Thursday, February 27, 2014

Blasphemy – I am calling “BS” on Warren Buffet (and I am not even talking politics here).


Who am I to criticize Warren Buffett who is generally considered the greatest investor of all time? He is worth slightly more than I am and has been at it far longer. His annual letters to the Berkshire shareholders are usually a treasure trove of great advice. Just not this year!

Even the Oracle of Omaha sometimes gets it flat wrong (investment in World Book Encyclopedia,1962 investment in the textile industry, 2008 investment in the Conoco Phillips). His latest annual letter is featured in the  March 17, 2014 Fortune (can I tell the future or what?)
includes some horrible advice.

In 1986 Buffett purchased a 400-acre farm north of Omaha for $280,000. Warren says: “I knew nothing about operating a farm. But I have a son who loves farming, and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.”  But Warren, these are conflicting trends. Improved efficiency tends to increased supply and reduced prices. (Remember the good old Law of Supply and Demand?)  Why would greater productivity and supply lead to higher crop prices?

“I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside.”  Warren – this falls in the “stupefying” or “huckster” category. No downside?  Remember the dust bowl? What if your water supply dried up?  What if there was a colossal insect infestation? What if new technologies in farming increased foreign production by 50% and the world-wide demand coincidentally dropped by 20% - would that lead to higher prices?  What if fertilizer or insecticide prices doubled or the cost of tractor diesel fuel quadrupled?  What if the US government stopped subsidizing soy beans or repealed the ethanol mandate, or charged the full cost for crop insurance?  What if property tax rates were increased dramatically? Your favorite president keeps warning us about the ravages of global climate change.  What if this had an adverse impact on your ability to grow the most valuable crops on your farm?

Warren continues: “Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm?” But Warren, what if your managers had cheated you?  (Even you are not immune to this risk.) What if one of your workers had a terrible work accident and your worker’s compensation insurance rates doubled? What if your work force had unionized? What if one of your managers created a nice little cash business where he accepted hazardous waste and buried it on your property? Were you going to notice this “detail” in your visits twice every 28 years? Your ensuing liability would extend beyond the money you had invested in the farm because of current hazardous waste law. 

Buffett then states: “You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren't, you must recognize your limitations and follow a course certain to work reasonably well.”  Nice sounding “strategy” Warren but what do you mean?  What “course” would you follow if you were to invest in a semi-conductor company, walnut orchard, or grocery chain in which you knew nothing about the market, the trends, or the general business landscape?  How in the heck would you determine a “course certain to work reasonably well”?  How many times have you said that you don’t invest in technology because you simply don’t understand the business?  You made sense the first fifty times I heard you say that you won’t invest in technology because you don’t have an edge? But now, in hindsight, you try and feed us this cock and bull story that despite knowing nothing about farming that you had an edge? Is there a chance that you simply got lucky this time?

Buffett says: “I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so.”  So Warren, how do you differentiate “speculation” from other business bets that you make all the time? Dictionary.com defines speculation as “engagement in business transactions involving considerable risk but offering the chance of
 large gains, especially trading in commodities, stocks, etc., in the hope of profit from changes
 in the market price.

Warren, you were betting that your revenues would grow based on improved production and an increase in crop prices (you were going “long” these factors.) You were simultaneously betting that your expenses would hold steady or decrease (wages, insurance, seeds, fertilizer, water, diesel, electricity). You were “short” these expenses. So tell me why you weren't “speculating”?  Please explain to me again how you had no downside – especially since you knew nothing about farming. 

Buffett goes on to say: “Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.” Warren, are you saying that you were not subject to macro trends when you bought the farm (by the way the Phrase Finder indicates that the meaning of the phrase “bought the farm” is “to die, particularly in an accident or military action” - that is not my intended meaning here)?  If you had bought the farm in 1929, your investment would have performed poorly for the next decade as farm prices collapsed (In this case the phrase would have had the Phrase Finder meaning as well.)  Macro trends matter more than micro trends (that’s what qualifies them as macro.)  If you don’t know enough about a market, to have an informed and usually correct perspective then you really are just counting on dumb luck.

Buffett then states: “During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it.”  But Warren, you already told us you knew and continue to know nothing about farming.  So how can you or I count on you to intelligently evaluate if the farm is a “solid business with good long-term prospects”?

