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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


Investors Business Daily on Deming

Posted on March 10, 2007  Comments (1)

He Pointed Firms To Quality by Kirk Shinkle:

Management responsibility took on an almost moral role for Deming. Failure in business and the resulting unemployment could be blamed almost entirely on leadership. Leaders, he believed, should commit to their employees, not hop around from job to job. He would likely have eschewed today’s renewed climate of zealous private equity buyouts and an increasing trend toward mobile management.

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

Firing Workers Isn’t Fixing Problems

Posted on February 26, 2007  Comments (1)

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

Both CEOs, Edward Zander at Motorola and Jeffrey Kindler at Pfizer, of course, kept their jobs and their paychecks. According to Motorola’s latest proxy statement, Zander received a salary of $1.5 million, a $3 million bonus and $2.3 million in restricted stock in 2005.
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For this kind of money, investors — let alone the workers who are being fired — deserve something a little more imaginative as a turnaround strategy. Cutting jobs has become a reflex, not because it works especially well at fixing the real problems at companies like these but because firings produce the kind of immediate earnings improvements that help CEOs keep their jobs. Getting rid of workers, you see, lets a company forecast the kind of immediate cost savings and surging profit margins that keep shareholders from marching on the executive suite.

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. Continue reading →

Danaher – Lean Thinking

Posted on February 14, 2007  Comments (1)

A Dynamo Called Danaher

DBS, as it’s called, is a set of management tools borrowed liberally from the famed Toyota Production System. In essence, it requires every employee, from the janitor to the president, to find ways every day to improve the way work gets done. Such quality-improvement programs and lean manufacturing methods have been de rigueur for manufacturers for years. The difference at Danaher: The company started lean in 1987, one of the earliest U.S. companies to do so, and it has maintained a cultish devotion to making it pay off.

Short term lean thinking payoffs are nice, but the long term benefits are much more powerful.

Over 20 years, it has returned a remarkable 25% to shareholders annually, far better than GE (16%), Berkshire Hathaway (21%), or the Standard & Poor’s 500-stock index (12%).Over 20 years, it has returned a remarkable 25% to shareholders annually, far better than GE (16%), Berkshire Hathaway (21%), or the Standard & Poor’s 500-stock index (12%).

Related: Danaher’s Low Profile Lean Excellence – Lean Blog – lean manufacturing articles – 10 Stocks for 10 years update (Danaher was in serious consideration)

10 Stocks for 10 Years Update

Posted on December 11, 2006  Comments (1)

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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Housing and the Economy

Posted on September 4, 2006  Comments (2)

Graph of home prices

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 doubt we are at the end of the bubble. However, financial bubbles are very difficult to time. My guess is the bubble will continue for over a year for most, if not all locations in the USA. And unless the bubble continues and prices reach levels much higher than they are now, the end of the bubble will not be a dramatic decline of prices (say an drop in prices of over 25%) in most locations.

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.
Continue reading →

Danaher Practicing Lean Thinking

Posted on August 22, 2006  Comments (1)

Manufacturer’s Acquisition Strategy Sets It Apart From The Pack, Investors Business Daily:

“It’s adapted from the Japanese Kaizen system,” Holmstead said. “Kaizen is a way of removing waste and standardizing processes and bringing underperforming or slow-growth companies with maybe single-digit margins up to midteen margins.”

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.
Continue reading →

Gladwell (and Drucker) on Pensions

Posted on August 21, 2006  Comments (1)

The Risk Pool by Malcolm Gladwell (author of The Tipping Point and Blink):

The most influential management theorist of the twentieth century was Peter Drucker, who, in 1950, wrote an extraordinarily prescient article for Harper’s entitled “The Mirage of Pensions.” It ought to be reprinted for every steelworker, airline mechanic, and autoworker who is worried about his retirement. Drucker simply couldn’t see how the pension plans on the table at companies like G.M. could ever work. “For such a plan to give real security, the financial strength of the company and its economic success must be reasonably secure for the next forty years,” Drucker wrote. “But is there any one company or any one industry whose future can be predicted with certainty for even ten years ahead?” He concluded, “The recent pension plans thus offer no more security against the big bad wolf of old age than the little piggy’s house of straw.”

