Value Investing using Economic Value Added (EVA)

President Proposes Relief for Small Business Owners as Small Business Owners' Optimism Tanks

Dec 8 MyBusiness.com

Today President Obama outlined a series of initiatives designed to spur job growth—particularly by small business owners. "Where was this proposal more than a year ago when the economy nose-dived?" you're probably thinking. And you're right, but so is the saying better late than never.

As outlined in this New York Times article, the proposals include a tax credit and a temporary elimination of capital gains for small businesses that create new jobs. Obama also proposes leftover money from the 2008 bailout package be used to help unfreeze credit lines for America's job creators.

Of course, Obama's speech today was just step one in a long process of making these efforts a reality for small business. Stay tuned to NFIB.com for updates on these small business stimulus efforts as they happen.

NFIB OPTIMISM INDEX FALLS AGAIN

The Index of Small Business Optimism lost 0.8 points, falling to 88.3 (1986=100), 7.3 points higher than the survey’s second lowest reading reached in March (the lowest reading was 80.1 in 1980:2). In the 1980-82 recession period, the Index was below 90 in only one quarter and quickly surged to a record high level in early 1983. In this recession, the Index has been below 90 for six quarters, indicative of the severity of this downturn.

I have contended from the very beginning of this administration that small business - those that create the jobs and the new ideas in this country - are the last on the list of the Democrats or the Obama administration.  And as if right on the Axelrod PR script - Obama throws together "relief" for small business today. 

Why does the Obama administration and Democrats cast aside small business people?  It's not so much they cast them aside but they do not have the interest groups that deal with them.  It is difficult to organize small businesses whose many everyday simple decisions creates an amazing complex - unable to control from Washington - dynamic economy.  These folks really do respond to incentives.  They do not need to be bribed, paid off or told what to do - they just need to be left alone with the certainty that the rules of the game are not going to change much from one year to the next.

What do they have now - extreme regime uncertainty.  Small business owners see free trade bills shelved; unions getting favored treatment for perceived past injustices; Congress flirting with all kinds of taxes - carbon, cap n trade, war taxes, and regulations - just today the EPA is now the regulator of CO2 - the air that we breathe out, the lifeblood of plants and animals.  Obama's EPA, on the eve of Copenhagen, scores another PR "victory" by letting the other statists around the world know that when it comes to trade and economic growth - the Obama administration is now prepared to everything in its power to regulate growth out of existence.

Oh and health care!  This is what the small business lobbying group said about the Senate health care bill being debated on Capitol Hill as I write:

We oppose the Patient Protection and Affordable Care Act due to the amount of new taxes, the creation of new mandates, and the establishment of new entitlement programs. There is no doubt all these burdens will be paid for on the backs of small business. It’s clear to us that, at the end of the day, the costs to small business more than outweigh the benefits they may have realized.

“Small businesses have been clear about their needs in health reform; they have been working for solutions for more than two decades. They have a unique place in this debate because of the exceptional challenges they face. They experience the most volatile premium increases, are the most cost-shifted market, see the most tax increases and have the least competitive marketplace. For all these reasons, they especially need reform, but these reforms can’t add to their cost of doing business. The impact from these new taxes, a rich benefit package that is more costly than what they can afford today, a new government entitlement program, and a hard employer mandate equals disaster for small business.

 

“We are disappointed that, after so many months of discussion, small business could be left with the status quo or something even worse. Unless extreme measures are taken to reverse the course Congress is on, small business will have no choice but to hope for another chance at real reform down the road.

 

The answer is who knows what's going to happen even next week.  Small businesses face the most uncertain environment since WWII and it is entirely the fault of the US GOVERNMENT.

 

Dithering there and dithering there - leadership by the mob rule in Congress is no leadership at all - and until there is clarity small business will be waiting and waiting until a leader shows up.

 

Even if health care passes it does not stop there for these guys and gals because the taxes start right away and the benefits do not start coming for two or three years - now that is ridiculous.

 

BERK

Today President Obama outlined a series of initiatives designed to spur job growth—particularly by small business owners. "Where was this proposal more than a year ago when the economy nose-dived?" you're probably thinking. And you're right, but so is the saying better late than never.

As outlined in this New York Times article, the proposals include a tax credit and a temporary elimination of capital gains for small businesses that create new jobs. Obama also proposes leftover money from the 2008 bailout package be used to help unfreeze credit lines for America's job creators.

Of course, Obama's speech today was just step one in a long process of making these efforts a reality for small business. Stay tuned to NFIB.com for updates on these small business stimulus efforts as they happen.

EVA Dimensions: Any Idiot Can Increase Accounting Profits.

