You may remember a few posts back when I mentioned that some days it's just too easy to write this blog. I suppose if I were trying to write some fluffy, upbeat web log about good business decisions, strategies that work, and people who appear to be doing things the right way, I’d have fewer days like these. And in fairness, I do to try to bring you the occasional example of someone who’s doing it right, at least when I find someone I think we can all learn from. But for the most part, a business blog that attempts to be both entertaining and educational is going to be something of a Gong Show Gambit in itself, since there is next to no chance of my ever running out of weird, strange, ill-advised, crooked, or just plain stupid business concepts. Even by those standards, however, today’s story stands out…
Tuesday’s “Threat Level” column on the Wired website brings us the story of a website called “YouveBeenLeftBehind.com”. I don’t have much to add to Kevin Poulsen’s excellent reporting on the subject, but for those of you who don’t want to follow the link, the web site he’s talking about is a literal Doomsday service that will store a message for you which will automatically be sent to up to 62 heathens of your choice after the Rapture happens and you are taken bodily into Heaven. They will also “encrypt” and store all of your financial information (to be sent to the heathen of your choice the day after the Rapture) since with no body available, a probate court will take 7 years to rule you legally dead, and there will only be 7 more years left in the Universe between the Rapture and the End. And all of this for a nominal service change of only $40 per month…
It’s hard to say what would be more fantastical: if the people behind this venture are joking, or if they aren’t. If they’re having one on us (or more correctly on all of the religious types who believe the Rapture is coming in their lifetime and also believe that they will be taken during it), then this is quite literally the most brazenly cynical activity I have ever seen or heard of. Even a few thousand customers will give the company millions of dollars in revenue each year for a service that literally costs nothing to provide (even if there IS a Rapture during the life of the company), all because they are willing to exploit some people’s religious convictions (or superstitions, depending on your point of view) for money. Even more amazing, however, would be if these folks are serious…
It’s hard to imagine what purpose, exactly, a message sent to one of those unfortunates “left behind” during the Rapture is supposed to have. If you believe that it is possible for those left behind to repent and be saved before the End of the World, then it’s difficult to imagine what a message from someone who has already left would add to having the Messiah arrive (or return, depending on your point of view), the Rapture occur, and the Government of the Beast take control of the Earth. Unless, of course, you believe that the people to whom you are sending these messages are too thick to realize that the End of Days are occurring and Armageddon is imminent…
If you don’t believe in this sort of 11th-hours redemption, then the only possible use of such a message is to say goodbye to all of the people whom you like enough to spend money on but don’t expect to be seeing again in the Afterlife. I can’t help thinking that this sounds like gloating, which in turn does not sound like something you want to be doing if you want to be picked up during the Rapture…
From a business standpoint, it must be conceded that if anyone actually signs up for this service (and there is some indication that people are doing so) then the company is offering its customers a service they could not easily arrange for themselves for a relatively affordable price, and that if this service actually benefits someone (e.g. provides some peace of mind, the opportunity to gloat, or the chance to make sure that your heirs know where you left all of your financial resources) then they are in fact providing value in return for the money.
I still hope they’re kidding, however…
Saturday, June 7, 2008
Friday, June 6, 2008
Four Lanes
It's hard to imagine anyone out there being surprised by the news that General Motors is going to discontinue the "Hummer" line of giant SUVs, unless you've been in some kind of weird time warp since the 1990's. Sales of large vehicles in general have been falling off for the past couple of years, and nothing currently for sale in the U.S. is bigger or more wasteful than the original Hummer. Even if we ignore the ethical (you're squandering limited resources), safety (Hummers are prone to collisions, because they're so hard to steer, unsafe to ride in and likely to cause fatalities in anything they hit), health (they also pollute like crazy), social (they're regulated and taxed as working vehicles -- e.g. not at all!), political (there's a reason we keep going to war in specific regions of the world) and moral (you're spending between 2 and 4 times more on your Hummer than you would on a more conventional ride; can't you think of anything better to do with your money?) aspects of the vehicle, the appeal of something that gets between 9 and 13 miles to the gallon (H1 model is 9; H3 gets up to 13) in a time when gas is over $4 a gallon is somewhat limited...
The part that confounds me is that GM seems to be surprised by these events. Certainly, they don't appear to have planned for this downturn in their sales, if closing 4 more North American plants is any indicator. Ford is suffering through a similar sales slump, and is also making plans to alter their production mix, while Chrysler is trying to deal with its flagging sales by offering gas at $2.99 a gallon for the next three years to anyone who buys one of their more problematic cars (an offer that could be very hard to cope with if gas crests $9 by 2011). Meanwhile, Toyota and Honda are actually reporting improvements in their sales, driven by hybrids and fuel-efficient compacts. Given that General Motors actually HAS both hybrids (including the Chevy Malibu and the Saturn Aura) and fuel-efficient conventional cars (like the Chevy Aveo and Pontiac Vibe), it's even more puzzling why they haven't made greater inroads into this critical market segment...
