This morning, while watching a portion of Ben Bernanke's first testimony on Capitol Hill as Chairman of the Federal Reserve, I listened to the whining of a Democratic Congresswoman from the state of New York.
She kept pestering Bernanke about job creation, complaining that many of her constituents were well-educated, white-collar professionals whose jobs had been eliminated or outsourced. Her tone suggested that there was some evil plot afoot to furlough the voters in her district, and Ben had better have some answers.
How sad. Why is it that so many members of Congress can't understand that it is not the job of the Federal Government to directly create jobs? In our system, the private sector is where that occurs.
Restrained spending, minimal lawmaking, and a stable currency are about all the Federal Goverment can effectively do to foster a positive economic climate in this country. Plus, of course, one of its crown jewels, the rule of law.
Think of it this way. Do you really want a job created by the same folks who waste so much of your tax dollars now in the bureaucratic morass that has become our Federal Government?
Wednesday, February 15, 2006
Monday, February 13, 2006
No Moving Parts
My business colleague is fond of remarking, about the portfolio management business, that it has "no moving parts."
In contrast to many businesses, such as producing automobiles, information feeds, cereal, or broadband capacity, managing an equity portfolio has a very simple operational structure.
Your manufacturing floor is open every day, from 9:30am-4pm. Somebody else pays all, or most, of the expenses associated with operating this facility. There is nearly always inventory to buy, or buyers for your unwanted items. No new "deals" to find every day, week, or even month.
In my view, portfolio management distills business to its essence. Are you capable of demonstrating a facility for adding value over the always-available option of simply buying the S&P500 Index? There are a host of equities from which to choose. And many styles to adopt, or adapt, with which to do so.
But at its heart, the business of managing equity portfolio has "no moving parts." It is the ultimate outsourced business model. True, one must manage the provision of normal business functions- sales, accounting, and finance. Nevertheless, the value-added portion of the business, outperforming the market, is chillingly clear-cut.
When I first developed the research on which my strategy is based, I knew there were only two potential applications. One was to market my knowledge to CEOs and CFOs of larger corporations, as performance improvement tools. The other was to skip trying to convince CEOs that they could do better, and simply select the promising companies which actually exhibited the consistently superior performances on which I focused.
To be honest, I really had hopes for the consulting applications early on. However, I suspect the same mediocrity that results in few consistently superior large-cap companies also accounts for why few CEOs are interested in learning how to improve their company's performances.
In the end, I guess it's better to just buy and sell equities of companies, based upon their ability to perform with consistent superiority, rather than attempt to guide CEOs of companies to achieve this lucrative performance pattern.
In contrast to many businesses, such as producing automobiles, information feeds, cereal, or broadband capacity, managing an equity portfolio has a very simple operational structure.
Your manufacturing floor is open every day, from 9:30am-4pm. Somebody else pays all, or most, of the expenses associated with operating this facility. There is nearly always inventory to buy, or buyers for your unwanted items. No new "deals" to find every day, week, or even month.
In my view, portfolio management distills business to its essence. Are you capable of demonstrating a facility for adding value over the always-available option of simply buying the S&P500 Index? There are a host of equities from which to choose. And many styles to adopt, or adapt, with which to do so.
But at its heart, the business of managing equity portfolio has "no moving parts." It is the ultimate outsourced business model. True, one must manage the provision of normal business functions- sales, accounting, and finance. Nevertheless, the value-added portion of the business, outperforming the market, is chillingly clear-cut.
When I first developed the research on which my strategy is based, I knew there were only two potential applications. One was to market my knowledge to CEOs and CFOs of larger corporations, as performance improvement tools. The other was to skip trying to convince CEOs that they could do better, and simply select the promising companies which actually exhibited the consistently superior performances on which I focused.
To be honest, I really had hopes for the consulting applications early on. However, I suspect the same mediocrity that results in few consistently superior large-cap companies also accounts for why few CEOs are interested in learning how to improve their company's performances.
In the end, I guess it's better to just buy and sell equities of companies, based upon their ability to perform with consistent superiority, rather than attempt to guide CEOs of companies to achieve this lucrative performance pattern.
