Review – The Millionaire Next Door

The Millionaire Next Door: The Surprising Secrets of America’s Wealthy

by Thomas Stanley, PhD and William Danko, PhD, published 1996, 2010

One out of ten Americans has a net worth of $1,000,000 or more, but how did they get that way (and more puzzling, what is going on with the one in ten Americans who have a negative net worth)? According to Stanley and Danko, accumulating a million dollar net worth has less to do with luck and inheritance and more to do with simple behavioral habits. The wealthy tend to be good at generating income, sure, but they’re even better at saving it, that is, spending far less than what they take in over any given period of time. As they put it, it’s no use having a good financial offense if you don’t know how to play defense and thus give up too many financial goals.

The authors recommend running your household like a small business– creating budgets, tracking expenses, reviewing your actual versus expected financial results, etc. They focus on the spending habits of the affluent decile to illustrate the surprising (for some) fact that those who have accumulated a million dollars or more in net worth typically don’t spend as if they have done so, highlighting tastes in clothing and automobiles (“purchasing vehicles by the pound”) amongst a few others. I expected the book to highlight more domestic life decisions, such as millionaire households doing home cooking versus eating out, and I was also expecting to see a lengthier investigation into housing accommodations and finance given that 97% of millionaires own their own homes or carry a mortgage rather than rent, an impactful statistic.

Thankfully, the authors spent a significant amount of time discussing the intergenerational wealth dynamic amongst the affluent which is a particular interest of mine. Highly affluent individuals tend to be less-educated than their children and are typically self-employed business owners, whereas their children tend to be more-educated (masters and even doctoral degrees) and employed as professionals (doctors, lawyers, engineers, accountants, etc.) It seems affluent people attribute a lot of their success to non-repeatable luck, and/or believe it’s possible to insulate their children from the volatility and vicissitudes of a more competitive life by encouraging them to obtain more education to enter cartelized industries with licensing or other legal obstacles to entry. The expectation (in terms of probability) is that these people will obtain less total wealth than their parents, but also experience greater security in their incomes and more stability in their long-term earnings path. As they say,

the relationship between education and wealth accumulation is negative… the longer one stays in school, the longer one postpones producing an income and building wealth

It would seem that regardless of the level of education our professional status of an affluent person’s children, the most important thing they need to learn is the same expense-control habits as their parents. Can that be taught in higher education? What happens if you become a stable doctor with a local practice and a strong propensity to consume all you earn? This isn’t exactly a profound point, but I was a bit astonished to see how little emphasis appears to be given amongst affluent families to instructing their children about how to manage accumulated wealth. One noted habit of the affluent is to avoid talking about receiving money that hasn’t been individually earned with their young children, the goal appears to be to avoid a sense of entitlement and get them to think about establishing their own financial position. But if they’re eventually due an inheritance (or manage to accumulate their own stack), why reinvent the wealth management wheel intergenerationally? Why aren’t more affluent people or families talking about how to responsibly manage, ie, grow, a starting base of capital accumulated in prior generations?

The book doesn’t explore the differences in behaviors between the merely wealthy ($1M+ net worth) and the significantly wealthy (say, $10M+) or the incredibly wealthy ($100M+), and while there are undoubtedly exceptions to the rule, my hunch is that any family that manages to sustain a fortune over subsequent generations ($100M+>$100M+) or grow it ($100M+>$200M+) is spending a lot of time talking with their children about how to handle this responsibility. The decision to have these conversations or avoid them is likely the tipping point between clearly defined social classes. Some people can’t imagine being anything but comfortably upper middle-class and glory in such identity, while others can’t imagine being anything but the cream of the crop.

Here are some other interesting ideas from the book:

  • Self-employment is a major positive correlate of wealth
  • “Employment-postponing” via higher levels of education has a meaningful impact on lifetime wealth accumulation
  • Is your spouse more frugal than you are? Millionaire households would answer “yes”
  • Most wealthy people feel that you get what you pay for in the realm of financial advice
  • Millionaires know how to play both sides of the wonder of interest– small expenses become big expenses over time; small amounts invested become big investments over time
  • The higher one’s net worth, the better off they are at minimizing realized income
  • Begin earning and investing early in your adult life; the longer your runway, the higher chance you have of becoming a millionaire
  • Under-Accumulators of Wealth (UAWs) usually think they have more wealth than their neighbors
  • The more dollars adult children receive, the fewer they accumulate
  • Good gifts for affluent parents to give their children:
    • subsidizing education
    • earmarking gifts so they can start or enhance a business
    • prefer to give their offspring private stock
    • Ask permission when contemplating giving significant gifts to your children
    • cash gifts are the single most significant factor for explaining the lack of productivity of adult children of the affluent
  • A typical behavioral mistake of affluent parents is to “strengthen the strong child, weaken the weak child”
  • Discipline and initiative can’t be purchased like automobiles or clothing off the rack
  • Courage can be developed, but it can not be nurtured in an environment that eliminates all risks, all difficulty, all dangers.
  • The sales profession is good exposure for the children of affluent; retail sales jobs provide children with objective third parties to evaluate their behavior
  • One of the proven ways that domineering parents control their children is by living close to them
  • Most spouses feel that charity begins at home
  • At least one outsider should be co-executor of an estate
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Review – Losing My Virginity

Losing My Virginity: How I Survived, Had Fun and Made a Fortune Doing Business My Way

by Richard Branson, published 2011

Spoiler alert– this book is choppy and inconsistent in the pacing and entertainment factor of its narrative. You really need to read between the lines a bit to get the most value out of it. That being said, it’s surprisingly literary for a dyslexic former publisher of a student magazine and I found Branson’s repeated reference to his high-altitude balloon voyage trials to be an outstanding metaphor for his life as a businessman and entrepreneur.

