I'm impressed with the clarity of thought the folks at "Motley Fool". I could not say this better in the context of self - evaluation and articulation of imaging oneself. No more comments:

My 4 Failures and 1 Major Flaw

Motley Fool CEO Tom Gardner enjoyed a recent article by Fool analyst Scott Hall so much that he wanted to share it with all Fools. Tom called Scott's commentary "as useful as it is eloquent." We hope you'll think so, too.

By Scott Hall (TMFRosetint)

Inclement weather here in Alexandria recently caused Fool HQ to close for the day, so I'm writing this in my apartment at 4 a.m. I keep odd hours. This may not seem particularly relevant, but I've found that reflecting on my life -- while in solitude -- helps me crystalize the lessons I've learned so far.

While I was staring at my ceiling trying (and failing) to go to sleep, my thoughts took a turn toward my own flaws and failures.

Failures in how I've perceived myself and the world around me. The sort of failures that are hard to understand and change because they require looking in the mirror and admitting long-lasting mistakes.

I compiled a list of these failures, mostly relating to mental traps I've caught myself in over the years. They're not all directly related to investing, but to bastardize Charlie Munger's teachings, having a multidisciplinary understanding of just how dumb you really are is probably useful. And in the end, I realized that all these failures stem from just one major flaw in myself.

Failure No. 1: Writing Off Rule Breakers

This one is probably the flaw that has cost me the most monetarily. When I first came to The Motley Fool three years ago, I was a diehard value investor -- a true believer in the writings of Benjamin Graham.

With history as my guide, I was certain that value stocks outperformed growth stocks, and I was pretty sure anyone buying stocks with a P/E ratio of 100 was just asking to go bankrupt.

But being so dismissive of the growth-fueled Rule Breakers investing style was absurd, given that I was working for the company that pioneered it. To make matters worse, I ended up penning an article about Facebook (NASDAQ: FB) when its stock price was hovering around $30 per share.

In it, I pointed out the company's "slowing" growth and sky-high P/E ratio of 106 as reasons some insiders were cashing out, and I used Facebook as a warning to avoid getting suckered in by the "Wall Street hype machine" next time.

Since then, Facebook's stock has risen about 190%, compared with just about 60% for the S&P 500. Whoops. Not only does my article look stupid in hindsight (it was), but I also cost myself a lot of money by writing off the stock so quickly.

What did I do wrong here, aside from being way too sure of myself? I misused historical analysis to try to understand what would happen in the future. Just because high-multiple stocks have been known to underperform in the past doesn't mean that they will continue to do so, and it certainly doesn't mean that any individual high-multiple stock will fare poorly.

For Facebook in particular, I underestimated the power of its network effect, which is perhaps the largest in the history of humanity, and the fact that its business model has essentially no comparison going back more than a decade or so.

Put more simply, Facebook is not the same sort of high-multiple stock your grandparents would have owned. It is a nearly infinitely scalable business that requires relatively minimal capital reinvestment.

Furthermore, Facebook's growth feeds off itself and has created a power-law dynamic, putting it in prime position to be one of the main beneficiaries as ad dollars shift from old media to new. I didn't adequately recognize this and viewed Facebook as just one of many players in the online advertising market.

In reality, it will probably end up being one of a few companies that will split the majority of the pie. When you apply conventional thinking to power-law businesses, they will almost always appear "overvalued." I missed a substantial gain because of this, though I've since purchased shares.

Failure No. 2: Complaining Without Doing

My second failure can be applied to a lot more in life than just investing and is much simpler to understand. It's complaining about what's wrong with something without stepping up and trying to improve that something yourself.

Not only does complaining have a 0% chance of improving the situation, but it's also likely to make other people resent you. Once that seed is planted, it's much harder to work with those people later if you do have suggestions -- because you've given them every reason to question your motives by letting them know what a poor job you think they're doing.

Unless you're willing to put your boots on and test new ideas together, it's probably better to just keep quiet and let other people do what they do best. Otherwise, you're contributing nothing of value. I've learned this one from experience multiple times.

Failure No. 3: Doing Without Understanding

This is tied pretty closely to the previous failure and is probably the most important of the three, as far as improving yourself is concerned. Let's say you've conquered Failure No. 2, have put your boots on, and are ready to parachute in and fix everything you see wrong with the world.