Jack Welch's Grab For Another Five Minutes
Holman Jenkins, Jr., the very talented editorial columnist for the Wall Street Journal, wrote yesterday of his recent interview with Jack Welch, retired CEO of GE.
What struck me most about the piece is that Jack Welch seems to be desperately grabbing for another five minutes of fame, to paraphrase the late Andy Warhol. Wasn't running GE for more than a decade sufficient?
It seems you can't turn on CNBC, open the WSJ, or visit a bookstore without seeing Neutron Jack's mug or byline. What is it with him? Does he have insecurity issues?
However, with regard to the interview piece, I continue to be mildly surprised, and, frankly, underwhelmed, that Welch seems to believe his great contribution now is to preach (the article featured a caricature of Welch in a minister's collar) about hiring great employees, being honest in performance reviews, and letting your managers run the company.
It seems to me that the first two are old hat. Who seriously needs Jack Welch to tell them to hire smart people, or fire the nonperformers? The last is perhaps why GE has never been included in my portfolio selections of consistently superior fundamental and technical performers. As a conglomerate, Welch didn't really seem to "lead" strategically, so much as "cheerlead."
Some years ago, I had the occasion to meet with Mr. Welch to discuss a new value-added measurement and management approach I had developed, which led to the portfolio management approach I now use. In the discussion, I showed him a chart using an early version of a concept I now view as crucial for CEOs. It plotted GE's market value change versus the market. At that time I used the Dow. Now it would be the S&P500.
What was evident then, in the mid-1990s, was that the bulk of Welch's market value creation at GE, relative to what an investor could have gotten in the market, occurred in the initial years of his tenure. His successful triage, upon becoming CEO, was instrumental in creating relative value for his shareholders.
So it seems to me that what would be most compelling to hear from Welch is how he did that. His defining value-creation era was, I believe, when he culled the mess he inherited from Reg Jones.
I'm not at all sure GE has been a consistently superior company since then. Its description by some market analysts as a close-ended mutual fund seems on target. For the last five years, it has lagged the S&P500. What does that say about the company Welch handed to Immelt?
In fact, it may be recalled, Immelt was roundly criticized for "owning" two inherited practices of Welch. One was overleveraging GE Capital, in order to grow earnings faster. The other was using these earnings to subsidize, dare I say mask, the slower growth and margin challenges of GE's industrial businesses.
It seems to me that Welch is trying awfully hard to remain in the business spotlight after his allotted five minutes of fame, and not even by counseling others on what he did uniquely well as CEO. Why?
What struck me most about the piece is that Jack Welch seems to be desperately grabbing for another five minutes of fame, to paraphrase the late Andy Warhol. Wasn't running GE for more than a decade sufficient?
It seems you can't turn on CNBC, open the WSJ, or visit a bookstore without seeing Neutron Jack's mug or byline. What is it with him? Does he have insecurity issues?
However, with regard to the interview piece, I continue to be mildly surprised, and, frankly, underwhelmed, that Welch seems to believe his great contribution now is to preach (the article featured a caricature of Welch in a minister's collar) about hiring great employees, being honest in performance reviews, and letting your managers run the company.
It seems to me that the first two are old hat. Who seriously needs Jack Welch to tell them to hire smart people, or fire the nonperformers? The last is perhaps why GE has never been included in my portfolio selections of consistently superior fundamental and technical performers. As a conglomerate, Welch didn't really seem to "lead" strategically, so much as "cheerlead."
Some years ago, I had the occasion to meet with Mr. Welch to discuss a new value-added measurement and management approach I had developed, which led to the portfolio management approach I now use. In the discussion, I showed him a chart using an early version of a concept I now view as crucial for CEOs. It plotted GE's market value change versus the market. At that time I used the Dow. Now it would be the S&P500.
What was evident then, in the mid-1990s, was that the bulk of Welch's market value creation at GE, relative to what an investor could have gotten in the market, occurred in the initial years of his tenure. His successful triage, upon becoming CEO, was instrumental in creating relative value for his shareholders.
