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And Again

NYT article quotes Bill Gates:
Commenting on the increasingly contentious issue of how to account for stock options in technology companies, he noted that neither he nor Steven A. Ballmer, the chief executive — two of the world's richest men — had ever taken stock options.

"Our interests overwhelmingly are the same interests that are the interests of the shareholders," he said.

I hope the general principle of ethical accounting over precisely legal accounting will catch on, rather than the 1 or 2 obvious transgressions.
7/26/2002 05:47:00 PM [Link] |

Mobs Rule!

Tech Central Station has an analysis of the stock market based on Smart Mobs by Howard Rheingold. Here's the NYT book review. TCS makes some of the same points I was trying to make about market forces (supply and demand) and their effect on stock prices. The conclusion seems bizarre, but I'll let you draw your own.
7/26/2002 09:15:00 AM [Link] |

Follow the Leader

From the New York Times:
Washington Post Co will follow advice of investor Warren E Buffett, its largest outsider shareholder, by accounting for stock options as operating expense; chief executive Donald E Graham comments; company's 2000 net income of $136.5 million would have been reduced by $3.8 million, or 2.8 percent, had it recognized options as compensation expense

and from The Washington Post
Bank One Corp. announced yesterday that it will deduct the value of executive stock options as an expense, becoming the third major company in as many days -- and the first major banking firm -- to take such action.

Coca-Cola Co. and The Washington Post Co. -- both of which have billionaire Warren E. Buffett, an advocate of counting options as expenses, on their boards -- said this week that they will begin expensing them. AMB Property Corp., a San Francisco real estate company, said last week that it will do so. Boeing Co. and Winn-Dixie Stores Inc. already treat options as an expense. Many others companies are discussing the issue, Wall Street sources say.

7/25/2002 04:02:00 PM [Link] |

Old School CEO's

This week, Warren Buffett wrote an op-ed in the New York Times criticizing not the "outright crookedness" of Enron and WorldCom, but the "flagrant deceptions" perpetrated by CEO's all over America. One such deception he cites is CEO compensation with options and the assertion by many CEO's that these options do not incur a cost to the company:
For these C.E.O.'s I have a proposition: Berkshire Hathaway will sell you insurance, carpeting or any of our other products in exchange for options identical to those you grant yourselves. It'll all be cash-free. But do you really think your corporation will not have incurred a cost when you hand over the options in exchange for the carpeting? Or do you really think that placing a value on the option is just too difficult to do, one of your other excuses for not expensing them? If these are the opinions you honestly hold, call me collect. We can do business.
The whole piece can be found on the New York Times site, but they require registration and charge a fee for old articles.

I've read some of Buffett's letters to his stockholders--they are exceptionally clear, explanatory with a nice blend of wit and charm. Here's a quote from his 2001 letter:
Another of my 1956 Ground Rules remains applicable: "I cannot promise results to partners." But Charlie and I can promise that your economic result from Berkshire will parallel ours during the period of your ownership: We will not take cash compensation, restricted stock or option grants that would make our results superior to yours.

Additionally, I will keep well over 99% of my net worth in Berkshire. My wife and I have never sold a share nor do we intend to. Charlie and I are disgusted by the situation, so common in the last few years, in which shareholders have suffered billions in losses while the CEOs, promoters, and other higher-ups who fathered these disasters have walked away with extraordinary wealth. Indeed, many of these people were urging investors to buy shares while concurrently dumping their own, sometimes using methods that hid their actions. To their shame, these business leaders view shareholders as patsies, not partners.
Check out the whole letter at Berkshire Hathaway's site (be sure to read about the MiTek acquisition).

If more CEO's would sound like this and less like whining "I didn't do it" babies, and back up their claims with action, then I believe they would bring the average investor back in the market (to their own benefit).
7/25/2002 03:14:00 PM [Link] |

Facts and Opinions

Sometimes I feel like I'm dealing with people who were out sick the day they taught facts and opinions in first grade. As a public service, I'm providing a self grading test to see if you need a refresher (try not to peek at the answers):

a. Fact or Opinion: Four is greater than three
Fact. The number 4 is greater than the number 3.

b. Fact or Opinion: Blue is the best color
Opinion. It's not even my opinion, I like maroon.

c. Fact or Opinion: There are 26 letters in the english alphabet
Fact. The english language does indeed contain 26 letters.

d. Fact or Opinion: The U. S. Constitution protects the right to own guns.
Opinion. The second amendment of the U. S. Constitution says:

Amendment II

A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.