Well, then, you've hit Failure No. 3: doing without understanding. As it turns out, for just about every process in the world, someone at some point decided it was the best way to deal with the problem it addresses.

Why does that matter? Because more likely than not, the dragon you're trying to slay exists for a reason. It probably works decently well, or at least did at one point. Otherwise it wouldn't have been created in the first place.

Before you jump in and try to change the process, you need to understand why the process works as it does in the first place. What's it optimized for? Why was it designed that way? Have any other processes been tested? If so, why aren't those processes the ones that survived?

If you don't take the time to do this, you'll be going in dark -- with no real idea of how to build a new process to your satisfaction while incorporating the attributes that made the old process successful.

Fortunately, although this lesson is very important to understand, it's also simple to understand. To ensure you don't fall into the trap of building a useless process, you need only learn how the existing process works, bottom to top. You must also leave your ego at the door so you can learn from the people who have mastered the existing process. Once you have, you may discover that your attempts at improvement were misguided, or at least will be much harder to successfully implement than you originally thought.

Failure No. 4: Undervaluing Incremental Improvement

This can be applied to investing or process-making. Often, we like to go for the big score; a company that will become a 100-bagger or creating a process that completely changes how something gets done.

Those things can be wonderful, but they're rare and not essential to success. Suppose the market returns 10% per year for 50 years, while you manage to earn 11% per year. That doesn't sound like a big difference on a yearly basis, but it adds up over time.

Starting with just a $10,000 investment, you'd have roughly $1,173,908 after 50 years by getting the 10% return. But if you got the 11% return (although it doesn't seem like much of a difference) you'd have $1,845,648 instead -- almost $700,000 more.

The same thing can be applied to churn rates for subscription businesses such as Netflix(NASDAQ: NFLX). Although a few percentage points of difference might not seem like much, over time, they can compound out to be an enormous difference.

For example, if you have 1 million subscribers and 98% of them renew their contracts annually, you'd have about 817,073 at the end of 10 years. But if only 95% renew annually, you'd only have about 598,737 left after 10 years.

The percentage-point change in renewal is very small, but it makes a huge difference in the value of those customers over time. It goes to show that you really should sweat the small stuff.

I underestimated the implications of this for a long time before I joined the Fool and would often try to hit home runs with my investments, concentrating pretty heavily in these ideas. It worked out modestly favorably on average, but it was tax-inefficient, required a lot of effort, and was very risky.

These days, I buy two or three companies a year and just hold them. It saves a lot of time and energy, and assuming I can earn just a few points of market outperformance, will add up to a material amount over time.

The Common Theme

You're probably wondering by now what all of these things have to do with one another. The answer is hubris.

The idea that I knew so much about Facebook that I was certain it was a bad investment. That I knew more about whatever I was complaining about that day than people who'd dedicated their lives to it. That I should try to hit home run after home run with a concentrated portfolio, despite the risk of a massive drawdown.

All of these failures ultimately tie back to my own ego. I was far too confident about too many things. I've become better about this over the past year-and-a-half, but my ego's still there.

It's not even entirely bad, as long as it's managed -- you have to have some level of ego to try your hand in any new field.

The key, I think, is not to stop trying to improve things: it's to try to improve things while understanding that you probably know nothing about what you're trying to improve.

Act according to your inexperience, gain understanding, and then create your plan of action. Otherwise, you're just tilting at windmills.

Scott Hall owns shares of Facebook. David Gardner owns shares of Facebook and Netflix. Tom Gardner owns shares of Facebook. The Motley Fool owns shares of Facebook and Netflix.

Truth is elephants are not afraid of mice and traditional media is still more effective than digital age newbies. 

As context for our story, an early stage B2B service client was determined to test a comprehensive marketing campaign with significant emphasis on social media.  The premise was we would be effective in using Internet marketing along with traditional vehicles to build relationships with prospects in advance of direct sales meetings. 

This core effort was further supported by a significant free downloadable books and business evaluation guides, along with direct mail effort.  Traditional networking continued as well.  The target audience was top executives of middle market companies within a defined geographic area. 