Of course, some of it may simply be that GM has been listening to closely to the fans of the Hummer (and big SUVs in general), like the ones quoted in the story this week in the Houston Chronicle. The market for Hummers has always been bigger than you might expect, and the margin on each one they can sell is also truly amazing. Still, if a company's entire product line is based on gasoline-powered vehicles, one might reasonably expect them to have their forward-planning shop keep at least one eye on the price (and projected future price) of that fuel. One might also expect them to spend some time, effort and advertising money to promote new products that they spent large amounts of R&D money to produce...
Now I'm not suggesting than any of you are going to be foolish enough to ignore what your strategic planning staff is telling you about future market conditions; I feel quite certain that if any of my readers are in an industry that depends on a single natural resource (like petroleum) to power its products that you would at least keep an eye on the supply of that resource. The problem is that just because people with an outside perspective on the world can see this sort of product crisis coming down four lanes of highway, that doesn't mean that the senior executives, who have lived with this product and its market conditions their whole lives will be able to see it, or that the CEO and the Board will be able to adjust their thinking to the new market conditions in time to make a difference. Rather than rip on these troubled industrial giants for failing to recognize the glacier advancing on them, maybe we should all ask ourselves "How will future conditions change OUR business model?"
It's worth thinking about...
The part that confounds me is that GM seems to be surprised by these events. Certainly, they don't appear to have planned for this downturn in their sales, if closing 4 more North American plants is any indicator. Ford is suffering through a similar sales slump, and is also making plans to alter their production mix, while Chrysler is trying to deal with its flagging sales by offering gas at $2.99 a gallon for the next three years to anyone who buys one of their more problematic cars (an offer that could be very hard to cope with if gas crests $9 by 2011). Meanwhile, Toyota and Honda are actually reporting improvements in their sales, driven by hybrids and fuel-efficient compacts. Given that General Motors actually HAS both hybrids (including the Chevy Malibu and the Saturn Aura) and fuel-efficient conventional cars (like the Chevy Aveo and Pontiac Vibe), it's even more puzzling why they haven't made greater inroads into this critical market segment...
Of course, some of it may simply be that GM has been listening to closely to the fans of the Hummer (and big SUVs in general), like the ones quoted in the story this week in the Houston Chronicle. The market for Hummers has always been bigger than you might expect, and the margin on each one they can sell is also truly amazing. Still, if a company's entire product line is based on gasoline-powered vehicles, one might reasonably expect them to have their forward-planning shop keep at least one eye on the price (and projected future price) of that fuel. One might also expect them to spend some time, effort and advertising money to promote new products that they spent large amounts of R&D money to produce...
Now I'm not suggesting than any of you are going to be foolish enough to ignore what your strategic planning staff is telling you about future market conditions; I feel quite certain that if any of my readers are in an industry that depends on a single natural resource (like petroleum) to power its products that you would at least keep an eye on the supply of that resource. The problem is that just because people with an outside perspective on the world can see this sort of product crisis coming down four lanes of highway, that doesn't mean that the senior executives, who have lived with this product and its market conditions their whole lives will be able to see it, or that the CEO and the Board will be able to adjust their thinking to the new market conditions in time to make a difference. Rather than rip on these troubled industrial giants for failing to recognize the glacier advancing on them, maybe we should all ask ourselves "How will future conditions change OUR business model?"
It's worth thinking about...
