Facebook v GM

Facebook has 5,000 employees and is worth $135 billion.  They made $7 billion in revenue.

GM has 200,000 employees and is worth $55 billion.  They made $150 billion in revenue. 

I understand that people are upset about income inequality but if you can create that kind of value with the help of so few people, in such a short period of time, you are going to get massively rewarded.  

We all want freedom and equality but we can't complain if the market assigns more value to a business that makes it's money when you click on pictures of your best friend's kid than the one that makes cars and trucks. If value creation is how we compensate CEO's in a free market then what are we so upset about?  

If CEO's were compensated based on how many people they could employ, then the system might look different...interesting idea but tough to get shareholders and creditors behind that notion. 

This is no knock on GM really...they make 30% more cars today than they did in 1979 with 66% fewer workers. That is just the results of innovation and technology.  

As labor costs rise, companies are operating with less people and CEO salaries are reflecting their ability to create value for shareholders.  We are all free to try and compete if we think a CEO is getting paid excessively. In our society, we can start our own company and take a smaller cut of the pay if that is what we think will drive value. 

I am not sure how to make it more fair than that. 

The Secret Sauce

"Tell me your secret sauce" is something heard a lot in business. Most of the time, this is just another way of saying "show me how to be successful."  The funny part is, knowing the secret sauce and being successful are two totally different things.  

Below is the recipe for Coca-Cola from over 100 years ago. 

"Holy crap!" one might think. "The formula for one of the most addictive beverages on the planet?! We are gonna print money, right?" 

WRONG.  Its online and anyone can have it.

Having the secret sauce gets you nothing.  The question is: how are you going to execute and make it a success?

Sure, you are going to be able to make the exact same flavored brown bubbly beverage.  But how are you going to make that drink into a successful business?  Once you have the recipe, you need the cool logo, the stadium advertising, cool music in the commercials, a famous artist to paint people holding your product, super-models drinking it poolside, and friggin' Santa Clause! 

A successful business happens when you solve a problem and make people feel good -  all while marketing the hell out of it.  Those ingredients had more to do with making Coca-Cola what it is today than the perfect amount of vanilla and nutmeg.

Surprisingly, cocaine was in Coca-Cola until 1903....so maybe I am totally wrong :)

What you can get in Detroit

We used to live in the West Village in an apartment building called the Printing House.  It was an old industrial print factory that was converted into cool loft apartments in the 70's.  I recently heard the values of these apartments have gone parabolic.  

According to StreetEasy, you can buy a lovely 3 bedroom apartment in the Printing House for a cool $4.25 million. This runs for about $1,700 a sq. ft. and comes fully equipped with a doorman and all the luxury a small family could ask for. 

3 Br loft apartment in NYC's Printing House

That sounded like a pretty lofty price to a lay person like me. I wanted to see how far my money could go in Detroit.  In keeping with the "printing house" theme, I was looking for some similar loft apartments until i came across a listing for what is effectively the entire printing INDUSTRY of Detroit:  the Detroit Free Press Building.

The Detroit Free Press Building

You can own this entire historic 300,000 sq ft building for around $5 million right in the heart of downtown Detroit. They are saying it is ripe to be converted into 200 loft apartments. A sale price could come out to about $16 per sq. ft.  Not a lot of downside in this compared with owning real estate priced 100X higher. 

Talk about opportunity!  If only the mainstream media would spend less time focusing on the disaster porn and more time on the people and businesses that are coming up with creative solutions for Detroit. There are several places in the D that have this kind of potential.  Blank canvases - looking for smart and adventurous entrepreneurs who want to build something from nothing.   

     

The Anger Gap

I feel like America is angrier than it used to be. People are upset about jobs, crony capitalism, the government, taxes, the list goes on and on. I was watching the documentary Detropia and a lot of the autoworkers were pissed at corporations for cutting pay and moving jobs to China or Mexico.  I don't mean to sound heartless but what did we expect? We kicked our feet up as a nation and got out innovated and underpriced. We got our collective lunch eaten.  

Speaking of lunch, a few years back I was having lunch with an uber smart guy who builds actuarial models for insurance companies. Somehow our conversation steered toward how a lot of Wall Streeters were angry their compensation dropped. The advent of technology in finance made a lot of people obsolete over the past decade.  

He drew a picture on a napkin that looked something like this: 

(Obviously he didn't have different color pens with him)

The thought is that when a new industry or business is discovered, it's easy to add a lot of value early on.  As time passes, competition grows and folks are forced to innovate. If you aren't the one innovating you might be seeing diminishing returns given the same inputs - creating a gap between expectation and experience.   

The gap between what we think should happen and what actually happens is the ANGER GAP. Trying harder or putting in more time only to get the same, or worse, results...sucks. 