You see, in Branson’s ballon journeys, the key factors of any consistency were that: a.) Branson was knowingly and openly taking what he perceived to be a potentially life-threatening risk b.) Branson was almost always underprepared for it, or decided to go ahead with his attempt despite early warnings that something was amiss and c.) nonetheless, he somehow managed to survive one disaster after another, only to try something bigger and bolder the next time around.

And this is quite similar to the way he comported himself as an entrepreneur on so many occasions. Again and again, he’d make a daring foray into a business, market or industry he didn’t quite understand, the company would stumble after an early success leaving them all on the brink of failure and yet, each time they’d double down and somehow win.

In that sense, Branson is a perfect example of survivorship bias. On the other hand, having so many narrow misses that turn into massive accelerators of a person’s fortune start to make you wonder if isn’t mostly luck but rather mostly skill.

As an entrepreneurial profile, “Losing My Virginity” is full of all kinds of great successes and astounding failures. With regards to the failures, something I found of particular interest was the fact that Branson’s company were victims of some of the most common pitfalls of other businesses throughout its early history: taken for a ride by indomitable Japanese owners/partnerships in the 80s, repeated victim of the LBO-boom and the private/public buyout-cycle in the 80s and 90s. When you read these stories in the financial press it always seems to happen to the rubes of the business world, but Branson’s foibles help one to realize even rather sophisticated types can get taken in now and then.

The volatility in Branson’s fortunes do leave one with a major question though, namely, why did Branson’s company ultimately survive?

This isn’t a Harvard Business School case study so I don’t mean to pass this off as a qualified, intelligent answer to that question, but I will attempt a few observations and, in typical HBS fashion, some or all of them may be contradictory of one another and none will be provided with the precise proportional contribution they made to the end result:

  • the group had a cultural commitment to change and dynamism; they were not so much their businesses, but a culture and group of people who did business a particular way, a true brand-over-merchandise, which allowed them to reinvent themselves numerous times
  • the group strategically focused on being the low-cost provider in their industry, usually while simultaneously attempting to pursue the seemingly mutually exclusive goal as being seen as the highest quality offering as well
  • the group focused on serving customers but equally saw treating its employees with concern as an important value
  • the group consciously created a brand that could be applied to diverse businesses (see point #1)
  • the group pursued businesses that seemed “interesting” or sensually appealing to it, which ensured that everyone involved was motivated to do well because they liked the work they had chosen

Another thing I noticed about Branson and the development of his company was the attention he paid to the composition of management and owners and his dedication to weeding out those who were not good fits in a charitable way. Channeling the “best owner” principle, Branson made a conscious effort to buy out early partners whose vision and tastes did not match the current or future vision of the group. In this way, the company maintained top-level focus and concentration on a shared strategic vision at all times, sparing itself the expense and distraction of infighting and wrangling over where to go next and why.

Another aspect of the company’s resilience had to do with its operational structure. Branson built a decentralized company whose debts and obligations were kept separate. In an environment where new ventures were constantly subject to total failure, this arrangement ensured that no one business failure would bring the entire group down.

The final lessons of the Branson bio were most instructive and had to do with the nature and value of forecasting.

The first lesson in forecasting has to do with the forecasts others make of us, or the world around us. For example, Richard Branson had no formal business training, he grew up with learning disabilities (dyslexia) and he was told very early on in his life by teachers and other adult and authority figures in his life that he’d amount to nothing and his juvenile delinquency would land him in prison. Somehow this worthless person contributed a great deal to society, through business and charity, and by most reasonable measures could be considered a success, making this forecast a failure. If one had taken a snapshot of the great Warren Buffett at a particular time in his adolescence, when the young boy was known to often take a “five-finger discount” from local department stores, it might have been easy to come up with a similar forecast about him.

I’m not sure how to succinctly sum up the concept there other than to say, “Things change.” Most forecasts that involve extrapolating the current trend unendingly out into the future will probably fail for this reason.

The second lesson in forecasting has to do with how we might attempt to forecast and plan our own lives. When we have 50, 60, 70 or more years of a person’s life to reflect on, it is easy to employ the hindsight bias and see how all the facts of a person’s life were connected and led them inexorably to the success (or infamy) they ultimately achieved. And certainly there are some people, again using Buffett as an example, who from an early age were driven to become a certain something or someone and so their ability to “predict their future selves” seemed quite strong.

But the reality is that for the great many of us, the well-known and the common alike, we really don’t have much of a clue of who we are and what we’ll ultimately become. The future is uncertain and, after all, that’s the great puzzle of life that we all spend our lives trying to unravel. Richard Branson was no different. He was not born a billionaire, in a financial, intellectual, personal or other sense. He had to learn how to be a businessman and how to create a billion dollar organization from scratch. Most of the time, he didn’t even know he was doing it. In other words, HE DID NOT KNOW AHEAD OF TIME that he would become fabulously wealthy, and while he was hard-working and driven, it doesn’t even appear he purposefully intended to become so.

Maybe we should all take a page from Branson’s book and spend less time trying to figure out what’s going to happen and more time just… happening. We could sit around all day trying to figure life out, or we could follow the Branson philosophy where he says, “As for me, I just pick up the phone and get on with it.”

Recession Risk, The Ultimate Risk Paradigm Of Modern Business Operations

The business cycle rotates periodically between boom and bust. This is one of the inevitable consequences of centrally planning the economy’s interest rates and forcing them below their market equilibrium levels. Because it is inevitable, it is “predictable” and thus every business person must conduct their affairs in light of the fact that at some point in the future they will be faced with a recession. The key measure of risk for a business person operating in a central bank-managed economy, then, is “How will I feel when the recession comes?”

If a recession poses no risk to the financial structure of his holdings and he is positioned in his operations to weather a storm, he may be termed “low risk.” If instead a recession represents an existential threat and/or the potential for severe hardship for his operations, he may be termed “high risk.”

