Wealth

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.

From compensation for my daughter who is a junior sales executive at a national company to chairmen - friends at global ones is a critical topic in the righting of the American economic ship.

In my daughter's case the answer was a corporate wide pay freeze due to "business weakness" despite her and few others' personal high achievement. In the case of top executive at publicly traded ones the issue of re-balance total compensation between cash and stock options to insure long term effectiveness of  decisions.

Lost in the conversation is the topic of making public employees or government accountable for decisions along with private company executives and the subject of integrity. We'll talk about government issues at the end of this piece.

I believe any of the three alternative approaches above, i.e. total lock down. cosmetic rebalancing or status quo, are solutions to the fundamental problem of self - serving focus of people in authority.

What I am helping several private company clients do is position their businesses for eventual sale or IPO, is restructuring executive roles to be more strategic than functional and linking total compensation to the long term performance of the organizations. We are doing this through a gradual re-alignment of the organization to fit the concurrent evolution of the businesses in complexity and adding a layer of non cash compensation.

Revised compensation structure, along with standard cash, tailored insurance vehicles and bonuses are warrants that are exercisable with change of ownership or longer term under special circumstances if the executive leaves the company in good standing. This is a work in progress with counsel, compensation consultants and business valuation advisers, but offers owners an ability to encourage and reinforce behavior that is in the optimizes the total performance of the company and not the individual income for selected employees. It further does not dilute owners' executive control or create unfunded tax obgligation to executives.

The current Administration is trying to foster regulations that require banks and others financial institutions (except Fannie Mae and Freddie Mac employees) to craft incentives along lines proposed by Professor Kane of Boston College. His idea is to bonus senior executives with a special class of stock that has claw back provisions require a return of capital if the company becomes insolvent. This seems like a smart but unworkable idea.

The second proposal is to establish a "West Point for regulators" according to Jason Zweig at the Wall Street Journal. The concept is to instill "a sense of honor and duty" with those charged with oversight. With these goings on in Washington, I wonder where all the adults, all the educators, all the parents have gone so that smart people think we need an institution to teach adults in responsible position about honor.

Integrity and honor, traditional concepts, are fundamental to motivation. Beyond that, compensation issues are central to behavior that potentially maximizes executive conduct that benefits all stake holders. Contemporary boards and managers have arranged compensation to optimize personal returns while sub-optimizing benefit to their cohorts. Under a capitalistic system it appears to me a straight forward; tie wealth creation to long term performance whether executives stay or leave organizations.

Jason Zweig, in is WSJ article, rhetorically notes: "It's probably too much to ask for Congress to abide by the sample principles (honor, duty and long term accountability even after leaving office), but we can dream. Could anyone possibly doubt this would wake up the watchdogs?"

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

5.7

Bus. Enterprise / EBIDA

5.1 - 10.0

5.5

Equity / EBT

5.5 - 13.2

9.0

Equity / Net Income

7.6 - 21.6

15.0

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.

In a meeting last week, a business-owner client with about thirty full-time employees made a comment that the pending changes in health care would bankrupt him in several years despite reductions in his work force to control operating costs.

Later, I asked Scott Peloquin, CEO of benefEx, a leading New Jersey employee benefit consultancy for small and mid-market companies, how I should begin advising my clients to think about the upcoming changes in federal health insurance mandates.

Scott said: “First, I don’t think the reforms now being discussed could possibly go through.  Even if they do, the most efficient solution today is for employers to deploy a consumer driven program, rather than retaining more traditionally designed – and expensive - plans. This was innovative thinking to me about how to rebalanced risks and costs, so I rhetorically wondered how the program worked and what a representative cost impact could be.

“In a nutshell traditional plans charge about $4,000 monthly in premiums to insure about $3,000 of up-front risk, or ‘deductibles’ (think about this as though you were lowering your annual auto insurance premium by increasing your deductible from $ 500 to $ 1,000).  The current higher cost arrangement is profitable for the insurance company commission-based insurance brokers.  High-priced insurance also produces disproportionate revenue for state governments which further increases health insurance costs. 

This ‘dirty little secret’ rarely enters the discussion, that states embed a premium tax into insurance rates as a flat percentage of gross premiums.  New Jersey is so concerned by the potential loss of premium tax revenue as companies switch to consumer driven programs that it is requiring a “declaration of understanding” attestation – part of a effort to dissuade employers from offering these more efficiently designed health care financing programs.