The yearlong test failed to generate any new business for the client and thus was abandoned. While any failure is a composite of several elements, we conclude these are the five primary reasons for the outcome: 

  • The target audience was very resistant to the media used i.e. LinkedIn and Twitter. e-Mail drives and direct mail proved equally ineffective. Generational shift of business ownership may change behavioral disuse or distrust of Internet based campaigns. Further, the vast majority of the target market companies did not participate on either LinkedIn or Twitter.
  • Copy strategy and execution across all messaging was judged strong, tested well in advance of actual campaign but clearly missed the mark of being compelling. We conclude the media was the message, thus the copy failed to initiate a trusting relationship with prospects as expected.
  • While true social media as an advertising medium exchanges high media costs for high human capital costs
    • Operationally, finding and developing social media management required more time than allocated and longer continuity of effort than the client’s test plan afforded;
    • The cost of actionable lists of private company executives was the client’s budget limitations.
  • The comprehensiveness of the marketing campaign exhausted the time limitations of the client’s executive pool to execute consistently. Less may be more.
  • Even thought the test market was well funded, the expected efficiencies of using social media to reach a difficult to reach audience never materialized. Net, the cost of Internet marketing in a B2B environment is equal to or higher than the costs of traditional media campaigns.

 Do you have different stories to tell? Please share.


Executives in middle-market companies we work with frequently model marketing, sales and even operating processes used by larger companies. More often than not, results do not meet expectations. My observation is because the solutions chosen do not suit the company's given objectives and require more resources than the organization has available. Furthermore, employees and teams are not trained sufficiently to execute the demands placed on them with such imported systems.

A basic truism is that middle-market businesses need to improvise, innovate with limited resources and inspire employees to find simple but elegant solutions to challenges. Specific business to business examples offer insights, but I find metaphors are more memorable in illustrating how unconventional solutions to problems, inspires new ways to think, and can be used to lead teams to achievements never before conceived.

That's where jumping cows comes in.

A German teenager,Regina Mayer, wanted a horse so she could jump, but her parents said no. Because the family apparently had cows on the family farm, Regina decided to teach one cow, Luna, to jump like a horse.

As Steve Hoffer reported: "Luna wasn't ready for cow-back riding right away, however. The transformation from stubborn farm animal to long rides in the German countryside was nearly a two-year process, gradually progressing from strolls through the woods to Mayer finally mounting her trusty steed." Here is a link to the story and video, a must see illustration how frustration can be turned into inspiration.

We see companies trying too many tactics without matching resources to activity. We see them looking big and smart rather than  achieving meaning and substance, and concentrating on doing things versus focusing on essential customer needs. Today, companies are advised to use social media, link video on Facebook to web pages, go viral with YouTube and stay in touch via Twitter. Lost in the conversation and analysis is a deep discussion about  who the customers are, how they acquire information, and compatibility between the essence of the message and trustworthiness of the medium.

Regina Mayer and Luna remind us to be centered on results, patient with process and indifferent to style as long as we are true to purpose and mission.

Perhaps someday we will all be jumping cows.


Herman Melville’s Moby Dick opens with one of the most famous lines in American literature, “Call me Ishmael.”  The novel is also the inspiration for the logo of Howard Schultz’s Starbucks coffee empire. The siren acknowledges both the seafaring nature of the historic coffee business and the irresistible lure of Starbucks coffee.  Moreover, Starbuck was the first mate on the story’s legendary sailing ship Pequod.

To mark its 40th anniversary, Starbucks has redesigned the familiar logo, removing both the name “Starbucks” and the reference to “Coffee.” As a recent Knowledge@Wharton article asks: Logo Overhaul: Will Customers Still Answer the Siren Call of Starbucks? The simple answer is of course they will, because Starbucks is a loved brand that offers a social–coffee experience that few businesses have been able to develop or sustain.

My view is that redesigning logos is generally a poor investment and a distraction.  Logo redevelopment may be justified under the flag of re-branding, changing business mix or internal leadership; all are examples of over-intellectualization of what is needed to create and sustain a great brand.

To me, a brand is the bundle of attributes that a product or services promises and delivers every day to its customers. Add to that definition that it does so profitably, which in turn means the brand’s message is meaningful, clear, interruptive and memorable and its pricing is value-based.