As an ideal, a sufficiently low risk operator should eagerly anticipate a recession as it will represent a cheap buying opportunity during which he will consolidate the failing enterprises of his competitors, scooping up their assets at bargain prices and thereby leap ahead of them without the use of leverage or cheap competitive tactics. Conversely, a sufficiently high risk operator will find the economic Sword of Damocles plunging through his neck in a recession, permanently severing the connection between himself and his former assets. How then to manage financial and operational risk so that continued growth can occur in a manner that is sustainable in all possible economic environments?

In terms of financial risk, we could sort our assets in two ways, by asset quality and by financing quality. The asset with the highest asset quality is the one which has the largest earnings yield relative to its current value. The asset with the highest financing quality is the one which is cheapest to own (ie, annual interest cost).

Practically speaking, sorting assets by asset quality and financing quality and then selling low quality assets and paying down outstanding debt would move an organization toward a more favorable balance between asset quality and finance quality, with an emphasis on equity in the balance sheet. The capital that is freed up in the process is now available to purchase a higher quality asset in the future.

In a recession, the cash flows from low quality assets dwindle while the finance charges on debt remain fixed; not only does such a mixture create a problem in a recession but it falsifies the true “free cash” position of the company in a boom because, to operate prudently, extra cash must be maintained on the balance sheet to offset the risk this low quality asset and debt represent should a recession appear.

The insistence on focusing on the management of financial risk first offers us clues as to a sound growth strategy overall. To be successful and sustainable through all potential economic conditions, growth must be purposeful and planned and should only occur when three conditions are met: there is abundant free cash on the balance sheet, the organization has people “on the bench” and ready for new opportunities and a good buying opportunity (represented by a fair or discount to fair value price) presents itself.

A debt-laden balance sheet is not cash rich because the cash which may be present is actually encumbered by the debt as an offset in a recessionary environment. When we are talking about a cash rich balance sheet, we’re by implication talking about an unlevered balance sheet. Otherwise, the cash is not “free” but rather is “phantom” cash– it will disappear the moment adverse economic conditions present themselves.

The organizational bench condition may be harder to evaluate objectively, but there is a decent rule of thumb. When people in each position in the organization are sufficiently organized to handle their own responsibilities with time to spare, there is organizational bandwidth to spend on promotions and new responsibilities, such as management of newly acquired assets. In contrast, when people in relatively higher positions within the organizational hierarchy are spending their time doing the work of people relatively lower in the organizational hierarchy, it indicates that there is a shortage of quality personnel to fill all positions and that those personnel available are necessarily being “mismanaged” with regards to how they are spending their time as a result.

Further, it implies the risk that growth in such a state might further dilute and weaken the culture and management control of both legacy assets and those newly acquired. This is a risky situation in which every incremental growth opportunity ends up weakening the organization as a whole and creating hardships to come in the next recession. If it’s hard to find good people, inside the organization or without, and there is a general attitude of complacency about what could go wrong in a recession, it is a strong indicator that underperforming assets should be sold and the balance sheet delevered to reduce organizational risk in the event of a recession.

Growth should be fun, exciting and profitable. If it’s creating headaches operationally, or nightmares financially, it should be avoided. You shouldn’t own or acquire assets you don’t love owning. Perhaps the best rule of thumb overall is to ask oneself, “Does owning this asset bring us joy?” If yes, look for opportunities to buy more. If no, sell, sell, sell!

Ultimately, there are three ways to get rich: randomly, with dumb luck and unpredictable market euphoria for the product or service offered (billion-dollar tech startups); quickly, with a lot of leverage, a lot of luck in terms of market cycles and a lot of risk that you could lose it all with poor timing (private equity roll-up); and slowly, with a lot of cash, a lot of patience and a lot less risk while taking advantage of the misery of others during inevitable downward cycles in the economy.

If you were fearful in the last economic cycle, it suggests your financial and organizational structures were not as conservative as you might have believed. It may be an ideal, but it’s one worth reaching for: a recession represents a golden buying opportunity for a cash rich organization to leap ahead of the competition and continue its story of sustainable growth and success.

Review – Panic: The Betrayal Of Capitalism By Wall Street And Washington

Sadly, Panic: The Betrayal Of Capitalism By Wall Street And Washington does not appear to be in print any longer. Luckily, I found a good used copy on Amazon and will cherish its now-secret message all the more.

As I read through this book several months ago, instead of summarizing my thoughts I just want to record a few key ideas and quotes for later reference.

“The Anti-Entrepreneurs”

In any modern state the government will always be the banks’ biggest client and therefore will always make most of the rules, even if it pretends not to.

The ideologues of modern finance offered to make any fool rich if only he renounced the first obligation of the capitalist, the burden of judgment.

This process of confronting uncertainty and successfully resolving it usually by dint of hard work, diligent analysis, and sound judgment is the only source of what many economists have called “entrepreneurial profit” or sometimes “true profit”.

Underpinning the ideology of modern finance is the notion that the insight, judgment and even diligence of the entrepreneur are irrelevant for investing in public securities markets. These markets, we are told, are special, too powerful and too perfect to allow any entrepreneur’s judgment to matter.

If the ideology of modern finance had a motto, it might be “thinking doesn’t work.”

Capitalism demands free markets because it needs free minds.

The bureaucrat of capital dreams of a world in which failure is impossible.

Crony capitalists on the right and socialists on the left united as always behind their most fundamental belief, that wealth is to be captured by power and pull rather than created in the minds of men.

“New Risks in Old Bottles”

The great mission of modern investment theory is to replace all idiosyncratic risk with systemic risk.

The primary skill for finance, under this theory, becomes diversification, which becomes an advanced statistical methodology for making sure a relatively small number of securities accurately represents a much larger class of securities.

