Notes – Complete Family Wealth

“Our family has always been rich, and we’ve sometimes had money.”

Introduction

It’s easy for people to focus on money as the most important or most obvious sign of wealth for an individual or family. But because families are multi-generational enterprises, they require several other forms of wealth to be developed and grown over time to sustain or enhance financial wealth; more importantly, even without significant financial wealth, a family that builds the other four forms of capital will feel quite “rich” regardless, as the quote at the top of these notes suggest.

Therefore, to consider complete family wealth, there are really five forms of capital, four qualitative and one quantitative:

1. Qualitative capital
   1. Human
      1. Genetics
      2. Physical well-being
      3. Emotional well-being
      4. Individuality
   2. Intellectual
      1. Knowledge
      2. Wisdom
      3. Education
      4. Experience
   3. Social
      1. Reputation
      2. Relationships
      3. Network
      4. Community
   4. Spiritual
      1. Purpose
      2. Meaning
      3. Legacy
2. Quantitative capital
   1. Financial
      1. Property
      2. Resources
      3. Cash flow
      4. Equity

Exploring family wealth

Wealth preservation is a dynamic process. Each generation of the family must adopt a wealth-creating mindset. Any family whose complete wealth is simply maintaining value rather than growing is either in or in danger of entering into a state of decay or entropy. (The biological truism of “You’re either growing, or dying” applied to the family wealth.)

An important principle of human capital is the connection between meaningful work and an individual’s sense of self-worth, a concept explored deeply in the child development theories of Maria Montessori. There is a difference between well-paid, highly-compensated or financially remunerative work and MEANINGFUL work. The former may or may not build human capital while supplying financial resources to the individual or family, but the latter most definitely is necessary for an individual to fully exercise and express their self through a positive impact on the world around them. Healthy families are characterized by all able-bodied, adult members having some kind of meaningful work that they apply themselves to, whether it is in the family business enterprise or outside of it. And one thing a wealthy family can do for its members is to support each person finding and achieving meaningful work.

Thinking of intellectual capital, families are able to leverage the experience and know-how of other members when they provide a means for the collection and dissemination of the accumulated knowledge of family members. Much of this happens over time in an informal sense via family story-telling, a series of parables and life lessons the family has gained through trial and experience. But it can also happen formally through mentoring, tutoring or developing a “Wisdom Book” within the family, where the most important proprietary knowledge and know-how is gathered and documented in one place.

Becoming myopically focused on financial capital is risky for families because it’s unlikely that most family members can make equal financial contributions, particularly with regard to a founding, risk-taking/entrepreneur generation that created the family’s financial capital initially. Defining success in financial terms can create a sense of not being good enough. This leads to a lack of motivation and ultimately becomes a problem for the family’s long-term financial stability. Long-term success depends upon helping family members talk productively about money with each other.

Many families develop budgets for administering the preservation and growth of their financial capital. But if complete wealth is about four other forms of capital that are not financial in nature, wouldn’t it be an interesting exercise to develop a budget for the preservation and growth of non-financial family capital? If you had a budget and could compare spending across capital categories, what would that comparison say about the relative importance of the five forms of capital in your family’s life?

The family enterprise

Families who flourish over time understand themselves as families of affinity. A family of affinity does not limit its sense of identity to blood or genetic lineage. It sees itself as linked by a common mission and sense of “differentness” from other people who don’t share affinities for the family values.

Based upon extensive research and experience, there appear to be seven key aspects to long-term flourishing for family enterprises (ie, the business and the family as an enterprise):

1. Early on the fundamental intention is set to build a great family, not just a great business
2. These families articulate and share their core values amongst themselves and with others, through example, education and discussion
3. These families respect and encourage individual differences and encourage and support each member in achieving their unique dreams
4. They keep their collective focus on their strengths, even when facing challenges
5. They share history with story-telling that is told and re-told through the generations, creating a reputation and tradition for each person to live up to and contribute to
6. Parents see themselves as teachers AND learners
7. These families understand the importance of individual stages of development and integrate that into their understanding of parenting

The Three Circle Model

The three main parts of any family enterprise are family, owners and management. Family is the family of affinity. Owners include all those who own title to family capital. Management can include the managers of family-controlled businesses but also advisors and administrators of the larger family enterprise.

Each circle has its own priority. For family, the priority is inclusion. For owners, it is preservation. For managers it is performance. Trouble arises when when circle dominates the others in terms of priority. That being said, for long-term success, the family circle should be larger than the other two, not smaller, in terms of importance and priority of resources and effort.

The ownership circle is about taking ownership in the sense of taking responsibility. Passive ownership leads to paternalism. Managing risk is a complex discipline that all owners must undertake.  It’s important that all family owners, whether they’re actively involved in a family business or not, learn how to manage risk to avoid becoming paralyzed by overestimating risk to avoid making mistakes.

Family owners must possess a basic understanding of systems theory, leadership science, the process of leadership transitions and methods for assessing the health of the enterprise and the performance of management. Family owners must communicate with each other and truly listen to each other, to develop their dreams for the enterprise as it evolves beyond the dream of the founder or creator generation.

A family enterprise faces just a few, critical transitions to manage in each generation, and no short-term transactions are likely to make a comparable difference in the enterprises’s success or failure. Thus, it is key to develop an understanding of what is truly critical as far as the strategy of the enterprise and what is merely ancillary or operational in nature. Family owners’ prime responsibility is to keep their focus, with a beginner’s mind, on the strategic level and not succumb to tactical thinking appropriate to short-term problems. The strategic question is not just how to preserve the family’s complete wealth but how to grow it.

Time should be measured by the generation. Short-term for a family is 20 years, intermediate-term is 50 years and long-term is 100 years or more. Abandoning a process too soon, because it seems too hard, is the most common reason that endeavors fail. Successful families over the long-term must decide to continue the process of strategically developing the family’s complete wealth literally for all generations to come.

It takes courage to plant a tree that takes 150 years to mature, like the Copper Beech Tree. No one who does so will ever see it full grown. Does that mean they’re not worth planting?

A Summary of Principles

Summarizing some of the information above, here are 6 key principles of growing complete family wealth:

1. Preservation of complete family wealth is a question of human behavior– what does each family member choose to do, in relation to the family, and why?
2. The most fundamental assets of a family are not its financial resources but its individual members and their health and capabilities.
3. The complete wealth of a family includes the human, intellectual, social and spiritual capitals of its members. The family’s financial capital is a tool to support the growth of its human, intellectual, social and spiritual capitals.
4. To preserve its complete wealth successfully, a family must form a social compact amongst its members that reflects its shared values, and each generation must reaffirm and readopt that social compact.
5. To preserve its complete wealth successfully, a family must agree to create a system of representative governance through which it actively practices its values. Each generation must reaffirm its participation in that system of governance.
6. The mission of family governance must be the enhancement of the pursuit of happiness of each individual family member. This pursuit will enhance the whole family and further the long-term preservation of the family’s complete wealth.

The Rising Generation

If you are a member of the rising generation in a family, you hold the keys to the family’s true wealth.

Individuation occurs over time through a multi-stage life development process:

• Infant, trust vs. mistrust
• Toddler, autonomy vs. shame and doubt
• Preschooler, initiative vs. guilty
• School-Age Child, industry vs. inferiority
• Adolescent, identity vs. role confusion
• Young Adult, intimacy vs. isolation
• Middle-Age Adult, generativity vs. stagnation
• Older Adult, integrity vs. despair

The real cause of entitlement is failure of the rising generation to individuate. The core of entitlement is failing to see yourself as a capable, independent person.

Rising is a life’s work.

The Four Cs:

• Control, vs. powerlessness
• Commitment, vs. alienation
• Challenge, vs. threat
• Community, vs. isolation

Parents

Every true gift carries spirit. True gifts promote the growth and freedom of both giver and recipient. Transfers lack spirit and tend to breed resentment in both parties. That spirit of the gift requires communication to give it voice.

Trustees and Beneficiaries

The combination of the trust wave (generation skipping) and this feeling of burdensomeness accelerates families’ entropy, dissolving their human and financial capital with great speed. The factors behind this decline are emotional and relational, not legal or financial. The response must be similar.

Trust creators find ways to make sure that the trust documents reflect the spirit of their gifts. These may include writing a letter of wishes to the trustee, including a preface to the trust, composing an “ethical will” to accompany the trust, or writing a personal summary or other precatory language. It may mean something as simple as thinking seriously about the name of the trust, rather than simply affixing a family name along with some legalese.

The ultimate purpose of a trust is to make distributions to the beneficiary. If there is any way by which trusts are going to become blessings rather than burdens, it is going to be through a thoughtful and proactive distribution function. It must be the primary intention from the beginning of the trust.

The human trustscape achieves “control without ownership.”

Friends

There are three types of friends:

1. Friends of utility
2. Friends of pleasure
3. Friends of virtue

Character

What law and custom truly shape is character, the character of individuals and family.

Work

Meaningful work involves serving something larger than yourself through the application of your signature strengths and virtues. Doing meaningful work requires identifying your signature strengths and virtues.

Play might just be the most serious thing in human life.

The Family Executive Summary

The most important activity to begin with is reflection: intentions, culture and the development of your family enterprise. Reflection requires some sort of translation to result in action.

Family Meetings
Every family that succeeds over multiple generations makes some use of family meetings.

Family Stories and Rituals

A family that hopes to preserve its complete family wealth over time must learn to keep its stories alive. That is the only way the family itself will continue.

Some prompts for thinking about family stories:

• Who is someone that played a significant role in your life? How did this person shape your life, perspectives and values?
• What are some of the important lessons you have learned in your life?
• Reflecting on your past, which of your accomplishments do you find the most gratifying and are you most proud of?
• What has been your greatest challenge thus far? What did you learn from this experience?
• Which of your stories, values and beliefs would you most like to maintain and pass on to future generations?

Many families preserve stories of failures, crises or disasters. These stories teach themes of resilience and perseverance.

An Annotated Reading of Good Strategy/Bad Strategy

Strategy: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.

Role of leadership: identifying the biggest challenges to forward progress; devising a coherent approach to overcoming them.

A good strategy honestly acknowledges the challenges being faced and provides and approach to overcoming them.

A strategy that fails to define a variety of plausible and feasible immediate actions is missing a critical component.

Guiding policy is a signpost in reference to the diagnosis, shows the directional way forward.

Coherent actions are feasible coordinated policies, resource commitments and actions designed to carry out the guiding policy.

Can you identify what your competition is doing strategically that is valuable? From there can you devise a counter-strategic move that would increase your competitive position?

Most complex organizations spread rather than concentrate resources.

Good strategy itself is unexpected.

Having conflicting goals, dedicating resources to unconnected targets, and accommodating incompatible interests are the luxuries of the rich and powerful, but they make for bad strategy.

Good strategy requires leaders who are wiling and able to say no to a wide variety of actions and interests.

Consider the competition even when no one tells you to do it in advance.

Whenever an organization succeeds greatly, there is also, at the same time, either blocked or failed competition.

Integrated design: each part of the design is shaped and specialized to the others. The pieces are not interchangeable parts.

When analyzing and developing strategy, consider what is the “basic unit of management”, such as the Wal-Mart example where the network is the basic unit of management.

