Grant’s book: Minding Mr. Market

September 12, 2006

Minding Mr. Market“, is a collection of articles from “Grant Interest Rate Observer”. They’re from the 1980s and the earliy 1990s. Grant does not add much to the articles. Some annotations update the reader on how events turned out, but there is no organized attempt to look back at history and the predictions that were made. The essays are organized by topic. Apart from that, the reader has to do the analysis and summarizing on his own, with no help from the author.

Nevertheless, here’s something from the book…

Perhaps the oldest and purest blind pool on record was the “company for carrying out an undertaking of great advantage, but nobody to know what it is” during the South Sea Bubble of the early eighteenth century.

Grant goes on to quote Charles Mackay, from “Memoirs of Extraordinary Popular Delusions and the Madness of Crowds”:

The man of genius who essayed this bold and successful inroad upon public credulity, merely stated in his prospectus… … each subscriber, paying his deposit [of an initial 2 pounds for a 100 pound share], would be entitled to 100 pounds per annum. He… promised that in a month full particulars should be duly announced, and a call made for the remaining 98 pounds… he found that no less than one thousand shares had been subscribed for… He… set off… for the continent. He was never heard of again.

I would not recommend this book to a general audience. Since Grant did not add any commentary, the collection of articles would be of interest to a small niche of folks who already have a decent understanding the financial history of the period and who want to see what Grant said about it.



July 3, 2006

“Greenmail” is supposed to be a form of corporate-blackmail. Someone buys a large chunk of a company’s shares, threatens the company with a take-over and ends up getting bought out at a good profit.

Fact is, most of the time, the “greenmailers” do not take anything near a majority stake in the company (more like a 10% share). Fact is, that they threaten managements, not shareholders.

The typical situation is this: the company is in a situation where radically different action by its management can make a huge difference. Existing managements are often sentimentally attached to parts of their business, or to certain ways of doing things. At other times, managements know what they need to do, but simply procrastinate because its a tough decision; then they make a half-hearted effort, “hoping for the best”.

A typical investor, seeing such a management situation, would go elsewhere. Others, however, are more “activist” in their calls for change. The ones who earn the “green-mailer” title are the most ruthless of all. Their attitude is: it’s all dollars and cents. (e.g., T. Boone Pickens, Sir James Goldsmith, Carl Icahn, Kerkorian).

Recently, Carl Icahn bought a stake in AOL and he was on the business news every week explaining why the CEO of AOL (not AOL, but the CEO) was doing such a bad job. Kirk Kerkorian took a large stake in GM last year, and insisted on having a representative on the board. When he got that, the representative — Mr. York — began telling GM what they ought to be doing. This week, Mr. Kerkorian sent GM a letter suggesting that they should tie up with Nissan/Renault. (This might even imply bringing in Mr. Goshn of Nissan as some type of super-boss over Mr. Wagoner.)

In essence, what these so-called “raiders” do is to light a fire under management. Since they do not own a huge chunk, the real threat is that the other big holders — large mutual funds and pension funds — will agree with the raider’s reasoning. The big boys usually stay polite and let the “raider” hold the gun in public. The ultimate threat is not to the company, but to its top-management team: shape up or we’ll find someone else who can run the company.

Added  (Aug 19th): The above does not mean that shareholders should always welcome folks who want to take over the management of their companies.  The WSJ of Aug 19th 2006, had a page-1 story about some shareholders that fight back, with good reason. Here is how it works: a raider targets a firm where management could do better. Instead of selling for a price that is slightly higher than market, and letting the newcomers whip the company into shape, the raid can be a wake up call for shareholders. They can motivate management or bring in new managers and do great things for themselves. If you spruce up that jalopy, you might be able to keep more of the profit for yourself.

47000 Hourly workers leave GM

June 27, 2006

Today, GM announced that over 47,000 of the 137,000 hourly workers at GM and Delphi have opted to take the buyout offered by the company. That’s about a third of the hourly workforce.

A few (under 5000) took a large cash payment (between $70K and $140K) and gave up their perpetual health coverage [perhaps they’re covered by a spouse’s plan]. The majority took the smaller payouts [upto $35K] but retained GM health benefits.

Evidently, this plan does not solve one GM problem: a huge healthcare liability stretching into the future. However, it does solve another important problem: too many workers, that the company could not fire because of the stupid contract they negotiated. (Many workers were staying home because the company did not need them, but were still being paid upto 90% of their wages!) Some analysts are now saying that too many workers left — and GM will have to hire temps, at higher costs. Instead, I think GM should “embrace their loss of market share”, by trimming low-margin products in the US.