If I know nothing, my need for diversification is infinite.

All investment is reduced to insurance.

Ignorance is the father of panic.

“The Misinformation Economy”

One way to think about panic is as a general, nonspecific response to a poorly understood particular and specific problem.

“To build a perfect model of the universe would require all the matter and energy in the universe, because the only perfect model, the only model that shed no information and made no compromises in order to achieve its object, would be the universe itself.”

The mortgage meltdown can be understood as an instance of model failure.

information is differentiation; information is what comes as a surprise against the background of knowledge already possessed.

If uncertainty and risk are nearly synonyms. then information and risk are nearly opposites.

It is not particularly unusual for all thirty stocks in the Dow to go up and down at the same time; that rarely happened when market participants were interested in the value of individual companies.

“The Reign of Risk”

Modern portfolio theory was a late bloom of the great eighteenth and nineteenth century impulse to explain human society by mechanical or “scientific” principles as regular as those of classical physics.

If economics were about entrepreneurship, it would not look like physics. It would look a little like philosophy. Mostly it would look like literature. [The Lion’s note: if you ascribe to the Austrian school, it does!]

To treat investment as a quantitative exercise relying on the efficiency of markets and advanced mathematics to eliminate the hazards of human judgment. [the ambition of investors under Modern Portfolio Theory]

MPT created a field for which PhDs could be granted and journal articles published. Before MPT, investment theory had been mere reflection upon experience, a wisdom literature dominated by amateurs like Benjamin Graham.

[MPT…] can be deeply attractive to those trying to support capitalist lifestyles with only bureaucratic talents.

The most important question any investor can ask: For what are investors paid? MPT’s answer: For accepting risk.

risk is not the foundation of profit but its most dreaded enemy.

The modern theory conceptually severed financial markets from the rest of the economy. [My note, ” Macro is to Micro as Financial is to Real”]

“The Romance of Risk”

Men and societies become richer precisely as they employ insight, skill and experience, effort and discipline to reduce risk.

Investors are paid for being right, not for the possibility of being wrong.

In life, men who make one good judgment tend to make more good judgments; men who make one bad judgment tend to make more bad ones.

the most important but the most difficult-to-identify ability in business management (or investment) is the ability to judge other men’s ability to judge. [meta-judgment]

“Zoom, Zoom, Zoom”

What modern capital markets do very well is raise large amounts of capital from a broad base of investors who are persuaded to give their money to perfect strangers with precious little idea of what those fortunate recipients are going to do with it. [And, I’d add, little control or legal right to have any say in such decisions; “crowd-sourcing”]

different markets make different trade-offs between liquidity and price discovery one one hand and confidence about value on the other.

Public equity investors demand liquidity in large part because they are unsure about value.

Humor is surprise

It is reasonable to call markets better or worse depending on how much surprise they can absorb before convulsing in dramatic disequilibrium

Lacking a more substantial basis on which to make decisions, financial markets set prices to an astonishing extent by watching– prices!

The most dramatic resolution of this conflict is to eliminate most of the shareholders altogether by taking public companies private

public companies have no owners

Companies, like most assets, do better with strong owners than weak owners.

“Strategic Ambiguity”

When New Dealers tried to set up a banking system immune to panic, their top priority was to remove Mom-and-Pop from their role as bank police.

“Insolvent Immunity”

Here is the quickest way to determine whether you are operating in an honest capitalist system or a corrupt imitation thereof: check the bankruptcy rates.

“Black September”

“Things are somewhat amiss when a country’s finance minister plays bond salesman for a supposedly privately owned company.”

By this time the government had: (a) intimated that deficits in the financial sector were so large and widespread that “anyone could be next” (b) terrified private investors from making investments that might preserve the solvency of deteriorating institutions (c) assumed unprecedented responsibility for investment banks outside the Federal Reserve system and then abandoned that responsibility and (d) made clear that its policy would change on an ad hoc basis. [on the US federal government’s initial response to the financial panic of 2008]

To assume that the buying and selling of shares amounts to managing the firm is the most extreme form of efficient market worship.

“Capitalism Without Capitalists”

The term for someone who rests his economic fate on unknowable future events is not “owner” or even “investor,” but “speculator.”

the government, the biggest player and the weakest owner of all. [criticizing the present ownership of major banks]

Another great review of this book was posted by “CP” at CreditBubbleStocks.com.

And after reading this book, I was inspired to purchase Frank Knight’s Risk, Uncertainty and Profit for my library for further study.

 