Thursday, June 5, 2008
Corporate Madness
One factor that seems to be going overlooked during the current sub-prime mortgage crisis is how badly many of the banks and mortgage companies are behaving in their own right. I’m not referring here to predatory lenders or crooked financial advisors; many of these companies extended high-interest and/or adjustable-rate loans in relatively good faith; some of them have even made a point of explaining the terms of the loan and the consequences of not living up to the requirements of the agreement. But the fact is that many of the home buyers currently facing foreclosure have been sabotaged by unrealistic rates and loans that “adjusted” upwards at a bad moment, and even the companies that have been dealing straight with their customers have generally not done much to prevent this. Unfortunately, those birds are now coming home to roost…
There’s nothing very special about a sub-prime mortgage. Some buyers are not able to qualify for the standard loan terms when buying a house, either because their credit isn’t good enough or because they can’t demonstrate that their income is high enough to guarantee that they will be able to make the payments. Rather than lose their business altogether, some lenders will offer these customers a loan at a higher rate, figuring that the increased profits to be made on the higher loan rate will compensate for the fact that more of these customers will end up defaulting on the loan…
An adjustable rate mortgage (ARM) is a loan that does not have a set (or “fixed”) rate determined at the onset. Thus, if the prime rate rises (or other factors change) the lender can “adjust” the rate of interest on the loan, and increase their profits. Loans of this type tend to start out with lower interest rates, and some people will take them in the hopes of selling the property again before the rate goes up. Unfortunately, this will only work if the real estate market continues to rise, and the prime rate doesn’t…
In the current crisis an unprecedented number of buyers have been defaulting on their loans, and an unprecedented number of houses have been foreclosed on. This is causing problems for the lenders, since as the market continues to cool, many of these houses are not selling for enough to cover the outstanding loans, and an increasing number are not selling at all. Even worse, a mortgage that gets paid off will bring in between two and three times the face value of the loan (depending on the rate and terms) over the course of 30 years, to take the obvious example. If the lender forecloses, the best they can hope for is 100% of the sale price, and if the loan was for more than the purchase price (the infamous 105% and 110% loans) there is no way to even recoup the loan through a sale.
Now, in fairness, a lot of the people being caught up in the Sub-Prime crisis are small-scale speculators; people hoping to make money on the “Bigger Idiot” principle who figured they’d just default on their loans and walk away if things didn’t work out. But a lot of those victims are ordinary people who saw the chance to buy a house they normally would never have been able to qualify for. And while it’s true that the financial institutions have a responsibility to foreclose on deadbeats, it’s also true that if they would make the effort to work with some of these marginal customers, they might be able to recoup more of their losses and keep more people from being turned out of their homes – a clear win-win situation.
Of course, this would require quite a lot of additional work on the part of the lenders. They would have to devote significant resources to working with their customers, raising loan payments only in those cases where the customer can afford the increase, and restructuring loans where necessary to prevent foreclosures. It might almost be easier to just make better loans and build better relationships with their customers in the first place…
There’s nothing very special about a sub-prime mortgage. Some buyers are not able to qualify for the standard loan terms when buying a house, either because their credit isn’t good enough or because they can’t demonstrate that their income is high enough to guarantee that they will be able to make the payments. Rather than lose their business altogether, some lenders will offer these customers a loan at a higher rate, figuring that the increased profits to be made on the higher loan rate will compensate for the fact that more of these customers will end up defaulting on the loan…
An adjustable rate mortgage (ARM) is a loan that does not have a set (or “fixed”) rate determined at the onset. Thus, if the prime rate rises (or other factors change) the lender can “adjust” the rate of interest on the loan, and increase their profits. Loans of this type tend to start out with lower interest rates, and some people will take them in the hopes of selling the property again before the rate goes up. Unfortunately, this will only work if the real estate market continues to rise, and the prime rate doesn’t…
In the current crisis an unprecedented number of buyers have been defaulting on their loans, and an unprecedented number of houses have been foreclosed on. This is causing problems for the lenders, since as the market continues to cool, many of these houses are not selling for enough to cover the outstanding loans, and an increasing number are not selling at all. Even worse, a mortgage that gets paid off will bring in between two and three times the face value of the loan (depending on the rate and terms) over the course of 30 years, to take the obvious example. If the lender forecloses, the best they can hope for is 100% of the sale price, and if the loan was for more than the purchase price (the infamous 105% and 110% loans) there is no way to even recoup the loan through a sale.
Now, in fairness, a lot of the people being caught up in the Sub-Prime crisis are small-scale speculators; people hoping to make money on the “Bigger Idiot” principle who figured they’d just default on their loans and walk away if things didn’t work out. But a lot of those victims are ordinary people who saw the chance to buy a house they normally would never have been able to qualify for. And while it’s true that the financial institutions have a responsibility to foreclose on deadbeats, it’s also true that if they would make the effort to work with some of these marginal customers, they might be able to recoup more of their losses and keep more people from being turned out of their homes – a clear win-win situation.