The oft-forgotten cost of decentralization is lost coordination across units.

Where are you strong? How do you apply this to your competitors’ weakness?

Strategy: what stands in the way of your goals?

Strategic objectives should address a specific process or accomplishment, such as halving the time it takes to respond to a customer, or getting work from several Fortune 500 corporations.

Motivation in context: The job of the leader is also to create the conditions that will make that [one last] push effective.

Discover the most promising opportunities for the business: internal, fixing bottlenecks or constraints in the way people work; external, look very closely at what is changing in your business.

Business competition is not just a battle of strength and wills; it is also a competition over insights and competencies.

To obtain higher performance, leaders must identify the critical obstacles to forward progress and then develop a coherent approach to overcoming them.

The cutting edge of any strategy is the set of strategic objectives (subgoals) it lays out.

Use the word “goal” to express overall values and desires and use the word “objective” to denote specific operational targets.

Strategize in steps: pick a “way forward” and then, as you make progress, new opportunities and challenges will present themselves.

If the leader’s strategic objectives are just as difficult to accomplish as the original challenge, there has been little value added by the strategy.

1.) Define the challenge; 2.) Explain why it exists.

Bad strategy is the active avoidance of the hard work of crafting a good strategy.

The value of debating a strategic thesis: disciplined conflict calls forth stronger evidence and reasoning.

Group irrationality is a central property of democratic voting; do not make decisions by democratic consensus.

The essential difficulty in creating strategy is not logical; it is choice itself. Strategy does not eliminate scarcity.

Universal buy-in usually signals the absence of choice.

Leadership inspires and motives self-sacrifice.

Strategy is the craft of figuring out which purposes are both worth pursuing and capable of being accomplished.

Ascribing the success of Ford and Apple to a vision, shared at all levels, rather than pockets of outstanding competence mixed with luck, is a radical distortion of history.

All strategic analysis starts with the consideration of what may happen, including unwelcome events.

A good diagnosis simplifies the often overwhelming complexity of reality by identifying certain aspects of the situation as critical.

A guiding policy is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis.

Coherent actions are steps that are coordinated with one another to work together in accomplishing the guiding policy.

In business, the challenge is usually dealing with change and competition. Before naming performance goals, diagnose the specific structure of the challenge. Then select a guiding policy that builds on or creates some type of leverage or advantage. Finally, design a configuration of actions and resource allocations that implement the guiding policy.

A strategic question of first importance: “What’s going on here?”

Defining the problem restricts the domain of the potential solution sets.

Diagnosis is a judgment about the meaning of facts.

Good guiding polices define a method of grappling with the situation and ruling out a vast array of possible actions.

A good guiding policy tackles the obstacles identified in the diagnosis by creating or drawing upon sources of advantage.

A guiding policy creates advantage by anticipating the actions and reactions of others, by reducing the complexity and ambiguity in the situation, by exploiting the leverage inherent in concentrating effort on a pivotal or decisive aspect of the situation, and by creating policies and actions that are coherent, each building on the other rather than cancelling one another out.

Seek simplicity for a strategic breakthrough.

Absent a good guiding policy, there is no principle of action to follow.

It is the hard craft of strategy to decide which priority shall take precedence; it requires letting go of optionality, perceived or otherwise.

Sometimes strategic solutions arrive in the form of shifting incentives to achieve cooperative goals.

A strategy coordinates action to address a specific challenge; unrelated operational actions may be good ideas but they’re not, therefore, “strategic”.

Strategic coordination is coherence imposed on a system by policy and design.

A powerful way to coordinate actions is by the specification of a proximate objective.

Decentralized decision-making cannot do everything. In particular, it may fail when either the costs or benefits of actions are not borne by the decentralized actors. The split may occur across organizational units or between the present and the future.

Coordinate in a few select, high leverage areas, otherwise decentralize.

Most strategic anticipation draws on the predictable “downstream” results of events that have already happened, from trends already at work, from predictable economic or social dynamics, or from the routines other agents follow that make aspects of their behavior predictable.

When there are threshold effects, it is prudent to limit objectives to those that can be affected by the resources at the strategist’s disposal.

The more dynamic the situation, the poorer your foresight will be. The more uncertain and dynamic the situation, the more proximate a strategic objective must be.

To concentrate on an objective — to make it a priority — necessarily assumes that many other important things will be taken care of.

When there is a weak link, a chain is not made stronger by strengthening other links.

Resources and tight coordination are partial substitutes for each other.

Unless you can buy companies for less than they are worth, or unless you are specially positioned to add more value to the target than anyone else can, no value is created by acquisition.

Corporate leaders seek growth for many reasons. They may (erroneously) believe that administrative costs will fall with size. Also, leaders of larger firms tend to be paid more.

Healthy growth is not engineered. It normally shows up as a gain in market share that is simultaneous with a superior rate of profit.

Advantage is rooted in differences. No one has advantage in everything.

Think about where you don’t have an advantage; and where you are actively disadvantaged.

Most advantages will only extend so far.

An investment or a strategic position is “interesting” when there is a way to deepen the advantages it possesses.

Standardization and efficiency are not the same as innovativeness. One must reexamine each aspect of product and process, casting aside the comfortable assumption that everyone knows what they are doing.

You can often benefit from putting corporate resources to use in other products or markets, but beware vaporous generalities such as believing that competitive strength lies in “transportation”, “branded consumer products” or “management.”

A brand’s value comes from guaranteeing certain characteristics of the product.

One way to grab the high ground is to exploit a wave of change.

You exploit a wave of change by understanding the likely evolution of the landscape and then channeling resources and innovation toward positions that will become high ground — become valuable and defensible — as the dynamics play out.

Most industries, most of the time, are fairly stable.

Historical perspective helps you make judgments about importance and significance.

The challenge is not forecasting but understanding the past and present.

When change occurs, most people focus on the main effects; you must dig beneath this surface reality to understand the forces underlying the main effect and develop a point of view about the second-order and derivative changes that have been set into motion.

To make good bets on how a wave of change will play out you must acquire enough expertise to question the experts.

To glimpse the future, consider what “area of excitement” currently exist in research-oriented institutions.

Sometimes restating a general question in specific terms can help clarify confusion and drive insight.

Increases in fixed costs often force industries to consolidate.

Regulated prices are almost always arranged to subsidize some buyers at the expense of sellers. Highly regulated companies do not know their own costs. When deregulation arrives, such companies can be expected to wind down some product lines that are actually profitable and continue to invest in some products and activities that offer no real returns.

Predictable biases in forecasting often exist. In durable products, there is an initial rapid expansion of sales when the product is first offered, but after a period of time everyone who is interested has acquired one, and sales can suffer a sharp drop. After that, sales track population growth and replacement demand.

Faced with a wave of change, the standard forecast will be for a “battle of the titans” however often it is a disruptive or new entrant who ends up taking the field.

In a time of transition, the standard advice offered by consultants and other analysts will be to adopt the strategies of those competitors that are currently the largest, the most profitable, or showing the largest rates of stock price appreciation. They predict that the future winners will be, or will look like, the current apparent winners. This is naive extrapolation of trend.

We expect incumbent firms to resist a transition that threatens to undermine the complex skills and valuable positions they have accumulated over time.

Attractor state: how the industry “should” work in the light of technological forces and the structure of demand; an evolution in the direction of efficiency.

The critical distinction between an attractor state and many corporate “visions” is that the attractor state is based on overall efficiency rather than a single company’s desire to capture most of the pie. In effect, ask yourself, “What will eliminate cost and margin?”

An accelerant toward this state is the demonstration effect, the impact of in-your-face evidence on buyer perceptions and behavior.

Ways to overcome organizational inertia: hiring managers from firms using better methods, acquiring a firm with superior methods, using consultants, or simply redesigning the firm’s routines; it will probably be necessary to replace people and reorganize business units around new patterns of information flow.

Inertia by proxy: when streams of profit exist because of their customers’ inertia. Many “disruptive” businesses grow rapidly until their example excites the incumbent’s customers enough that the incumbent is forced to change their behavior to retain them, at which point the disruptor’s growth stops or reverses and the incumbent arises from its slumber.

Use a hump chart to figure out at what point your cumulative gain to operating begins to trail off.

Entropy: Each quarter, each year, each decade, corporate leadership must work to maintain the coherence of the design. Without constant attention, the design decays.

If the design becomes obsolete, management’s job is to create a new way of coordinating efforts so that the competitive energy is directed outward instead of inward.

Growth is the outcome of a successful strategy.

Make a list of “things to do, now” rather than “things to worry about” forces us to resolve concerns into actions.

Being strategic is being less myopic.

In estimating the likelihood of an event, even experienced professionals exhibit predictable biases.

What the kernel does is remind us that a strategy is more than a localized insight; it leads from the facts on the ground to diagnosis, thence to an overall directive, thence to action.

Shift your attention from what is being done to why it is being done.

Don’t just go with your first strategic idea. Create a number of alternatives. A new alternative should flow from a reconsideration of the facts of the situation, and it should also address the weaknesses of any already developed alternatives. Try hard to “destroy” any existing alternatives, exposing their fault lines and internal contradictions.

Invoke a virtual panel of experts to judge and criticize your strategic ideas.

Good strategies are usually “corner solutions”, they emphasize focus over compromise, focusing on just one aspect of the situation that’s really critical.

Commit your judgments in writing to keep yourself honest and to have a record of your thought process and assumptions for later adjustment.

Choices, not products, have costs.

Notes – The Well-Trained Mind, Part I

These are my notes from the first part of “The Well-Trained Mind: A Guide To Classical Education At Home”. It covers concepts and instruction from the typical kindergarten through fourth grade period of education. My notes will remain fairly rough for now; later I may go back and compile them into a comprehensive “1 sheet summary” to classical education for home schooling. For now I will just provide my notes chapter by chapter, with the understanding that there is a mixture of direct quotes with clarifying commentary or analysis from me personally.

Chapter 2, A Personal Look at Classical Education: Susan

The author states that her personal experience with classical education applied at home was like this:

Our education was language-centered, not image-centered; we read and listened and wrote but we rarely watched.

Trivium

A classical education revolves around three core disciplines: grammar, logic and rhetoric. These three disciplines become an organizing principle for a home school family attempting to follow a classical education, and a model of the individual child’s intellectual development:

• Grammar stage, the building blocks for all other learning are laid
• Logic stage, cause and effect, relationships among different fields of knowledge, the way facts fit together into a logical framework, learn and apply the scientific method
• Rhetoric stage, write and speak with force and originality, express conclusions, begin to specialize knowledge, specialized training

As the authors suggest, a child will go through three distinct “parts” of their education mirroring these stages; within each discipline or educational topic they’ll also individually progress through these stages.

Principles of classical education:

• Language-focused, language requires the mind to work harder; images allow the mind to be passive
• Three part pattern, the mind must first be supplied with facts and images, then given the logical tools for organization of those facts and images, and finally equipped to express conclusions (grammar, logic, rhetoric)
• Mastery in skill areas, discovery and exploration in content areas; workbooks and textbooks are valuable for building skill areas; content areas are fields of study that are open-ended and can’t be mastered, we steer away from textbooks in the content areas, and towards collections of “living books”, books written by single authors, exploring particular issues and ideas
• All knowledge is interrelated; history as an organizing outline of knowledge

Twelve years of education consist of three repetitions of the same four-year pattern: ancients (5000 BC to AD 400), medieval period through the early Renaissance (400-1600), late Renaissance through early modern period (1600-1850) and modern times (1850-present). The student will end up visiting each of these historical periods once each in the grammar, logic and rhetoric stages.

