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Investing related posts. You many also be interested in investment articles and investment books we like and our dictionary of investment terms
Favorite posts: Saving for Retirement - Improving the 401(k) System - 10 Stocks for 10 Years Update - Annual Report by Warren Buffett - Gladwell (and Drucker) on Pensions - How Not to Convert Equity - 30 Year Fixed Rate Mortgage Rates - Financial Education
Does it surprise you to learn traders would cover up losses to protect bonuses? It shouldn’t, it happens over and over. Would it surprise you that almost any bonus (or quota) scheme increases the odds that the data will be doctored to meet the goals? It shouldn’t. Intelligent measures to make such doctoring difficult can help reduce the practice. But it is a likely risk of any such goal. As we have quoted Brian Joiner as saying: there are: “3 ways to improve the figures: distort the data, distort the system and improve the system. Improving the system is the most difficult.” So it is no shock that distorting the data is often the tacit people use (especially when the rewards are great or the punishment for missing is severe).
Of course the people that take unethical or illegal action are responsible for their actions. But managers that set up poor systems and then get poor results should not be surprised. You mainly read about the exciting distortion of data - but there is much more such distortion that doesn’t seem interesting enough for the press.
Traders at top investment bank ‘covered up losses to protect their bonuses in £1.4 bn scam’
Shares in the bank, which is based in Zurich, tumbled 7.5 per cent yesterday. Credit Suisse admitted it had discovered intentional “pricing errors” by a small number of traders involved in complex investments linked to the mortgage market.
Related: Problems with Bonuses - Be Careful What You Measure - Measuring and Managing Performance in Organizations - Another Quota Failure Example
As usual, Warren Buffett’s letter to shareholders is packed with wisdom. He is best know for his investing genius but his writing provides great thoughts for managers also: Berkshire Hathaway 2007 Letter to Shareholders:
Related: Buffett’s Letter to Shareholders (from last year) - Buffett’s Shareholder Letter (2006) - Overview of Warren Buffett - Annual Report by Warren Buffett (2005) - Hiring the Right People
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With Microsoft’s offer for Yahoo I am replacing Yahoo with Danaher in the 12 Stocks for 10 Years portfolio. Other stocks in the portfolio include Google up 137% since purchased, PetroChina up 132%, Amazon up 106% and Toyota up 44%. I have considered Danaher since creating the portfolio and now looks like an attractive time to make the change. Other stocks I like now are Google, PetroChina, Toyota and Tesco. The bias toward companies that practice what I discuss in this blog is very intentional - I believe this stuff works and believe companies that manage using the ideas discussed here will prosper.
Curious Cat Management Improvement Blog previous posts on: Danaher - Toyota, Tesco and Google.
Related: Curious Cat Investing Search - Curious Cat Investing Blog - 10 stocks for 10 years
Sybron has adopted principles known as Danaher Business Systems, which he called a “playbook” to make the company run as a more efficient team. It’s centered on “kaizen,” a quality improvement process that grew out of the teaching of W. Edwards Deming. The focus on manufacturing and operations, combined “with our sales and marketing expertise (has) made us a much stronger company,” Tuttle said.
Danaher continues to do a good job improving management practices one purchase at a time. I continue to eye Danaher as a stock to buy but have not bought yet.
Related: Danaher Practicing Lean Thinking - Lean Thinking at Danaher - Tilting at Ludicrous CEO Pay - lean manufacturing directory
I have mentioned I like the way Amazon, and Jeff Bezos, have been managing in several posts. Recently Amazon has added very strong financial results to that portfolio of things they do well. Amazon earnings announcement:
Operating income increased 149% to $116 million in the second quarter, compared with $47 million in second quarter 2006. Net income increased 257% to $78 million in the second quarter, or $0.19 per diluted share, compared with net income of $22 million, or $0.05 per diluted share in second quarter 2006.