Of course, this would require quite a lot of additional work on the part of the lenders. They would have to devote significant resources to working with their customers, raising loan payments only in those cases where the customer can afford the increase, and restructuring loans where necessary to prevent foreclosures. It might almost be easier to just make better loans and build better relationships with their customers in the first place…
Wednesday, June 4, 2008
Suspension of Disbelief
It's funny sometimes how things come full circle, or at least continue to decline. In the early days of television, some conservative commentators worried that the fact that police dramas always ended with the bad guys being caught and punished might one day convince the general public that all crimes (and indeed all problems) really could be resolved in just 46 minutes (allowing for commercials). Of course, this was garbage; most people knew the difference between television and fact, and no one really expected to have Joe Friday show up and solve real crimes. In recent times, however, the highly popular "CSI" television series really have begun to impact the prosecution of real crimes, since juries are starting to believe that crime scene investigators really have all of the cool-looking computers and bleeding-edge equipment shown on the programs. If the crime lab people on TV can use DNA evidence to know, within minutes, who the bad guy is, then the people in real life should be able to do that, too! And if they don't have such conclusive evidence, then obviously the defendant must be innocent...
It's just as bad for medical dramas and legal dramas, too, where everything is always clean, neat, and ready to go; no gray areas, no ethical dilemmas (unless that's the plot of today's show), no issues with red tape, court delays, insurance issues, stacks of paperwork or other things that don't make for good television. Why exactly people can't remember that these same media offerings also include such improbabilities as characters who never have to visit the toilet (unless that's part of the plot), parking spaces that are always open right in front of wherever the character needs to go, cell phones that always get perfect reception, restaurants that always have a table available and so on is beyond me. Granted that all acting (television, movies, stage plays, whatever) requires the audience to suspend their disbelief (you're not actually looking through a magic arch into somebody's living room, for example), no one has ever been able to explain why people fail to reinstate their disbelief once the program is over...
An article on the MSN Money site points out that this now applies to money issues, too. The fact is, people earning $86,000 per year (taking home about $5,600 a month) DO NOT live in quarters that rent for $5,000 a month, and young people on minimum wage jobs (or working as street performers, artists or whatever) do not live in quarters that cost $2,200 a month. They also don't spend 150% of their take-home pay on clothing, drive cars that cost more than my house, or eat out at $200-a-plate restaurants every night. Yet one could easily get that impression from a variety of popular television programs and movies – none of which have even a nodding acquaintance with reality.
Nor do matters improve any when we consider the portrayal of professionals. Not all doctors and lawyers earn what the senior partner of a top Wall Street firm makes, and nearly all of them have to deal with insurance and/or collections issues unknown on the small screen. Social dynamics are another area where a poor grip on reality seems to prevail: it's hard being the only poor member of a well-heeled social group, and such an individual will generally have the unappealing options of being excluded from group activities they can't afford or mooching off the better-off members of the group.
So why am I ranting on about all of this? What harm can these skewed perceptions do to our society in the real world? Well, just as CSI viewers can throw off jury trials with their unrealistic expectations, so can people with preposterous ideas about money throw off the economy. Just as sales of Dalmatian puppies shot up after “101 Dalmatians” hit theaters (despite the fact that they really don’t make good pets), and enrollments in cooking schools skyrocket every time there’s a “Next Celebrity Chef” or “Next Food Network Star” series running (despite the fact that most people can’t make it as a professional chef, and would be ill-advised to try), so to do people who actually believe in these preposterous fictional lifestyles attempt to buy houses they can’t afford, cars they will never make the payments on, and consumer goods they do not need…
Unless we can get them to re-engage their common sense, bring their disbelief back online once they leave the theater, and stop thinking that life is anything like TV…
It's just as bad for medical dramas and legal dramas, too, where everything is always clean, neat, and ready to go; no gray areas, no ethical dilemmas (unless that's the plot of today's show), no issues with red tape, court delays, insurance issues, stacks of paperwork or other things that don't make for good television. Why exactly people can't remember that these same media offerings also include such improbabilities as characters who never have to visit the toilet (unless that's part of the plot), parking spaces that are always open right in front of wherever the character needs to go, cell phones that always get perfect reception, restaurants that always have a table available and so on is beyond me. Granted that all acting (television, movies, stage plays, whatever) requires the audience to suspend their disbelief (you're not actually looking through a magic arch into somebody's living room, for example), no one has ever been able to explain why people fail to reinstate their disbelief once the program is over...
An article on the MSN Money site points out that this now applies to money issues, too. The fact is, people earning $86,000 per year (taking home about $5,600 a month) DO NOT live in quarters that rent for $5,000 a month, and young people on minimum wage jobs (or working as street performers, artists or whatever) do not live in quarters that cost $2,200 a month. They also don't spend 150% of their take-home pay on clothing, drive cars that cost more than my house, or eat out at $200-a-plate restaurants every night. Yet one could easily get that impression from a variety of popular television programs and movies – none of which have even a nodding acquaintance with reality.