To shrink the gap we either need to lower our expectations, or find new ways to add-value.  Neither is easy. No one likes to "CTRL + ALT + DEL" their expectations (part of the motivation to start this blog). Additionally, finding new ways of adding-value means getting out there and talking to customers, stakeholders, competitors. Figure out all the pain points in your industry and find ways to ease them through new products and services. You will be so busy doing this you won't have time to be angry.      

My Brush with Charles Ponzi

Everyone has heard of Bernie Madoff by now.  His crime was the most heinous in the history of finance. The fact is there are still thousands of Ponzi schemes happening around us and most victims do not even know what to look for.

I was introduced to an "investment opportunity" back in 2010.  A man from Detroit, living in Italy married to a famous actress, got in touch with me through some mutual acquaintances. 

I took his call, partly because he was from Detroit and I like to connect with people from my hood, and partly because I like to look at all sorts of ideas. I admit I probably donate too much of my time listening to would-be entrepreneurs but occasionally I meet great people that way. Something felt off about this guy and his partners so I indicated the investment opportunity was going to have to set sail without me.

Last week, I found out that the man I spoke with was sentenced to jail for 10 years for wire fraud and stealing money from investors in a Ponzi scheme (article).  

It motivated me to look back at my interactions with him to see what clues made me uncomfortable. Maybe some of these observations will help other targets avoid future Madoff-wannabees.

I have made plenty of bad investments in my life and the list will surely not be comprehensive, nor does it guarantee to be able to detect a fraud. These are just a few smell tests any fool can use to avoid parting with their money too quickly.  

1) Returns are not guaranteed. Promising financial benefit is not something any professional investment manager will do.  Especially in writing. He sent me this in one of his emails:      

"...if we can raise more funds we can really see the financial benefits from the product.  Let me know what you think..."  

2.) Outsized returns are LESS guaranteed.  The best and brightest in the finance space have averaged mid-single digit returns for investors over the past few years. Anyone who purports 10% returns per month should immediately get the Larry David squinty-eyed stare. 

3.) Look for "intense domain expertise." This guy was raising money for investment vehicles that were going to purchase raw emeralds in Africa, invest in gold mines in Laos, trade foreign currency markets through a Swiss entity, and buy Hong Kong stocks on the cheap. Sounds exciting, right? Sounds like bullshit to me. You cannot be a jack-of-all-trades in this industry anymore. 

4.) Investment managers cannot court you. Regulations prohibit investment managers from excessive spending on prospective investors. These guys offered to fly me out on a private jet to meet them in Rome or Switzerland (whichever was easier for me, of course). Come on! Even if it were legal, the amount of money in fees they were hoping to generate on my piddly investment wouldn't cover the cost of a trip to Europe. 

5.) "WHY ME?"  This is the most important question of all. You have to ask yourself "why is this  opportunity being presented to me?"  "How did I get so lucky to have stumbled across this brilliant idea that no one thought of before this shiny salesman brought it to me?"  You might be hearing the pitch because you don't and won't understand the investment.  It's the old "if you don't know who the sucker is, it's probably you" test.  

Through all the dumb things I have done in my life, I could have saved myself a lot of dough had I simply asked "why me?"  I knew little about the business or the industry I was being asked to invest in, but got involved anyway. Every time the outcome was identical:  a big fat doughnut.      

 

A Trillion in Tuition

With an overwhelming number of topics for discussion these days, I find myself running into information overload on what to write about (a form of writer's block= too much out there!).  I have a new simplistic way of organizing whether an issue is newsworthy:  pay attention when the number associated with the issue has a "T" next to it..."T" like TRILLION. In 2002, I worked for Deutsche Bank and I remember we celebrated being the first European bank to have assets over $1 Trillion Euros. Back then it was a huge deal. 

Today, it is the prioritization "line in the sand" for politicians, economists, and journalists trying to deal with issues that matter. Numbers that have a "T" next to them include:  bailouts, Federal Reserve money printing, US National Debt owned by foreigners, pension shortfalls, municipal liabilities, household debt, etc.  The item I would like to discuss today, however, is college debt.  This number, according to Alan Collinge from StudentLoanJustice.org, is nearing the $1 Trillion mark.  While Americans have tightened their belts, reduced some frivolous spending, and gone back to school to help their candidacy for employment, college debt has surpassed credit card debt! No small feat!  

I have seen tons of articles about the topic of higher education recently and wrote a little note about it a few months ago (Creative Economy).  There are a couple things I would like to share about why people should be paying attention.  Why is the government pushing us so hard to go to college and offering us financing at terms that appear too good to be true?  Well, it is one of the ways to get people under the proverbial "thumb" of Uncle Sam. These loans do not go away, the interest rates will go up, and the government is behind 90% of them.  "Take out a loan, go back to school...help our collective brain trust get smarter...lets show countries around the world that our education standards are the highest...Asians go to school 8 days a week, we have to step it up!" It seems logical to me.  After the housing bust, the government needs to somewhat modify the American dream.  What is the 2nd most expensive asset we buy, something we are told we cannot live without, and something the government can easily offer to us?  A COLLEGE DEGREE.