Pretty impressive. It seems Amazon might be able to begin delivering strong current financial performance (they have done so at least twice, and maybe longer depending on how you look at it…) and continue to build and innovate for the future. That is when a company really sets itself apart from the crowd. Previously, from the investing perspective, the argument was largely based on the belief that the steps taken today were building for the future (a fine thing, but risky - without the evidence of success actually making real profit it is often easy to make a good case for why the future will be good). In an investment it is more comforting when current earning provide some evidence the profits predicted in the future have some basis in reality.
Since the beginning of April Amazon’s share price has gone from $40 a share to $70. And based on the after hours trades today it is going to be in the $80s tomorrow (though after hours trades can often be misleading - there is some more confidence based on the large volume of hour trades in Amazon, but still…). I must admit this price does seem like it might be getting a bit ahead of itself but Amazon is making an impressive case for strong future performance.
Related: Amazon Innovation - 10 stocks for 10 years (April 2005) - 12 Stocks for 10 Years Update (June 2007) - Very Good Amazon Earnings - Bezos on Lean Thinking - Is Amazon a Bargain?
Often people have trouble understanding Dr. Deming’s disapproval of arbitrary numerical targets. What he was trying to prevent is what many see every day, such as managing to quarterly earnings targets. There are several problems with numerical goals but in here lets focus on one. The change from managing for what is best for the business to managing to hit a target. Google Profit Trails Analyst Estimates; Shares Slide:
Great statement. And if more people could manage that way, one of the problems with numerical goals would be eliminated. But with so many organizations tying huge bonuses to meeting arbitrary numerical targets you will have a great deal of difficulty getting managers to hire 3 extra people this quarter, who will help the business, but will ruin their chance at a bonus. Or even if they just take a hit on their performance appraisal compared to the other managers that meet the headcount target - even if it meant turning away talent the organization could have benefited from greatly - and then the manager that missed their target loses out in the next promotion opportunity.
I am happy to own a tiny portion of Google and glad they are making decisions like this. Now just because I think there is a good case to be made for exceeding the targets that doesn’t mean that hiring more people is necessarily good. It is perfectly possible Google is hiring too many people and making a bad prediction about how these people will benefit Google in the long run. I am just saying I strongly support not tying yourself to short term numerical targets, if you predict a better decision requires taking actions that will cause the target to be missed.
Google increased profit by 28%, from the second quarter last year, to $925 million (and down from $1.0 billion in the first quarter of 2007). Lest you think personnel can’t really cost Google that much can it, just the stock based compensation in the second quarter reduced earning by $242 million in the quarter (an “expense” that wasn’t reported just a few years ago). Google had 13,786 full-time employees as of June 30, 2007 (up 1,548 in the quarter) - so that is over $17,500 per full time employee. If anyone at Google wants to talk I am open to considering an employment offer.
It is good to see more people understand the bad practice of excessive short term focus on quarterly profits. It is also a bit amusing to see the Chamber of Commerce pushing an idea Deming was called unrealistic for pushing.
The right way to handle a surprise:
Roughly a quarter of the companies in the S&P 500 have stopped giving guidance (or never started), including Berkshire Hathaway, Coca-Cola and Google. Check the investor-relations area of a company’s web site to see whether it plays what David Hirschmann of the Chamber of Commerce calls the “fool’s game” of earnings guidance.
Related: Management: Geeks and Deming - Deming’s Seven Deadly Diseases of Western Management - Goodbye Quarterly Targets? - Distort the System
He Pointed Firms To Quality by Kirk Shinkle:
In the introduction to his 1983 book “Out of the Crisis,” Deming called hostile takeovers and leveraged buyouts “a cancer in the American system.” “Fear of takeover, along with emphasis on the quarterly dividend, defeats constancy of purpose,” he wrote. He also derided a focus on short-term profits that comes with traditional benchmarks used by many corporations.