Nor do matters improve any when we consider the portrayal of professionals. Not all doctors and lawyers earn what the senior partner of a top Wall Street firm makes, and nearly all of them have to deal with insurance and/or collections issues unknown on the small screen. Social dynamics are another area where a poor grip on reality seems to prevail: it's hard being the only poor member of a well-heeled social group, and such an individual will generally have the unappealing options of being excluded from group activities they can't afford or mooching off the better-off members of the group.
So why am I ranting on about all of this? What harm can these skewed perceptions do to our society in the real world? Well, just as CSI viewers can throw off jury trials with their unrealistic expectations, so can people with preposterous ideas about money throw off the economy. Just as sales of Dalmatian puppies shot up after “101 Dalmatians” hit theaters (despite the fact that they really don’t make good pets), and enrollments in cooking schools skyrocket every time there’s a “Next Celebrity Chef” or “Next Food Network Star” series running (despite the fact that most people can’t make it as a professional chef, and would be ill-advised to try), so to do people who actually believe in these preposterous fictional lifestyles attempt to buy houses they can’t afford, cars they will never make the payments on, and consumer goods they do not need…
Unless we can get them to re-engage their common sense, bring their disbelief back online once they leave the theater, and stop thinking that life is anything like TV…
Tuesday, June 3, 2008
Public Service Announcement
Let me take a moment to depart from the usually light-hearted tone of these discussions in order to call to your attention one of the fastest-growing social problems ever to strike at the United States. It's a scourge that is causing loss of life and limb, permanent impairment even among the survivors; destroying families and causing untold heartache, pain and nausea to innocent custodial staff members nationwide. I refer, of course, to juggling lit chainsaws...
Okay, not really. The simple fact is, no one who lacks the natural ability, the perfect timing, the years of practice, the skill and the specialized knowledge would dream of attempting anything as hyper-spastically dangerous as trying to juggle a bunch of roaring, snarling chainsaws, the smallest of which could kill you in the blink of an eye if you make a single bad catch. Yet, for some reason, this does not keep hundreds of thousands of people – many of them otherwise sane! – from attempting to speculate in a field far more complicated (and in some cases even more difficult) than juggling chainsaws. I refer here to real estate speculation, particularly in the sub-prime mortgage market, and this time I'm not kidding...
Obviously, there are a lot of people who manage to make quite a lot of money speculating in real estate investments on the side; it's one of the most common means of wealth creation in this country. But the people who succeed in this enterprise don't just plunk down money they don't have to purchase property they can't afford on the spur of the moment; they invest considerable amounts of time and energy in learning about various markets, study economic trends and future indicators, calculate risks and returns, and stay away from the sort of all-or-nothing, death-or-glory flings that are so beloved of movies and fiction writers. Long-term success in real estate investing is just like long-term success in any other business activity: it takes time, it requires investment of effort and energy, and it doesn't always work. It's anything but a classic get-rich-quick scheme...
Unfortunately, most people DO just want to get rich, quickly, without any of that tiresome working, learning, studying, or putting up any of their own money. People who want to believe that they are too smart to play the lottery (but want the same huge payout for no effort whatsoever) will sometimes indulge in zero-down mortgages with preposterous payments and adjustable-rate loans that are nothing more than ticking bombs, never suspecting that they'd be better off with a handful of scratchers and a Powerball ticket. There was another story in the Times this week, about a couple who came to California, liked it here, and decided to stay and buy a house. A few years later they sold at a large profit, and used the funds to buy a larger house. That one sold even faster, and they doubled their money, which they then put toward the purchase of an even larger house. With an Adjustable Rate Mortgage (ARM), and then a second mortgage...
You see this coming, don't you? Sure enough, the real estate market slowed down, they defaulted on their second mortgage, and then their ARM "adjusted," almost doubling their mortgage payments. Congress is trying to pass some new legislation to prevent people in this situation from being forced from their homes, but it won't pass in time; the folks in the story are being foreclosed on right now. It’s impressive that they aren’t being bitter or angry about the situation; the couple in question say they weren’t victimized by predatory lending or fooled by bad sales people or screwed over with poor financial advice; they just got greedy and didn’t quit the game in time. They’re young enough to start over, and they fully intend to be smarter about things this time around. But that doesn’t change the fact that they are starting over in their late 40s…
Folks, the simple fact is that if it was easy to make a fortune in real estate, everybody would do it – and during the current fad for real estate investment, just about everybody tried it, with the usual fad results – a handful of people did well, everybody else lost their shirts, and the rich get richer enabling the foolish dreams of people who should know better. Of course, the mortgage companies are indulging in their own stupidity throughout all of these events. But that’s a story for another day…
Okay, not really. The simple fact is, no one who lacks the natural ability, the perfect timing, the years of practice, the skill and the specialized knowledge would dream of attempting anything as hyper-spastically dangerous as trying to juggle a bunch of roaring, snarling chainsaws, the smallest of which could kill you in the blink of an eye if you make a single bad catch. Yet, for some reason, this does not keep hundreds of thousands of people – many of them otherwise sane! – from attempting to speculate in a field far more complicated (and in some cases even more difficult) than juggling chainsaws. I refer here to real estate speculation, particularly in the sub-prime mortgage market, and this time I'm not kidding...