The competition is fierce.

 

No wonder this debt is piling up and the cost of college is rising at its fastest pace ever.  It is a way to balance the debtor-creditor relationship – if the students owe the government a trillion and the government owes China and Japan a trillion…hmmm.  Get the students to owe us more and then our national debts will not look so bad.  Follow me?  Some public universities are seeing double digit increases in tuition each year (LINK).  As you extrapolate those increases you will see why new parents have to start paying attention…TODAY!  Here is a helpful website (College Tuition Calculator) for all of the parents out there who plan on seeing their children go to 4 year universities.  If you want to be spared from doing the work, here is a theoretical scenario of a newborn:

-Current school tuition/room and board annual cost:  $20,000
-Years until college: 17
-Number of years attending the university: 4
-Expected annual tuition increases over the next 17 years:  6%
-Expected annual returns on investment for savings account: 2%

TOTAL COLLEGE COST:  $235,597

-Monthly savings required today in order to pay this amount once college begins: $939 (based on the 2% savings rate of return) (the math on these numbers)

Add a couple kids to the equation and you can see how this is becomes a monstrous problem quickly.  The sheer notional size of the numbers is staggering; that is not the only shocking part.  I found some other interesting "features" about student loans that I am willing to bet not everyone was aware of.  Student loan debts are precluded from the following protections that apply to traditional consumer debt (mortgage, credit card):

1.)  Bankruptcy protection (you go bankrupt and your student debts are NOT erased)
2.)  The right to refinance (government loans cannot be refinanced though private loans can)
3.)  Fair debt & collection practices (they can garnish disability and call you at odd hours)
4.)  Adherence to usury laws (interest rates have no limit)
5.)  Truth in lending requirements (disclosures can be vague)
6.)  Statutes of limitations (time does not run out on how long they can come after you)

(Source: Default-Student Loan Documentary)

I was surprised to find this was the case for college loans...then I thought about it for a second… then I was not surprised.  Either college will have to become more affordable or we better start saving now.  Either way the government is incentivized to make college more expensive.  You owe them more and they get to tip the terms on the debt in their favor.  At the end of the day, we do not want every kid in America trying to become the next Lebron James. Of course bailing out on college wasn't the worst bet for Henry Ford, Michael Dell, Bill Gates, and Mark Zuckerberg, but they may be the exception.  Is meritocracy and mentorship the answer?  If someone can get the job done without the degree, then they should not be viewed any differently.  For example, I am spending a year traveling, getting my version of a post-graduate degree in global entrepreneurship from the college of “the world.”  Should that not count as legitimate education?

For the Unemployed Turning Entrepreneur

A good friend sent me an article he pulled out of Worth magazine the other day.  The article summarized the 10 Rules of Successful Entrepreneurship from Bill Murphy Jr.'s new book The Intelligent Entrepreneur.  I enjoyed the piece and thought it would be worthwhile to share.  I am finding a high correlation between articles about how difficult the job market is and new startup business ventures friends and former colleagues are embarking on.  In addition, there are tons of talented "out-of-work" people who are teaming up to start businesses.  These folks gave up looking for the next mindless job... they are going out and creating exciting new careers.  

It is great to talk with enterprising people who are optimistic about the prospects of growth both in the developed and emerging worlds.  Even in Michigan (despite what you may read in the dreaded papers) at a recent entrepreneur's conference held in Dearborn, the halls were buzzing about alternative energy, life sciences, social media, mobile marketing strategies, etc.  I did not even hear the word "automotive" mentioned once.  Who says Detroit cannot reinvent itself?

For those of you who are considering taking the plunge into one of the many entrepreneurial ecosystems, here are the 10 rules that came from Bill Murphy's research and are flushed out in his book (which I am definitely going to buy):

1.)  Successful entrepreneurs commit to entrepreneurship rather than to a specific business.

2.)  Successful entrepreneurs look for market opportunities before creating business solutions.

3.)  Successful entrepreneurs focus on innovation and scale.

4.)  Successful entrepreneurs pick founding teams with a history of working well together.

5.)  Successful entrepreneurs realize that they play the most important role.

6.)  Successful entrepreneurs manage risk.

7.)  Successful entrepreneurs commit themselves to learning management skills.

8.)  Successful entrepreneurs learn to sell.

9.)  Successful entrepreneurs redefine failure.

10.) Successful entrepreneurs aren't in it just for the money.