The Wharton article is worth reading because it embodies a rich discussion of issues to be considered when engaging in any brand development or redevelopment initiative.  Some key considerations covered in the article include:  

  1. Significant shift in strategic business mix: Starbucks’ business mix has changed, and will continue to evolve, beyond coffee, so management apparently believed the “Starbucks Coffee” moniker was limiting.
  2. International growth: Global expansion made translating the Starbucks message into different cultures and languages challenging. The goal was to simplify. Apparently management argued that the symbolism of the name “Starbucks” would not translate well.
  3. Dilution of brand message: By not standing for what made a business great to begin with or what management believes will make a great business, customers will not understand why the product or service claims are uniquely the best choice and thus consider supporting competitive brands. Clearly, company management decided to accept this risk.
  4. Backlash by loyal brand fan. The article cites a study by Vikas Mittal from Rice University’s Jones School that supports this conclusion. Backlash to change is a risk that must be considered carefully as businesses expand geographically and culturally.

Strategically there are other options to logo redesign and the management distraction caused by this activity in managing brands. The first and most significant principle of branding is to engage current and prospective customers.  One must question whether there is a significant flaw in the existing bundle of communications and deliverables that limits growth and/or greater opportunity in a strategic shift of all brand-related elements.

In my experience, logo design is one of the most over-emphasized brand development elements and one of the least significant attributes of brand experience. My recommendation is to treat, and invest in, this activity with the limited weight it deserves in the total brand decision-building program.


A recent Subaru ad clearly demonstrates the power of emotional selling. The ad which features a dad giving his car keys to his young daughter on her first solo drive is simple, interruptive and relevant which makes it memorable to the target market and likely to build sales for the brand.

But, I am not in the target market of young families, which emphasizes the point I often make that to be successful communicating and building a brand, focus must be on customers that companies sell to. Reaching customers not in the target audience is just "spill out" which increases the cost of touching likely buyers, a critical consideration but one rarely considered in budgeting.

In my last post I addressed the double blind trap of technology, specifically the need for companies to selectively exploit technology to be commercially competitive versus the legal risk of using technology, intended or not, to effectively abuse employees or customers. This might be applicable here.

Consider a recently published debate by Wired  about the death of the Internet, namely the end of open source and evolution to "semi-closed" platforms (think Apps) like Facebook, Twitter or Pandora. It is worth reading and thinking. Google and others are collecting massive amounts of data about how people use the web, shorthand for cognitive and emotive behavior. In turn, those data can be intrusive if abused or highly valuable services if applied "properly". That is the trap.

So what impact would the Subaru ad -- and what profit impact would happen -- if the company were able to target families down to the individual with girls pre - driving age, middle income with known behavior patterns that favor safety versus adventure, yet with kids that both respect those values and have a personal sense of self reliance? Algorithms analyzing keystrokes are giving clues to those conjoint behaviors which of course deliver messages to you, email, text or social.

Today, as never before, we have the ability to narrow focus the message with little "spill out" wasted on unlikely buyers. Now if the car ad was about Ferrari, it'd be a whole different story.

Is this a great time to be in brand marketing? Without a doubt.

Many years ago an advertising icon, Jerry Della Femina, warned ad agencies about inflating the cost of producing commercials. He likened the inflated costs of advertising to the then bloated cost of movie production. His views, now called blogs, were published in 1969, lifetimes before the Internet.

He said: "The day is coming. When the man who foots the bill is going to revolt. When the manager is going to say ' Why?'. When all is said and done the $ 100,000 dollar commercial (with inflation $ 300,000) wasted commercial is going to disappear forever.

Jerry could not imagine social networking's interactive communication. He had no insight to social-mobile-e-commerce or impact of self-publishing on opinion driven endorsements.  Essentially,Jerry foresaw agencies loosing their ability to give high value to their customers because they were focused on their bottom lines rather than on their customers'. Highly produced commercials and media spending in support of them is disappearing. Lesson learned: Focus on your customer.

The biggest advertiser, P&G is announcing a "stunning new business strategy" to jump-start growth. They claim it is a startling, counter-intuitive way to innovation proposing brands develop values and sense of purpose to invoke the heart and care about human needs. Succeeding at that, so go the natural extension of that strategy, revenue and profit will follow. No duh.

We at MacDuff have long argued that businesses have to find and deliver emotional benefit of their product and services to customers to be successful. Product end benefits support the emotional value claims. This concept is tough for entrepreneurs to grab onto, but is essential to the creation of great companies.