Obviously, there are a lot of people who manage to make quite a lot of money speculating in real estate investments on the side; it's one of the most common means of wealth creation in this country. But the people who succeed in this enterprise don't just plunk down money they don't have to purchase property they can't afford on the spur of the moment; they invest considerable amounts of time and energy in learning about various markets, study economic trends and future indicators, calculate risks and returns, and stay away from the sort of all-or-nothing, death-or-glory flings that are so beloved of movies and fiction writers. Long-term success in real estate investing is just like long-term success in any other business activity: it takes time, it requires investment of effort and energy, and it doesn't always work. It's anything but a classic get-rich-quick scheme...
Unfortunately, most people DO just want to get rich, quickly, without any of that tiresome working, learning, studying, or putting up any of their own money. People who want to believe that they are too smart to play the lottery (but want the same huge payout for no effort whatsoever) will sometimes indulge in zero-down mortgages with preposterous payments and adjustable-rate loans that are nothing more than ticking bombs, never suspecting that they'd be better off with a handful of scratchers and a Powerball ticket. There was another story in the Times this week, about a couple who came to California, liked it here, and decided to stay and buy a house. A few years later they sold at a large profit, and used the funds to buy a larger house. That one sold even faster, and they doubled their money, which they then put toward the purchase of an even larger house. With an Adjustable Rate Mortgage (ARM), and then a second mortgage...
You see this coming, don't you? Sure enough, the real estate market slowed down, they defaulted on their second mortgage, and then their ARM "adjusted," almost doubling their mortgage payments. Congress is trying to pass some new legislation to prevent people in this situation from being forced from their homes, but it won't pass in time; the folks in the story are being foreclosed on right now. It’s impressive that they aren’t being bitter or angry about the situation; the couple in question say they weren’t victimized by predatory lending or fooled by bad sales people or screwed over with poor financial advice; they just got greedy and didn’t quit the game in time. They’re young enough to start over, and they fully intend to be smarter about things this time around. But that doesn’t change the fact that they are starting over in their late 40s…
Folks, the simple fact is that if it was easy to make a fortune in real estate, everybody would do it – and during the current fad for real estate investment, just about everybody tried it, with the usual fad results – a handful of people did well, everybody else lost their shirts, and the rich get richer enabling the foolish dreams of people who should know better. Of course, the mortgage companies are indulging in their own stupidity throughout all of these events. But that’s a story for another day…
Unintended Consequences
One of the most controversial legal decisions to hit California in the past four decades was handed down a week or so ago, when the State Supreme Court ruled that the law against same-sex marriages violated the California State Constitution and struck it down. As a result, same-sex marriages were suddenly legal in California and thousands of people began making plans to either get married or else stage an all-out effort to amend the Constitution to make such laws possible in the future. I’m going to leave the social, legal, political, religious, civil rights, equality and historical aspects of this situation to those better qualified to comment on them; I write about business issues. Fortunately, this leaves us with over $370 million dollars in new business to talk about…
Various stereotypical images aside, it’s hardly surprising that ANY group of people who have been denied the right to legal marriages for centuries might be excited by the idea of finally gaining that right, or that in their excitement they might begin planning some incredibly elaborate weddings (complete with massively expensive cakes, costumes, meals, settings, floral arrangements and accessories). The scope of the upsurge in this business sector appears to have taken everyone by surprise, however…
A story in today’s Los Angeles Times estimates that the uptick in wedding-related services resulting from the legalization of same-sex marriages in California could reach as much as $370 million. If couples from other states in the Western United States start coming to California to get married, this figure could rise even farther. And if conservatives in other Western states succeed in blocking such unions in their own jurisdictions, this sort of migration is in no way far-fetched. Nor does this figure even consider the corresponding uptick in business for the Legal industry, as scores of attorneys stand to be hired to fight for or against the legalization of same-sex marriages and recognition of those unions by other States…
It’s almost certainly not something that the people debating the issue on legal terms had given much consideration; those who are for same-sex marriages are working on the basis of equality and civil rights, and those who oppose it are mostly bringing up religious, social and political factors. Certainly the political liberals who favor these unions were not intending to create vast commercial opportunities, nor were the political conservatives who oppose them intending to find themselves working against hundreds of millions of dollars in business revenue for the State. As so often happens, the Law of Unexpected Consequences has introduced a completely new set of questions into what was already a complicated situation…