If you think that means that you can own guns, that's your opinion, but it is not a fact. By the way, if you hold this opinion, perhaps you were also out sick the day they taught qualifying phrases. Why do you think the phrase, "A well regulated Militia, being necessary to the security of a free State", is there, if not to qualify the following phrase? By the way, my belief that the constitution offers no protection of your right to own guns is only an opinion.

You can read more about the wording and interpretation of the second amendment here.
7/24/2002 05:10:00 PM [Link] |

The Stock Market: Back to Basics

Yesterday, on one of the financial wrap-up shows on MSNBC, a reporter remarked that that the stock market had gone down even though there had been good earnings reports that day. This is somehow supposed to come as a surprise, as if the market is a black-box that looks at all of the facts and then adjusts stock prices based on the true values of the companies. However, in fact, there is only one thing that determines the price of a share of stock--the price that a share for that company was last sold.

If I have two willing participants that want to trade the stock at 50 cents lower than the last transaction, then the stock price goes down 50 cents. It's that simple. Even if the company has assets that are worth more than their market cap (The price of 1 share times the total number of shares in the company), that won't necessarily mean that the price will go up. It only goes up when stock is sold for more than the last time it was sold. The reasons why someone would buy or sell stock are on the micro level (sell to pay my bills, buy because I have extra cash, hold because I'm in it for the long term, sell because I never hold stock overnight). The market as a whole is the sum of all of these mini-decisions.

Now, if all interested parties in the stock of a particular company are extremely informed about that company and have total and equal knowledge about its industry, position, assets, revenue, costs, etc, then the share price would tend to reflect the true value of the company--an earnings report would be meaningful. When you mix in irrational participants who invest based on hype, misinformation, or wild speculation, then it becomes less correlated with value. When you mix in immoral participants with more inside knowledge and more control of the sources of information, then you're in for a roller coaster ride.

Now let's consider what happens when a company releases a rosy earnings report. Three years ago, the news channels would be fawning all over them, they'd be the darlings of The Street. Everyone would know who they were and would want to invest. Those with stock would tend to want to hold it; those without would tend to want to buy it. To buy, I have to convince someone (with stock) to sell. If everyone thinks they should hold, I have to offer more money. When they accept, a transaction is made, and the price goes up (to the level of the transaction). It really isn't any more complicated than this.

A good earnings report is only worth anything if people believe that it's true. If they do, then they will hold and buy stock and the price will go up. If they don't, then it falls back to whatever reason they were holding, selling, buying the stock before. This could be anything. Right now, those reasons are tending to make prices go down and there's nothing an earnings report in this climate can do about it.

In 1999, students at The Stanford Graduate School of Business showed that Internet stocks were governed more by the laws of supply and demand rather than value of the company. This happens whenever the value is hard to determine. Here's a short overview of the research, the full version can be found here (it's a Microsoft Word document).
7/24/2002 12:05:00 PM [Link] |

He Hated, Hated, Hated That Movie

I've been reading Roger Ebert's I Hated, Hated, Hated This Movie. If you've only seen Ebert on TV, you should really check out his written reviews. He's a great writer and is very funny. The title of the book is taken from his review of North:

I hated this movie. Hated hated hated hated hated this movie. Hated it. Hated every simpering stupid vacant audience-insulting moment of it. Hated the sensibility that thought anyone would like it. Hated the implied insult to the audience by its belief that anyone would be entertained by it.

You can read many of the reviews from the book on his site, but they only go back to 1985 and the book goes back to the beginning of his career (in the late 60's).
7/23/2002 08:04:00 PM [Link] |

Capitalism and Regulation

I recently read Diana Hsieh's Philosophical Underpinnings of Capitalism. In it she opines:

After all, capitalism is simply the economic system where people are free to trade what they wish with whom they wish. Capitalism says that if you want to interact with others, then you cannot use force, threats, or fraud. You must interact with others based upon the principle of trade, the principle of voluntary exchange to mutual benefit.