Video: FMN October 2009 - Segment Two: “EVA Momentum: One Ratio That Tells the Real Story”

Bennett Stewart, EVA father, talks about his new measure - EVA Momentum - The only ratio that encourages profitable growth.

BERK

via evadimensions.com

Paying for groceries like we pay for healthcare? Who cares about price (or cost)?

What if paying for groceries was like paying for healthcare? Watch the short video

http://www.whatstherealcost.org/wtrc/toolbox/connect.html?video&site=

The Psy-Fi Blog: Intelligence Can Seriously Damage Your Wealth

Intellectual people - smart people - we sometimes call them, are rarely equipped to give us good investing advice, political advice or other advice.  I am not arguing that advisors should not be trusted - after all that would prove that I am one of the dumb ones since I am an advisor.  But it is imperative that we evaluate our advisors and the managers of our companies for that matter by their decision making processes not by outcomes alone and certainly not by credentials alone.

We have seen in earlier posts that smart people make the same dumb decisions as non-smart people.  Another way to say that is to not trust experts just because they are experts.

The entry below from the Psy-Fi blog reviews some of the evidence that suggests that Harvard Law professors are not necessarily better decision makers than housewives from Alaska.

BERK

Monday, 16 November 2009

Intelligence Can Seriously Damage Your Wealth

Cerebral Investors

In most walks of life intellectual superiority is generally viewed as something that gives the possessor an advantage over their fellow humans. Admittedly measuring intelligence is a pastime fraught with difficulty and hedged in contradiction but, even so, there are a few easy ways in which we can distinguish people who have better than average analytic abilities. Whether that’s the same as being clever is another matter, but it’ll have to do for the current considerations.

As investing itself is often viewed as a cerebral occupation, an area where the spoils fall to the smartest, we ought to expect to find a good correlation between intellect and returns. After all the calculation of alphas, betas, coupons, coefficients, efficient frontiers, adjusted earnings and the rest of the paraphernalia beloved of market gurus is pretty complex stuff. Of course this is a myth: simply being smart isn’t anywhere near sufficient to succeed in stocks.

via www.psyfitec.com

Trust Matters, But It Requires Thinking a Bit

“Smart” is a vastly over-rated virtue in the human species."  Smart people make bad decisions because they share the same evolutionary history and genetic makeup as the rest of us.  That basic mental human model sees the world one way when we need to see the world in another way to make better decidions.

BERK

Is it Stupid to Be Trusting?

by Charles H. Green on Tuesday, April 21, 2009 #post #475#

The ever-catchy Seth Godin  highlights an ad for the new super-exclusive Visa Black Card.  So rare it’s made of carbon.  So elite that it’s limited to just you, and 2,999,999 of your closest friends. It screams exclusivity right through the mass media it’s advertised in.  

Nicholas Kristof reported last month  on how mists, political scientists, journalists or historians, whether they had policy experience or access to classified information, or whether they had logged many or few years of experience,” Mr. Tetlock wrote. 

Indeed, the only consistent predictor was fame — and it was an inverse relationship. The more famous experts did worse than unknown ones.

Dr. Robert Cialdini, the reigning expert in the field of influence, has identified six basic drivers of influence in human beings.  The first is reciprocity—a mutual sense of obligation triggered by the actions or words of one. 

The second and fourth are scarcity (the Black Visa Card) and authority (Jim Cramer).  It is demonstrably stupid to believe that the Black Card is exclusive, and that Cramer is a better stockpicker than the next guy.  Demonstrably.  But we believe both anyway.  (Well, not you and me, of course.  But everyone else does.  The fools.)

In sales, any number of experts will tell you that people buy from people they like, or trust; that people buy with their heart, and rationalize it with their brains.

If you’re not buying any of this, review exhibit A, Bernard Madoff.  He masterfully combined all the triggers into one slick package.  An expert, likeable, you could get in on the deal if you were special (you and your 3 million closest friends), and so forth.

A lot of people I talk to about trust throw up their hands at all this and say, “Anyone who trusts is a fool and a sucker.”  I prefer to call it human.  Trusting is not going away anytime soon; it’s too deeply imbued in our genes and is, net net, too valuable.

We can, of course, get smarter.  But the most likely result of getting “smarter” is to stupidly avoid sensible risk-taking by following the "smart" advice of someone else. 

“Smart” is a vastly over-rated virtue in the human species.  I’ll bet my Black Card on it.
 

via trustedadvisor.com

50 Year High Increase in Productivity - From Lucy to Robots

Productivity shot up today to a 5 decade high.  Productivity is doing more with less to free up resources to serve in another capacity generating more growth and wealth.  It is the foundation of a society's "pursuit of happiness". 