Notes – “Socialism” Chps. I-III

Notes from Socialism: An Economic and Sociological Analysis by Ludwig von Mises [PDF]
  1. Introduction
  2. Chapter I, Ownership
    1. the nature of ownership
      1. the economic concept of ownership has to do with “having”, that is making use of the benefits of a particular good, whereas the legal concept of ownership has to do with whom the benefits rightfully belong to
      2. consumption goods can only be owned, economically speaking, privately on an individual basis
      3. production goods can have joint ownership in a legal sense, but it is the ultimate consumers of the output of production goods who own them economically because they are the ones who enjoy their benefits, in a division of labor society
      4. in an autarkic society, the user can also be the owner of the production goods because all output serves to benefit him, but in a division of labor society the user of the production goods decisions are guided by the demands of end consumers who have economic ownership of them
    2. violence and contract
      1. all economic ownership derives from occupation and violence
      2. all legal titles followed back in time must originate in appropriation of common goods
      3. law arises when society comes together to recognize current ownership with legal title, thus ending the war of all against all
      4. law and the State can not be traced back to contracts, they came into being in conditions of lawlessness and the absence of contract
      5. “economic action demands stable conditions”; long-term productive processes can not exist in conditions of violence; peace is the aim of law, which allows for long-term economic action
      6. law defends property in the interests of peace-making; all violence is aimed at property of one form or another
      7. “Law cannot have begot itself of itself… in complaining that Law is nothing more or less than legalized injustice, one fails to perceive that it could only be otherwise if it had existed from the very beginning” (consider Proudhon’s “Property is theft”, how can one define theft in the absence of property?)
      8. Law set to formalize a set of conditions which were then existing, and from which standpoint all future actions were to be judged
      9. “Law did not leap into life as something perfect and complete. For thousands of years it has grown and it is still growing. The age of its maturity, the age of impregnable peace, may never arrive.”
      10. three types of law, in order of economic importance
        1. Private Law: regulates behavior between individuals
        2. Public Law: regulates behavior between individuals and community/State
        3. International Law: regulates behavior between communities/States
      11. today, the principle of violence has been completely abandoned in Private Law; violent revolution is slowly being abandoned as a principle of Public Law and International Law is still in large part governed by the principle of arbitrary violence
    3. the theory of violence and the theory of contract
      1. liberalism, the principle of contract/Law dictating human society, takes time to develop and is the realization of a conscious effort guiding social life
      2. “All anti-liberal social theories must necessarily remain fragments or arrive at the most absurd conclusions”
      3. critics charge Liberalism with focusing only on earthly delights; it is an empty charge because Liberalism admits this; Liberalism promises nothing besides abundant material commodities, it doesn’t concern itself with The Greatest Secret of Man
      4. urban settlement is an outgrowth of the division of labor/exchange society promised by Liberalism
      5. Social philosophy must be earned with effort; immigration waves from country to town have often threatened to upset Liberal social order because immigrants are slow to adopt new modes of thinking (country bumpkins)
      6. many Liberal civilizations have been ruined not from without by barbarians, but from within by seeming-citizens
      7. theories based on struggle as the motive power for society deny a role for social cooperation, yet social cooperation is the essence of social theory
      8. the strongest argument of imperialism is the idea that each country should have ownership over the essential means of production (economic nationalism); but if this principle were true, that one can not derive economic benefit from goods one does not legally possess, then why shouldn’t EVERY man possess these essential means of production for himself?
      9. imperialism and socialism agree in their criticism of liberal property rights/ownership, but socialism seeks to divise a closed system of a future social order which imperialism could not
    4. collective ownership of the means of production
      1. the intent of early reforms of property rights was to provide equality in the distribution of wealth
      2. a railway, a rolling mill, a machine factory can not be distributed; equal ownership principle has been abandoned in favor of the idea of social (State) ownership of the means of production
      3. “Our whole civilization rests on the fact that men have always succeeded in beating off the attack of the re-distributors” lest economic regression take hold
      4. this new idea for socialism is shaped by the private property order, it could not have occurred in its absence and it is a compromise of socialist philosophy because it realizes abandoning the social division of labor would totally destroy man’s economic life as we know it
      5. in this sense, socialism IS a consequence of the liberal social order
      6. socialism claims for itself a grandiose enterprise; it can not be thrust aside with one critical word but deserves a full response
    5. theories of the evolution of property
      1. it is an old political trick to try to found your ideal in a “Golden Age” of the long ago, since corrupted
      2. Liberalism stresses the important development and “evolution” of civilization caused by private property in the means of production; Marxism plays to the idea that private property was an evolution, but a corrupt form
      3. the historical record of private and “public” property is mixed and not certain, the idea of founding a theory of property rights on timeless history is flawed and untenable
      4. regardless of the historical question, it is a separate problem to demonstrate that rational agriculture and other forms of economic development could be carried out in the absence of private property as an institution
  3. Chapter II, Socialism
    1. the State and economic activity
      1. “the aim of socialism is to transfer the means of production from private ownership to the ownership or organized society, to the State”
      2. limitation of the rights of owners as well as formal transference is a means of socialization (ie, regulation)
      3. piecemeal socialization via regulation leaves the owner in position of owning an empty title, with true ownership/property rights resting in the State
      4. Socialism and Liberalism have the same ends, but they choose different means for attaining them
    2. the “fundamental rights” of socialist theory
      1. culture is the true safeguard of rights, not legal formalities; numerous nations have legal guarantees of rights but culture is not widespread enough to support their consistent application
      2. most of the time the economic rights dictated by socialism are for sloganeering purposes, or to act as a critique of the existing order; they don’t consider whether institutiing them legally is enough to change the social order and take this idea for granted so far as they believe in it
      3. three fundamental socialist rights:
        1. the right to the full produce of labor
          1. this can only be had in a competitive process of buying and selling which dictates to each element (labor, capital and land) its respective value based off the subjective theory of value
          2. this idea has always come to logical ruin and so the compromise is the idea of abolishing all “unearned” income via means of state control of the means of production
        2. the right to existence
          1. the idea of guaranteeing minimum existence was achieved in most communities by means of charity long ago, and is thus a harmless idea
          2. what socialists actually mean is that every individual have their needs met based on the means available in the community, before  the less urgent wants of others are met
          3. the impossibility of judging the urgency of needs objectively means in practice this is simply a call for equitable distribution of society’s total wealth; “no one should starve while some have more than enough”
          4. it is an idea fundamentally incompatible with the concept of private ownership because it will demand collective ownership in order to be realized
        3. the right to work
          1. the idea here is that people have the right to a job they enjoy that provides them a minimum level of subsistence with regards to their wants
          2. it owes heritage to the idea that Nature was superabundant and everyone could fulfill his needs easily in this primitive state and so to “buy” man’s cooperation with society, which denies him this superabundance, some compensation must be made
          3. it ignores that Nature is full of hardship and man enters into society because it is more productive, not less
          4. unemployment is caused by economic change, and where it is not hindered by regulation it is a transitory affair
          5. socialism, too, would need the ability to move labor to its most highly valued role; the idea of guaranteeing people a minimum income in their chosen work is absurd and ignores the demands of economic change
      4. these 3 rights could be larger or smaller in number and today have been superseded by the idea of socialization of the means of production
    3. collectivism and Socialism
      1. society is only possible to the extent that the individual finds his ego and will strengthened by participating in the collective; the idea of a combat between the collective and the individual was false and a red herring used by collectivists interested in protecting the interests of various ruling classes
      2. collectivism rests on a teleological problem, that is it purports to explain human action based on a purpose served rather than individual causes
      3. collectivism posits the State as a God directing society toward a higher purpose; it assumes a war of all against all exists in society and individuals must be forced against their better interests to move in the direction of their divine purpose; that no peaceful social organization is possible
