakdowns by organizations. Find the top patent-generating corporations in America to see who's serious about committing capital to applied research.
Size of IP portfolio. This is related to the number of patents filed, but some companies can build their IP portfolios through acquisitions. IP portfolio management is a cottage industry serving companies who elect to outsource the tracking and fulfillment of things like trademark registration payments. Some companies may wish to keep the size and nature of their portfolios close to the vest.
Size of R&D budget. Good luck getting a company to discuss its hottest research openly. Read a public company's financial statements to get a glimpse of how seriously they take R&D. No way is a privately held company going to reveal their budget. Reverse engineering their budget by reviewing their appearances at conferences may lead to a wild guess.
Number of new innovations launched. This is probably the real bottom line for a company aspiring to the top ranks of innovation. The total number of new products announced in a year is not the only metric. Old products can get new features. Counting this category means separate weights for the number of new products, number of upgrades, and number of new features for existing products. Innovation gets stale if it doesn't get to the market.
There's my criteria rundown for an innovation premium. In each factor, a larger number (more patents, bigger budget) means more innovative power. I do agree that an innovation premium is not necessarily a valuation premium. Railroads rarely innovate but Warren Buffett prefers them to technology stocks. Investors who paid a valuation premium for the most innovative dot-com stocks in the '90s learned the hard way that innovation is not the only requirement for successful execution.
Monday, February 18, 2013
Monday, September 10, 2012
Sunday, July 08, 2012
Wednesday, April 18, 2012
Chesapeake Energy (CHK) Discovers Gas-Powered Self-Licking Ice Cream Cone
CEOs have a lot of power. They can hire and fire thousands of employees at will. They negotiate deals worth billions of dollars. They even have a new prerogative of which I was previously unaware: Energy CEOs can use equity in projects they don't yet own as collateral for loans to acquire those projects from their employer. That's the deal the CEO of Chesapeake Energy (CHK) has worked out with the company he runs. This freebie has apparently never been disclosed to this natural gas producing company's shareholders but takes the risk on the company's balance sheet to a whole new metaphysical level.
This particular deal by itself doesn't materially endanger the company as long as the wells in question keep producing. Chesapeake's shareholder equity cushion of $16.6B for the quarter that ended last December is plenty big to cover the notional loan amount of $1.1B. The bad news is that non-disclosure of this moral hazard raises questions about other potential sweetheart deals the company has not revealed. It also raises the issue of agency costs to shareholders if executives are accustomed to using their company's balance sheet as a backstop for self-enriching deals. This perk's sole purpose is to enable insiders to strip productive assets from a healthy company. If those assets suddenly become nonviable (lower natural gas prices and pipeline disruptions can do that), the loan could become non-performing but the company can't recover from this credit event because it already owns the collateral for the loan.
This deal is the embodiment of the self-licking ice cream cone theory, applied to business value creation. In the final days of the Soviet Union, Communist Party officials and intelligence operatives took control of state-owned assets to enrich themselves and become power brokers in post-Soviet Russia. I cannot determine how this deal is any different from those events.
Full disclosure: No position in CHK at this time.
Tuesday, January 10, 2012
Are Corporations Really People?
Dinner tonight with some deep thinkers at a private club in San Francisco brought forth an interesting discussion of Mitt Romney's statement that "corporations are people." A quick read of his quote reveals it may have been taken out of context. I think Gov. Romney meant to say that corporations are comprised of people - workers, managers, shareholders, etc. - who make it run by earning incomes and paying taxes. I don't think he meant to say that a corporation is the equivalent of a living, breathing human being with comparable political rights.
Unfortunately, American law seems to substantiate the "corporate personhood" argument more than ever. The most significant legal support for corporate personhood in modern times is the 2010 U.S. Supreme Court decision removing any restrictions on corporate spending in political campaigns. A disembodied corporate "person" thus has the same right to express political opinions as a live person without fear of government interference. This is a significant departure from what legal scholars in the era of our Founding Fathers considered corporations to represent.
I believe a return to the original spirit of the Framers' time is in order. Corporations back then were chartered in the public interest to accomplish a specific project, then allowed to disband. They had a definite life span, which is as close an analogy to a human life as an artificial non-person could possibly get. Corporations chartered for an indefinite life span are the norm today, so our legal system needs mechanisms to deter them from egregious behavior. These mechanisms would be analogous to legal sanctions against individual's lives and property. One such mechanism would be a corporate death penalty. Any corporation with a sufficiently long and troubled history of conduct could be found to be in violation of its corporate charter and disbanded. The capital structure of the company would be rendered worthless and its stock and bondholders would lose their entire investment. The financial assets and physical property of the company would remain intact and could be sold to another corporation. The employees and managers would remain a viable part of the new enterprise. Handled wisely, such a transition could even go unnoticed by customers and suppliers in a manner similar to debtor-in-possession bankruptcy proceedings.
Such a legal solution would be impossible to implement today with corporate spending governing political campaigns. It will have to wait until after the next financial meltdown, when both politicians and corporate executives sufficiently fear citizens in the streets to agree to limits on corporate power. Society needs corporations and capital markets, but it does not need certain corporations that have habitually violated the public trust.
Unfortunately, American law seems to substantiate the "corporate personhood" argument more than ever. The most significant legal support for corporate personhood in modern times is the 2010 U.S. Supreme Court decision removing any restrictions on corporate spending in political campaigns. A disembodied corporate "person" thus has the same right to express political opinions as a live person without fear of government interference. This is a significant departure from what legal scholars in the era of our Founding Fathers considered corporations to represent.
I believe a return to the original spirit of the Framers' time is in order. Corporations back then were chartered in the public interest to accomplish a specific project, then allowed to disband. They had a definite life span, which is as close an analogy to a human life as an artificial non-person could possibly get. Corporations chartered for an indefinite life span are the norm today, so our legal system needs mechanisms to deter them from egregious behavior. These mechanisms would be analogous to legal sanctions against individual's lives and property. One such mechanism would be a corporate death penalty. Any corporation with a sufficiently long and troubled history of conduct could be found to be in violation of its corporate charter and disbanded. The capital structure of the company would be rendered worthless and its stock and bondholders would lose their entire investment. The financial assets and physical property of the company would remain intact and could be sold to another corporation. The employees and managers would remain a viable part of the new enterprise. Handled wisely, such a transition could even go unnoticed by customers and suppliers in a manner similar to debtor-in-possession bankruptcy proceedings.
Such a legal solution would be impossible to implement today with corporate spending governing political campaigns. It will have to wait until after the next financial meltdown, when both politicians and corporate executives sufficiently fear citizens in the streets to agree to limits on corporate power. Society needs corporations and capital markets, but it does not need certain corporations that have habitually violated the public trust.
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