GM has already done a lot to cut non-labor costs.

On its own, cutting costs cannot save a business. GM has to look to the revenue side of the P&L. That part of their move started in 2001, with the hiring of Bob Lutz. Recently, that has started to show results, with quite a few new models hitting the lots.

As a (itsy-bitsy) shareholder, I mostly like the way GM is attacking their problems (not everything about it). The change is not going to be easy, and there are many things that can bring it down. The two most important things for GM now are: to negotiate a good union contract in 2007; and, to continue to bring out interesting vehicles at ever lower prices.

Meanwhile, the story at Ford does not appear quite so full of possibilities. GM is in bad shape, but at least it is trying to do something meaningful about it. If it fails, it won’t be for lack of one last valiant effort. On the other hand, Bill Ford is telling people to cut the bureaucracy… all well and good, but hardly turnaround stuff. Recently they also have been hyping “work at Ford, buy a Ford”, which is truly an ominous sign. I wonder if Bill Ford Jr. will be the one to finally send the family firm into bankruptcy. Indeed, if Toyota buys Ford in a fire-sale (post-bankruptcy, with union contracts voided) SE Michigan may see an end to years of lagging the country economically. [I wonder of Toyota will keep Bill’s roof!]  [Update: Sept 5th. Bill Ford has stepped down as CEO of Ford.]

Businessman Interview: Infosys CEO

June 16, 2006

Interesting interview with the CEO of Infosys.

…when we sat down in the bedroom of my apartment in 1981, we discussed
for four hours what our objective should be. Should it be revenues, profits,
market capitalization?

No, we said it should be none of
those. We will seek respect from every one of the stakeholders. My view was if
we sought respect we’d automatically do the right thing by each of them. We’d
satisfy our customers, be fair to our employees, and follow the finest
principles with respect to investors, we would not violate laws, and, finally,
we’d make a difference to society. And then I said automatically you’ll get
revenues and profits and all that.

Buffett cites Passion as top requirement for CEO job

June 1, 2006

Warren Buffett, of Berkshire Hathaway is eminently quotable. Janet Lowe even has a small book full of quotes from Buffett. His business partner, Charles Munger, is very perceptive too. Here are some snippets from this year’s annual meeting.

Buffett, speaking of investors with short time-horizons: “The only way you can leave your seat in burning financial markets is to find someone else to take your seat, and that is not always easy….”

And Charles Munger’s comment on short-term thinking is witty: “If you jump out the window at the 42nd floor and you’re still doing fine as you pass the 27th floor, that doesn’t mean you don’t have a serious problem.”

When asked what he looks for when choosing a CEO to run one of his companies, Buffett said that the first thing he looks for is passion for the job. This is followed by: intelligence, energy, and integrity. Then, with characteristic wit, he added: “If you’re dealing with someone who doesn’t have integrity, you’d better hope he’s dumb and lazy, too,…”

A level playing field

December 6, 2005

Every now and then one hears an appeal to “level the playing field“. This is a call for help; but, not for help in the name of charity, rather … in the name of justice. The person asking for a level playing field is saying that the existing situation is unjust to them. They do not want a special dispensation, but recompense. This plea is an important weapon in the arsenal of the beggar, because if you believe it, he is no longer a bum asking for a handout, but a wronged man asking for his due.

The phrase is popular enough for there to be an apparently left-wing “Level Playing Field Institute“. There’s also a novel titled “The Level Playing Field“, about the Japanese “infiltrating” U.S. markets. Recently (Dec 6th, 2005), Rick Wagoner, GM’s CEO sounded just like that novelist. In an op-ed, published in the Wall Street Journal, he says: “GM wants a level playing field, not a bailout“.

He cites three areas where he claims injustice is being done to GM: health-care costs, exchange rates and unchecked litigation. Of these, heath-care costs (not just for current employees, but for retirees) is the largest contributor to GM’s financial woes. On the issue of health-care, Mr Wagoner says this:

Foreign auto makers have just a fraction of these costs, because
…their governments fund a much greater portion of employee and retiree health-care costs.
Some argue that we have no one but ourselves to blame … That argument, … ignores the fact that American auto makers … created a social contract with government and labor that raised America’s standard of living and provided much of the economic growth of the 20th century. American manufacturers were once held up as good corporate citizens for providing these benefits. Today, we are maligned for our poor judgment in “giving away” such benefits 40 years ago.

