I'm Lovin' It 2.0

I just ordered an Egg McMuffin from this friendly person.   No hassles, no misunderstandings, no line...minimal banter.  

The new American workforce.

No vacations, infrequent maintenance, no healthcare, no payroll taxes, no inter-office romances, no world star hip hop videos.

According to "da innernets', there are McDonald's in 118 countries and it employs over 1.7 million people.  That 1.7 million is a top tick - going lower from here.

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. 

Follow the Money: Healthcare

Americans spend a lot of time hating about how much other people make.  Throughout the financial crisis there was considerable scrutiny on banker's pay.  I get it.  The word "bonus" became a 4-letter word. "How can bankers get paid so much when they ruined the economy..." - we all remember the anger. 

There is a new crisis in America and its the healthcare industry. However, the tone is very different. 

There are many similarities between finance and healthcare.  They both require licenses, or degrees, or some form of expensive higher education.  They both require a massive amount of regulation and government oversight. They create highly lucrative jobs.  And my favorite: people will persistently overpay for advice, or services, related to both of them. People generally don't skimp on decent medical care or financial advice...am i right or am i right?

America loves to hate on the fat cat bankers (myself included) but as mad as everyone is about the healthcare gridlock our nation faces, you never hear about the fat cat doctors. 

I was browsing the website of the BLS (Bureau of Labor Statistics), cuz that's how I roll, and came across this table on average mean wages for all occupational groups in the US and it really got me thinking.

You can view the full list here: http://www.bls.gov/oes/current/oes_nat.htm#13-0000

  

See any themes here?  The highest paying jobs in America are healthcare jobs.  Is it a coincidence that health insurance and medical care is so expensive and the people in the industry are the highest paid earners in the US?  I'm no expert but I have to imagine there is a relationship there.

Here is the funny part: there isn't a finance related job in the top 25 (a "Financial Manager" was #29 on the list), though Wall St wages and bonuses are still (5 years later) volatile topics of discussion.  

No one ever says "this Doctor made $X and they should have to give it back because so many patients died along the way." It's part of the job. 

We are happy to blindly pay whatever cost a doctor or an insurer says because our health...our lives, our children's lives, are on the line.

Well, I think we are getting duped here.  The cost of medical care in the US is many times more than anywhere else in the world.  The system is riddled with middlemen and friction. Not to mention doctors have little incentive to keep people healthy.  Instead we over medicate, over treat, and over charge.

I know a guy who started a consulting business to help doctors "optimize" the numerical codes they submit on insurance claim forms to earn more money.  He basically finds similar procedures and treatments that the insurance company accepts to get the biggest bang for the buck.  I'd like to punch this guy in the face. 

The system sucks. It needs to change. Will there be a day when the doctors who have the fewest sick patients get paid the most?  Maybe.  i like that incentive system.   

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 :)

Detroit v Brooklyn

This could have easily been a post about why Eminem is a superior rapper to Jay-Z but I will save that for when the new Eminem album comes out and buries Jay-Z's newest tribute to his royal holiness himself.

The other night, I had dinner in NYC with some Detroiter buddies and the conversation steered toward Detroit real estate (a minor obsession of mine for the moment). I did a little search for comparable properties in Detroit and Brooklyn. Brooklyn, being the edgier crustier sister borough to Manhattan where prices have gone parabolic, had more similar characteristics to the D. I found a couple 4,000 sq ft homes and here is what came back.

I thought the crime statistics were particularly interesting. Of course there are reasons why this analysis is flawed, chiefly because Brooklyn has 2.5 million people and Detroit has 700,000. Detroit covers an area of 150 sq. miles and Brooklyn is only 90 sq mi. That is a lot of less congested space to run away from stray bullets.   

Kidding aside, I did bias my search to Indian Village in Detroit and Bedford-Stuyvesant in Brooklyn so I guess this proves that the right kind of data mining can prove any thesis.  My point is that even the most dangerous parts of NYC still trade at a silly premium relative to the safe parts of Detroit. I guess it all depends on how you define "value".  

Hat tip to Larry Chen!

SOURCES:

BROOKLYN

http://spotcrime.com/#40.684766%2C%20-73.94201

http://streeteasy.com/nyc/sale/927343-multi-364-jefferson-ave-bedford-stuyvesant-brooklyn

DETROIT

http://spotcrime.com/#indian%20village%2C%20detroit

http://www.zillow.com/homedetails/2532-Seminole-St-Detroit-MI-48214/88291661_zpid/

    

Know the Downside

A good friend of mine called me the other day to ask me what I thought about some mutual funds that his broker suggested he buy.  The broker said the funds would return 7-8% per year and they are super safe investments with minimal volatility. 

I took a quick look at the funds and all 4 had MORE volatility than the S&P 500 with LESS returns. To add insult they were all about 90% correlated to the S&P 500. So basically they were just crappier versions of the stock market. 

These mutual funds were down between 20-50% in 2008. I am not sure if I would describe that kind of price movement as "safe." Besides, why invest in a mutual fund when just buying the stock market through the SPY ETF gets you better returns, less volatility, and lower fees? Brain scratch?  Not really. This particular broker doesn't earn much of a fee if his clients invest in ETF's.

After seeing the funds had the potential to go down between 20-50% if another 2008 were to happen, my friend could easily identify that these kinds of investments might not be a great fit given his objectives. Of course the broker focused more on the reward rather than the risk so the potential downside was never discussed. 

We can't know every risk before walking into an investment. And there is nothing to say that we are guaranteed to have another 2008, but a wise man once told me "your biggest drawdown is in front of you." This means that the next calamity will be worse than prior ones and if we invest with this in mind, we can take steps that allow us to live to invest another day. 

That doesn't mean sit with cash under your mattress and go buy a bunch of guns (been there done that). It means that your EXPECTATIONS on investing should reflect a fair measure of the risk of loss in a given day, week, month, year...etc.  

If you own stocks and you would be surprised if they went down 30% in one year, then you are fooling yourself. Maybe you should own less stocks. If you are ok with them falling 30% because you have a long term horizon and would welcome an opportunity to buy more should the market drop, then that sounds like a plan worth sticking to.

Expectations management and discipline separate the good from the ugly. 

I put a piece together that talks about the idea of having some knowledge of the expected volatility in advance and it was recently published on the CBOE website (link).  Felt like it is relevant for this blog too. 

Enjoy!

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.