For example,  a 7-employee company paying nearly $98,000 / year for their health care program, before proposed rate increases to more than $111,000 in 2010.  Working in conjunction with the company accountant and HR administrator, they were able to restructure the health care financing so the worst case scenario cost was under $75,000.

Employee contribution rates and out-of-pocket maximums were reduced, and – if the plan performs better than expected, the employer may recover as much as an additional $25,000, thanks to a federally approved ‘dividend’ structure  an important, recurring part of the plan’s architecture.

Though he did caution that each company situation is unique, he stressed “…the same principal applies whether an employer has seven, seven hundred, or seven thousand employees!”  He also pointed out that benefEx converted 85% of clients to some form of consumer-driven healthcare solution – as compared to an industry standard still hovering around 7%.  Not a single employer group has returned to a traditional plan, which speaks well to both the sustainability of consumer driven program, and their popularity with covered employees.”

This issue is of major interest to company owners.I believe significant tax increases targeting small businesses next year are inevitable, thus recommend that owners spend at full available. Invest specifically on building a rock solid team of employees, along with a strong brand.Companies that do so will be best positioned in their markets six – eight years from now (when tax policy reverts to a more rational structure) to gain profitable market share, or enter into a profitable merger / sell transaction.

Other insights Scott shared with me is that businesses must proactively assess their Family Medical Leave Act (FMLA) and COBRA compliance. Speculation is that federal regulatory actions positioned as worker protections may be launched as “revenue enhancement” initiatives. From a cost management standpoint, outsourcing the complex administration of these federal mandates is more effective than in-house administration and more efficient since outsourcing costs dropped by 50% over the last three years.

Business owners building a highly profitable company in this political and economic climate need consider implementing a thoughtfully designed disability program. Done smartly it could mitigate some risks associated with FMLA. Communicated properly, more than two thirds of employees may actually volunteer to pay these premiums rather than having employers pay, due to the adverse tax implications inherent in most employer-paid disability plans.

The lesson to be learned is that owners must ramp up innovation throughout their companies. Innovation is required not only for profitable new revenue production but also for ongoing cost management. Building a highly profitable company demands customer focus more than ever, supported by a cohesive employee team.

 


With the ongoing economic dislocation in 2009, many small - midsized enterprises (SME) lost significant revenue and profit. Business owners I talk to from car dealers to commodity traders have seen revenue and profits drop significantly and apparently see a slow return to pre-2009.

However, offsetting the decline in traditional markets, such as retail, consumer products manufacturing, or clothing as well as discretionary services from cosmetic surgery to luxury vacations.

Earlier I blogged about the pressing need for owners to offset revenue losses by assessing their company's strengths, weaknesses, opportunities and threats (SWOT) and then matching the strength and opportunity with government-legislated markets.

Yesterday I attended a NJBIA workshop "How to Get Government Contracts and Federal Stimulus Funding" focused on New Jersey simply to help client focus on new opportunities and how to get financial resources. Kick off understanding of NJ programs by exploring first the NJ state business site about available financing and then the NJ Recovery Site . Funding is available in NJ specifically opened up by the 2009 Recovery Act . (A broad starting point would be at Federal Grant Opportunity Resources.).

  • infrastructure primarily roads, pavement, bridges and light rail tunnel to Manhattan
    1. see Port Authority of NY & NJ Procurement Guide. Port Authority has separate and distinct protocols from balance of government agencies.
    2. see NJ Department of Transportation. There is a 10 year statewide capital investment strategy (SCIS) which will open markets from engineering through machinery cleaning
  • green or renewable energy of a special kind (solar, wind or geothermal)
    1. see Workforce for green job training support and funding
  • hiring and training new workers primarily in areas of high unemployment
    1. see Grant Opportunities for customized and literacy
    2. to apply see Training Grants
  • environmental infrastructure
    1. see 2009 Stimulus Loans - NJ Infrastructure
    2. see NJ Projects by area
  • new funding available through government agencies
    1. NJ Regional SBA (William Boone Assistant District Director)
    2. Economic Development Authority Fast Start for new business funding

I urge owners to critically think through strategic ways to fit current core business competencies into these new, well funded markets. Whether it is technology to create web sites as a vendor to government - private partnerships, sub contractors for major infrastructure vendors or a printer to support all the new forms government requires, there is opportunity in this new vertical called "recovery" and a new venue for wealth creation.