Move forward chronologically and organize the bulk of your history by time period, rather than by individual country. The traditional American method of studying history by region does nothing to help students draw connections between events, vital to critical thinking about history.

They suggest a 4-year pattern for sciences instruction:

• biology, classification and the human body
• earth science and basic astronomy
• chemistry
• basic physics and computer science

The classical pattern lends coherence to the study of history, science and literature.

Virtuous men and women can force themselves to do what they know is right, even when it runs against their inclinations. Classical education continually asks a student to focus not on what is immediately pleasurable but on the steps needed to reach a future goal.

“The Great Conversation”: the ongoing conversation of great minds down through the ages.

Part I, The Grammar Stage K-4

Chapter 3, The Parrot Years

A classical education requires a student to collect, understand, memorize and categorize information.

Your goal is to supply mental pegs on which later information can be hung.

The elementary years are ideal for soaking up knowledge.

The child should be accumulating masses of information: stories of people and wars; names of rivers, cities, mountains, and oceans; scientific names, properties of matter, classifications; plots, characters, and descriptions.

Seize this early excitement. Let the child delve deep. Let him read, read, read. Don’t force him to stop and reflect on it yet.

The immature mind is more suited to absorption than argument.

There is nothing wrong with a child accumulating information that she doesn’t yet understand. It all goes into the storehouse for use later on. [like language]

Children like lists at this age.

The goal of grammar-stage instruction is not to restrict your child but rather to protect her love of learning. Children mature out of the grammar stage into the logic stage at different times. Children mature unevenly. Give your children the time and space to mature, in each subject area, from grammar into logic-stage thinking.

Prioritize reading, writing, grammar and math.

A child who reads and writes well will pick up surprising amounts of history and science as he browses.

Chapter 4, Unlocking the Doors: The Preschool Years

She’s learning that words are used to plan, to think, to explain: she’s figuring out how the English language organizes words into phrases, clauses and complete sentences. [sportscasting with an infant]

Repetition builds literacy.

After you read to your toddler, ask her questions about the story.

As soon as your child begins to talk teach her the alphabet.

Teach a child from the beginning to hold a pencil correctly.

Start with counting: fingers, toes, eyes and ears; toys and treasures; rocks and sticks.

Most four-year-olds have microscopic attention spans, immature hand-eye coordination and a bad case of the wiggles.

Children can listen to and enjoy books that are far, far above their vocabulary level. Audiobooks stock a child’s mind with the sounds of thousands of words.

Many children are ready to read long before they have the muscular coordination to write. Why delay reading until the muscles of the hand and eye catch up?

Do “daily” math by adding and subtracting in the context of everyday family life.

Do lots of addition and subtraction with manipulatives (beans, buttons, pencils, chocolate chips).

Chapter 5, Words, Words, Words: Spelling, Grammar, Reading and Writing

Your goal, in grades 1 through 4, is to make the proper use of language second nature to your child.

Begin the academic year with three-ringed notebooks, a three-hole punch, and lots of paper, both lined and plain. Also lay in a boxful of art supplies: glue, scissors, construction paper, colored pencils (good artist-quality ones like Sanford Prismacolor), stickers and anything else that strikes the child’s fancy. For elementary language arts, you’ll want to make use of two of these notebooks. Label one “Literature” and the other “Writing.”

Always spend as much time on one level as you need and progress on to the next level only when your child has mastered the previous one.

Three levels of reading:

• Instructional level, the student is still working hard at the mechanics of reading, and rarely has the comprehension to match
• At-level reading, the student knows all of the letter combinations and words she’ll encounter, tends to be slow and requires concentration
• Below-level (or “fun”) reading, these are the books that use only the words and combinations that the student is completely comfortable with, and is important because it allows the child to enjoy reading and it improves reading speed

Aim for the “reading periods” to include all three skills, each week.

Try to give the child simplified versions of the original literature that he’ll be reading in the higher grades or introduce him to a writer he’ll encounter later.

After a child reads, you can ask questions about the reading and the oral answers are called narrations.

Learning how to identify one or two items about a book as more important than the rest is a vital first step in learning to write; a young writer will flounder as long as he cannot pick out one or two of the ideas in his mind as central to his composition.

Children in the 3rd or 4th grade can write down their own narrations after reading. Instead of learning to complete fill-in-the-blank questions, the child uses all his mental faculties to understand, remember, and relate the main points of a story.

Every three or four weeks, the child should also memorize a poem and recite it to you. Memorization and recitation of poetry is an iomportant part of the reading process; it exercises the child’s memory, stores beautiful language in his mind, and gives him practice in speaking aloud.

Spelling is the first step in writing.

We don’t think you should allow spelling to consume your language arts time.

It’s important to allow students to progress at a natural pace in each of the language arts areas without frustrating them by limiting their progress to the speed of their worst subject.

Grammar exercises should be done orally with 1st and 2nd graders.

Early writing instruction should focus on developing those tools, rather than demanding a great deal of original content.

How to more quickly develop writing capability:

• Most people try to teach children to express ideas at the same time they are writing them down, Inarticulate idea -> Idea in words -> Words on paper
• We recommend you separate each step into a discrete action, ie, first Inarticulate idea -> Idea in words, then Idea in words -> Words on paper

The young writer practices putting ideas into words, and then putting words down on paper, before trying to do both simultaneously.

The classical pupil learns to write by copying the great writers.

Chapter 6, The Joy of Numbers: Math

Mathematics is a language because it uses symbols and phrases to represent abstract realities.

Mathematical literacy (numeracy) involves learning both the procedures and the reasons why they work (conceptual math).

Two primary methods of learning math:

• Spiral approach, assumes students learn best when they practice a skill at a basic level, move away to other skills, and then return to the first skill and practice it at a slightly deeper level.
• Mastery approach, teaches fewer topics per year but focuses on each longer

Chldren aged 5 through 7 usually need concrete objects; children aged 8 through 10 begin to shift into “mental image” mode. Abstract thinking begins around age nine or ten, which coincides with the beginning of the logic stage.

Firm principle of elementary mathematics: no calculators.

Math is a science of not being wrong about things, its techniques and habits hammered out by centuries of hard work and argument. With the tools of mathematics in hand, you can understand the world in a deeper, sounder, more meaningful way.

Chapter 7, Seventy Centuries in Four Years: History and Geography

The history of the world is but the biography of great men.

Thomas Carlyle

History is the study of everything that has happened until now. Unless you plan to live entirely in the present moment, the study of history is inevitable.

Keep one central fact in mind: history is a story.

The logical way to tell a story is to begin at the beginning and go on till you come to the end.

The history curriculum covers seventy centuries; America occupies only five of them. [don’t over-emphasize your time and place in historical study]

The goal of the classical curriculum is multicultural in the true sense of the word: the student learns the proper place of his community, his state, and his country by seeing the broad sweep of history from its beginning and then fitting his own time and place into that great landscape.

Tackle original sources.

[why does the history curriculum begin with 5000BC, what about pre-history? biological history? spread of mankind over the globe?]

Three goals of studying history:

• to give students an overall sense of progression of historical events from ancient times to the present
• to develop skills in reading and writing
• to teach geographic awareness.

Progressing chronologically from your chosen starting point gives students an organized and orderly way to think about history; the majority of your history study should be done with a worldwide focus, not country by country. [comparing and contrasting simultaneous developments]

Follow the same basic pattern:

• Read the material to your child as they follow along; as they gain reading skills, alternate the reading responsibility
• Make a narration page.
• Ask the child to illustrate what has just been read, or color a picture related to the story
• Find the geographical area under discussion on a globe, wall map, etc. and color the appropriate black-line map
• Go to the library to find more books on the subject

Give priority to reading, grammar, spelling, writing and math. History and science follow on these basic abilities.

History should be a delight-centered activity for the grammar-stage child. Allow him to explore, do activities and projects, and have fun; you can always hurry over (or skip) later chapters without injury.

Chapter 8, Investigating the World: Science

Two important attitudes to cultivate: a sense of amazement; a commitment to look hard at the world around us.

Parents who are themselves scientists have told us that they prefer to teach the sciences as connected to each other rather than related to history.

Chapter 9, Dead Languages for Live Kids: Latin (and Other Languages Still Living)

Reasons to study a “dead language” like Latin:

• Latin trains the mind to think in an orderly fashion.
• Latin-trained mind becomes accustomed to paying attention to detail.
• Latin improves English skills
• Latin prepares the child for the study of other foreign languages.
• Latin guards against arrogance.

A foreign language “provides one with entry into a worldview different from one’s own… If it is important that our young value diversity of point of view, there is no better way to achieve it than to have them learn a foreign language.”

Whole-to-parts Latin instruction is frustrating and counterproductive, and breaks down the very skill that systematic Latin lessons develop– the habit of systematic thinking.

Conversation is the only path to fluency.

Chapter 10, Electronic Teachers: Using Computers and Other Screens

During school-time, we read books, do experiments, and write about what we’re learning. It’s hard work, but the more the student reads and writes, the more natural reading and writing become.

Chapter 12, Finer Things: Art and Music

Art for elementary students should cover art techniques and elements, and learning about great artists.

Two years is the minimum time that it takes to begin to enjoy an instrument, rather than simply struggling with it.

Notes – Corporate Strategy

The following are my unedited notes from my reading of Corporate Strategy:

Corporate strategy versus business strategy

Corporate advantage versus competitive advantage

Two ways of increasing competitive advantage:

1.) raise the price customers are willing to pay

2.) lower the price suppliers are willing to sell for

Maximizing corporate advantage may or may not be consistent with maximizing the competitive advantage of each individual business

Some businesses could give up competitive advantage in their business in order to enhance the competitive advantage of other businesses in the portfolio

Corporate strategy matters at least as much as the analysis of industry competition (implication for passive investment analysis)

A natural, minimal benchmark for a corporate strategist is a passive investor

Synergy is therefore the means through which corporate advantage is created relative to a typical investor who can select the same portfolio of investments

Portfolio assembly can be a corporate advantage in cases of private/restricted capital markets

By coming into existence, the multi-business firm in effect destroys its own best benchmark

The super-rich may treat their business group as their own mutual fund

Corporate advantage is defined in terms of jointly owning businesses and synergies in terms of jointly operating them.

While an investor could create corporate advantage, an investor cannot extract synergies.