Look at this fun way to view productivity increases over the 50 years - packing food.

Remember Lucy and Ethel trying to pack candy?

Now take a minute to see the way we do it now.  HT: Carpe Diem

 

Adept Technology has just broken the “300 cycle per minute barrier” with their Quattro robot. The secret, they say, is that using four arms instead of three enables higher speeds and faster accelerations. If you want to see what 300 cycles per minute looks like, pay attention at about 1:30 in the video and remind yourself that you’re not watching it on super fast forward.

BERK

Focus On The Short-Term Hurts Companies - Bill George

One of the important qualities of ValueAligned companies is that its management team and its processes are organized around maximizing "economic value", called "intrinsic value" by Warren Buffett, not some vague notion of maximizing "shareholder value", which almost always degenerates into short-term management of accounting earnings, or "making" the number.  The sad result of this is that public companies rarely overcome what the Aspen Institute calls "short-termism".

The statement, “Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management,”identifies three leverage points for encouraging a renewed focus on long-term value creation and for addressing one part of market short-termism, shareholder short-termism: 

1. Market incentives:  encourage more patient capital through tax policy

2. Alignment: better align the interests of financial intermediaries and their ultimate investors

3. Transparency: strengthen investor disclosures

We would also add better "alignment" between corporate managers and shareholders - whether financial intermediary or not.  Of course, we prefer to eliminate financial intermediaries like mutual funds and directly to own the shares of great companies.  

The best way we have seen to signal to investors that a company is well-aligned is for top management and other employees, all the way down to the shop floor, to have implicit incentives within the management systems and explicit incentives within the reward and compensation systems, to maximize economic value.  That's what Value-Based Management (VBM) is all about.

On his blogand in the WSJ, Bill George the former CEO of Medtronic (MDT), makes his plea for managers to do the "right" thing and reject short-termism: 

This crisis wasn't caused by subprime mortgages; it was caused by subprime leadership. Its root cause is leaders who practice short-termism. The culture of short-termism—investing for short-term gains at the expense of long-term accumulation—has taken hold on Wall Street. Managerial capitalism has replaced financial capitalism as holding periods for stocks dropped from eight years in the 1960s to as low as six months today.

George goes on to remind investors that if they do not demand economic value creation from their companies they own then it isn't likely that much will change anytime soon.

Warren Buffett once said that the best holding period is "forever." That philosophy earned him $40 billion and the reputation as America's best investor. Unfortunately, long-term value investing is decidedly out of favor these days. Instead, investors pursuing short-term returns pressure corporate leaders to meet quarterly expectations rather than creating long-term sustainability and growth.

Many corporate leaders fell prey to playing this short-term game. They bought into the widely-believed myths that a company's stock price represents its true economic value and that success can be measured by comparing quarterly earnings to security analysts' expectations.

They hyped their stock prices with short-term actions or made value-destroying acquisitions that crimped their long-term competitiveness, often putting their entire business at risk. Many of their firms, like General Motors, AIG and Citigroup, are barely surviving now.

It is the very idea that maximizing stock price in the market at any given moment is what managing for value is all about that has given Value-Based Management (VBM) a bad name.  The corporate objective function in a well functioning capital market ought to be singular, but ought not to be share price.  It ought to be "intrinsic or economic value" - which can mathematically tied directly to "economic profit dollars per share".

BERK

TARP CZAR doesn’t understand why bankers get paid when their banks make money

It's bizarre to watch the collectivist instinct of the people that have come to power in this government.  Most of the people come from Academia - like our President, or from government.  Few come from the real world - I guess by their actions and words.  My friend Marc Hodak nails this with the following post concerning Elizabeth Warren - the TARP Czar.

Elizabeth Warren is discouraged.  Not with regards to her job of overseeing TARP spending, on which the Harvard professor has done a very decent job.  She is “speechless” at the prospects that certain bankers may get record bonuses this year.

“I do not understand how financial institutions could think they could take taxpayer money and turn around and act like it’s business as usual,” Warren says. “I don’t understand how they can’t see that the world has changed in a fundamental way - it’s not business as usual.  All I can say right now is they seem to be winning this argument.”

It’s not an argument, Liz; it’s a business model.  The financial services business model is actually quite simple:  employees get 50 percent of net revenues.  The stable portion of this net revenue is paid out in “salaries” and the uncertain, variable portion of this net revenue is paid out in “bonuses.”  The “bonus” portion gets split in rough proportion to who brought in the revenues.  All this goes on regardless of how “the world has changed.”  Last year, net revenue was lower, and bankers on average got much less.  This year, net revenues are higher, and bankers (the ones who survived the carnage, anyway)  get more.  What’s not to understand?