      4. science of society begins by removing this dualism and with it the need for gods and heroes; human action in social cooperation can be explained by the simple idea that man sees more benefit in cooperating than he would achieve left on his own
      5. collectivist philosophy is barren in terms of producing economic theory; it wasn’t until the “German mind” was freed of the collectivist philosophy of the State that pathbreakers like Menger, Bohm-Bawerk and Wieser were able to make important contributions to economic science
      6. collectivists refer to the social will but can not consistently explain its origins, which are based on individual political, religious or national convictions
      7. collectivism is political, not scientific; it teaches judgments of value
      8. collectivism tends to be closer to the world philosophy of socialism but even some collectivists have advocated private property in the means of production (socialism != collectivism)
  4. Chapter III, The Social Order and The Political Constitution
    1. the policy of violence and the policy of contract
      1. in a state of nature, “the Law of the Stronger”, the negation of law, exists; no peace, a truce at best
      2. society grew out of the smallest associations agreeing to keep the peace and expanded outward from there
      3. the policy of contract has nearly fully captured questions revolving around property, but political domination is still determined by the ancient means of arms, although this too is beginning to come under a set of rules
      4. in response, the nature of war has come under the influence of “Just Cause”, the policy of naked aggression tending to attract powerful anti-coalitions
      5. Liberal social policy teaches that war is harmful to the conqueror and the conquered; society is built through peace; peace is the father of all things
      6. Liberalism’s aim at protecting property, and avoiding war, are expressions of the same principle of peace
    2. the social function of democracy
      1. the highest political principle of Liberalism is self-determination of people
      2. for Liberalism, democracy performs functions that men are not prepared to do without
      3. many claim the aim of democracy is to select political leaders, but there is no inherent reason why democracy should choose better leaders than any other form of government
      4. the true function of democracy is to make peace, to avoid violent revolutions; persons and systems in the government of non-democratic states can only be changed by violence
      5. democracy attempts to economize on the loss of life and property, the interruption of economic activity, which comes with political revolution by bringing the will of the state in accordance with the will of the majority; it is a policy of internal pacifism to complement external pacifism of the Liberal order
      6. history bears out the truth of this function when looking at the relative stability of the English social order since the 17th century versus the instability and violence of the monarchies of Russia, Prussia, Germany and France
      7. democracy seeks to extirpate revolution; in this sense Marxism is anti-democratic; “Liberalism wants success at the smallest price”
      8. direct democracy is not necessary as long as the principle of the will of the state conforming with the will of the majority is attained
      9. democracy should be carried out by professional politicians so long as they represent the will of the majority
      10. there is no difference between the unlimited will of the democratic state and the unlimited will of the autocrat; both rest on the notion of a state based in pure political might
      11. it is a formal mistake with grand consequences when a legislator believes he is free from material considerations because all law emanates from his will; he is not above the natural conditions of social life
      12. “Democracy without liberalism is a hollow form”
    3. the ideal of equality
      1. it is said that socialism necessarily grows out of democracy because democracy requires equality to function
      2. the principle of equality of all before the Law is an essential peacemaking principle because without it people have common interest in subverting the law and ending the peace to get what they want
      3. another reason for equality before the law is to ensure that the ablest producers are ably legally to come to possess the means of production, which has outstanding benefits for all of society
      4. all democracies have foundered on the spirit of pitting the poor against the rich, people who are unequal in material means despite being equal in legal means (supposedly)
      5. the idea of equality arising from a pro rata distribution of the national income is not inherently democratic and should be judged on the basis of its own effects, not as a principle of democracy
    4. Democracy and social-democracy
      1. the idea of democracy and socialism being wedded intellectually comes from the followers of Hegel who believed in the idea of social evolution; because democracy and socialism both were arrived at thorough political and economic “progress”, they were deemed to be compatible
      2. “Democracy is the means toward the realization of socialism, and socialism is the means toward the realization of democracy”
      3. the other idea was that socialism would bring paradise on earth, so it seemed odd if this paradise offered anything less than the “best” political circumstances as well
      4. people ultimately diverged on whether or not it was okay to deviate from the principles of democracy on the way to socialism, ie, the dictatorship of the proletariat
      5. Marxism as word fetishism: revolution meaning development, destroying the contrast between evolution and revolution
      6. Marxism does not offer liberal political rights once it is in power, it only asks of them when it is out of power, as a propaganda tool
      7. Liberalism demands democracy always and at once because it is the only means of peaceful political development in society
      8. The Bolshevist revolution revealed the inherent violence of the socialist program, unintentionally
    5. the political constitution of socialist communities
      1. if the socialist paradise is given, the question remains as to who shall govern “the will of the people” and direct the productive process
      2. the history of socialist communities — Pharoahic Egypt, the Inca, Jesuit State of Paraguay, and the writings of Plato and St. Simon — are all distinctly authoritarian in nature
      3. socialism foresees a social peace made through a permanent regime with unchanging rules and policies; the peace of the graveyard (same with the economic system!)
      4. Liberalism seeks a peace which is maintained with respect to man’s yearning for change
  5. The Social Order and The Family
    1. Socialism and the sexual problem
      1. socialism promises universal happiness in love by doing away with private property in relationships
      2. socialism’s critique of “capitalist” sexual relations starts from the premise that a Utopian Golden Age existed in history and sexual relations have degenerated from that point to the current capitalist paradigm
    2. man and woman in the age of violence
      1. “unlimited rule of the male characterizes family relations where the principle of violence dominates” (see: Mafia families)
      2. in this situation, woman is an economic good that man has and makes use of; she is the servant of man because man has the power and and thus the rights
      3. the man can divorce the woman, but she can not do the same to him
      4. love is the anti-thesis of this system because it involves “overvaluing” the object, woman is a queen, rather than a slave
      5. love creates conflicts in this system only from the point of view of the man, who can not stand his property (woman) being possessed by another
    3. marriage under the influence of the idea of contract
      1. capitalism is blamed for bringing money marriages and prostitution and sexual excess; before this love was pure
      2. polygamy tends to accompany the principle of violence because women are property and men wish to acquire as many as they can defend
      3. as women came to possess property and wealth and marriage with them granted access to that property, clear delineation between legitimate and illegitimate connection and succession developed, that is, contract
      4. the idea of contract breaks the rule of the male and makes the wife a partner with equal rights
      5. women were freed from men for the first time when their rights were legally enforceable as contracts
    4. the problems of married life
      1. modern contractual marriage involves conditions by which marriage and love are united; it is morally justified only when love is involved
      2. most of the problems of married life come from the fact that it is a contract for life yet biological passions and even philosophical love may be of limited duration
      3. these problems are internal in nature, not external; they’re due to individual psychology, not the capitalist social order
      4. the feminist movement claimed that marriage forced women to sacrifice their personality and the only solution was abolition of the institution
      5. women are faced with a unique choice: to spend the best years of their lives as mothers, or pursuing their personalities, but rarely both
      6. so long as feminism desires for woman the legal freedom to develop according to her own will, it is a partner of Liberalism
      7. to the extent feminism seeks to reform institutions in an attempt to reform unalterable facts of nature, it is a child of Socialism
    5. free love
      1. socialism aims for free love by abolishing economic necessity and social institutions which previously hampered relations between the sexes
      2. sex is less of a burden for man because the nature of the act for him is less demanding; for women it brings with it the risk of child birth which can be a sincere distraction from her inner development
    6. prostitution
      1. prostitution goes back to ancient society and is a vestige of old morals, not new
      2. women prostitute themselves for different reasons, only one of which is money
      3. capitalism loves peace, yet militarism is one of the primary “patrons” of prostitution
      4. in a society of equal means the economic motives for prostitution may dwindle, but there is no reason to believe other new social sources would not arise in their place