Now, the second paragraph is just a way of saying something along the lines of: when we at GM were not pushing for workers to be too productive and when we were promising them things that we could not deliver on, everyone was cheering. Now that it has nearly bankrupted us, why are you blaming us? [Basically he’s asking: who were we to know! We’re just human beings; our corporate jets and multi-million dollar salaries don’t make us immune to short-term thinking and a quest for approval.]

The first paragraph is the plea for a level playing field. The argument is simple:

  1. Other countries forcibly take tax money and pay for health-care
  2. To level the playing field, the U.S. should forcibly take more tax money than it currently does, and spend it on health care

Here is an equivalent argument:

  1. Chinese companies use slave labor to produce some product more cheaply than we can in the U.S.
  2. To level the playing field, the U.S. should force some people into slavery too

GM made a contract with their workers; they didn’t make any social contract with the country. That’s completely bogus. They made that contract with their unions. Many people all over the country did not join GM or other firms that made impossible promises. Many of these others earned less than GM workers. The reward they got was that their companies were more competitive. Also, that they did not allow themselves to be lulled into a sense of complacency, by believing they would be taken care of somehow.

Now, Wagoner wants these non-GM people to pay. Having earned less than their equivalents who worked for GM, he now wants them now to contribute to the GM folk in retirement. This is the justice he seeks; this is the levelling he asks for.

Disclaimer: Wagoner has done many things right at GM. I do not think GM is necessarily doomed. I even own GM stock (I’m not recommending it.) I think Wagoner has been facing up to reality to the extent he thinks feasible; it may not be fast enough. Indeed, the recent urgency might have been catalyzed by the “barbarian at the gate”. But, that’s material for a different post.

Wanna Play?

October 29, 2005

Can you design a management control that cannot “be gamed”?

Rate programmers on the number of bugs, and the number of bugs may fall, with minimal improvement in quality. Risk-taking and productivity will also drop. Also, a new pastime will be born: the post-mortems of bugs: “this one is not really a bug”, “this one existed before I touched the program”, “this one was a bug in the specification I received”.

Measures of productivity are even worse. They work okay when one is analysing the past, but if they’re applied to ongoing tasks, they’re easily gamed. Lines of code … too easily gamed to even talk about it. Even “function points” are gamed by “deflating” the content of a function point.

Wait… what is “gaming the system”? The essentials are:

  • Some measurement or calculation is used as a proxy measure of something else. (E.g. # of bugs == quality; or, function-points == productivity).
  • You “game” the system by doing great on the proxy measurement, but not on the underlying nebulous “thing”.

Simplistic contols don’t work: Is there a solution? Is it just about designing a good system?
Let’s take a non-software example. A factory makes shoes. We want to measure employee productivity. Simple enough — count the number of shoes produced per day.

We find that some are hurrying though shoes, so that they get “good numbers”. So, we only only count shoes that make it past quality control!

Wait… what if producing [50 passed and 1 failed] shoes takes a person more time as producing [51 passed and 2 failed] shoes? An employee with an eye on the numbers would prefer doing the second, because the only number being counted is 51 vs. 50. By speeding up just a little, the employee gets more failed shoes, but also more passed shoes.

Complex Controls are… complex: What if the cost of material for the one additional failed shoe is (say) $10 and the employee’s average wage per shoes is $5? Then, we’d rather an employee made 50 and wasted just one. So, we tweak our measure again. We need to adjust our measure by subtracting some “points” for each failed shoe.

Also, a shoe might pass QC with flying colors or it might just scrape through. If we assume that the firm prefers to produce better quality shoes, rather than just “passable” shoes, how do we factor that into our measure? We might tweak it again, by having different levels of quality.

Now, what if there are some employees who are gentle on the shoe-making equipment while others aren’t? The former will cost us less in the longer run. How do we compensate them for that?

Complex Controls don’t work ALONE: You could go on designing more complexity into the system of rewards, but that doesn’t always work either. Firstly, complexity and bureaucracy of the control system begins to impact the system being measured. Secondly, people continue to resent the unfairness of the (say) 2% error in the system. Also, the “de-skilling” of the control system is taken by some to be an invitation to give up thinking for themselves.

So, can there be a good system of controls? Yes, it is possible when work is objectively measurable. Where it isn’t, a “forced objectivity” is not the answer. There proxy measures are good for self-understanding, and that’s all. They are not overall measures. Much more important is to create a “sense of ownership” and doing what is right. This means laying out values and goals. It means communicating them clearly. Even the best measurement and control system works in a context of shared values with the bulk of employees not trying to game it.

Updates:  Here’s a good article about trying to measure programmer productivity.