So it seems to me that what would be most compelling to hear from Welch is how he did that. His defining value-creation era was, I believe, when he culled the mess he inherited from Reg Jones.
I'm not at all sure GE has been a consistently superior company since then. Its description by some market analysts as a close-ended mutual fund seems on target. For the last five years, it has lagged the S&P500. What does that say about the company Welch handed to Immelt?
In fact, it may be recalled, Immelt was roundly criticized for "owning" two inherited practices of Welch. One was overleveraging GE Capital, in order to grow earnings faster. The other was using these earnings to subsidize, dare I say mask, the slower growth and margin challenges of GE's industrial businesses.
It seems to me that Welch is trying awfully hard to remain in the business spotlight after his allotted five minutes of fame, and not even by counseling others on what he did uniquely well as CEO. Why?
Not-So-Golden Oldie
This past Thursday, the Wall Street Journal printed an editorial by Peter Chernin, credited as president and CEO of (Rupert Murdoch's) News Corporation. Judging by Mr. Chernin's articulation of the return of "old media," I believe I better understand why it has been on its way out to begin with.
Under the guise of any media-related technology, Mr. Chernin asserts that "old media" is not dead. Far from it, he maintains. All these new technologies- broadband, wireless, cheaper storage, on-demand viewing, interactivity- all allegedly actually play to "old media's" strengths.
Funny, but I could have sworn that all or most of these forces are precisely why "old media" is, well, old.
Take interactivity, for example. Old media can't do this. If a medium can, then by definition, it's not "old." Same with on-demand, or wireless.
The whole point, Chernin's protestation to the contrary, is that "new media" can do more rifle-shooting of segments. Such as cable, video on-demand, and itunes. In fact, it's because of this sort of competition, ultimately ending in any video content being available wirelessly from a url, that is causing conventional network TV to lose value faster than the contents of an unrefrigerated Good Humor truck on a midwestern August afternoon.
Perhaps it is due to companies like News Corp having CEOs like Mr. Chernin that their ilk have never been selected for inclusion into my equity portfolio's strategy of consistently-superior fundamental and technical companies. If the strategic thinking in his recent WSJ piece reflects News Corp's view of the world, I'd say Mr. Murdoch has overpaid his own management, and it's not going to do much to increase shareholder value at the company very consistently in the near future. Perhaps in the conference rooms of News Corp, this type of thinking counts as nimble, longterm strategy. I suspect that, in the rest of the competitive environment, it marks "old media," News Corp included, as badly out of position as new technologies gut the value of yesterday's communications titans.
Under the guise of any media-related technology, Mr. Chernin asserts that "old media" is not dead. Far from it, he maintains. All these new technologies- broadband, wireless, cheaper storage, on-demand viewing, interactivity- all allegedly actually play to "old media's" strengths.
Funny, but I could have sworn that all or most of these forces are precisely why "old media" is, well, old.
Take interactivity, for example. Old media can't do this. If a medium can, then by definition, it's not "old." Same with on-demand, or wireless.
The whole point, Chernin's protestation to the contrary, is that "new media" can do more rifle-shooting of segments. Such as cable, video on-demand, and itunes. In fact, it's because of this sort of competition, ultimately ending in any video content being available wirelessly from a url, that is causing conventional network TV to lose value faster than the contents of an unrefrigerated Good Humor truck on a midwestern August afternoon.
Perhaps it is due to companies like News Corp having CEOs like Mr. Chernin that their ilk have never been selected for inclusion into my equity portfolio's strategy of consistently-superior fundamental and technical companies. If the strategic thinking in his recent WSJ piece reflects News Corp's view of the world, I'd say Mr. Murdoch has overpaid his own management, and it's not going to do much to increase shareholder value at the company very consistently in the near future. Perhaps in the conference rooms of News Corp, this type of thinking counts as nimble, longterm strategy. I suspect that, in the rest of the competitive environment, it marks "old media," News Corp included, as badly out of position as new technologies gut the value of yesterday's communications titans.
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