The synopsis of P&G's strategy from Knowledge@Wharton follows, which is not only the way forward for entrepreneurs with tiny businesses in the grand scheme of things, but also the US Government:

  1. Inspire employees to add their hearts to their heads.
  2. Add a third P to performance measurement: potential for impact. (To those who follow MacDuff, this means "change the world".)
  3. If purpose-inspired opportunities and commercial considerations seem to conflict, find another way.

Recently we have seen a significant increase in merger and acquisition interest in our client base. That activity prompted me to review business valuations for businesses sold several years ago. The first lesson from this review was the need to lose the emotional attachment to businesses and accept the agnostic reality of how businesses are valued. The second lesson from successfully closed deals was the need for clarity of objectives in buying or selling companies.

As background, we are talking about privately held companies with no empirical market value. That said, valuation is as much art as science. For private companies on both sides of the buy - sell transaction these are emotional events. Thus, knowing this and understanding in crystal clear detail the objectives of a deal allow shrewd buyers or sellers to effect trades that maximize the probability of realizing a successful deal beyond the transaction itself.

Published research suggests that 80% of all M&A transactions fail to meet their stated objectives. Consideration of any transaction, which also impacts valuation, must include post closing integration. To see our approach on maximizing probability of success, see our Basic M&A Checklist. (This MAP is read clockwise from 1 AM to Noon.)

Owners need to be aware there are many valuation models but all fall under broad families: a) Asset Driven b) Income Based and c) Market Comparison. Each model offers ranges of valuation metrics, which means company owners not experienced in corporate finance retain suitable counsel. Each merchant bank, PE capital or M&A specialist focuses on different industries, deal sizes even buy or sell side of transactions. (A short list of favorites follows.)

For example, a family valuing a company for an estate may want to obtain an independent valuation on a low end for estate tax purposes. Remember that a low base now may translate to significantly higher capital gains in a following sale transaction or may reduce the ability to collateralize future transactions. But we will settle on the low valuation objective for this discussion. A special note on this example: All states have different regulations that apply so local counsel is critical.

Here is an actual range of trading ratios for a consumer products company based on publicly traded like-company values several years ago:

Trading Ratios

Guideline Company Range

Selected Multiple

Bus. Enterprise / EBIT

5.7 - 11.5


Bus. Enterprise / EBIDA

5.1 - 10.0


Equity / EBT

5.5 - 13.2


Equity / Net Income

7.6 - 21.6


The various metrics relate to income statement entries; EBIT = earnings before income taxes, EBITDA = earnings before income taxes and depreciation, EBT = earnings before taxes and net income is revenue minus returns and product costs. The use of any of these ratios as benchmarks again depends upon the nature of the industry and objective of the business deal.

In fair value determination, premium or discount salaries to family members paid are normalized to industry standard, as are premium rent payments and other idiosyncratic expenses that benefit a family. This normalization may either inflate or deflate valuation depending upon the objectives of the parties to the transaction. Examples of other variables influencing valuation are:

  • Market or business category in terms of size, volatility, growth / decline
  • Competitive concentration and market share of target company
  • Nature and quality of inventory
  • Revenue composition i.e. few large customers with constant order streams or many small accounts with few repeat orders
  • Patents, trademarks or factors that give unique, sustainable competitive advantage.

Awareness of different fair market value methodologies is important for owners using their companies as a means of wealth creation versus current income production. All readers can understand that the range of ratios applied to whatever valuation metric is wide and the attending company value dramatically changes from the low to high end of the relevant range.

The key for me lies beyond the historic performance of a company. As a general rule, sellers are selling the past and buyers are buying the future. It is the potential a business has for future growth, a view I hold whether buying or selling companies. This gets back to the intangible but real value of brand strength and how to package a sale or conversely see extraordinary value in a purchase.

Regardless of turnaround or high growth going concern, I personally focus on the nature and strength of a company's perception in the collective minds of customers. Financial experts are essential in identifying and appraising fair monetary value and deal structure, yet real wealth is derived from grasping how to translate historic performance into ongoing profitable revenue while serving customers extraordinarily well.

Here are selected companies I know and their roles in ongoing transactions with us: AME Capital for client financing and acquisition of technology companies; Touchstone Capital for consumer product company acquisitions and business valuations; Millburn Capital for technology company acquisitions;Castle Island Partners for larger, consumer based business. By way of disclaimer, none of these company principals necessarily agree or disagree with views expressed here.