Always, but especially, in tough times, character matters. Life's journey is not so much about what is accomplished but how. My view is that all company presidents, owners, heck everyone, looking in a mirror in the morning has to love the reflection he or she sees.

I am astounded by the Madoffs, Helmsleys or Stanfords of the world. They have had financial wealth but no character. Just because we can is no excuse to do. A close friend (Jack) and I talked today about our top sales  executives in totally different companies shipping container loads of products at fiscal year end so they could make bonus for themselves and their teams. Unfortunately, they shipped against  non-existent purchase orders. Bonuses paid, shipments returned, companies in a hole.

Congress, by the way, is not different. Congress passes unfunded mandates, and push costs downstream. Downstream are companies, states or municipalities. Congress is clean, all the others pay. If they can't pay, well, welcome to hell.

Entrepreneurs and leaders have to stand clear of this behavior and not tolerate duplicity. This is tough when your money, your family, your life is on the line. My view is that if you, owner, leader and visionary, do not set the example, true North, no one else can or will.

One of our clients, Peter Ladka of Parse3 exemplifies this idea of standing true. He is the last to win and the first to lose. He never forgets it is his family and the people in his company that create his wealth. It is not how many 0000000000 are in front of the decimal point in his checking account that measures his wealth. It is his character.

Lead. Lead from strength of principle that you believe in.

My wife and I had tough times in our family company, but never forgot the idea that we get there together or not at all. My mission. My men. (PC is people but readers will get the idea.) At the end of the day, character matters.

 

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.

Small companies generally have a significant advantage over global ones in terms of flexibility, innovation and speed to market but suffer a big disadvantage in available capital. The capital I'm talking about is not so much financial variety but intellectual. Crowdsourcing can help in a variety of disciplines to offset lack of human capital, from product innovation to leadership skills to sales. When the subject turns to comprehensive approaches to optimizing profitability, the specific uniqueness of an individual company's internal structure makes the crowdsourcing option less viable.

Virtually every accountant and CPA I've met see profitability through standard cost accounting approaches. For small businesses especially those standards fall short.

In larger corporations there is a budgeting concept sometimes called "fully burdened". Simply, costs carry not only physical costs (direct product, labor and freight).but also fiscal ones (direct and indirect overhead, loads to offset underperforming brands or divisions, etc.). Margin (M) calculations are based on selling price (sp) minus cost (c) divided by selling price or M = sp-c/sp. Thus getting accurate cost information is key to margins and profitability management.

A former client developed a sophisticated yet simple program available online called "Your Cost Center" at www.yourcostcenter.com. I preferred 'your profit center" but that didn't fly.

It forces business owners, especially those driven by hourly productivity, as in service businesses such as health care, construction, accounting, legal and consulting, to build into costs paid vacations, sick days, owner income goals (for wealth creation), taxes, insurance and related intangibles not often included in costs. The program helps owners determine how many more jobs (units) the company needs to sell to meet profit goals, analyze pricing alternatives and helps guide other strategic decisions.

This is not a promotion for the service but a recommendation that business owners rethink how they envision product / service cost and pricing.

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.


MacDuff Partners was created to help entrepreneurs and small business owners build highly branded, highly profitable companies that are ultimately more salable. Whether or not those companies are sold to a third party or not, we guide clients to use their businesses as platforms for sustainable wealth.

MacDuff itself is a result of our family’s inability to make the transition from a highly successful and profitable company into durable wealth.  We decided to share our stories with clients in a way that helps bring to life innovation to improve the odds of our clients’ ultimate success.

So what is wealth? To me it is freedom and independence. To our clients it is whatever they think it is.

We dig deeply into basic beliefs, behaviors, rituals or taboos that either accelerate or inhibit performance. We help to develop leadership behaviors that perpetuate high performance and adapt to changes in market and competitive actions. Finally, we bring a stable of proven business practices, developed at Fortune level companies but smartened up to be practical and affordable to small and mid – market ones.

The last point is we believe in healthy conflict. It is a source of creative tension that enables true leadership, real innovation and commitment to goals.

We hope others join this discussion, in agreement or not with our positions, so we  share stories of our journeys, learn anew and do something every day that moves us to our business and life goals.