Read Marc's whole post at the link below.

Elizabeth Warren doesn’t understand » Hodak Value.

VAT: Like Giving Whiskey and the Car Keys to a Group of Teenage Boys

This Center for Freedom and Prosperity Foundation video explains why a value-added tax would be a dangerous money machine for big government. The evidence from Europe also shows that VATs actually lead to higher income taxes. www.freedomandprosperity.org

 

 

New VAT is good for Washington politicians but really bad for America - VAT looks benign on the surface but in Europe when the VAT taxes went in all the other taxes went up too.   Why? Federal governments, especially the ones in really big jurisdictions, will not and probably cannot restrain spending - the only way to constrain spending is to starve the beast.  Notice Ms. Pelosi and Co's "innovation" - of new collection schemes that is.

BERK

HT: Carpe Diem

 

 

The New Atlantis » Diagnosis »Baucus Bill Is A 70 Percent Tax on Work

The New Atlantis » Diagnosis » A 70 Percent Tax on Work Shared via AddThis

President Obama said the other day that the debate on health care has gone on long enough, and now is the time to pass something.  Here's one unintended consequence that will be overlooked by the media and those drumbeating for "something" to get done - low wage earners' trapped by Obamacare in low wage jobs as work incentives are destroyed.

Remember that most of the economists in the administration had to check their common sense and their knowledge of "what works" at the door on the way in.  To the man and women they refuse to acknowledge the importance of marginal tax rates as an incentive for work because doing so would have to admit that their boss' wealth distribution efforts are severely damaging to future economic growth. 

James C. Capretta of National Review Online's Health Blog shows how the current health bills are bound to destroy work incentives for the nation's low income earners.  This will hurt income mobility and retard economic growth.

But does Congress, let alone the public, really understand what these bills would mean for the health sector and the wider U.S. economy? In 1994, the Congressional Budget Office (CBO) issued a lengthy assessment of the Clinton administration’s proposal, covering everything from its distributional consequences to the budgetary treatment of its various moving parts. The public should get the same kind of thorough review of what Obamacare would mean before Congress takes any further steps toward passage.

For instance, there hasn’t yet been a thorough analysis of what the bills moving in the House and Senate would mean for work incentives among low-wage families. A cursory review indicates that Obamacare would impose a massive new implicit tax on low-wage households, effectively penalizing the family that tries to do the right thing by working their way into the middle class.

According to CBO, family coverage in 2016 is likely to cost about $14,400 under the so-called “silver option” in the health-care reform plan sponsored by Senate Finance Committee Chairman Max Baucus. In the Baucus plan, a family of four at the poverty line (about $24,000 in 2016) would have pay to about $1,400 toward coverage, with the federal government paying the other $13,000 on their behalf. In addition, the government would also provide $3,500 to reduce the family’s deductible and co-payment costs for health services. Thus, the new entitlement provided by the Baucus bill would be worth a whopping $16,500 for a family at the poverty line.

As incomes rise, however, the Baucus bill cuts the value of the entitlement. A family with an income at twice the poverty line, or $48,000 in 2016, would get $9,072 in federal assistance for coverage — still a substantial sum. But its $7,400 less than the family would get if they earned half as much. The Baucus plan thus imposes an implicit marginal tax rate of about 30 percent ($7,400/$24,000) on wages earned by families in this income range. 

And that would come on top of the high implicit taxes already built into current law. Low-wage families with children also get the Earned Income Tax Credit (EITC). The EITC boosts incomes for those with the very lowest wages, but it is also phased-out as incomes rise. Past a certain threshold (about $21,400 in 2016), the EITC is reduced by $0.21 for every additional $1 earned. Throw in the individual income tax rate (15 percent) and payroll taxes (7.65 percent), and the effective, implicit tax rate for workers between 100 and 200 percent of the federal poverty line would quickly approach 70 percent — not even counting food stamps and housing vouchers.

The more Obamacare is rushed through Congress, the more likely it is to produce highly regrettable unintended consequences. Surely even the Democrats in Congress can see how damaging it would be to send signals to low-wage breadwinners that it no longer makes sense to seek a higher-paying job.

This last sentence is comical - of course the Dems will refuse to notice how damaging their healthcare bill(s) are.  After all, the economic argument smacks of "more of the same" Bush policy that "got us into this mess"  Never do they get asked which mess and exactly how that happened.  So much for the hope that the President's economic appointees would sway the President from his growth desgtroying ideology.

BERK