Many business owners (going concern or pre-revenue) are surprised that a key starting point for MacDuff Partners' engagements, after conducting a 360° business audit, is to begin defining a company's brand. We start with "brand" based on experience that strongly demonstrate branded companies and products lead to superior profitability.

Brand is the character of a business, along with the essence of what is promised and delivered to customers every day. As important to company owners, brand strategy provides the organizing concept, a theme, from which to lead an entire company. By extension, having a clearly articulated brand integrates the company's vision and mission and is the platform for sustainable wealth creation when the company is sold.

As small business owners struggle accepting brand as the core asset for a company, it appears management of Fortune ones do as well. A recent article in Advertising Age discussed a finding that on a global basis only P&G and Reckitt Benekiser communicate the importance of brand to the bottom line. The article summarizes a global survey by the Institute of Practitioners in Advertising in the UK covering the top 50 marketing spenders on all continents.

Ad Age gives an example of P&G as a thought leader in business communication based on their annual reports. The article pointed out that P&G's marketing strategy was integrated into the company's overall business commentary. A.G. Lafley, Chairman, explained throughout the report on a brand-to-brand basis how his company's focus on innovation and understanding customer needs delivers high value. (See our discussion of customer focus.)

An analyst, Seamus Gillen, concluded:"There's a correlation between how a company talks about its business and how it runs its business. The stronger the role played by brands in generating a company's revenues, the more important it is for there to be appropriate disclosure on the role of brands in developing and delivering the value proposition." Net, net, even for publically traded companies, strong brands translate to revenue, and revenue to value, thus value to wealth.

Many books and programs are dedicated to methods and practices for developing brands. Look in the MacDuff "Resources" section from some tools to use. A terrific quick read on brand building was written by Allen Gorman, President of Brandspa, "Briefs for Building Better Brands".

All business owners must spend time re-thinking the value of their company's and product's brands. Despite day to day operating challenges, time conflicts and emotional hurdles we go through running our businesses, long term brand equity is the critical asset for wealth creation.

Earlier I discussed the need for business owners to reconsider government created markets as part of their strategic plans. McKinsey illustrates this point extremely well in an article called Electrifying cars: How three industries will evolve.

The essence of strategic thinking is understanding that there is enormous wealth and brand equity to be created due to the inherent volatility of government legislated or controlled markets. The issue for each entrepreneur is to identify the strategic entry point, develop a plan to exploit the opportunity and take action.

I am not taking a moral or political stance. This is about wealth creation (freedom) within government created economies. Pharmaceutical, oil, nuclear, tobacco, mortgage and even liquor industries experience the vicissitudes of political action. Scale of opportunity and threat of loss is beyond historical precedence in our current economic ecosystem.

Yet, it is impossible today to forecast where opportunities will lie. First, most of congress does not even read bills they pass (excerpt from healthcare discussion). Senator Hoyer from Maryland, for example, even derides the concept of reading them because it takes too much time.

Secondly. unexpected events may subvert a seemingly winning decisions. For example, unions stopped the building of solar panel plants and solar farms in California by issuing a 62 page data request with the California Energy Commission related to alleged environmental violations. (California mandated renewable energy use a a percent of total. Never-the-less politicians sided with unions to extend the reach of environmental laws originally intended for other purposes, and apply them to desert land being developed for solar farms.)

Despite uncertainty and volatility, my belief is entrepreneurial businesses must participate in legislated new markets. The entry point is likely to be in supporting core infrastructure companies. Through analysis, get to know target customer needs. Either building information or e-commerce web sites or coaching executives in high stakes presentations; whether advising gas station chains to install electric recharging units or junk yard facilities to convert from metal reprocessing to battery recycling, opportunity calls. Analyze market data. Anticipate and respond to the future politicians are creating.

Think deeply and act boldly now or prepare to reap the winds of inaction.

We are working with colleagues to construct new wealth creating business strategies in the wake of unprecedented growth in federal government control over free markets.

The first strategy is to actively pursue markets congress and the administration legislate into existence.The second is to pursue innovation and nimbleness to accelerate go to market efforts. The third is to investment spend on people and brand so as to minimize taxes while creating a strongly branded company with an up-beat, can-do team of employees. We believe those ideas, executed soundly, create a company the is ultimately more salable in any environment and is the platform for wealth creation and freedom.