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.
Continue reading →

Improving the 401(k) System

Posted on August 18, 2006  Comments (1)

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.

Continue reading →

Investing Update

Posted on July 27, 2006  Comments (0)

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.

The Future for Investors

Posted on July 15, 2006  Comments (0)

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.
Continue reading →

Employee Ownership

Posted on June 26, 2006  Comments (1)

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.

Employees of H.C. Miller Co. have learned to look at their company differently. And because they did, on July 31 they will become its owners.

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. Continue reading →

Tesco: Lean Provision

Posted on June 8, 2006  Comments (4)

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):

Tesco’s lean provision system combines point-of-sale data, cross-dock distribution centers, and frequent deliveries to many stores along “milk-runs” to stock the right items in a range of retail formats. These include Tesco Express convenience stores at gas stations and busy intersections; Tesco Metro (small supermarkets in cities); traditional Tesco supermarkets in cities and suburbs; Tesco Extra (“big box” superstores in suburbs); and Tesco.com for web shoppers.

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.
Continue reading →

Financial Education

Posted on May 23, 2006  Comments (0)

“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.

Outlining the various initiatives that the Fed already sponsors to boost public understanding of financial matters, Bernanke pledged to keep up the work.

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. Continue reading →

Invest for the Long Term

Posted on May 13, 2006  Comments (1)

Invest Like a Simpleton by Tim Beyers, fool.com:

Ten years ago, Tom Gardner boldly picked 10 stocks to buy and hold for the next decade.
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Even with a tough week in which Silicon Graphics filed for bankruptcy and Dell admitted its business is not at all like it used to be, the Simpleton Portfolio would have returned more than six times your money had you invested on day one. For context, consider this: Over the same period, the S&P 500 gained approximately 135%.

Quite a nice record. Fool.com is an excellent web site worth reading for investing education (they do force you to provide an email address, which I think is a bad practice for web site usability, but the content on fool.com is worth putting up with the bother – just use the email address you have to deal with these types of hassles). Continue reading →

Energy Future

Posted on May 6, 2006  Comments (0)

Interesting chart from: The Oil Age Poster. There are all sorts of opinions on the future price of oil.

My view is based in the capitalist/market model – I believe that if it becomes obvious we are running out of oil the price will go up drastically. Those who own it will feel if you don’t buy it today they will sell it to you for much more later. And those that want it don’t have much choice (as the last several spikes in oil prices show – demand does not decline without enormous price increases).
Continue reading →

Why You Need a Roth IRA

Posted on April 12, 2006  Comments (0)

Why You Need a Roth IRA by Erin Burt:

If a 25-year-old contributes $4,000 each year until she retires and makes an average annual return of 8% on her investment, she’ll have more than $1.1 million saved by the time she retires at age 65. And the money is all hers — she won’t have to give the IRS a cent of it if she waits until retirement to cash out.
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If that same 25-year-old invested that same $4,000 a year in a regular taxable account earning the same 8% return, she’d only have about $802,000 after 40 years if her earnings were taxed at 15%. That’s more than one-fourth less money than if she’d gone with the Roth.

And the second figure would be less, if the tax rate were higher than 15%. The Roth IRA is a great way to save money. With a Roth IRA you pay taxes on the money you put in (unlike a traditional IRA), but you pay no taxes on the money you take out (once you reach retirement age). The tax benefit of avoiding taxes on the accumulated funds is much greater than the tax deduction up front (if you have a long period of time to invest and your return is good: you also have to consider the difference in tax rates today versus at retirement).

Which IRA Is Best? – short article from Smart Money.

Along with matching contributions from an employer on a 401k plan (where you can get an immediate 100% return and accumulate gain tax deferred) the Roth IRA is where you should invest if at all possible (see more on articles on investing for retirement).

Warren Buffett’s Shareholder Letter

Posted on March 6, 2006  Comments (4)

As usually Warren Buffett’s Berkshire Hathaway shareholder letter is packed with good investment thoughts along with some management wisdom.

Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.

Continue reading →

Saving for Retirement

Posted on March 5, 2006  Comments (2)


Our Financial Failings by Neil Irwin, Washington Post:

Meet the typical American family.

It has about $3,800 in the bank. No one has a retirement account, and the neighbors who do only have about $35,000 in theirs. Mutual funds? Stocks? Bonds? Nope. The house is worth $160,000, but the family owes $95,000 on it to the bank. The breadwinners make more than $43,000 a year but can’t manage to pay off a $2,200 credit card balance.

That is the portrait of the median American household as painted by the Federal Reserve Board’s Survey of Consumer Finances.

Saving for retirement is not complicated, it is just a matter of priorities. Most people care more about a Startbucks coffee each day (or season tickets, or new shoes, or a new car every couple of years or…) today than saving money for retirement. In a capitalist society we believe in letting people make their economic choices. The choices most of us make (in the USA) lead to the results above.
Continue reading →

How Not to Convert Equity

Posted on January 10, 2006  Comments (1)

CNNMoney is not exactly intellectual discussion of economic and investing issues but normally it offers fairly good material for the large number of people. Especially those who really don’t want to read Warren Buffett or Brad Setser. Still the following quote in their article, Cashing in on hot real estate is just wrong:

They also have one extremely valuable asset: a house in the now trendy Silverlake neighborhood of Los Angeles that’s worth $1 million, nearly four times what they paid in 1995. The equity, Handel says, is “lovely,” but it’s not doing them much good right now.
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San Diego-based certified financial planners Christopher Van Slyke and Terry Green recommend an unconventional plan: taking out a new $500,000 ARM.

Handel and Laport can pay off their existing mortgage before the rate rises and retire their other debts. They can put the remaining $200,000 into stock and bond funds.

To be sure, borrowing against a house to put the proceeds into the market rarely makes sense. But in Handel and Laport’s case it does because so much of their net worth is tied up in their home, and the super-hot L.A. real estate market looks primed for a fall…

They can convert equity that might melt away.

They can what? In no way does increasing their leverage convert equity that might melt away. Any amount of “melting away” will still happen after this increase in leverage – no conversion has happened. They still have a full ownership interest in the real estate. If the value of their house fell $300,000 before or after this supposed “conversion” they would “lose” (on paper) the same amount: $300,000. The investment risk for the house has not changed (for the whole portfolio you could argue it has but that gets complicated and subject to debate).
Continue reading →

10 Stocks for 10 Years Update

Posted on January 9, 2006  Comments (3)

In April of last year I posted on 10 stocks for 10 years. At that time I also setup an fund through Marketocracy, which allows for 3rd party tracking of investing results. See the results so far on Marketocracy’s site. Thusfar the portfolio is up 20%, in under 9 months (versus 13% for the S&P 500 for the same period of time.

The 10 stocks didn’t meet the diversification requirements for marketocracy, at the time, so I modified the portion of the portfolio for each stock when I setup the fund. The portfolio as of Jan 2006 (17% cash):
Stock % of fund Current Return
Google – GOOG 16 114%
Templeton Dragon Fund – TDF 12 25%
Toyota – TM 10 48%
Dell – DELL 8 -13%
Petro China – PTR 5 36%
Cisco – CSCO 5 8%
Amazon – AMZN 4 39%
Pfizer – PFE 4 -9%
First Data – FDC 4 11%
Yahoo – YHOO 4 25%
Intel – INTC 3 13%
BP – BP 3 5%
Walmart – WMT 3 -5%
Templeton Emerging Markets Fund – EMF 2 43%
Microsoft 1 6%

Obviously Google is doing quite well, up 114%. The second largest gain is for Toyota, which is up 48%, I’m sure a surprising result to many.

I also manage a more aggressive fund (more volatile stocks and much more active trading) through marketocracy – see more on the Darvamore Fund The largest holdings in the Darvamore Fund are: DEPO, ATPG, CRDN, GOOG, SFCC and EEFT. More on the Sleep Well Fund.

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