Thursday, April 3, 2014

The market as a social institution

A stock or the broader market on the margin are like people.

Say you are having a bad day because you are sick. Then your computer crashes. Then your dog craps on the floor. The day gets worse and worse. It doesn't matter if you are a billionaire or a poor man. The progression of that day is "bearish."

The same thing for stocks: bad earnings hit, then a downgrade, then another company in the sector cuts guidance. It doesn't matter if it's a $200 billion company or $100 million.

But then imagine you have been sick for a long time, and instead of needing to have your entire hand amputated, you only lose a finger. Imagine that the $100,000 home repair will only be $20,000. Imagine that the dog only crapped on the tile floor and didn't urinate into the couch? Now the day is bullish.

Likewise with stocks. Imagine that the expected bankruptcy doesn't happen. Imagine that conditions aren't as bad as expected, etc. Now a $2 stock can double.

Yes, in the bigger picture over the longer run, things like valuation matter. For instance, the life of a billionaire in general will likely be better than that of a security guard making no more than $40,000 a year. But for each individual day or week or month, there will be movements. There are good time and bad times for everyone, and for every stock. The question is identifying what's happening now and trading around it.

Tuesday, February 4, 2014

The problem with corporate capitalism

Imagine someone runs a restaurant with a chef who can make really excellent food. But there's only one of him.. so in order to expand, management starts serving microwaved food. He is slowly pushed out. Customers notice a slight decline in quality, but the business continues to grow. What are we to make of this?

On one hand, we are told that capitalism and free enterprise result in the most and the best of everything. However, this is demonstrably false. It can produce better products at lower cost, but good managements over time will phase out low-margin commoditized products and try to force consumers into more expensive ones.

The bigger question is the worker or employee. Everywhere we look today, we encounter stories of a shrinking middle class and stagnant income growth. This in many ways results from aggressive cost cutting by management, but it also results from workers not being able to advance.

What I have noticed is that few companies want truly excellent employees. Few want people with a passion or imagination. They want dull and predictable clock punchers. New companies and new opportunities aren't being create.. in my view because we never had the destruction that was needed as part of Creative Destruction. Bank of America, Citi, etc, never went bankrupt. Their bad management teams never lost their $10mln houses. They never lost their stadiums or board memberships. Incompetence was rewarded instead of punished. Garbage that should have been destroyed was protected. Manure that should have rotted to fertilize new businesses was kept in its original fecal state, and everyone was forced to live with it.

After living in Third World countries, I realize that this was a big part of their weaknesses... not that businesses fail, but specifically that they do not fail and the surviving losers -- usually with close ties to governing elites -- monopolize opportunities. Small people running hot dog stands profitably in the barrio are never given access to bank loans, while failing big corporations are bailed out left and right.

Getting back to the problem with corporate capitalism: owners of companies view their investments as you or I would view a fork or knife. We own them because we want them to serve a specific purpose.. helping us eat, for instance. We don't own them to be creative, to invent new things or to aspire for greatness.

Well, that's essentially how capital views all employees. It just wants us to do our jobs and go home. Excellence, ambition, hopes and dreams are all irrelevant. I once read in a finance book that an ideal company has no employees... that is true, and it says a lot.

This is especially true for corporations... not necessarily large ones but corporations in general because of their multiple layers of decision-making. These layers of responsibility (or irresponsibility) are a breeding ground for incompetence.

Free enterprise and private property and wonderful things because they afford human beings opportunities to excel. But corporate capitalism corrupts that because private property -- ordained by God for human persons -- is extended to fictitious non-human persons. These soulless, amoral and a-responsible entities, controlled by people thinking at the basest levels, now have massive power over millions of people.

Combine that with the legacy of the bailouts and political protections for big business, and you have the worst of both worlds. Incompetence is rewarded. Innovation is ignored and quashed.