For a corporate strategist to create corporate advantage over what an investor can achieve in efficient capital markets, there must at least be some form of synergy between two businesses in the portfolio

To find synergies, construct a value chain for each business/division and look for opportunities to coordinate or economize activity

Forms of synergy

1. Consolidation, creating value by rationalization across similar resources from similar value chain activities by eliminating redundancies, affects mostly costs and invested capital
2. Combination, creating value by pooling similar resources from similar value chain activities, such as combining purchasing to obtain volume discounts or acquiring a competitor then raising prices for customers, impacts either costs or revenues
3. Customization, creating value by co-specializing dissimilar resources in order to create greater joint value, results in improved value in production or consumption and involves modification of resources, the transfer of best practices can create unique value
4. Connection, generates value by simply pooling the output of dissimilar value chain activities, for example customers may value being able to buy a bundle of different products and services together, the product development of one business is being connected to the distribution channel of another

One common negative synergy is brand dilution, ie, does the brand apply? Another is complexity. Another is market rivalry, this is a significant concern in the advertising industry, where when two firms who serve rivals merge, the chances of keeping both their clients is low

Governance costs act as taxes that eat into the potential benefits from synergies when they are attempted to be extracted

When an autonomous business becomes a division within another, the incentives of the owner and managers are necessarily diluted

Synergies are likely to generate significant transaction costs are less likely to be successfully realized in arms length relationships between independent firms than under common ownership

A management services firm is a kind of non-equity alliance

The more mature and efficient the capital markets in which a company operates, the greater the pressure on the company to engage in diversification primarily on the basis of potential synergies between existing and new businesses

The CEO should be spending the shareholders’ money on entry into new businesses only to extract value that the shareholder could not by investing directly in such a business on her own

In the absence of bargains, passing the synergy test is necessary but not sufficient to pass the diversification test

If some other corporate parent has even stronger synergies with a business than you do, you should consider divesting

An active policy of looking for divestiture opportunities is sensible

On average, a corporate parent that divests a business increases shareholder value

Imagine that, starting today, the two businesses would be moved into separate ownership and would be operated completely independently, with no communication or exchange of any kind between the two. How would the value of the businesses be effected?

Divesting when you can, and not when you have to is usually preferable

Outsourcing often carries significant transaction costs

Think about the multi-business corporation as a collection of value chain activities

One should be able to read the corporate strategy of a company in its organization chart: what kinds of activities does the top management feel are essential to integrate?

Pure forms of organization: by activity, by output, by user/customer

Grouping similar activities together emphasizes economies of scale at the expense of economies of scope, whereas grouping different activities together does exactly the opposite

Every grouping arrangement emphasizes certain interactions but excludes others, which show up as opportunity costs and bottlenecks

No structure is permanent

Don’t forget about how to integrate activities while you’re thinking about ways to partition them up

Corporate management functions:

• Treasury
• Risk management
• Taxation
• Financial reporting
• Company secretary
• Legal counsel
• Government relations
• Investor relations

The goal of resource allocation in the portfolio is thus to push businesses further away from the origin toward the top and right, away from the investment threshold (pg 212)

One low hanging fruit for multi-business firms in terms of corporate strategy is to actually give thoughtful consideration to capital allocation decisions within the portfolio

In the M&A and Post-merger Integration process, Evaluation refers to a post-transaction review of what went right and wrong

On average, acquirers do not benefit (in terms of market cap) from an acquisition; most target shareholders benefit from an acquisition

The ICSA Company Secretary’s Handbook, resource for corporate management

Notes – Horizon Kinetics 2015 Compendium

For the last two years, Murray Stahl and Steve Bregman of Horizon Kinetics have published a “Compendium Compilation” of their various research pieces and market commentaries throughout the year. I recently requested copies of the 2014 and 2015 compendiums and just completed reading through the 2015 compendium. What follows are “stitched together” quotes from several of the essays.

The Indexation Experience

An active manager always can be found to be deficient if underperformance relative to an appropriate index is discovered. In fact, a manager can be found to be deficient if a return generated is equivalent to the appropriate index… one could always purchase the index as the less expensive investment alternative.

How does one judge an index to be deficient?

Since short-term interest rates approach zero in most regions of the world, the valuation environment is very benign… most governments during this period have embarked upon grand fiscal stimulus efforts that are now becoming unsustainable.

When one measures a manager relative to an index, is one measuring investment acumen or marketing ability?

The manager… will purchase a security until the expected excess rate of return is zero. The index… is marketed until the marginal revenue from a product is zero, which is an entirely different concept.

The index is not constrained by valuation.

Most indexes, in the fullness of time, do not earn impressive rates of return.

Problems With Indexation

When indexation excludes the so-called marginal securities, two things happen. The marginal securities are the stocks where the volatility really resides, which means the index is going to lose its volatility. Second, the marginal securities are an important contributor to what would have been the return… their negative impact gets captured on the way down– but the positive return impact does not get captured on the way up.

It is the nature of a market capitalization weighted index that it is always un-diversifying.

Diversification

The problem with such an approach [wide diversification] is that it is quite impossible for any individual, or even a team of individuals, to have a good working knowledge of the individual investments at a security level. The portfolio can only be understood in terms of its statistical attributes… CalPERS… has about 20,349 individual investments.

If a team of 10 analysts were to work eight hours a day for three months, which is 22 business days per month, with no interruptions, the team would have at its disposal 10 x 8 x 3 x 22 man-hours to read 20,349 quarterly reports. This amounts to 5,280 man-hours available to read 20,349 quarterly reports, which equates to slightly more than 15 minutes per quarterly report… It should be obvious that success or failure in this endeavor must depend upon whether the statistical attributes of the portfolio provide the data necessary to make intelligent asset allocation decisions… it is impossible to devise a simple list of fundamental statistics to be used to comprehend a portfolio… because of differences in corporate expenditure practices, depreciation policies, tax laws in various jurisdictions, and GAAP vs. IFRS accounting.

The many diversified funds that purchase the most liquid securities must by definition generally own the same securities, since there is only one set of liquid securities. If the diversified institutions, therefore, own the same securities, when studying the price behavior of those securities, those institutions are, in reality, studying themselves.

If one believes in the Efficient Markets Hypothesis, then securities prices must reflect the beliefs of the holders of the securities. Yet, as shown above, the holders of securities do not study the securities. In fact, given diversification practices, it is not possible to study the securities. It is only possible that the investors study one another. Thus, one is confronted with a feedback loop or a huge self-reference paradox, as one may see in the paintings of M.C. Escher, such as Waterfall or Drawing Hands.

Another interesting case is the Singapore Index… returned 3.2% per annum. The mere fact that the economy of Singapore grew at over 6% per annum for more than 18 years does not correlate well with the stock market return for the simple reason that the Singaporean companies in the index are global companies. These results reflect many factors apart from the economy of Singapore.

Similarly, the Swedish index does not necessarily reflect the economy of Sweden. And the UK index does not necessarily reflect the economy of the UK.

The thrust of these facts is to question, if not actually reject, the geographical form of classification as an asset allocation building block. That calls into question the entire international method of investing. The characteristics of equities have little to do with the legal place of domicile of a given firm. However, on a weekly basis the Investment Company Institute records $3 billion to $4 billion withdrawn from domestic equity funds and deposited into international equity funds in search of diversification and risk control attributes that simply do not exist. As has been the case with many widely held investment beliefs without foundation, this will not have a good outcome.

Inefficient Markets

[Fischer Black] said that there are people who are highly knowledgeable about certain companies– the information traders– and when they trade, they are very well informed. Most others, however, are not so well informed; they are the noise traders.

[Fischer Black’s concept of] efficient markets was that if the bulk of investors were in an index that, as he defined it, would include every stock out there– everything– the noise traders would go there. That would eliminate the bulk of the noise traders from the active marketplace, so only the information traders would be trading. They would not go into the index, because they are highly informed, and the market would be much more efficient in the sense that it would reflect the judgments of informed participants.

If one reflects upon this matter [Carl Icahn’s letter to Apple], one will see that Mr. Icahn has posed an exceedingly profound question to all investors, and especially academics. Apple is the largest company in the world. It is arguably the most ubiquitous company in the world. Billions of people use Apple products daily and are very familiar with those products. If there is any equity in the world that should be priced efficiently, it should be Apple.

Yet, Apple has a lower P/E than companies such as Exxon, Coca-cola, and even Philip Morris International. One might debate the future prospects for Apple, but surely these are more robust than those of Philip Morris International. Does anyone assert that demand for cigarettes will increase?

The money manager industry is not populated by Homo Economicus, carefully and rationally evaluating different investment opportunities. The money manager can only survive by attracting assets to manage for a fee.

Modern financial theory cannot explain momentum because, if the stock market is efficient, there should be no serial correlation observed in securities… momentum investing is not a new innovation. It is a concept virtually as old as the idea of a stock market, although it has not always been called “momentum.” Technical analysis is essentially a search for securities with momentum.

It is now possible to raise substantial sums for almost any index if the rate of return is sufficiently high. It is nearly impossible to raise money for any index if the rate of return is insufficiently high, let alone if that return happens to be negative. This is not the asset allocation process. This is the momentum process. The industry makes use of a substantial marketing budget, It clearly influences the valuations not only of individual securities but of entire sectors, and it dominates, for the time being, the investment process.

Other Remarks

• Is modern risk control methodology actually serving to reduce risk or is it merely convincing professional investors to accept, perhaps unwittingly, another type of risk?
• It should be noted that the real was not always the currency of Brazil. There were cruzeiros, there were cruzadoes, and now we have the real. That in itself should tell the reader something about the stability of the currency.
• Historically, that is what emerging market debt was: questionable claims against governments.
• Bonds should be thought of in the following way: they offer risk with no possibility of reward, especially if you are a taxable investor.

 

Notes – Real Food for Mother and Baby

Real Food for Mother and Baby

by Nina Planck, published 2016

This was one of the first books I read on fertility/pregnancy because we already had it in our library (see The Lion’s review of it).  Planck’s book dispelled some commonly held beliefs on what pregnant can/cannot consume and further confirmed that the way I eat currently is optimal to maintaining good health. Some interesting/important points I found throughout her book:

• Exercising during pregnancy is good for mother and baby. Walking, running, swimming, dancing, cycling, rowing, hiking–but never to the point of fatigue. Listen to your body and rest as needed.
• In the second trimester, the growing baby needs protein and calcium to build bone and muscle, so take cod liver oil, eat protein and saturated fats, and drink milk and eat sour cream and cheeses. Raw is better than pasteurized, and supplements are not as effective. Drink the best milk you can afford.
• Swelling in the hands and feet is a sign of protein deficiency, so try to eat 100g daily of meat/poultry (skin + bones), fish, eggs, and milk.
• Salt your food freely (with unrefined sea salt) because blood and amniotic fluid are briny! And eat plenty of fresh produce for potassium
• Keep up the calcium intake even though the baby’s skeleton has formed by six months because the bones are still bulking up. Eat oysters and beef for zinc, and eat protein (meat, dairy, eggs) to prevent swelling and prematurity. Obviously, drink lots of water and eat tons of fish to aid in baby’s brain development!
• “Don’t avoid fish, just methylmercury.” No shark, swordfish, King mackerel, or tilefish. Two to three times per week, consume anchovy, common mackerel, salmon, catfish, trout, tilapia (wild caught and fresh) and be generous with the butter and cream (creamy clam chowder for days, yum…).
• On Birth Day: the atmosphere should be dark, private, and quiet. After birth, hold the baby naked against your skin and ask to delay bathing and weighing. Let the baby look at you, smell you. Newborns aren’t dirty, but if bathing is necessary, do so gently without removing the white stuff (vernix). Try not to cut the cord until the placenta is delivered.
• The mama’s hormones are working on realigning after birth, so emotions may still be up and down. Continue the diet of red meat, fish, and liver to prevent worsening the baby blues.
• Get lots of help on practical matters so you can gently surrender to your baby’s needs, unpredictable as they are.
• Breastfeed [exclusively] if possible (and for as long as possible! At least for 6-12 mos) because breastmilk contains probiotics, antibodies, amylase, and boosts immunity for the newborn. Keep eating well.
• From four to ten months (once they can sit up), babies can try real food, as long as theres not vomiting or diarrhea. At seven months, the baby can eat seafood, pork and dairy. At one year, time for the baby to start his/her cod liver oil supplements!
• Let the baby choose what he/she wants to eat, don’t micromanage/point/stare/direct. Do less, RELAX.
• Surrender your old life temporarily to be the mother that nature intended. Ask for help (cooking, cleaning, grocery shopping), and nurse on cue (aka when the baby asks).
• Watch the baby, not the clock! There is no schedule for breastfeeding.
• Bread and chocolate (grains and sugar) are inevitable, so try to find ones with good, clean ingredients. Let your child know over time why you favor certain foods over others. Try not to let the child fill up on bread before fats and protein.

