Posts tagged finance

I believe in generously rewarding people who can create billions of dollars in lasting value for stakeholders. But I don't believe in rewarding people who create billions of dollars in ephemeral fakery. Here's a simple solution.

re: business, economics, finance

Andy:

The holding period [for equity-based compensation] should be the longer of age 65 or two years after retirement. That will ensure that key executives make decisions that truly are in the long-term best interests of the company (as opposed to decisions aimed at a shorter period — after which an executive could depart, taking all his marbles with him). Note that holding-through-retirement also addresses the major concern about top executives’ unnecessary risk-taking.

Holding equity compensation through retirement is perhaps the single most important — and fundamental — fix to getting executive compensation back on track because it also addresses all the past outstanding excessive option and restricted stock grants. And, by requiring chief executives to keep their skin in the game for the long term, it will go a long way to restoring public trust in our companies and our market, which is so important to restoring stability to the markets.

As an über-blogger, Seth Godin gets a special hyperbole permit not available to the rest of us. But I totally agree. We are exiting the consumption era, where people defined themselves by what they consumed (and took whatever job would pay for it) and entering the era of culture making, where people define themselves by what they contribute to the world. And, by the way, we don't have to "imagine" what would happen if 5,000 investment bankers were to put their talents to doing something else . . . the long-overdue Great Deleveraging will ensure that happens. Not without pain, to be sure, but I, like Seth, am hopeful.

re: business, finance, trends, vocation

Andy:

Perhaps we’re on the verge at getting much better at making useful things, spreading ideas that matter and helping people, and not quite so good at leveraging capital for financial institutions. Imagine what would happen if 5,000 investment bankers or 500 M & A lawyers put their talents to work doing something else…

As I look through all the notes and applications I received for the program I’m running next year, I’m not just optimistic. I’m thrilled. There must be hundreds of thousands of movers and shakers out there, people of all ages who are smart and get things done. And more and more, they’re being motivated by the quest, or the outcome, or the people they work with, not just the cash payout. It’s exciting beyond words. The ten people I’ve chosen are just astonishing, each and every one of them.

If you can’t find people like these, you’re not looking in the right places. And if you can’t figure out how to work with them, you’re missing out.

The most penetrating idea in this column by former Treasury Secretary Lawrence Summers is stated obliquely, but it's crucial. "Finance-led growth is problematic." Economies grow when real innovations—Summers mentions my favorite example of a complex cultural good, the interstate highway system—help human beings cultivate and create the real world. They become frothy and unstable when finance becomes the primary arena where wealth is made and talent is invested. One of the most promising side effects of the current crisis is the likelihood that a generation of Ivy League students will shy away from investment banking and put their skills to work elsewhere. Unless, of course, they all become lawyers. :)

re: economics, energy, finance, infrastructure, money

Andy:

Economists do not understand what drives productivity growth very well. However, we know these facts: productivity grew rapidly after the second world war and then sometime between the late 1960s and mid-1970s it slowed dramatically only to re-accelerate to record levels in the mid-1990s. Unfortunately, even before the downturn, underlying productivity growth appeared to be slowing.

The most plausible explanation is that an array of transforming investments and technologies – the interstate highway system, widespread air travel and the expansion of electronics – were spurs to growth during the postwar period. Eventually their impact dissipated and, as energy costs rose, growth slowed until the information technology revolution kicked in during the 1990s. Unfortunately, the IT supply shock that powered the economy in the 1990s and early part of this decade appears to be diminishing.

So there is a need to ensure that the pressure to increase spending is directed at areas where it will have the most transformational impact. We need to identify those investments that stimulate demand in the short run and have a positive impact on productivity. These include renewable energy technologies and the infrastructure to support them, the broader application of biotechnologies and expanding broadband connectivity, an area where the US has fallen behind.

The crisis has also reminded us of the lessons of the technology bubble, Japan’s experience in the 1990s and of the US Great Depression – that finance-led growth is problematic. The wealth and income gains from the easy availability of credit were highly concentrated in the hands of a fortunate few. The benefits also proved temporary. In retrospect, the fact that 40 per cent of American corporate profits in 2006 went to the financial sector, and the closely related outcome – a doubling of the share of income going to the top 1 per cent of the population – should have been signs something was amiss.

I'm thinking about starting a series to track the little-known numbers and indices that provide a clearer picture of various aspects of our culture than the figures that make the headlines. Call it "the numbers that actually count." Sometime soon I'll explain why you should plug your ears and sing, "La la la, I'm not listening," when any politician talks about cutting "income taxes"—it's not income taxes but payroll taxes that take the biggest bite for many Americans, and any serious tax policy needs to treat the two together. In the meantime, here's another important number at the moment: not the overhyped Dow Jones Industrial Average, but the TED Spread, the blood pressure reading of the global economy. Recently it's been, um, a bit high.

re: business, economics, finance, statistics

Andy:

Generations of Americans have been trained to follow the Dow Jones Industrial Average for a quick snapshot of how the economy is performing or is expected to perform. There’s a lot that’s ill-advised about that habit, but, most importantly, attending to the ups and downs in the Dow won’t tell you much about the current financial crisis. Ours is a crisis of credit: Financial firms are unwilling to lend to each other (at all-but-exorbitant rates) for fear that borrowing firms may fail or that they themselves may need the cash to fend off their own crisis.

Whereas the hourly fortunes of the Dow or any stock index are, at best, indirect reflections of this reluctance to lend, the TED Spread measures credit conditions directly. Bloomberg tracks the TED Spread here. What sounds like second-rate Nutella is actually the difference between the interest rate banks charge each other on three-month loans and the interest rate on three-month U.S. Treasury bills.

Andy Warhol—who along with being a painter of soup cans was a volunteer at soup kitchens—would doubtless be pleased.

re: failure, finance, food and drink, horizons of the possible, poverty, wealth

Nate:

Campbell Soup Co. was the only stock in the S&P 500 that escaped yesterday’s historic sell-off. That’s right: 499 fell, and just one rose.

Could there be a clearer metaphor for Americans refocusing on the basics after a decade of greed and excess?

Culture-predicting = Culture-Making?

re: business, finance, future, horizons of the possible, investing, kevin kelly, money, predictions, trends

Nate:

Kevin Kelly says:

  Warren Buffett recently bet an ambitious hedge fund operator $1 million that they won’t beat the returns of S&P 500 after their extremely hefty fees are accounted for. Buffett claims investors will do as well with a no-load index fund over the ten years of the bet. He has long been critical of the performance claims of hedge funds, and his bet is intended to put his money where his mouth is.

Buffett’s million dollar bet was made on Long Bets, the accountability mechanism founded in 2002 by Stewart Brand and myself, and operated by Long Now Foundation. The intention of Long Bets is to encourage responsibility in prediction-making (by keeping a public roster of predictions), to encourage long-term thinking (by offering a opportunity to shape a long-term bet), and to sharpen the logic of forecasting (by recording the logic of predictions and bets.)

In order to make a Long Bet, bettors need to lay out their reasoning. It’s worth reading the two sides’ very short arguments about investing because the two extremes of investment advice are contrasted in them. Buffett, as usual, is stunningly clear in his argument, which ends:

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.