Politically, of course, no conservative can expect to oppose $370 million worth of new business and survive, any more than he or she can expect to support same-sex marriages and survive. But by the same token, any liberal who attempts to cloak him- or herself in a mantle of defending the civil rights of the people entering into same-sex marriages can reasonably expect to be questioned about whether they are really in favor of liberty or merely in favor of increased business and tax revenues…
Personally, I have always taken the position that anything that you benefit from that does not unnecessarily harm another person is not evil, and that anything which creates jobs, stimulates the economy, allows people to earn a good living and maintain a good lifestyle, and does not unnecessarily harm anyone (including members of future generations who have to live on this same planet) is generally a good thing. But under the circumstances, I have to say that it’s probably just as well that I’m not a politician…
Various stereotypical images aside, it’s hardly surprising that ANY group of people who have been denied the right to legal marriages for centuries might be excited by the idea of finally gaining that right, or that in their excitement they might begin planning some incredibly elaborate weddings (complete with massively expensive cakes, costumes, meals, settings, floral arrangements and accessories). The scope of the upsurge in this business sector appears to have taken everyone by surprise, however…
A story in today’s Los Angeles Times estimates that the uptick in wedding-related services resulting from the legalization of same-sex marriages in California could reach as much as $370 million. If couples from other states in the Western United States start coming to California to get married, this figure could rise even farther. And if conservatives in other Western states succeed in blocking such unions in their own jurisdictions, this sort of migration is in no way far-fetched. Nor does this figure even consider the corresponding uptick in business for the Legal industry, as scores of attorneys stand to be hired to fight for or against the legalization of same-sex marriages and recognition of those unions by other States…
It’s almost certainly not something that the people debating the issue on legal terms had given much consideration; those who are for same-sex marriages are working on the basis of equality and civil rights, and those who oppose it are mostly bringing up religious, social and political factors. Certainly the political liberals who favor these unions were not intending to create vast commercial opportunities, nor were the political conservatives who oppose them intending to find themselves working against hundreds of millions of dollars in business revenue for the State. As so often happens, the Law of Unexpected Consequences has introduced a completely new set of questions into what was already a complicated situation…
Politically, of course, no conservative can expect to oppose $370 million worth of new business and survive, any more than he or she can expect to support same-sex marriages and survive. But by the same token, any liberal who attempts to cloak him- or herself in a mantle of defending the civil rights of the people entering into same-sex marriages can reasonably expect to be questioned about whether they are really in favor of liberty or merely in favor of increased business and tax revenues…
Personally, I have always taken the position that anything that you benefit from that does not unnecessarily harm another person is not evil, and that anything which creates jobs, stimulates the economy, allows people to earn a good living and maintain a good lifestyle, and does not unnecessarily harm anyone (including members of future generations who have to live on this same planet) is generally a good thing. But under the circumstances, I have to say that it’s probably just as well that I’m not a politician…
Monday, June 2, 2008
Strange Magic
"So, does Extension offer any classes that can help me to understand how investments work?" the Astrophysicist asked me. "I've always found Finance to be rather intimidating."
I was rather surprised to hear it, and said as much. "The science of financial management is just a set of mathematical models based on a limited amount of data, and the mathematics in question are much simpler than the ones you are already studying," I told him. "Trust me; I took Physics for Non-Majors and Astrophysics for Non-Majors as an Undergraduate, and the basic Finance class during business school. The Physics was definitely harder.”
“It’s not the math,” the Astrophysicist told me. “It’s the assumptions. Every one of these calculations assumes that the Prime Rate will do something, or won’t; that the Cost of Capital will be something, or won’t; inflation, foreign trade, consumer spending patterns, who gets elected to national office – all of it is based on assumptions, and none of those assumptions is based on anything! How do you build on a foundation like that?”
I’ve often encountered this same attitude in people without training in business, especially those with degrees in the humanities (or no college at all). This was the first time a scholar from a math-oriented discipline had ever asked me that question, however. “Human behavior is one of the keys to understanding Finance,” I agreed. “And it probably helps to remember that this is a new science; even two centuries there was no such thing as High Finance. But, that said, we’re still trying to predict future events based on past experience, and trying to take into account all of the factors we know about.”
“But you can’t ever be sure of those assumptions,” he objected.