TL;DR Avoid trans fats and pesticides. Buy organics and avoid hydrogenated vegetable oils, margarine, vegetable shortening, and cheap fried foods.

TL;DR2 Breast feed your baby. Nurse after the baby starts eating. Delay or skip vaccinations. Spend time on farms and outside in the dirt. Touch animals. Drink raw milk.

Notes – Best Practices in Deal Flow Origination

These notes are from an article entitled “Where Are The Deals?” by David Teten. He also has resources on adding value to portfolio companies which are worth browsing. For notes on a related topic, check out the “Notes – Stanford Graduate School of Business Search Fund Primer” post.

• the median investor in private companies had to review 80 companies in order to close one transaction
• investments sourced through personal and professional networks have been shown to yield better results
• in order to train your relationships, it is important that you provide them with simple, clear investing criteria, not lengthy checklists; provide them a narrowly defined niche of interest (“Retail brands with $50M in annual revenues”)
• on average it can take 1-2 years between the first meeting with a target CEO sourced through a network and the close of the deal
• market mapping, identifying key macro and micro drivers of an industry and creating a database of all key companies; identify those with greatest growth potential or competitive white space
• specialization enhances deal origination through deeper knowledge base, ability to add value through enhanced network and likelihood of being top of mind to key deal sources
•  monitor target sector for cyclical opportunities and structure shifts; M&A creates orphan divisions and downturns cause strategy refocuses; 30-46% of PE returns over last 30 years driven by EBIT arbitrage (market timing)
• other valuable sources of deal flow:
  • regional surveys
  • “fastest growing company” lists
  • trade association membership lists
  • commercial vendors
    • Amadeus
    • Capital IQ
    • Dun & Bradstreet
    • Hoover’s
    • InfoUSA
    • Lexis-Nexis
    • Thomson-Reuters
    • OneSource
• set up alerts in a blog reader based on key words important to your target or industry focus
• “A large portion of my deal flow comes from people I have rejected in the past.” be kind to everyone, even those you don’t do a deal with
• consider having a dedicated, SEO-optimized website and blog for your acquisition fund/team that explains what you’re looking for, why, what you bring to the table, etc.; many VCs and most PE investors are not using basic internet marketing techniques (competitive advantage opportunity)
• Accel Partners and Khosla Ventures post detailed analyses of their target investment sectors; blogging and posting of internal analyses is the “VC freemium model”
• PE investing is a relationship business and the most important relationships are with LPs, entrepreneurs, executives and intermediaries which are relatively few in number
• blogging is the best tool for VC investing according to one experienced observer; helps investor gain information, credibility and relationships through improved visibility
• look for access to secondary interests through directly approaching funds (particularly distressed), markets for secondary interests (SecondMarket, NYPPEX, PORTAL Alliance) and approaching ibanks specializing in secondary interests (Cogent Partners, Probitas, Triago, UBS)
• service providers such as accountants, lawyers, etc., are typically not good sources of deal flow because they require too much education and often have a fiduciary responsibility to their client; on the other hand, connecting with service providers in a specialized domain that is being targeted can be a good source of insight
• trawl the Q&A portion of sites such as LinkedIn to identify domain experts for further outreach
• measure your deal origination efforts with activity measures, deal flow by source, pipeline analytics and industry benchmarking measures
• many professional services firms do not use a global CRM system such as Salesforce.com, Act, Saleslogix, Microsoft Access or Angelsoft (angel/VC network)
• Key data sources for CRM systems include employee networks (ContactNet Enterprise Relationship Management), business cards (Cardscan, IRIS, Neat, Presto), data from email and files (eGrabber, Gwabbit, Grab-Text, Broadlook), the “cloud” (LinkedIn, Spoke, Plaxo) and direct from target companies’ websites, media, etc.

Key attributes of top originators in order of importance

1. persistence (every no gets you closer to a yes)
2. personality (people do business with those they like)
3. business and financial judgment
4. adequate financial sophistication
5. seniority and appropriate title (decision-maker)
6. internal authority to get transaction executed
7. creativity

Important deal signals when identifying targets (utilize commercial databases, social media, data mining and targeted phone research to uncover)

• Status of the major equity owner
  • PE funds motivated to sell due to fully invested, raising next fund or current fund has aged beyond 5-7 years
  • Large corp raising cash by selling subsidiaries
  • Time limited tax incentives
  • Family in midst of succession battle
  • Death, disease and divorce (“three Ds”)
• Status of CEO
  • retirement
  • age
  • acknowledgement of limited competence
• Corporate performance
  • growth too rapid for self-funding
  • underperforming/distressed
• Industry/economic trends
  • industry consolidation
    • competitive pressure
    • seeing competitors liquidating equity for large gains
  • competitors raising capital; pressure to maintain parity
  • growth sector

Top considerations for deal intermediaries in directing deal flow

1. Possibility of future revenue
2. Integrity
3. Timely responses
4. “Fair” treatment of sellers
5. Experience with the industry or owner type
6. High certainty to close
7. Friendship
8. Feedback and referrals
9. Maintaining a single point of contact

Most valued aspects of acquiring companies by the acquired

1. Added operational value
2. No extra costs
3. Fair treatment of employees post-transaction
4. Brand
5. Long holding periods (no buy-to-flip)

Leading databases of institutional investors (use principles of SEO to optimize your profile here)

• Galante’s
• Grey House
• VentureXpert
• PE funds
  • Eurekahedge
  • Pitchbook
• VC funds
  • Angelsoft
  • CrunchBase
  • PWC MoneyTree
  • TheFunded
  • VentureDeal

Market Mapping steps

1. choose industries and geographies of initial interest
2. define your proprietary point of view
3. translate into investment theme (industries/geographies of interest)
4. list major players in target industry/geography
5. improve market map with feedback from industry contacts and investment targets
6. determine which activities offer the highest return and outsource the rest
7. identify areas of future growth
8. asses fit with your overall strategy
9. regularly update the market map with additional feedback and lessons

10 Simple Steps to Improve Your Origination

1. Analyze your network
2. Use market mapping to develop deep, proprietary insights about your target
3. Monitor target ecosystem for cyclical/structural opportunities
4. Align internal interests
5. Divide and conquer
6. Centralize data and become an information sponge
7. Develop a network with limited overlap
8. Take control of your virtual presence (marketing)
9. Join the in-person and virtual communities of your target market
10. Take a leadership role; find a way to stand out and attract others to you

Notes – Edward Tufte’s “Presenting Data and Information”

Edward Tufte is a Yale-connected academic who conducts several private seminars around the country each year promoting his view of visual design for the display of quantitative information and statistics. He has published multiple books through his own publishing mark such as The Visual Display of Quantitative Information, Beautiful Evidence, Envisioning Information and Visual Explanations. His personal website which contains articles, research papers, examples of his work and principles and other information is at EdwardTufte.com. A friend who is a fan has blogged some notes about the man and his seminar courses.

If I were to summarize Tufte’s philosophy of information design into a single sentence, which is certainly a crude way to approach the nuanced and thoughtful lifework of a person, I’d say this– beautiful design means creating the highest density information display the resolution of your medium will allow. This stands in stark contrast to the reigning paradigm of “less is more” and sacrificing much of the available real estate of an information display for white/empty space, navigational or UI elements and “inference assists” (my term) such as arrows, boxes and non-data lines which are supposed to draw the viewer’s attention to what’s important or where to focus their eyes.

In Tufte’s own words, he summarized the philosophy with the pithy, “The information is the interface; maximize content reasoning time; minimize design decoding time.” [Note: on my hand-written notes written in a darkened room early in the morning at the start of his seminar, I think I mistakenly wrote “maximize design decoding time” but meant to write “minimize”.] Even more pithy, and in Tufte’s own words:

The purpose of information display is to assist thinking about its content.

I attended his seminar in San Diego, CA in February. Below I am posting my notes which may or may not be useful to a person unfamiliar with his work or the content of the seminar. Tufte, who introduces himself as “ET”, likes to circulate amongst his audience before, during and after the session and introduce himself– clearly he enjoys what he does and appreciates the people who have taken an interest in his work which is a good professional example for others to follow.