I prefer Buffett’s earlier and wiser advice: “Risk comes from not knowing what you’re doing.”  Warren, you didn't know what you were doing when you bought the farm. You got lucky (or alternatively weren't as dumb as you suggest). I challenge your notion that one shouldn't look to understand an investment or business extraordinarily well before putting your money on the line.

I am a huge fan of Warren Buffett. But I take everything he says with a grain of salt (especially in politics). I remain skeptical and try to understand the logic of any advice before I apply it. Don’t believe everything you hear or read - even from me!

I suggest you dig deep, find a competitive information advantage (yourself) and then accept that there are no sure-things. And Rule #1 is: Don’t buy a farm if you don’t understand farming.

Just to balance things out, here is advice from Buffet that you should follow:
1)    “If you get into a lousy business, get out of it.”
2)    “If you want to be known as a good manager, buy a good business.” (Of course this      requires a deep understanding of the business to really know if it is “good”.)
3)    “Price is what you pay. Value is what you get.”
4)    “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

It is always valuable to listen to Warren Buffet.  And most of the time it even makes sense to follow his advice. But when he came out in support of Barack Obama I knew that even he was fallible.  



Wednesday, February 26, 2014

At last - something good to report about the Affordable Care Act


I have to say that today I found one good thing to come from the ACA. You ask, Jerry what could that be? Well, I read that "Retail" health clinics are increasing in number where in the past they had reached a point of stagnation. Now, if you don't know, a retail health clinics is one that, in general, is open seven days a week, doesn't require an appointment, accept more types of insurance than doctors and charge about 30% to 40% less for similar services. The reason for the increasing numbers is that the small business people who are opening them are betting that the ACA will bring longer waits and higher prices at the doctors' offices and will drive a money making percentage of patients to their door. Just economics. If there is a need for a product then someone will come along and attempt to fill that need.

This could be a great idea and the reason that I think so is that the AMA is against it. Their position is that "such facilities don’t provide the continuity of care" and "they are detrimental to the concept of a 'medical home,' where patients have a personal physician who knows them well and coordinates all their care."

And if that does not keep people from using these new clinics then they say, “Some pediatric practices say they won’t see you if you go to a retail clinic,”

Well, if the "competency card" does not work then you can always play the "fear card"...

Jerry

Tuesday, February 25, 2014

Saudi American


Two items of interest in the petroleum production sector. Thanks for the information Mark Perry [Professor of economics at the University of Michigan].

"For the 12th month in a row starting in November 2012, “Saudi America” took the top spot again in October as the No. 1 petroleum producer in the world. Also, for the 12th straight month, total petroleum production (crude oil and other petroleum products like natural gas plant liquids, leased condensate, and refined petroleum products) in the US during the month of October at 12.77 million barrels per day (bpd) exceeded petroleum production in No. 2 Saudi Arabia (11.82 million bpd)... During the 2004 to 2008 period before America’s shale boom started, Saudi Arabia was routinely producing 20-30% more petroleum than the US. But when America’s shale revolution started in 2009, there was a surge of nearly 50% in the supply of petroleum produced in the US and America surpassed Saudi Arabia at the end of 2012 to become the world’s No. 1 petroleum producer." and "In October, the US produced more petroleum products (12.77 million bpd) than the combined petroleum output of all of the countries in Europe, Central America, and South America (11.82 million bpd) for the fifth straight month".


The second item of interest is the following from Schlumberger [almost went to work for them before I graduated undergrad school]:

"New ‘broadband sequence’  fracturing technology increases shale output by 20% and cuts well completion time in half" and broadBand sequence fracturing technique has enabled customers in South Texas to increase production from new completions in unconventional reservoirs by more than 20%. It has also reduced well completion time by up to 46% in plug-and-perf operations by stimulating longer intervals compared with conventional methods. In addition, this technology was applied to a well in South Texas for a refracturing operation, which resulted in double the production with a fourfold increase in flowing pressure."

I like the term that is used, "Saudi America"...and this with no increase of production on federal lands.....lot of private land owners are making some good money....

Jerry

Saturday, February 22, 2014

The Congressional Budget Office and Alice in Wonderland


“Begin at the beginning," the King said, very gravely, "and go on till you come to the end: then stop.” Lewis Carroll, Alice in Wonderland.