The rhetorical question is this:"Is wealth, by definition, the new social quicksand?". In a period when local governments claim eminent domain to confiscate one taxpayer's property and deliver it to another for "common good", in a period when Government deems one company's bonus policy (AIG) unconscionable and another's  (Fannie Mae) acceptable,  one company too important to fail (GM) and another not (Lehman Brothers), we lose the connection between market performance and customers and enter one where bureaucrats decide winners and losers. 

Coincidentally, I have been re-reading "Civil Disobedience" written by Henry Thoreau, published in 1849. The US at that time was struggling with the political and moral "correctness" of slavery and the war with Mexico. His reflections are as relevant today when we face different problems, 160 years after he published them.

Thoreau speculated on individual responsibility in democracy and cynically observed:

All voting is a sort of gaming, like checkers or  backgammon, with a slight moral tinge to it, a playing  with right and wrong, with moral questions; and  betting naturally accompanies it. The character of the  voters is not staked.  I cast my vote, perchance, as I think right; but I am not  vitally concerned that that right should prevail. I am  willing to leave it to the majority. Its obligation,  therefore, never exceeds that of expediency. Even voting for the right is doing nothing for it.

Simply, voting is an essential part of a democracy, but generally is only a feel good exercise in personal responsibility. Elected officials do what they want, not necessarily what they were voted into office to do.

As a capitalist, I am shocked by the government's egregious seizure of power and consequential loss of our economic and personal freedom that directly and proportionately evolves. By simple ukase, industries are born like the one for ethanol, and others killed like domestic oil and gas exploration.

I stand in wonder over the seismic change we face. Thoreau made a statement that goes to explain the paradox private citizens encounter with government citizens:

There will never be a really free and enlightened State until the State [sic. politicians, my translation]comes to recognize the individual as a higher and independent power, from which all its own power and authority are derived, and treats him accordingly.

While Thoreau was talking about slavery and citizens' behavior / association with it he said:

...All men recognize the right of revolution; that is,  the right to refuse allegiance to, and to resist, the  government, when its tyranny or its inefficiency are  great and unendurable.

His solution was to stop paying taxes. A tax revolt to him was a non violent revolution. To me that is a naive but elegant solution that is not workable today but becomes a strategic element of a business practice. Together we may force government citizens to think hard about real solutions to our common problems.

In an prescient statement, Thoreau's conclusion about politicians is more apt today than probably it was 160 years ago:

There are  orators, politicians, and eloquent men, by the  thousand; but the speaker has not yet opened his  mouth to speak who is capable of settling the  much-vexed questions of the day.  We love eloquence for its own sake, and not for any  truth which it may utter, or any heroism it may  inspire. Our legislators have not yet learned the  comparative value of free trade and of freedom, of  union, and of rectitude, to a nation. They have no  genius or talent for comparatively humble questions of  taxation and finance, commerce and manufactures  and agriculture. If we were left solely to the wordy wit  of legislators in Congress for our guidance,  uncorrected by the seasonable experience and the  effectual complaints of the people, America would not  long retain her rank among the nations.

Quicksand is the footing we are in now. There is no action certain, but know that "when in doubt, do something". Something to me is reinvesting in our businesses, our employees and our customers in terms of service and experience to build solid greatness in real terms and not simply with words.

Compasses are critical navigation tools and powerful metaphors. We use them at MacDuff to remind us to work hard at getting our life values straight, prioritized and reflected in our personal as well as business decisions.

We identity a person's single most important value as "true north". During our life and business journeys we can fully explore possibilities, take risks, wander and always find our way home. The benefit of true north thinking is it keeps things simple, direct and focused on what is important.

My true north is ethics-based behavior. (Sometimes my compass points to magnetic north and I go off course just in case there's a question.) From a business standpoint, for me, ethics driven decisions keep decisions less cluttered with extraneous nonsense, simplify clear communication in high stress environments and help create self-directed teams whose members respect each other. In other words, this sets a leadership tone that builds and reinforces camaraderie, builds a strong company and a strong brand.