The Long War: Changing Ownership, Management Incentives & Reporting Practices

Ian Cassel, founder of MicroCapClub.com, made a comment on Twitter today which grabbed my attention:

If a company is over $25m market cap they should have to have earnings conference calls w/ Q/A. Coalition Against Private Public Companies.

Shortly thereafter, he was asked by Jeff Moore of the Ragnar Is A Pirate blog:

How about if they have more than 100 shareholders?

To which Ian replied:

yes another good idea

At this point, I asked:

so you guys are for imprisoning and fining people because they won’t give you info you want?

Ian considered it and responded:

do I think every public company should, Yes. Force probably not, but cld be part of a tiered listing standard

I think this whole idea is worth a comment so I’m now going to give it one.

The first angle with which to approach Ian’s compulsory conference call proposal is the moral one and concerns the question, “Should managers of public companies, whatever their size, be compelled by force of law (ie, threat of fines or imprisonment for non-compliance) to provide the investing public conference calls regarding their earnings releases?”

The answer to such a question would hinge on whether or not, by refusing to hold such calls, these managers were committing an act of violent aggression against the investing public, such as theft, assault or fraud. If refusing to hold an earnings call is an act of theft, assault or fraud, clearly there is justification for compelling such behavior in order to remedy this affront to the rights of the individual members of the public and the answer would be “Yes”; similarly, if refusing to hold an earnings call does not represent the initiation of the use of force against members of the public, the answer to this question is clearly “No”.

I don’t want to waste anyone’s time going into a lengthy exploration of the facts on hand. I think it’s obvious that refusing to hold an earnings call is not an act of aggressive force and I don’t think Ian provided or attempted to provide any evidence that it was. In fact, he suggested this was not an issue to be handled by the law at all. I elaborated as much as I did, anyway, because there may be people reading this who did not understand the issue in this way and may have been confused prior to reading it. For their benefit, I state plainly now, the answer to the question is “NO”.

The second angle of approach is institutional. As Ian suggested in his final comment, the solution to this perceived problem could be handled at an institutional level (in this case, the voluntarily adopted rules and internal regulations of the listing exchanges) by adopting Ian’s preference for mandatory earnings calls at a certain market cap threshold as an observed “best practice” or condition of doing business on the exchange. If a company doesn’t want to follow it, they have the option of not being listed on the exchange observing such a rule. From a moral standpoint, there is no issue as there is no coercion, and compared to the alternative of creating a top-down, one-size-fits-all-companies-and-exchanges external regulation backed by force of law by government, this solution is indeed preferable because it at least allows for the possibility that some companies would not follow this practice and would find other avenues for listing their shares and allowing for equity exchange.

This leads to the third angle which, for lack of a better term, I’ll simply refer to as the “practical” considerations, of which there are several. For starters, I wonder if this is really an issue? In Ian Cassel’s (and Jeff Moore’s, perhaps?) world, it certainly seems to be. Ian Cassel’s world would be a happier place if all the public companies whose market caps were $25M or greater provided the public (of which he is a member and would stand to benefit) an earnings call upon release of each earnings statement. But embedded in such a proposal seems to be the belief that the world should reflect Ian Cassel’s preferences, and everyone else should bear the cost and expense of preparing and providing this information to Ian Cassel (and others of like mind).