I first read, or it was read to me by my grandmother, Alice in Wonderland before I was six or seven years old. A few years later my grandmother gave me her 1870's copy of Alice and I still have it on my bookshelf, a bit worse for wear these sixty years later. I was reminded of some of the lines from the book this morning while reading a post by Don Boudreaux (Professor of Economics at George Mason University) about the CBO study of the proposed minimum wage hike on employment.

The CBO considered the role of publications bias on their study and to their mind academic journals “According to some analyses of the minimum-wage literature, an unexpectedly large number of studies report a negative effect on employment with a degree of precision just above conventional thresholds for publication.” Because of this the CBO study assumes that the bias of published data would be stronger toward a negative employment outcome for minimum wage workers.

Now standard economic theory predicts that hiking the minimum wage reduces the number of jobs that low-skilled, first time job seekers have available. This standard supply and demand theory is just that, standard theory, while the CBO assumes that the number of studies about negative impacts show a bias in the publications (which must be "adjusted" for).

Because of this, the CBO study may give undue weight to the no or small effect publications and not enough weight to the standard supply and demand analysis. Don's conclusion is that “the negative effects on employment of minimum-wage legislation are likely even greater than those predicted by the CBO.”

I have said many times that original source data is important but I also have said that source is not everything. One must know how the data is "manipulated" to have a true understanding of the meaning of the data presented.

Jerry

Income Inequality, Opportunity Cost and Efficiency on the Farm


Why do we have 'income inequality'? Adam Smith, in 1776, answers the question: 

In Book Five of Adam Smith's Wealth of Nations: "...that in the hunter-gatherer stage, the first stage of society, all are equally impoverished and hence all have equality [equality of poverty]. That once man enters the shepherd stage inequality occurs and it is associated with birth [inherited traits] and good fortune (the more one practices, the luckier one gets)."

Jerry

^^^^^^^^

John and I have been talking about "start-up" companies the last few weeks. Here is a new start-up company created on "opportunity cost"? Postmates is billing itself as 'Everyone's favorite delivery service' and promises to get any product from a store or restaurant to you in under one hour. Now fast delivery is not something new. Most of us can call up for a pizza and get it to our door in 20 to 30 minutes. Generally these delivery are very limited in scope while Postmates promises to deliver 'any product'.

What makes Postmates interesting to me, in an economic way, is that they are using the concept of opportunity cost in their advertising. Opportunity cost is the difference in return between something you spend your money/time on and what you did not spend your money/time on. One example is the money you would have earned by working full-time instead of going to college. You lose four, or more, years of salary, your opportunity cost, but you hope to make up for that loss during your job life by having a degree. You are forgoing job advancement and profit now for something that may pay off at a later date. A second example is if you have a garden and grow carrots the opportunity cost is the other crop that you might have grown but did not (tomatoes, corn, etc.). The gardener is saying that he will grow carrots for his dinner plate at the loss (cost) of tomatoes for his sandwich. 

Back to Postmates. Their ads say that “We give you something priceless: time. Delivery fees start at $5. An hour of your time is worth way more than that.” 

Remember there is a cost associated with every decision. A cost for getting something and a cost for not getting something else.

I wonder how many of us consider 'opportunity cost' when we decide to do anything. Back in school, from kindergarten to graduate school, we all made opportunity cost decisions and probably, if like me, did not know we did. To study or to play. The number of hours studying would, I hope, increase my grade but would cut into my leisure time.

I should have studied more.....

Jerry

^^^^^^^^

I get discouraged by the growth of Big Government and its inherent inefficiency. And the trend seems to be more government involvement in the economy rather than allowing free enterprise to solve the world’s problems.

But this New Yorker article (from last Fall) is quite encouraging.

The Climate Corporation is one of at least a handful of companies that are using satellite monitoring, GPS tracking, and the analysis of Big Data to help the American farmer squeeze more yield from his/her farmland. It also uses this capability to offer customized crop insurance that supplements that offered by the US Department of Agriculture.

In an era of shrinking water resources (especially in the Western US) and ever-changing weather and climate, our ability to plant the right crop at the right time in the right place adds greater efficiency to the American farm.

Monsanto purchased the Climate Corporation last October for $930 million. In this case, Big Data is big business and getting bigger.


John

Monday, February 17, 2014

How much is American farmland worth?

Why should American farm land trade at a premium to farm land in Russia, South Africa or Argentina?