• The information is the interface.
• Idea: maximize content reasoning time; minimize [maximize? see above] design decoding time
  • design decode effort/time is wasteful as the pattern for design is often not repeated in the future
• Graphics are only useful when there is a lot of data, not a little bit of data
• Design should encourage scanning, scrolling and choosing
• Increases in resolution allows for spatial adjacency [note: this is the idea of putting lots of information side-by-side versus having to change mediums, windows, displays, repeatedly to compare and contrast blocks of information]
• Digital display screen resolution is finally approaching “P.A.P.E.R. technology” (paper) resolution
• Simple, clear conventional design with rich, complex data is preferable to complicated design devoid of content; many designers invest too much effort in display relative to content quality
• NYT, WSJ are highly trafficked websites high in information density (many links, many pieces of data and text) which demonstrate this approach is desirable for design of corporate sites
• Names have reputations, put your name on your work
• Reasoning on a flat surface means all viewers can go at their own pace; a slideshow makes most people wait; think “documents” not “decks”
• Listing sources for data provides credibility and reasons to believe
• Look at sources, start points, end points, rates of change, to examine whether a chart establishes a relationship between evidence and conclusion
• Annotations help explain all data by providing specific information about one data point captured in the graphic
• Look at “excellence in the wild” to contrast your own efforts against the pros
  • Use Word, not PowerPoint
  • Be web-based
• Order data tables by performance, not by alphabet; performance often tells a story
• ESPN.com demonstrates that even complex data can be appreciated by lesser intellects (!)
• Dashboards are idiotic and no way to operate a business or institution
  • Dashboards are information deficient
  • See dashboard essay on Tufte.com for more thoughts
• How to Make A Presentation, some tips:
  • show up early (head off problems, ensure equipment works, room not double-booked, etc.)
  • talk to people
  • give them a document for discussion; don’t give it in advance of the meeting, no homework
  • begin meetings with study hall, people can read faster than you talk
  • the document addresses the principles of individualism and personalization as people can take what information from it they deem important
  • PPT disappears as you go higher up an org chart, the top execs have no time for the “long and winding road” (Steve Ballmer anecdote); submit ideas to discuss as written documents
  • provide intellectual leadership about content, stop discussing production methodology
  • finish early, your audience will thank you
  • Remember “Problem, Relevance, Solution”, three necessary components of any good presentation
• How does Jeff Bezos run a meeting? Read the Forbes article or watch this Charlie Rose interview:
• Applied presentation tip– provide notes/documents of medical concerns for a doctor to read during your doctor visit; this is what they’re trained to do and they’ll pay more attention to the information if you give them something to read
• Check out The Public Library of Science and its templates for ideas on content rich documents
• You can copy the source code from EdwardTufte.com and use the CSS to apply style ideas to your own blog or website
• Real reading entails looting and hacking the valuable materials useful for later efforts, liberating them from the text; always read with an awareness for context (what came before this, what comes after, why did the author write it?); this echoes the idea of “making the work your own” of Mortimer Adler
• Refer to “Beautiful Evidence”, pg. 78-79, using diagram trees appropriately (annotated linking lines)
  • links need to convey causality and action
  • replace generic lines with words and numbers– annotate!
• Turn fundamental principles of analytical thinking into design decisions
• The purpose of information display is to assist thinking about its content
• Don’t pre-specify a data display method, use whatever method the job requires
• Look at Google Maps and ask IT why you can’t achieve similar design capabilities; their maps are rich, colorful, multi-dimensional, varied fonts and orientation of information, etc.
• Refer to “Visual Explanations”, pg. 90-91
• Refer to “Beautiful Evidence”, pgs. 82-83, 114-115; exploring words, numbers and images together
• Today’s computer interfaces separate and segregate information based on the method of production
• Statistical graphics can be anywhere a number or letter can be
• Statistical graphics can have the same resolution as topography
• Refer to “Beautiful Evidence”, pg. 46-47, “sparklines” method for creating text-sized data graphics, embedded within text (inspired by Galileo’s revelation of Saturn)
• “Nature” magazine has some of the best data-driven graphical displays, good place to look for examples of the possible
• Why aren’t all data displays excellent? Tufte suggests there is a profit-driven bias and the dominance of Microsoft combined with the lack of scientific rigor of many data designers results in a failure of the “public spirit” principle; color me skeptical about profit and “public spirit” being at odds!
• Excel, Google Analytics can both produce sparklines
• Refer to “Beautiful Evidence”, pg. 58, for the famed Swiss mountain maps, or see this video (YouTube):

• The human eye-brain optic system operates at 20mb/s in 16-bit color, digital displays don’t come close to this much data and resolution
• Content and credibility are the keys to presenting and spectatorship
  • have the sources been credible in the past?
  • demonstrate your understanding of detail and mastery of verbs, not nouns (not who is who, but who does what to whom?)
  • threats to credibility: lying, cherry-picking (evidence vs. evidence selection), over-polished, hidden or absent sources (“proprietary”, “legal liability”, “violate federal law”, etc.)
• Know your content, not your audience; maintain respect for your audience
  • “know your audience” leads to pandering
  • use presentations as a teaching moment to inform people of your content
• Scan lots of material and drill down where you see discrepancies for superior economization on large volumes of data to achieve relevance
• Investigate how data was measured; go out, walk around, see the process producing the data
  • people can not keep their own score; the metric is gamed as soon as it becomes important
  • eg, Google words are gamed by SEO, so use Google Images to search
• Refer to “Beautiful Evidence”, pg. 32-33 for “small multiples” concept; use the need to learn a repetitious format to get people to focus on the content
• Universality and “forever ideas”; Galileo was the supreme data designer; why should the “best thing ever” have occurred recently versus long ago?
• Personal curiosity– why are US internet pipelines significantly slower than other developed nations?
• Spatial adjacency versus temporal stacking (hi-res vs. low-res)
• Different modes of display are not competitors, they are co-operators in communicating information; no one display is optimal

Notes – The 2014 Rothbard Graduate Seminar

In 2014 I attended the Rothbard Graduate Seminar at the Ludwig von Mises Institute in Auburn, AL as an observer. The following are notes I typed while listening to lectures and discussions between faculty and graduate students. They have been edited for clarity, organization and in some cases privacy.

Lecture 1, Praxeology, David Gordon

• Praxeology is the science of human action, uses deductive methodology, begins with axiom of man acting, deduced with supplementary postulates (Rothbard uses action axiom, Mises never refers to “Man acts”, he refers to the concept of action)
• Supplementary postulates: leisure is desired over work, there are a variety of economic resources
• Economics is the best-developed branch of praxeology: Crusoe economics (isolated human action), catallactics (economics of exchange) including barter and money
• The study of violent intervention in the market, socialism and interventionism, are also part of praxeological analysis, as well as “games”, but these have not been well-developed (no systematic treatises?)
• Examples of praxeological reasoning— every action uses means to achieve an end; every action is a choice between alternatives; the actor always chooses his highest valued alternative
• Methodological individualism— only individuals act, not groups or societies or nations or classes, however this doesn’t imply that nations and classes don’t exist
• “On Austrian Methodology” by Robert Nozick, an interesting article
• Methodological Individualism has been used to deflate various ideologies such as nationalism, statism, etc.
• Why should we do economics this way (praxeology)?
  • Popular objection: principles of praxeology are supposed to be synthetic (truth about the world) and a priori (knowable by simply thinking about them), but you can’t learn about the world just by thinking about it, the meaning of concepts is conventional, people just decide to use words a certain way, you can’t make something true about the world just by defining words, other a priori truths are logical and tautological that say nothing new about the world
  • Rothbard’s answer: concepts come from experience, action isn’t an arbitrary construction but rather an abstraction from experience, if we get the concept from experience we know action exists, then anything we deduce from that applies to the world, deduction transmits truth from premises to the conclusion, if the premises are true the conclusion is true
  • Tautology objection: rests on an equivocation
  • Rothbard’s objections to the mainstream: they construct mathematical models and then test predictions derived from the models; math substitutes functional relations for causation, also introduces the false assumption of continuity but human action occurs in discrete steps, he objects to the testing because there is no way to perform controlled experiments as all phenomena are occurring simultaneously, and there are no quantitative laws of human action, human action is the product of choice

Questions:

1. In property rights theory, how can joint ownership (or government ownership) of a resource be explained if “only individuals act”?
2. How do we know the experience of action is true? Don’t we need a prior theory to interpret the empirical experience of action as action?
3. Can Austrian economics be translated into math? If not, does this suggest it is not rigorous or coherent?
4. Why is the Austrian ERE a useful abstract tool for studying elements of reality in isolation, but the “equilibrium” economy of mainstream thought is not?

Discussion session:

Rothbard’s book (Economic Controversies) had great depth, not just covering epistemology and economic theory but historical commentary, etc., this book is also digestible, repetitive so you get the same concept dissected from different angles, straight to the point, challenges the mainstream orthodoxy, accessible to the layperson, Rothbard starts with realistic premises and deduces from there which makes this approach even more empirical (econometric models falsify the real world), his criticisms are very thorough and you want to smile after you read them which is unique in reading academic papers. Rothbard isn’t ashamed to say there is meaning and truth.

Methodological individualism applies only to the concept of action, it does not exclude the idea of something like a “cosmic consciousness”, there is a difference between ontological and methodological claims; praxeology is not a metaphysical system, it simply takes the world as we find it

Mathematical annotation is more precise than verbal logic, but one problem is how do you convert initial premises into mathematical annotation (and back when a conclusion is reached)?

“Academic choice”, public choice analysis applied to the incentive structure of academia and how this influences their search for truth

Lecture 2, Methodological Debates, Jeff Herbner

• Every academic discipline is defined by its method and scope (boundaries).
• Rothbard— Each subject matter has a proper method; neoclassical approach— there is only one scientific method.
• Praxeology’s divisions:
  • Theory of Isolated Person (autistic exchange)
  • Theory of Voluntary Exchange
    •  barter
    • medium of exchange (catallactics)
      • unhampered market
      • violent intervention
      • violent abolition of market
  • Theory of Games
  • Theory of War
  • Unknown
• Neoclassical divisions:
  • Rational choice model
    • Market participants
    • Political participants
    • Social participants
  • Behavioral economics
• Categories of the social sciences
  • Economics— voluntary associations w/ economic calculation (UME, HME)
  • Sociology— voluntary associations w/o economic calculation (family, church)
  • History— contingent, concrete conditions of action blended w/ theory
  • Ethics— personal action, interpersonal action, voluntary and involuntary
  • Politics— involuntary associations (gangs, states)
• Praxeology— logic of action, economizing, underneath all 5
• Praxeology and Ethics— public policy (economic science is value free, but economic policy is value laden and requires assumptions or principles about ethics and what is desirable to make conclusions), critique of ethics, political philosophy, welfare economics
• Misesian Economics— a.) economic theory b.) economic history (understanding economic action in the past) c.) applied economics (predicting economic effect in the future based on proposed economic cause, i.e., policy)
• Neoclassical Economics— economic model and empirical testing

Questions:

1. Is the division in economics between calculating and non-calculating, or financial calculation and non-financial calculation? How are non-calculating actors choosing if not by some form of calculus?
2. Who has best developed Games and War theories of praxeology?
3. Why aren’t Austrians trying to develop comprehensive treatises in these fields
4. What is the application of game theory?
5. How do you know when a circumstance is new and requires an extension of the existing theory, or when it is “unoriginal” and can be explained by the previous body of theory? How do we know when existing theory can’t explain a new phenomenon or historical incident? How is this explanation different from the pragmatist argument about a lack of common principles?
6. Who, if anyone, is worth reading right now outside of the Austrian tradition, and why?
7. How can “proportionality” be administered in a judicial punishment setting without treading into utilitarianism or other non-subjectivist value systems?