Going on, she lays out the four pillars of capitalism: reason, egoism, harmony of interests, and mind-body integration, and then discusses the consequences of ignoring any one of them. Although I read the piece with great interest, in the end, I found that it was not grounded in reality. And I completely disagree with her assertion that government regulation of trade is borne out of a disrespect of human rationality. Certainly, that might be the case in the drug war and other vice laws, but regulation is an absolute requirement for fair free trade.

Let me state for the record that I am a pro-capitalism, pro-free markets, pro-globalization liberal. But, I am also pro-realism. Classroom capitalism is all well and good, but what about the real world? How do we deal with irrational and immoral partners in trade? How do we deal with inefficient markets, incomplete knowledge, and imperfect communication? What do we do about the enormous advantages afforded to some participants in the transaction, whether they got that advantage through honesty or the increasingly more common rampant dishonesty? Perhaps you trust the "Invisible hand" that will make the markets fair, but we are dealing with a system that is inherently unfair, where a small group controls important information and its dissemination.

There are many examples of how small actions by the government can actually make the markets more free and efficient than they would be otherwise. In fact, I would like to consider the government just another player in the capitalist system. The other players exchange money (in the form of taxes) with the government in exchange for oversight and enforcement of the rules of conduct. It is easy to say, "you cannot use force, threats, or fraud", but there needs to be a means of enforcing those rules.

A simple example of a rule that results in enormous advantages to the free market is our system of patents and copyrights. Without it, there would be little incentive to innovate, since many inventions are not hard to replicate once you have a working model. In exchange for the protection, the government requires a full disclosure of the invention, which can be freely copied at the end of protection period. I think it's uncontroversial that these regulations generally promote innovation and act for the common good.

A more controversial regulation is helmet and seat belt laws, or, in general, safety laws. Personally, I'm not for laws that protect dumb people--if you want to endanger your life daily for no good reason, then go ahead, you contribute to our society by weeding yourself out. Unfortunately, those actions affect me by increasing my insurance premiums. I would greatly prefer a law that states that those not wearing a seat belt or helmet aren't entitled to coverage and can be denied insurance pay outs. I recognize the improbability of so blunt a statement of the actual need becoming law and so I accept the imperfect substitute that safety laws provide. Ditto, smoking, drugs, and prostitution. Smoke all you want, but be prepared to pay larger medical insurance premiums, or be denied coverage--or just accept the tax on cigarettes that will be used to care for you. I am not trying to protect our children from smoking (that's their parents job), I'm trying to protect my wallet.

I could go on, citing how the formation of the SEC contributed to a more efficient stock market and greatly increased the number of informed players, how tax incentives may be the only thing that keeps companies hiring in the US, why monopoly controls are important, etc. The point is an imperfect world needs arbiters and enforcers.
7/23/2002 02:48:00 PM [Link] |

Hey, It's That Guy (and that other guy)

Last weekend I went to see Ricky Jay: On the Stem at the Second Stage Theatre in New York. Ricky Jay is a actor who appears in a lot of David Mamet movies, but is also an expert on con games and magic. The show was a mix of acting, story telling, and sleight of hand and was very enjoyable. To tell the truth, my expectations were raised so high that it would be pretty hard to meet them. His stories/acting/banter met those expectations, but the magic did not. There are some tricks that have me completely baffled, many which are variations on sleight of hand (and believe me, knowing that will not help you see it), and some that there seems to be no trick at all--just a good story around a con--to make it seem like magic. His skill at card finding--the art of finding cards shuffled into the deck was worth the price of admission, and if that doesn't do it, his field hollers will. Here's a review of the show from the Village Voice.

Ricky Jay is the second Hey, It's That Guy actor I've seen live in the past couple of weeks. The other, "Dr." Kenneth Tigar, is appearing in two plays in Northampton as part of the New Century Theatre Company. We saw the first, Art, a few weeks ago. Very good, and Tigar was good in it. I recommend the play if you are interested in the boundaries of art (What is art?)--of course, this production is no longer running. This week, I'll be trying to see him again in The Drawer Boy.
7/22/2002 09:43:00 PM [Link] |