Well there are a number of factors today (although these may be shrinking). 1) What is the cost of labor to work the farm land? 2) What are the property taxes? 3) What is the level of economic stability in the area? You did’t want to invest in Cuban farm land right before Castro took control. 4) How close are the markets to your crops? If you are growing walnuts and the walnut market is on the other side of the planet then you will make less than if you are near your market. 5) What are the chances that the government will simply confiscate your property (think Venezuela’s confiscation of the property of Concoco-Phillips). 6) Do I have access to modern farm machinery to harvest my crop or do I have to rely entirely on human labor? 7) How dependable and economic is my water supply? 8) Can I use the best fertilizers for my crop?  8) What are the alternative values for the land? When farm land was being converted into subdivisions in the US, it lowered the supply and the minimum price for the land. 9) What are the state and federal income taxes on farm income? The lower these are the more valuable the land. 10) Is there an established support infrastructure for the crop you are growing? For example, if you are the only walnut orchard in the area then you have less opportunity for sharing hullers and sorters and this will likely drive your costs up. 11) How prosperous are the farmers in your region? Farmers are the usual buyers of available farmland and if they have been making and saving money then they can pay a higher price than if they are struggling to make money on their existing land.


The Sunk Cost Fallacy


Do you know what the "Sunk Cost" fallacy is? Do you make smart, rational decisions most of the time? Did you ever decide to finish reading a book or finish watching a movie that starts off 'bad', gets worse, and you knew that was not going to get any better? And your reason for doing so is, “I have already invested time/money in the book/movie so I need to finish it. Well, that is the 'Sunk Cost' fallacy.

Economically speaking the Sunk Cost is the past cost that you have already paid and can not recover.

The text book example of Sunk Cost fallacy is that you have purchased a theater ticket and when the time comes for you to use it you don't want to go to the theater. Your mind, and other people, will tell you that this is wasting the ticket but if you take time to consider this you will see that you and those other people are wrong. The money spent for the ticket is the sunk cost. You can't do anything but use the ticket to go to the theater and you now say that you don't want to go to the theater. I purchased the ticket so I must use it. In fact, if you use the ticket you are creating more waste in that you are wasting your time.

The Sunk Cost fallacy tells us that a decision can only be justified by its immediate true causes and that any arguments that were considered in the past and were dismissed then just do not count now...the old saying is “if you could have seen it coming, why didn't you?”

Rational behavior [buying the ticket and then using it] may be consistent but it does not mean that you can be more rational by simply being more consistent.

Considering the Sunk Cost fallacy is just way of asking “What have you done for me lately?”

Jerry




Big Data in American Agriculture


I get discouraged by the growth of Big Government and its inherent inefficiency.  And the trend seems to be more government involvement in the economy rather than allowing free enterprise to solve the world’s problems.

But this NewYorker article (from last Fall) is quite encouraging.

The Climate Corporation is one of at least a handful of companies that are using satellite monitoring, GPS tracking, and the analysis of Big Data to help the American farmer squeeze more yield from his/her farmland. It also uses this capability to offer customized crop insurance that supplements that offered by the US Department of Agriculture.

In an era of shrinking water resources (especially in the Western US) and ever-changing weather and climate, our ability to plant the right crop at the right time in the right place and adds greater efficiency to the American farm.


Monsanto purchased the Climate Corporation last October for $930 million. In this case, Big Data is big business and getting bigger.

John

Saturday, February 15, 2014

How much should the public sector consume?

The Fraser Institute has suggested that the public sector should consume 30 percent of the GDP for optimal economic growth. I am not sure about what data the Fraser Institute used to determine this level but the Rahn curve, suggest that the optimal level of government spending is 15 to 25 percent of GDP. If we check data from countries around the world, both current and historical, the data seems to lean toward the Rahn curve. Singapore and Hong Kong both have a public sector that consumes less than 20 percent of GDP and these are two of the fastest growing places on the planet. According to the Fraser Institute if these two governments spent 50 percent more they would grow faster while the Rahn curve shows that they are just right. Going back to some historical examples we have: Canada, before the 1920's had public sector spending of about 16 percent of their economic output and in the 1870's the U.S., Germany, France, Japan, Sweden, and the U.K all had government that consumed about 10 percent of their GDP. And in those time frames all these countries had rapid and major growth.

Reading between the lines of the Fraser Institute study and the Rahn curve you will see that they are actually calling for a reduction in the size of government (Rahn more so than the Fraser Institute). According to IMF data Canada has government spending of GDP is 41 percent, The U.S. is 39 percent of GDP and France is spending 55 percent of GDP.