“Neither can you,” I replied. “Everything in the Universe is moving all the time, and you never know when a previously undetected object is going to throw off an orbit you though you had pegged.”
“Well, to some extent that’s true,” he conceded.
“The misconception that most people have about Finance is that it’s just one set of computations – that you can run one simple calculation and know what a market or a specific company is going to do in the future,” I went on. “Theoretically, if you know every force acting on a body, you could tell me where it is going to go, and when, and how fast, and so on, right?”
“Of course,” he agreed.
“But if your first set of parameters was off, you’d never just throw up your hands and walk away,” I suggested. “This is essentially the same situation; we don’t know what’s lurking around the next corner, and we can’t just get out a telescope and look for it. But we’re only dealing with the actions of a limited number of people on one small planet; there are finite limits on what CAN happen. If you can figure out most of the things that MIGHT happen, you can plan for a whole range of different outcomes.”
“You can?” he asked, puzzled.
“Sure you can,” I replied. “Diversification can help you avoid being hit by failures in any one industry or region; International investments can help you avoid problems with natural disasters or popular revolutions; the right mixture of equity investments (stocks), debt investments (bonds), metals and commodities, real estate, and other investments can help you smooth out the effects of national economic and political events. Strategy is strategy; the means are always changing, but the science remains the same.”
“So you think I can do it,” the Astrophysicist said, smiling for the first time.
“Of course you can,” I assured him. “The only question is how much of your life you want to devote to pouring over spreadsheets. If it turns out that the science of money delights you, my colleagues on the Finance side can teach you everything you’re going to need. We can even teach you how to complete the Certified Financial Planner exam and become a CFA yourself. But if you’re like most of us, you’ll probably just want to hire one…”
I was rather surprised to hear it, and said as much. "The science of financial management is just a set of mathematical models based on a limited amount of data, and the mathematics in question are much simpler than the ones you are already studying," I told him. "Trust me; I took Physics for Non-Majors and Astrophysics for Non-Majors as an Undergraduate, and the basic Finance class during business school. The Physics was definitely harder.”
“It’s not the math,” the Astrophysicist told me. “It’s the assumptions. Every one of these calculations assumes that the Prime Rate will do something, or won’t; that the Cost of Capital will be something, or won’t; inflation, foreign trade, consumer spending patterns, who gets elected to national office – all of it is based on assumptions, and none of those assumptions is based on anything! How do you build on a foundation like that?”
I’ve often encountered this same attitude in people without training in business, especially those with degrees in the humanities (or no college at all). This was the first time a scholar from a math-oriented discipline had ever asked me that question, however. “Human behavior is one of the keys to understanding Finance,” I agreed. “And it probably helps to remember that this is a new science; even two centuries there was no such thing as High Finance. But, that said, we’re still trying to predict future events based on past experience, and trying to take into account all of the factors we know about.”
“But you can’t ever be sure of those assumptions,” he objected.
“Neither can you,” I replied. “Everything in the Universe is moving all the time, and you never know when a previously undetected object is going to throw off an orbit you though you had pegged.”
“Well, to some extent that’s true,” he conceded.
“The misconception that most people have about Finance is that it’s just one set of computations – that you can run one simple calculation and know what a market or a specific company is going to do in the future,” I went on. “Theoretically, if you know every force acting on a body, you could tell me where it is going to go, and when, and how fast, and so on, right?”
“Of course,” he agreed.
“But if your first set of parameters was off, you’d never just throw up your hands and walk away,” I suggested. “This is essentially the same situation; we don’t know what’s lurking around the next corner, and we can’t just get out a telescope and look for it. But we’re only dealing with the actions of a limited number of people on one small planet; there are finite limits on what CAN happen. If you can figure out most of the things that MIGHT happen, you can plan for a whole range of different outcomes.”
“You can?” he asked, puzzled.
“Sure you can,” I replied. “Diversification can help you avoid being hit by failures in any one industry or region; International investments can help you avoid problems with natural disasters or popular revolutions; the right mixture of equity investments (stocks), debt investments (bonds), metals and commodities, real estate, and other investments can help you smooth out the effects of national economic and political events. Strategy is strategy; the means are always changing, but the science remains the same.”
“So you think I can do it,” the Astrophysicist said, smiling for the first time.
“Of course you can,” I assured him. “The only question is how much of your life you want to devote to pouring over spreadsheets. If it turns out that the science of money delights you, my colleagues on the Finance side can teach you everything you’re going to need. We can even teach you how to complete the Certified Financial Planner exam and become a CFA yourself. But if you’re like most of us, you’ll probably just want to hire one…”
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