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“Back in 1980 when he talked about working with your suppliers, people would just back up against the wall. That was heresy,” Orsini said. “Now we’re teaching courses in supply chain management, and most people have no idea the roots of it are in Deming’s thinking.” Deming opposed protectionist laws and policies, calling trade between nations “an essential component of peace and prosperity.” Deming’s influence on managing people’s skill was built on a solid foundation of quantifiable fact.
Related: Deming on Management - The purpose of an organization - distorting the system - Management: Geeks and Deming - Curious Cat Deming Connections - Red Bead Experiment - Curious Cat Investment Blog - Willam O’Neil (Investor’s Business Daily founder) - not exactly a Deming based investing approach
I commented on a post on Evolving Excellence that Jim Jubak is a wall street guy who has good ideas. He has posted another good article: Firing workers isn’t fixing problems
Right. Wall street is not incapable of seeing past short term “thinking.” Even if many on wall street can’t seem to understand. I am far from convinced short term thinking is Wall Street’s fault, it seems to me many executives have this problem and blame “Wall Street.” I believe short term thinking is mainly management’s fault.
Short term thinking is part of the management system. Exorbinant executive pay exacerbates the problem. A failure to understand variation exacerbates the problem. (more…)
Short term lean thinking payoffs are nice, but the long term benefits are much more powerful.
Related: Danaher’s Low Profile Lean Excellence - Lean Blog - lean manufacturing articles - 10 Stocks for 10 years update (Danaher was in serious consideration)
In April of 2005 I wrote: 10 stocks for 10 years. At that time I also created a fund through Marketocracy. Thus far the portfolio is up 15.8% annually (versus 15.3% for the S&P 500) - see more below…
I have made minor changes to the fund during the year (less than 4% turnover). As I mentioned in June I would buy Tesco, but Marketocracy does not support it. Google is still doing quite well, up 122% since inception. The second largest gain is for Petro China, up 106% and Toyota is up 67%. Dell is the worst performer down 25% followed by Yahoo down 16%. I am comfortable with the original 10 stocks and don’t have any significant changes I would make to the portfolio now. For the small change I would make now see more…
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Chart of home values from 1890 through 2006 (the chart is a misleading because it crops the lower end at 60 (not 0). The values go from 60-200 (it is an index showing the cost of the standard house in thousands of 2006 $s. House prices have ranged from $66,000-200,000 for the standard house from 1890 to 2006, and never above $130,000 until 2001. Larger view of the graph (via the New York Times) and the data set from Robert Shiller. Graph source: Irrational Exuberance, 2nd Edition, 2006.
Home prices certainly seem like a bubble there doesn’t it? Many news stories now talk about the bursting housing market bubble: The housing collapse heard round the world, Fighting Inflation and Housing Bubbles, Pop Goes the Real Estate Bubble, Bubble Blog, Once bubble bursts, cities feel the pain, Housing bubble has burst, Housing bubble is finally at bursting point…
I wrote about the housing bubble in April of 2005:
I am not convinced that we are seeing a bursting bubble. Certain location are at a risk to experience such declines (most of those areas went up more than 100% in the last 5 years so they still would have large gains over the last few years). The market certainly has moved to the point where a transition to a bursting bubble is much closer than it was a year ago. Even several years ago many proclaimed the bubble was ready to burst, in the face of continuing rapid increases in prices. Today we are essentially at a flat market but the momentum is all toward a decline in prices. So it is certainly possible this post will look foolish in 6 months or a year but I’ll take that chance.
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Manufacturer’s Acquisition Strategy Sets It Apart From The Pack, Investors Business Daily:
The keys are standardization, measurement and innovation — all directed toward the goal of continuous improvement.
“It’s basically a set of tools that allows Danaher to make whatever widget they are manufacturing at a cost less than most of their competitors,” said Morningstar analyst Eric Landry. “Over the past decade they have (also been moving) DBS into the back office and into sales. It produces a culture where you are never satisfied.”
The quotes are from Wall Street Analysts. I think basically they like the ever increasing cash flow and then use the story the company gives for why they are successful. Still they are playing up lean thinking.