So the moral of this research is that government is far too large in all developed countries of the world.

Jerry

The Law of Supply and Demand and Nike’s New “Red October” Air Yeezy II Sneakers.


On February 9, Nike announced via Twitter that it has a few of the new Air Yeezy 2 Red October sneakers.  They sold out in 11 minutes.
Nike’s goal is to make the most total profits – from all their shoes and products.  They initially create a shortage for this new design by releasing only a limited quantity. But this doesn’t move the needle on their Profit and Loss statement.  The demand for the new shoes hopefully then creates a buzz, plenty of publicity and the chance to sell the new sneakers by the truckload.
Nike does not benefit initially from the higher prices in the secondary market like eBay (where one capitalist tried to resell his pair at about $16 million), but the perceived shortage provides a media spotlight on the new shoe and plenty of free publicity. It also helps drive the demand for more shoes that Nike will sell later.
Nike’s goal is to make lots of money from the new shoe line and to do that they will have to sell many more shoes and their total gross profit will be (the number of shoes sold times (wholesales shoe price less the cost of production)).

But here’s the rub.  The more shoes they sell, the less scarcity.  In the long run you can’t have both scarcity and sell an infinite number of shoes.  In a free market, prices self-correct. 

John


New word of the day "Locavorism"

Here is a new word for you [or at least for me today], "Locavorism". These are folks that have as an agenda the transformation of the U.S. food production system. Their transformation is from the large, one crop farms that are "corporation" owned to a system characterized by small farms growing multiple crops and marketing directly to consumers at the local level. From my reading of history what the Locavores want is a return to the way things were. Back in 1790 in the U.S. about 90 percent of the population worked and lived on 'the farm' and most farms were just a few acres. By 1900 the average farm was 147 acres and the farm population was 38 percent of the labor force and in 2000 the average farm was 461 acres with a farm population of 2.6%.

What we hear from the media and the Locavorism supporters is that by eating food grown or produced locally [50 to 150 miles] that they are made heather by eating this food, they get the freshest food possible, the farmers get a fair price, they support the local economy, and energy used to produce, package, ship, and store the food is reduced. All this sounds good to me and I must say that I do, in the spring, summer, and fall, shop at the local Farmers market.

I do have some concerns about the "Locavorism" movement. If we were to return to the agricultural "landscape" of 1930 we would find that the average farm produced 13 bushels of wheat or 20 bushels of corn per acre. Today the average farm produces 44 bushels of wheat or 164 bushels of corn per acre. In doing more reading about the 'Locavorism' movement I find that they are very concerned about Climate Change and the environment. They talk about the amount of 'energy' needed by the modern commercial farms. Did you know that today there are 4.3 million fossil fuel-powered tractors working on the farms and they have replaced 21.6 million farm work animals from 1900 [and I don't have to tell you what fossil fuel does to the climate]. About 14 percent of the national energy budget is used in agriculture by last count. Back in 1900 about 5 different crops were produced on each farm [average] and today it is about 1.5 crops per farm. This leads to the need for 'soil enhancements' and 'damage-control agents' [pesticides, herbicides, and fertilizers for us less literate folks]. This is a big concern to the environmentalist and locavorism movement.

My conclusion from what I have read, if carried out to the logical conclusion, is that the locavorism movement is an anti-urban movement. If we were to return to the days of yesteryear and 'small farm' America, food production would drop, food prices would rise, people would be reduced to having only those food items grown locally, and seasonally [I don't have a pineapple farm within 150 miles of me and I love pineapple]. My best guess would be that the population would have to be reduced by some method [maybe some type of "government" intervention]. Small multiple crop farms do not produce as much nor as efficiently as large single crop farms.

Jerry

Friday, February 14, 2014

The Law of Supply and Demand and Derek Jetter


In an effort at full disclosure I must tell you that I am not a big sports 'fan'. Yes I do play tennis as often as I can and I watch the tennis channel a few times a week when possible. I played baseball when I was much younger and then moved over to softball later in life (slow pitch and I don't want to hear any wise cracks). Now that I have disclosed that I will get on to the point of my post today.

I saw the Derek Jeter announcement that he will retire from the game after this season. Now what makes this of interest to me is that as soon as this was announced ticket prices climbed like mad. Before the Jeter announcement you could get a ticket to the season ending series in Boston for $26. About an hour after the announcement the ticket site did not have a ticket for less than $200 and as of the last price check the tickets were $1,153.01. Wish I had about 10 of those $26 tickets so I could resell them on-line. Yes, I would scalp for profit.