Ironically, this behavior based "north" plays a role in strategic planning, or more specifically in the flaws inherent in strategic planning. In a very thoughtful article written in 2003 by Charles Roxburgh for McKinsey Quartlerly Roxburgh looks at why so many terrific executives and owners implement non-workable strategies. The answer is the wiring of the human brain:

  • Overconfidence - intuitively obvious what this is
  • Mental accounting - we value the sources of money differently (ours, theirs, government's banks') thus discount or put a premium value on risks
  • Status Quo bias - doing what we are doing because it is comfortable
  • Anchoring - the tendency to judge future outcomes based on most resent results
  • Sunk cost thinking - the belief that if we keep doing what we have been doing unsuccessfully longer we will eventually get the results we want.

Down the road I will talk about ways to defeat these biases. In the meantime, read the reference article. If your time permits, please share how you define your true north.

Too small to be saved is in a perverse way is a building block for future personal wealth. To achieve prosperity, now more than ever and in the New Jersey more than other places, taxes and political considerations are more significant in the business decision mix than it has been since the 1950’s.

We do not know specifically where Congress is going, but it is generally moving into more regulations and penalties for company owners that violate these regs.. An essential exercise for all business owners is to pay more in depth attention than ever before to political developments.

On the other hand, government is creating new markets through massive spending increases. Taking advantage of opportunities opened by current (June 2009) political decisions is imperative. Owners must be sensitive to political – market risks of emerging regulation and oversight. These factors significantly rebalance weighing competitive market variables versus political ones in decision making.

From an operations standpoint, product and innovation remain key to customer satisfaction and top line revenue growth as before. However, legal tax - minimization efforts weigh more heavily in the decision process that a year ago in terms of long term wealth creation. We will explain later.

Pricing is always both a strategic and practical issue, of course. We ask clients not to change price structures that reflect their brand value proposition. Rather, we recommend adjusting to near term economic turmoil by structuring trade, distribution channel and end user pricing with short term promotions. Longer term value perception will be based on how company sets its product line valuations now. Seek and get professional counsel on these strategies.

We also characterize all customers in categories such as triers, loyal buyers and heavy users. As budgets allow, we recommend rotating promotional activity through each customer cohort or category based on an understanding of the business cycle. What this means is grasping customer behavior and develop programs specific to their needs.

In terms of debt, my bias is to use short term working capital loans to help liquidity and long term debt only for well positioned asset purchases that have demonstrable payout. Revenue volatility and inflation will be issues forefront on our radars; negative leverage can be catastrophic.

Back to the wealth creation strategy –we suggest investment spending in relationship building, even in terms of lost revenue now which means both trade and end user brand equity. Spend to achieve deep employee relationships and strong teams. Taxes on profits do not increase brand value.  Investment spending on brand, inside and out, does. In future years capitalism will return, as will a premium value on strongly branded companies based on a committed team, strong trade and end user brand.

If you talk to one hundred marketing executives you’ll get one hundred and ten definitions of brand. Those definitions range from logos and graphic design to page long definitions about consumer insight and essence.

To me a brand is the bundle of benefits, both emotional and physical, that customers buy from a company every day, profitably.  In the section “resources” you will find some approaches to how this process is created and managed.

At the end of the day, it is the sum of the experience every customer has with a company or even an individual entertainment personality. So company leaders either work hard at defining how they want to be perceived by customers, vendors and employees or they will define their experiences. All together, it is those impressions that form product’s or company’s brand. The pillar of this belief is my consistent experience that 90% of purchasing is emotional, 10% rational, even for hardened engineers.

 At one end of the brand spectrum company automated answering systems describe how a call is important to them, provide ten key options, keep the caller on hold forever and then have a semi – fluent person try to address issues. Net, net, my opinion is those specific companies do not get branding because they are not customer focused.

On the other hand, I visited a company one of my friends led. After checking into the building, one of the administrators was taking me to Jack’s office and said; “I love my job. This is the best company in the world to work for.”  Wow.  They go it and lived it. The company was all about good health, good health for consumers, good health for employees, good financial health.

From my perspective, a company owner’s wealth is derived from establishing a strong brand. If nurtured over time that strength translates to sustainable profitability through economic cycles. It also enables that experience to be translated into the financial community or to executives in companies that are potential buyers of the business when the time comes to transition away from the business.

Thus, strongly branded companies are the platform for sustainable wealth creation.