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The Risk Pool by Malcolm Gladwell (author of The Tipping Point and Blink):
Pension plans did work well for a short period of time. But recently they (along with the attached retiree health care) are one of the big problems facing large old companies: like GM. Gladwell talks about the dependency ratio for an economy and the dependency ratio of companies. Worsening dependency ratios can cause pension plans to kill companies (if they are not funded when the obligation is incurred) - as the company is forced to pay for more and more retirees with fewer and fewer workers.
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401(k)s are a great retirement investment vehicle (for those in the USA). Since the introduction of 401(k)s they have proved very advantageous to those saving for their retirement. See our previous post on: Saving for Retirement.
However, the experience thusfar shows a weaknesses in the system. Many people don’t even take advantage of a 401(k) to save for their retirement. From a public policy perspective it creates a huge long term problem. The economy will end up with millions of people that didn’t save for retirement and will be a drain on those who did save for retirement and the rest of the economy.
So Congress actually passed a good revision to the law. Employers will now be required to default to having employees save for their retirement in 401(k) plans. The employee still has the option to decline doing so, but now, without such a choice, they will automatically save for retirement. Great news, if like me, you believe many who would have not saved for retirement now will, and that doing so will be a good move for them and for the overall economy.
The recent performance of some of the long term stock picks has not been good. Several continue to have pretty good results so far, including: Google, Toyota, Templeton Emerging Market Fund, Petro China.
Several have had sharp declines recently including: Dell, Intel, Yahoo and Amazon. Is it time to sell any of these stocks? I don’t think so. I am a bit less confident about Dell and Intel than I was a year ago but I still think holding the stocks makes sense. Yahoo I think is fine and will consider buying more after doing some more research. Amazon continues to disappoint on the earnings front but I still believe the long term story is strong - though again I am a bit less confident than in the past.
My favorite stock, at these prices, is the one I most recently recommended: Tesco (the stock has been doing well since then). Overall I am happy with continuing to hold all the stocks.
I completed The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New by Jeremy Siegel today. It provides a great deal of analysis of what historical stock market returns for various strategies have been. The subtitle captures the basic theme of the book. The boring old stocks that people are not excited about is what have performed best.
His basic advise is still to buy the broadest market index fund (such as the Vanguard Total Stock Market Index Fund). He also concludes with the advise that those returns have been beaten historically by focusing on stocks with high dividend yields and low price earnings ratios.
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H.C. Miller workers to earn ownership by Richard Ryman.
I have always liked the idea of employee ownership. To me this can be a great help in creating a system where employees, owners, customers, suppliers work together. Alone an ESOP does little. But as part of a system of management it is something I think can be beneficial.
The 120 or so employees of the 118-year-old company will implement an Employee Stock Ownership Plan. An ESOP is a retirement plan in which employees are assigned shares in the company annually. Those shares accumulate in a retirement account.
Employees shouldn’t allow too much of their savings to be tied to the company (see Enron). Of course those ignoring this advice that worked for Microsoft, Walmart… in their early days did quite well. (more…)
Lean Provision Is Tesco’s Secret Weapon in Battle with Wal-Mart (annoyingly Yahoo has deleted that web page so I removed the link) (update again here is the LEI press release):
Great stuff. In fact I would add Tesco to our marketocracy portfolio created as a result of our 10 stock for 10 years post. Why would, (not did)? Martketocracy won’t process purchase request for Tesco. You can view Tesco on Google Finance but you can’t add it to your portfolio.
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“Financial education is a critical component of a robust and effective financial marketplace but it is not a panacea. Clear disclosures, wise regulation and vigorous enforcement are also essential to ensuring that financial service providers do not engage in unfair or deceptive practices,” Bernanke said.
The financial decisions we make have huge impacts on the quality of lives. This blog focus largely on management improvement: in such posts we often mention the importance of long term thinking and systems thinking. When planning our personal financial paths long term thinking and systems thinking (to optimize our long term financial well being given the options available in our individual situation) are necessary. (more…)
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