What does this tell us? Did Jeter's value as a player jump over $1000 per seat in just a few hours? I don't think he improved his game any in that hour or two. What this tells us is just basic economic theory. If there is fixed 'supply' of something [tickets to Jeter's last game] then the 'price' of that fixed something will go up as 'consumers demand' increases. Simple Supply and Demand.

Now if I announced that my last game of tennis would be next fall I don't think I could get any more for a ticket than I am getting now, which is zero dollars and no cents. More economic theory. If you produce something people want then they will demand that product and the seller can then demand a higher price. I hate to admit it but I don't think anyone is demanding to see me play tennis. But then again I could be wrong.

Jerry




Tuesday, February 11, 2014

Government Price Controls and Bad Reasons to Start a Business


The Role of Government Setting Prices


I have a question for you and that question is: “Which of these three choices do you think is better? 1) An economy that is a 'Free Market' system with little interference from government, 2) An economy with a mandated price-floor, or 3) An economy with a mandated price-ceiling? 

The first choice allows prices to reach their own level by the interaction of individuals [sellers and buyers] negotiating for products. The role of government is minimized and, for the most part, only intercedes to enforce contracts and, in the case of disputes between seller and buyer, act as an umpire.

The next two, price-ceilings and price-floors, are systems where the government steps into the 'market' and, for the 'common good', 'sets' the maximum or minimum price for products or services. Examples of both of these are to be found in the U.S. at every level of government, local, State, and Federal.

Price-ceilings are put in place to 'protect' the consumer from sellers who would overcharge for a product that is in short supply. One example of a price-ceiling that I like to use is rent control. Consider the results of this 'good' intentioned 'government' interference in the market. Sellers are restricted in their 'profit' and when 'profit' is lowered fewer sellers enter the market and may even leave the market [a basic economic law]. That simply means that fewer 'housing units' will be built because there is little incentive [profit] for the seller to build them. In the 'free market' sellers would have the incentive to build more housing units. Consider also that at a lower 'profit' margin the seller has little incentive to maintain or improve his product. The seller will get the same amount no matter what he does and the buyer is a captive audience because there are no other 'housing units' available.

Now most people think that price-floors are a bit different than price-ceilings but they are not and, again, the basic economic law still applies. A seller is required to put a certain price on his or her product and the buyer is required to pay that price [if the buyer wants it]. If the price on a product goes up I have found very few people that will buy 'more' of that product. I like to use the example of minimum wage when talking about price-floors. Government, for the 'common good', legislates price-controls for labor [an individual is required to 'sell' his or her labor for a mandated price]. This sounds good to the general public and in fact, many professional economists espouse the idea that the 'poor' can be helped by this form of government intervention. I now ask a pop quiz question. “Why should a buyer [a business person] buy more of something [the labor of an individual] from a seller if that something [labor] has a higher price?”

That is the problem with economics, everything is a product that the individual will either buy or sell to survive.

And suffer not the barren-handed to take part in your transactions, who would sell their words for your labor.

To such men you should say, "Come with us to the field, or go with our brothers to the sea and cast your net; For the land and the sea shall be bountiful to you even as to us." - Kahlil Gibran, The Prophet

Jerry


!@#$%^&*


Here are a few bad reasons to start a new business:

1)   You are struggling to get a regular job and can’t figure out anything better to do.

2)       You want to work out of your home, and it would be easy to convert that extra bedroom into an office and such a short commute. Unfortunately being an entrepreneur is not especially “convenient”.

3)      You want a part-time venture where you can control your hours. Starting a business is not a way to shorten your work week. The exception is if you are simply going to sell your expertise in a field in which you are already established. For example if you are a well-known patent attorney (on the front-end side of preparing and filing patents as opposed to the back-end side of litigating them) then you will probably continue to prosper after moving to your mountain cabin (with fast internet service). But if your venture is something untested, then you will usually be at a big disadvantage working remotely.

4)      Your “regular” job is too much work and too stressful.

5)      You want to be your own boss.

6)   You are running out of money.

Starting a new business is almost always far more work than a full-time job at an existing company. A startup might mean that you are away from your home more than you were before. It is generally harder to succeed at a new business than working for an existing well-run company.