Lecture 3, Austrian Microeconomics, Peter Klein

• Price theory, production theory, the theory of the firm, some parts of capital theory, etc., constitute “Austrian micro”
• It is not mainstream micro minus calculus and some graphs plus “spontaneous order” and “radical subjectivism”, etc.; this is a misconception of the contribution of Austrian econ
• Mengerian economics— focused on mundane topics, not esoterica; shares subjective utility and marginal analysis of Walras and Jevons; not simply verbal version of neoclassicism, emphasized cause and effect real market behaviors and thus “causal-realist”
• Fundamentals of Austrian micro— economics as the analysis of action (praxeology); teleology, means and ends; economic goods which are concrete (real prices of real goods, not abstract prices of conceptual entities) and are limited and desirable, split into consumer and producer goods (direct and indirect serving of human needs); time, implied by action, itself a scare means and the notion of time preference; production is rearrangement, not creation ex nihilo, takes time and uses stages
• General insights on valuation include emphasis on discrete, marginal units, not abstract categories, as well as attention to demonstrated preference
• Menger’s utility theory— the value of particular means, marginal utility being the value of the highest-ranked end that cannot be achieved if a unit is lost, law of diminishing marginal utility (not a psychological concept, a logical concept focused on individual use of each unit not the benefit)
• Contrasts with neoclassical utility theory— consumers in NCM are choosing among heterogeneous bundles, choosing between total utility of each bundle; marginal rate of substitution is rate at which consumer substitutes unit of good X for unit of good Y (slope of indifference curve) vs. causal-realist where substitution occurs at the margin and demonstrates that the marginal utility of X is greater than the marginal utility of Y w/ no separate income or substitution effects; indifference can not be demonstrated in action and is therefore not a scientific concept (focus is on explaining actions, not states of being)
• Price determination— analysis of the marginal pairs (see Greaves, paper by Egger) states that prices are set by pairs of buyers and sellers; characteristics of the equilibrium price, determined exclusively by individuals’ subjective valuations, subjective valuations of buyers and sellers matter, not set unilaterally by sellers, the real prices actually paid in market transactions
• Prices and knowledge— buyer and seller valuations can include speculative demands (they don’t need to know in advance what equilibrium price will be), prices as signals (Hayek)
• Factor pricing— Austrian theory of imputation, rental prices imputed backwards to the ???
• Applications and extensions— no distinction between production and “distribution” (Piketty), wealth is “distributed” in the act of production, it is not produced and then arbitrarily distributed by capitalists, government, etc.; rent = unit price of services of any good (Fetter); production functions, but no cost curves; firm as an organization, not a productive unit

Discussion section:

Kirzner and Schumpeter restrict entrepreneur to nothing but alertness, the Misesian approach is more expansive and includes everyone in some capacity acting as an entrepreneur

Mises in Human Action talks about the entrepreneur as a leader, who is far-seeing, comes from Weiser, who also mentored Schumpeter; Mises was uncharacteristically fuzzy and unclear on his writings on the entrepreneur, occasionally he refers to the “promoter” (ideal type) involving leadership, having a quicker eye than the crowd, etc., but typically he refers to the function of entrepreneurship

Kirzner is talking about alertness to opportunities for profit, but entrepreneurs create goods, capital, companies, etc., not “opportunities for profit”, opportunity implies objective configurations of resources that allow for a decision or action or take place, but is this analogous in the business world? Or is “opportunity” a metaphor? Do we need the construct of “opportunity” to explain what entrepreneurs do?

Salerno, “The Entrepreneur, Real and Imagined” [PDF]

Kirzner’s equilibrium is the condition under which no unfound profit opportunities exist

Mises vs. Knight on judgement— Mises never refers to Knight in this context, judgement is more of a black box for Mises than for Knight

Klein, “The Capitalist and The Entrepreneur” [PDF]

Questions:

1. If Austrian econ is not distinct, why do mainstream thinkers argue so violently with Austrians?
2. Did the anglo-American Austrians, etc., self-consciously identify with the “Austrian school” or did we lump them in post hoc? If so, what did they refer to themselves as?
3. When challenging Keynesianians and other mainstream opponents, Austrian critics often accuse them of “not understanding economic calculation”. Is this criticism accurate? Why or why not?
4. Would it be better to distinguish between “offers” and “prices”, where “offers” are ratios of exchange advertised but not consummated, hypothetical, whereas “prices” represent historical data of consummated exchanges between buyers and sellers?
5. Is Kirzner’s “capital-less entrepreneur” really a description of professional managers, and if it is, is it a legitimate analysis or does it still lack connection to reality?
6. Is “public choice” an analysis of entrepreneurship in socialism, or in privatization within socialism?

Lecture 4, Taxation and Public Finance, Mark Thornton

• Rothbard’s approach: nature of taxation; technical corrections to mainstream analysis; theories of “just” taxation; neutrality of taxation; approaches to tax reform
• Interventionism: autistic (ruler tells the ruled what to do); binary (e.g., taxation, transfer of property from owner to intervener); triangular (ruler tells two ruled how they can interact with each other, e.g., prohibitions and regulations)
• Impoverishment caused by taxation is in proportion to the amount of taxation, not the form the taxes take
• Taxes can not be passed on to consumers because of competitive pricing of supply and demand
• Taxation distorts market outcomes in two ways: the withdrawing of resources from the economy, and the redistribution of those resources across the economy
• “Benefit principle”— pay taxes in accord with the benefits you receive
• “Ability to pay principle”— pay taxes in accord with your relative wealth
• There are no scientifically valid principles of taxation, there is no conceptually possible neutral tax

Discussion section:

How to explain countries where majority of taxes are paid by a minority of people, as Calhoun’s analysis suggests the majority bear the costs for a small minority to benefit from? The answer could be additional implicit subsidies such as protections from the State in terms of liability or regulation that they see taxation as payment for

Can the State make investments? Rothbard is writing against the idea of “social investment” such as infrastructure spending, and he is writing in terms of capital structure— they’re not integrated into economic calculation, they’re not part of the capital structure; counter-example, State-owned oil production

Questions:

1. Why doesn’t taxation create business cycles due to mass misallocation of resources
2. When taxes are “shifted backward” to suppliers through lowered net revenue, aren’t consumers STILL paying the tax due to lower supply and lower quality of remaining supply versus free market outcome?
3. Why can employers shift taxes to employees if businesses can’t shift taxes to consumers?
4. In the marketplace, how is price discrimination explained in reference to the benefit principle?
5. Does the lack of scientificness of taxation principles imply the irrationality and injustice of government in general?
6. “Over” and “under” exploitation of a government owned resource… relative to what? How do we know how much the free market would exploit it?

Lecture 5, Monetary Theory, Joe Salerno 

• Money as a medium of exchange— trade requires barter in the absence of money, creating high search costs due to the double coincidence of wants
• Money as unit of account— used to express prices and record debts, simplifies relative price comparisons
• The value of money— measured as the inverse of the price level measured against an arbitrary basket of goods (i.e., 1/P), what does one unit of money buy?
• The (neo-)classical dichotomy— the theoretical separation of nominal and real variables; Hume and classical economists suggested monetary developments affect nominal variables but not real variables; if money supply doubles, for example, all nominal variables, such as prices, will double; in the short run, supply and demand determine the value of money, in the long run cost of production determines the value of money
• The neutrality of money— proposition that changes in the money supply do not affect real variables
• Purchasing Power Parity (PPP)— relies on the “law of one price” which establishes that arbitrage opportunities eliminate differences in value of common goods in different markets; exchange rates are supposed to be ratios of price levels between two economies

Discussion section:

“What Has Government Done To Our Money?” is Rothbard’s explanation of how an economy “progresses” from commodity to fiat money, because Mises said that a true fiat money is a historical question given that every episode in the past has been a form of “credit money” based on expectations about an eventual return to a commodity money that predated it

Questions:

1. For a relative price to be a useful data, wouldn’t it have to be collected from a real exchange (i.e., barter exchange)?
2. Do mainstream models explaining fiat money violate Occam’s Razor?
3. If velocity of money is increasing, isn’t the “velocity of hoarding” increasing at the same rate because all money balances must be held by somebody at some time?
4. If IEOR policy is causing banks to “hoard” bank balances and this is non-expansive, is this money “neutral” to the economy or what effect is it having? What role does it serve? (Compare to Jingjing’s question on corrupt Chinese official cash balances)

Lecture 6, Professional Strategies, Career Advice and Current Research Topics, Peter Klein

[I did not take any notes during this discussion.]

Discussion section:

[I did not take any notes during this discussion.]

Questions:

1. What about pursuing a career as a “private lecturer” by establishing yourself as an authority on Austrian economics with a crisp website?
2. How can Austrian economist career hopefuls improve their career by thinking in terms of their “personal brand”?

Lecture 7, Monetary Policy, Jeff Herbener

• Monetarists— micro efficiency, but macro instability caused by monetary regime; optimal monetary regime would create stability in the price level; requires an elastic money supply to offset forces causing price inflation or deflation to keep price level roughly stable; avoid trade imbalances w/ flexible exchange rates
• Monetary Disequilibrium Theory (MDT)— micro efficiency, macro inefficiency; means of payment must accommodate changes in money demand; avoid price deflation from excess demand for money; separate unit of account from general medium of exchange, supplant general medium of exchange with means of payment; competitive issue of means of payment adjust to accommodate changes in money demand;
• Banking school FB— micro efficiency, macro inefficiency; money stock and credit supply must accommodate the needs of trade; avoid price deflation from excess demand for money; competitive issue of fiduciary media adjust to accommodate changes in money demand
• Currency school FB— micro efficiency, macro efficiency; production of money and money substitutes should be integrated into the social economizing process of economic calculation by entrepreneurs
• “Free banking” in Scotland— Rothbard suggests using Vera Smith’s schema of 4 groups (free vs. central banking Banking School, free vs. central banking Currency School) rather than Larry White’s 3 groups; there was no Banking School free banking in Scotland, and the system didn’t work well, numerous bailouts, pyramiding credit on top of Bank of England notes;
• Free Market Monetary reform— separate money from the State; abolish fFed, dollar redeemable in gold, legal enforcement of 100 percent reserve on money substitutes;
• Ancillary roles for the State— Hayek (Sennholz), abolish all legal disabilities on private enterprise production of money and money substitutes; Yeagar (Timberlake), state defines the unit of account in terms of market-basket of goods, the general medium of exchange is eliminated, private enterprise provides means of payment
• Central role for the State— Fisher, state defines a market-basket of goods for the unit of base money, currency is redemption claim for base money, supply of currency managed to keep price level stable; Friedman, Fed conducts non-discretionary monetary policy to keep the price level stable

Discussion section:

[I did not take any notes during this discussion.]

Questions:

1. What “problem” did the MDT respond to? Similarly, did the Monetarist framework develop in response to existing statist monetary regimes or was it to address perceived problems with a theoretical free market monetary regime?
2. Does the existence of taxation in general complicate or prevent the possibility of private production of the money supply?
3. Is “balance of payments” thinking by mainstream economists an anachronistic way of thinking in a non-commodity standard money world?
4. Why do socialist countries have money? How does money function in these economies?
5. How can the crash and then explosion in the price of gold since ~2000 be explained in Austrian monetary theory?