Is this reasonable? If having better earnings communications from small companies is important to Ian, and if dialoging with management is a valuable commodity, Ian already has a course of action available to him to pursue such goals: he can make his own independent effort to email, write, call or visit in person the management of these companies and create a relationship whereby they would provide him answers to some of the questions he has in mind; or, he could acquire a sufficient number of shares of the company such that he is the owner of the company and the management is now fully responsible to him and he can have any and all information about the company that he pleases.

Neither of these actions require anyone being compelled to change their current practices. Both require nothing more than the expenditure of Ian’s own effort, time and wealth. If certain companies prefer not to establish such relationships or provide such information to people like Ian, Ian always has the option of walking away from them. And if he doesn’t have the financial resources to acquire such an ownership stake so as to make them more responsive to his inquiries, that would be a problem for him to solve by finding ways to produce more wealth for himself he could exchange with others for the privilege – it is not the responsibility of the company, its shareholders or anyone else.

Another practical consideration is the arbitrariness of the threshold for compliance. There’s nothing magic about a $25M market cap (nor a 100+ member shareholder base). The first number seems to be an attempt at defining “resourcefulness”, implying that a company with a certain sized market cap “should be able to afford” such accommodations. But market caps are not determined by managements and company resources, they are determined by the passions and dispositions of the investing public. It’s entirely conceivable that a company of truly inadequate resources (say, a book value of $50,000, just to harshly illustrate the point) could be bid up to a market cap of $25M in some bizarre turn of events. The fact that it has been so valued doesn’t make it more able to provide additional clarity about its business– and even if it did, it still doesn’t have an obligation to provide anyone anything like this. The shareholder base threshold is simple populism and the democratic principle– 99 of the shareholders could own one share at a penny a piece, with the remaining shareholder holding substantial control of the rest of the shares, making them truly insignificant in the ownership structure. But by creating arbitrary rules like this these individuals would create for the company sudden obligations simply by their existence.

Another practical concern is why a person, operating in the microcap space where an edge is often gained specifically because of the lack of consistent, clear information about these companies, would want to see measures taken which would serve to increase the “efficiency” of the market and thereby eliminate a lot of these mispricings and the opportunity to cheaply invest along with them. Sure, once you’ve put your money in you might have a self-interested reason to see everyone else suddenly figure out what a great company you’ve invested in because they have these wonderfully translucent earnings calls, but before that point you’d want to see opacity. Such a rule (compulsory earnings calls) would work to eliminate those opportunities before one could make their initial investment, not just after. As microcap investors, what we’re getting “paid to do”, essentially, is to find these opaque opportunities, get in there, agitate for change company-by-company and work to clear the dirt and smudges off the glass, so to speak. We want that to happen AFTER we get involved and BECAUSE we got involved, not before and regardless.

My final issue is with the cutely-named imaginary organization “Coalition Against Private Public Companies”. The implication is that public companies run like private companies constitute some kind of social ill. But if we look at the facts, it is often the owner-operator/private companies of the world which are most efficiently managed and whose business is best looked after compared to the alternative of entrenched, professional managers and disconnected, alienated and disinterested public shareholders (see this outstanding research piece by Murray Stahl [PDF] for a convincing argument, for instance). Indeed, it is often the public companies which are most dysfunctional– how is it preferable to have a management team obsessed with short-term earnings results, attempts to influence and gain the approval of Wall Street analysts, etc.? It’s perhaps syntactically confusing but what is really worth rebelling against is public private companies, not private public companies.

A public private is a company that SHOULD be private, but is in fact publicly traded and as a result the minority partners in the business, that is, the various outsider shareholders from the investing public, are treated like nuisances or smurfs whose capital is to be dissipated at the insider owners’ discretion. Such managers have no incentive to responsibly steward the outside shareholders’ capital because it doesn’t belong to the insiders and the outsiders are, in most cases, afforded an ambiguous and difficult, if not impossible, legal process to attempt to assert their equal status as capital owners. The most benefit they can receive from the capital is to issue some of it to themselves as generous salary or bonus payments, to use it as a tool for conducting ego-gratifying acquisition strategies or by sitting on it as a kind of future retirement/pension package to ensure they can care for themselves even in old age by remitting it to themselves as needed.

A private public company, on the other hand, is a company whose capital ownership is diversified and constituted by numerous members of the investing public, but which is managed and operated with the efficiency, passion, dedication and noble conservatism such as one would expect from a competent family dynasty or other limited, owner-operator control group or person. This is a company that treats capital as a precious commodity and always seeks to maximize the returns on its use which all members of the investing public so involved stand to benefit because they are treated as equals even though they have minority status. The fact that this company is publicly traded does not influence the decisions of the management and serves only to benefit all shareholders in the instances in which the management can buy back undervalued shares or issue significantly overvalued shares to raise cheap capital.

Truly, there are very few enterprises on all of planet earth that really provide their owners (shareholders) with outstanding additional benefits by virtue of their being publicly owned and exchanged. The more I think about the issue, the more I wonder why most public companies are public in the first place. Almost every IPO seems to represent an opportunity to cash in on delusional hopes and ignorant dreams rather than a genuine opportunity to “share the wealth” in exchange for some long-term capital necessary to fund profitable growth.

If I were to join a group agitating for change, I’d like to imagine it’d be called the “Coalition To Privatize Public Companies.” But honestly, I have no use for imagination, nor for agitation. I don’t seek to have others bear my cross, even as a joke or a day-dream. No, this is in fact a principle (one of several) of my efforts as a private, individual investor in the public market place and I intend to pursue it throughout my career.

It’s part of my long war.