There are plenty of great reasons to start a new venture - just make sure that you are the right person at the right time in the right location. Otherwise, adjust, learn, move, network, save and get ready to make the plunge.


There are plenty of great reasons to start a new venture - just make sure that you are the right person at the right time in the right location. Otherwise, adjust, learn, move, network, save and get ready to make the plunge.

John


Michael responded: "I'd refer you to my favorite millionaire, Dave Rogers. He started his guitar shop for two main reasons: first to keep his employers business going for the customers, and second: because he loved the business. He went through a period of living out of his car, then the back of the shop, and over the next 25 years became the most successful independent guitar dealer (and owner of one the largest collections of vintage guitars) in the US. To this day, he's passionate about the business and very appreciative of his customers, some of whom he's never met because of internet sales. When you are pretty much a nobody like me, certainly not a wealthy person or musical star like he deals with every day, but he remembers your name, your kids, spouse and band, and a hundred other details about you...this is a man who was born to business. And success. 

!@#$%^&*

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Sunday, February 9, 2014

A few thoughts from Jerry and John.


It’s Lonely at the Top!

If you think it is lonely at the top, consider the loneliness of the startup entrepreneur who is struggling to find customers, investors to keep the dream alive and is worried about how she will pay the bills.

John

!@#$%^&*


Great News on the Job Market!

Great news on the job market from North Carolina. In June, according to the BLS number, the jobless rate was 8.8 percent. In December the rate, again from BLS, was 6.9 percent. A full 1.9 percent drop in the jobless rate in six months. Looks like Carolina is on the road to recovery and if you are looking for a job you should pack up, and to put a twist on the Horace Greeley quote, “Go East, young man”. 

Or should you? 

Seems that the 'labor force participation rate' in North Carolina dropped a full percentage point over the same time while the national job participation rate dropped only 0.7 percent.

So there is a greater percentage of people out of work [dropped out of the work force and not counted as unemployed by the BLS] in North Carolina than across the country as a whole. As stated by the BLS spokesperson “So, our official estimates indicate that unemployment (both in terms of the level and rate) in North Carolina has gone down significantly since June, but neither the labor force nor employment level changes were significant.”

And I quote Mark Twain "There are three kinds of lies: lies, damned lies, and statistics." 

Jerry

!@#$%^&*


Advantage versus Economic Diversity

Most investors can only conceive of participating in “conventional” markets (stocks, bonds and real estate). The advantage of these investments is that there is plenty of public information available, they are highly regulated so you are less likely to get scammed, the friction costs of buying and selling stocks is very low (it is much higher for real estate) and you generally benefit from inflation (at least for stocks and real estate).

But the average investor is unlikely to get either an information advantage or a high level of diversity with this kind of portfolio. After all, low interest rates benefit both stocks and real estate, and increasing interest rates eventually tend to hurt investments in both arenas. If one owned Apple Computer, Exxon, Citibank, Allstate Insurance and Ford Motor and the overall market crashed one day by 20% don’t you think that each of these independent investments might do just as poorly? If the US stock market dropped by 20% one year, what do you think would happen to real estate prices?

On the other hand, if the law permitted you to operate a legal craps table and you only allowed pass line bets then you would have a 1.41% advantage on each and every wager. If you ran it yourself, never made a mistake on the payouts (your customers tend to point out mistakes in your favor more than mistakes in their favor), and had no other friction costs, this business would have a wonderful and rare combination of diversity and advantage. Each of the bets would have zero correlation with the other bets. Your small advantage would add up to steadily growing profits over the long run. The more reasonably sized bets that were made at your table, the more money you would make.

But these unique opportunities where you have both diversity and an advantage are hard to find and hard to retain. When you find such a prospect, the word tends to get out and new competitors undercut your advantage and increase your friction costs (for example advertising expenses).

John

!@#$%^&*

The Labor Movement

Pop culture and folk history [and our school system] tells us that the trade union labor movements and 'concern' over the welfare of children by 'progressive' were the heart and major reason for government laws and regulations against 'child labor'. We would still have little kids tied to looms if not for politicians fighting those greedy business people.

Would you be surprised to learn that here in the United States that the nation law against 'child labor' did not exist until the 'Great Depression' and the passages of the Fair Labor Standards Act in 1938? [that's the federal law that defined the age that you have to be to be hired. That law also brought us a national minimum wage and it defined full-time and part-time work.] And to drive my thought home I quote Jeffrey Tucker “...[by the] time this legislation passed, however, it was mostly a symbol, a classic case of Washington chasing a trend in order to take credit for it.”