Lecture 8, Mark Thornton, Comparative Economic Systems

• Hoppe’s A Theory of Socialism and Capitalism (1988)— systematic, offers a theory of comparative economic systems, based on the concept of private party
• Capitalism— based on property rights; property is the result of scarcity; provides non-violent mechanism for resource allocation; Garden of Eden, property right to your body; original appropriation; contractual exchanges; wealth; absence of systematic aggression; no unemployment (idle resources) problems
• Russian-style socialism— socialism par excellence; State owns the means of production; equality vs. anarchy of production; aggression and democracy; less investment, appropriation (black market); calculate the structure of production = waste; Mises (1920) complete vs. relative; East vs. West Germany
• Social democratic socialism— “reform”, taking steps at the ballot box; “commanding heights” (the sectors deemed essential by socialist planners for control such as education, utilities, transportation networks, etc.); owners remain caretakers with partial ownership; property owners taxes for redistribution; dominant form in Europe; Sweden
• SDS vs. Russian-Style and Capitalism— solves the calculation problem; compared to Russian, less impoverishment, less over utilization of resources, more leisure, more incentive to work, save and invest; but it’s still poor compared to capitalism; both reduce production of talent and skills, increase the production of aggressive and political skills, both increase barter and black market activities
• Conservative-style socialism— supports status quo, old order; private property, commanding heights; sin taxes, not income taxes; price controls, unions, prohibitions, not redistribution; regulations and cartels; Nazi Germany, Fascist Italy, Imperial Japan (Prussian social monarchy?)
• Similarities between conservative and social-democratic socialism— both have private property and commanding heights; both infringe on private property; both have negative effects on labor, savings, investment, innovation; SDS stresses egalitarianism, CS stresses nationalism; both underperform capitalism
• Socialism of social engineering— American pragmatism, technocracy; positivism and empiricism; reality must be verifiable or falsifiable by experience, “socialism might work”; however, empiricists must implicitly assume the existence of non-empirical as knowledge of reality, i.e., logic, math, geometry
• Empiricism— must assume some sort of existence of cause and effect; must presume the constancy principle in order to proceed in its investigation, but the constancy principle (there are relationships to be found empirically) is not established, confirmed or falsified empirically, it is a given a priori; life proceeds on the basis of cause and effect; social engineering via empiricism is a giant contradiction

Discussion section:

Crony capitalism is the modern day equivalent of mercantilism

Old wine in new bottles, people can intellectually reject an idea like mercantilism as an historical phenomenon but if it is repackaged in a new brand they might adopt it as sensible

Are many of the distinctions of totalitarian regimes explained by the path to power? IE, Hitler came to power through the ballot box, Mao led a peasant rebellion, Lenin was elected by the army

Democracy is one of the most stable forms of the State; democracy involves participation of the population, and has a process for slowly implementing policies vs. unitary or limited participation and the ability to make drastic, sudden changes via emperor or dictatorship; democracy tends to hand out favors to large groups of people so it is hard to create an opposition coalition to overturn it

Mises’s three pre-conditions of the division of labor and economic specialization: private property in the means of production, free exchange (for price formation) and ???

Questions:

1. There seem to be an endless variety of “socialisms” reflecting the unique cultural and historical factors of each society that has suffered them; what are some UNIVERSAL elements of socialism that must be or always are present to be declared a socialist system?
2. Does technological innovation and economic “evolution” allow for political change or does it work in the opposite order?

Lecture 9, Property Rights and the Public Sector, David Gordon

• Ethics and economists— one of Rothbard’s most original contributions is his criticism of the way mainstream economists deal with normative issues; economists want economics to be value free, economics is a science, normative judgments are mere subjective preferences; Rothbard agrees that economics is value free, but he doesn’t think that ethical judgments are mere subjective preferences; mainstream economists are caught in a dilemma, they want to make normative judgments that do more than express their preferences, how can they do so?
• Concealed value judgments— some economists think that they can escape the dilemma by endorsing a value-free statement that still leads to normative recommendations; if everybody prefers something, then it should be done (strong Pareto criterion), if at least one person favors something and it makes no one worse off, it should be done (weak Pareto criterion), these principles still involve value judgments; what if everyone has wrong views about what is desirable, or the starting point involves violating someone’s rights?
• Unanimity principle— Rothbard thinks that the unanimity principle has had bad results in practice; because unanimous agreement can’t in practice be reached, Buchanan and Tullock settle for less than full unanimity
• Rothbard on the State— it is a fundamental mistake to view the state as a voluntary organization; it is a parasitic, predatory gang that seizes resources from the productive; Rothbard follows Oppenheimer and Nock
• Public sector— if the State is predatory, then the productivity of the public sector is problematic; the State takes resources by force, thus, its activities cannot be considered productive; government expenditures should be subtracted from, not added to, production statistics; Rothbard’s definition of productivity is intertwined with an understanding of demonstrated consumer preference on the market
• Statistics— Rothbard is suspicious of statistics collection; they are not value neutral but are essential to government control
• Utilitarianism and property rights— many economists take some version of utilitarianism for granted; it’s argued that recognition of property rights makes nearly everybody better off; this isn’t a value-free claim, but it’s defended as non-controversial; Rothbard objects that this position doesn’t consider the justice of property rights, any stable system of property rights is accepted;
• Escape from the dilemma— Rothbard believes the dilemma of the economists can be escaped by developing an objective ethics based on natural law; self-ownership, Rothbard defends the concept by rejecting alternatives, slavery and a system where everyone owns part of everyone else; if you own yourself, then by mixing your labor with unowned resources you own them as well; once you own something you can exchange it and give it to anyone you want, including the right of bequest;
• Externalities

Discussion section:

[I did not take any notes during this section.]

Questions:

1. Can any philosophical principle be established simply by rejecting alternatives? (Last man standing philosophy?)
2. What criteria are sufficient for “mixing labor” and taking ownership? If mixing labor with factors of production, why doesn’t this mean workers own them? What makes “mixing labor” effective in one circumstance and not effective in another?
3. Walter Block claims that it’s okay for libertarians to take from the State, but no one else. Is there any logic to this?
4. Maybe there is a Coaseian solution for the dismantling of the State— it doesn’t really matter HOW it is privatized, it just matters that it IS privatized?
5. When your money is taxed, it is stolen, and your money is fungible and spent, so what legitimate claim do you have to fungible, disposed assets that can not be traced?
6. What about when government functionaries in “marketable” positions are part of unions or agitate for State privilege?

Lecture 10, Current Debates and Critiques, Joe Salerno

[I did not take any notes during this section.]

Discussion section:

Is the term “Austrian” valuable as a marketing concept? “Capital Based Macro”, “Causal Realism”

You don’t want to be the kid at camp who picked their own nickname, names come from the outside

Is there rhetorical value in labeling opponents in sensational ways (“Friedman is a socialist”) or does that hurt your cause more than it communicates information?

Questions:

1. What might have happened to the Austrian school’s influence if WW2 had never occurred?
2. What critical lessons have we learned (as a “movement”) from the Salerno/Hulsmann theory of the decline and rebirth of Austrian economics?
3. Why aren’t there more applied economic works in the Austrian tradition? What would be some priority applications?
4. What is “Austrian economics in a nutshell” or the Austrian elevator pitch? Why Austrian?

Notes – The Snowball, By Alice Schroeder: Part V, Chap. 43-52

The following are reading notes for The Snowball: Warren Buffett and the Business of Life, by Alice Schroeder (buy on Amazon.com). This post covers Part V: The King of Wall Street, Chap. 43-52

The modern Buffett

In Part V of the Snowball, we see Buffett’s transformation from the early, cigar butt-picking, Grahamian value-minded Buffett, through the filter of his Fisherite partner, Charlie Munger, into the mega cap conglomerator and franchise-buyer Buffett who is popularly known to investors and the public the world round.

It is in this part that we also see Buffett make one of his biggest missteps, a stumble which almost turns into a fall and which either way appears to shock and humble the maturing Buffett. It is in this era of his investing life that we see Buffett make some of his biggest rationalizations, become entangled in numerous scandals he never would’ve tolerated in his past and dive ever deeper into the world of “elephant bumping” and gross philanthropy, partly under the tutelage of his new best friend and Microsoft-founder, Bill Gates.

The lesson

Buffett made a series of poor investments but ultimately survived them all because of MoS. There will be challenges, struggles, and stress. But after the storm, comes the calm.

The keys to the fortress

From the late seventies until the late nineties, despite numerous economic and financial cycles Buffett’s fortune grew relentlessly under a seemingly unstoppable torrent of new capital:

Much of the money used for Buffett’s late seventies spending spree came from a bonanza of float from insurance and trading stamps

This “float” (negative working capital which was paid to Buffett’s companies in advance of services rendered, which he was able to invest at a profit in the meantime) was market agnostic, meaning that its volume was not much affected by the financial market booming or crashing. For example, if you owe premiums on your homeowner’s insurance, you don’t get to suspend payment on your coverage just because the Dow Jones has sold off or the economy is officially in a recession.

The growth in Buffett’s fortune, the wilting of his family

Between 1978 and the end of 1983, the Buffetts’ net worth had increased by a stunning amount, from $89 million to $680 million

Meanwhile Buffett proves he’s ever the worthless parent:

he handed the kids their Berkshire stock without stressing how important it might be to them someday, explaining compounding, or mentioning that they could borrow against the stock without selling it

Buffett had once written to a friend when his children were toddlers that he wanted to see “what the tree has produced” before deciding what to do about giving them money

(he didn’t actively parent though)

Buffett’s private equity shop

Another tool in Buffett’s investment arsenal was to purchase small private companies with dominant franchises and little need for capital reinvestment whose excess earnings could be siphoned off and used to make other investments in the public financial markets.

Continuing on with his success in acquiring the See’s Candy company, Buffett’s next private equity-style buyout involved the Nebraska Furniture Mart, run by a devoted Russian immigrant named Rose Blumkin and her family. And, much like the department store chain he once bought for a song from an emotionally-motivated seller, Buffett beat out a German group offering Rose Blumkin over $90M for her company, instead settling with Buffett on $55M for 90% of the company, quite a discount for a “fair valuation” of practically an entire business in the private market, especially considering the competing bid.

An audit of the company after purchase showed that the store was worth $85M. According to Rose Blumkin, the store earned $15M a year, meaning Buffett got it for 4x earnings. But Rose had buyers remorse and she eventually opened up a competing shop across the street from the one she had sold, waging war on the NFM until Buffett offered to buy her out for $5M, including the use of her name and her lease.

One secret to Buffett’s success in the private equity field? Personality:

“She really liked and trusted me. She would make up her mind about people and that was that.”

Buffett’s special privileges

On hiding Rose Blumkin’s financial privacy: Buffet had no worries about getting a waiver from the SEC

Buffett got special dispensation from the SEC to not disclose his trades until the end of the year “to avoid moving markets”

The gorilla escapes its cage

Another theme of Buffett’s investing in the late 1980s and 1990s was his continual role as a “gorilla” investor who could protect potential LBO-targets from hostile takeover bids. The first of these was his $517M investment for 15% of Tom Murphy-controlled Cap Cities/ABC, a media conglomerate. Buffett left the board of the Washington Post to join the board of his latest investment.

Another white knight scenario involved Buffett’s investment in Ohio conglomerate Scott Fetzer, which Berkshire purchased for $410M.

Then Buffett got into Salomon Brothers, a Wall Street arbitrage shop that was being hunted by private equity boss Ron Perelman. Buffett bought $700M of preferred stock w/ a 9% coupon that was convertible into common stock at $38/share, for a total return potential of about 15%. It even came with a put option to return it to Salomon and get his money back.

But Buffett had stepped outside of his circle of competence:

He seemed to understand little of the details of how the business was run, and adjusting to a business that wasn’t literally made of bricks-and-mortar or run like an assembly line was not easy for him… he had made the investment in Salomon purely because of Gutfreund

Buffett’s disgusting ignorance and hypocrisy

Buffett:

I would force you to give back a huge chunk to society, so that hospitals get built and kids get educated too

Buffett decides to sell the assets of Berkshire’s textile mills– on the books for $50M, he gets $163,122 at the auction. He refused to face his workers and then had the gall to say

“The market isn’t perfect. You can’t rely on the market to give every single person a decent living.”

Buffett on John Gutfreund:

an outstanding, honorable man of integrity

Assorted quotes

Peter Kiewit, a wealthy businessman from Omaha, on reputation:

A reputation is like fine china: expensive to acquire, and easily broken… If you’re not sure if something is right or wrong, consider whether you’d want it reported in the morning paper

Buffett on Wall St:

Wall Street is the only place people ride to in a Rolls-Royce to get advice from people who take the subway