When considering the reasoning behind the law to 'protect' children think about this. How better for 'government' to lower 'unemployment' and raise wages than to, through force, declare a group of potential workers unemployable [we did it 'for the children']. But you say, “Jerry, how can you be so cruel? Haven't you read Charles Dickinson?” Yes, I read Dickinson [and others] and for many years bought into the myth of the intolerable use of young children in factories [see any government history text in our public schools for photo's of children working in the 1900's] 'but' then, and I do use the word 'but' often, I began to read 'real' history. From 'real' history we learn that the development of the 'free market' in the 17th and 18th centuries was the primary driver in the reduction of child labor, not 'government' action. As prosperity grew, with the growth of the 'free market', more kids left the workforce and went to school. If you look at the census reports you will find that by 1930 about 6 to 7 percent of the American workforce were between the ages of 10 and 15 and of these 3 of 4 were working in agriculture. That is to say 75 percent of the 6 percent were working on the 'family' farm in 1930. In urban areas 'child labor' was mostly gone. Cultural factors were important but the major factor was economic. Parents could 'purchase' their kids education from the family's 'surplus income' instead of looking to those kids as a source of needed earnings.

So what brought about this line of thought today? I was thinking about 'unintended consequences' while reading an article titled “Why India's Ban Against Child Labor Increased Child Labor” by James Schneider. He makes the statement that “[it is taken] as a matter of faith that increasing taxes will dull people's desire to work. However, higher taxes can sometimes cause people to work more. When higher taxes reduce the after-tax wage, people are poorer for any given number of hours worked. When they become poorer, many people are more anxious to earn extra money. Economists call this the "income effect" and “Increasing tax rates is not the only way that the government can reduce wage rates. If the government punishes your employer for hiring you, your services will be less marketable, and your wage will fall.”


He goes on to discuss a paper that shows how 'child labor' has increased in India because of the Child Labor (Prohibition and Regulation) Act of 1986. The paper, 'PERVERSE CONSEQUENCES OF WELL-INTENTIONED REGULATION: EVIDENCE FROM INDIA’S CHILD LABOR BAN' by BHARADWAJ and LAKDAWALA, suggest that poverty is the key determinant of families using child labor to increase their income.

And just to let you know [I do speak from some experience], I started working full-time in the oil patch (8 hours-a-day 7 days-a-week, time-and-a-half for anything over 40 hours-a-week, good money) when I was 14. Of course that was only in the summer. But I did worked weekends when school was in secession. And that was legal in Oklahoma, at the time, under the Fair Labor Standards Act in 1938. There are loop-holes in every law if you know where to look...

Jerry 

Friday, February 7, 2014

Advantage versus Investment Diversity. Can you have it all?

Most investors can only conceive of participating in “conventional” markets (stocks, bonds and real estate). The advantage of these investments is that there is plenty of public information available, they are highly regulated so you are less likely to get scammed, the friction costs of buying and selling stocks is very low (it is much higher for real estate) and you generally benefit from inflation (at least for stocks and real estate).

But the average investor is unlikely to get either an information advantage or a high level of diversity with this kind of portfolio. After all, low interest rates benefit both stocks and real estate, and increasing interest rates eventually tend to hurt investments in both arenas. If one owned Apple Computer, Exxon, Citibank, Allstate Insurance and Ford Motor and the overall market crashed one day by 20% don’t you think that each of these independent investments might do just as poorly? If the US stock market dropped by 20% one year, what do you think would happen to real estate prices?

On the other hand, if the law permitted you to operate a legal craps table and you only allowed pass line bets then you would have a 1.41% advantage on each and every wager. If you ran it yourself, never made a mistake on the payouts (your customers tend to point out mistakes in your favor more than mistakes in their favor), and had no other friction costs, this business would have a wonderful and rare combination of diversity and advantage. Each of the bets would have zero correlation with the other bets. Your small advantage would add up to steadily growing profits over the long run. The more reasonably sized bets that were made at your table, the more money you would make.

But these unique opportunities where you have both diversity and an advantage are hard to find and hard to retain. When you find such a prospect, the word tends to get out and new competitors undercut your advantage and increase your friction costs (for example advertising expenses).