Coyote Blog

I know I have blogged too much about Tesla of late, and you can be forgiven for just skipping on.  However, I find the situation fascinating -- I have seen splits between bulls and bears on stocks before, but never a situation where there is such a cultural divide between the two groups. What really caused me to write this article is that I have read a number of naive and idealistic people who have written online that they have invested all their money into Tesla.  They love the car, they love Elon Musk, and they are going to trust him with all their money.  EEEEEKKK!  I am going to give my warnings about not being an investment professional in a minute, but I feel more than comfortable even as a regular guy telling you absolutely DO NOT put all your money into a single investment, particularly one you do not control.

So, disclosures:  I am not an investment professional.  I have studied the science of dissecting corporations at Harvard Business School, but I have a less than perfect history of actually trying to make money from this knowledge.   I am short $tsla via put options (a very small percentage of my portfolio), but shorting a stock like this where there is so much passion on the bull side is dangerous.  I and others recognized many of the issues I will discuss in this post over a year ago, but had we been trying to roll puts or sit on a short position all this time it would have gotten very expensive. Making this investment even more risky -- either way, long or short -- is the fact that at this point you are effectively betting on one question: Will Tesla be able to raise new capital in the next 6 months.  This is a question even the experts can't handle and as a result it is probably only safe to dabble in Tesla as a bar bet for most.

BTW, since there is a culture war over Tesla that mirrors the larger culture war in this country, criticisms of Tesla are often interpreted as being based on bad motives and evil intentions.   So I will say that despite having once worked for Exxon, I am not in the pay of the Kochs or other fossil fuel interests, and don't have an axe to grind over electric cars.  I am putting solar on my roof and I have a deposit put down on a Lucid Air.  I have a number of renewables investments in my portfolio, e.g. PEGI.

But I believe the reckoning may be coming soon for Tesla.  If you understand the risks and it is <5% of your portfolio, fine -- take a flyer.  But for any of you that have a lot of money in Tesla and maybe don't have a lot of experience investing or analyzing companies, my advice is get out ASAP.  You have a unique opportunity here that despite a lot of red flags and smoking guns, the stock still trades at a level that will get most folks out of their position cleanly.

The Tesla Passion

Tesla has an incredibly passionate customer base that overlaps a lot with its incredibly passionate investor base.  This passion is based, in part, on:

• The model S which, when it first came out, was years and years ahead of its time.  Every other electric car at the time was a joke -- the model S was a real legitimate luxury sedan one might want even if one did not care about EV's.  The later Model X SUV was also pretty good (though in my opinion not as good).  The current Model 3 is a mixed bag which we will discuss further. But suffice it to say that Tesla earned the right to be called a leader and an innovator in the field
• Elon Musk.  He seems to be passionate about the same things (the environment, hating on oil companies, etc) that his fans are passionate about.  He is involved in amazing, super cool stuff like SpaceX.  He is constantly coming up with new product and service concepts and promising them to his user base.  He responds directly to customer complaints and suggestions and generally promises everyone that they can have their fix or feature really soon.  He has created a mythology that he is Tony Stark incarnate, and many of his fans honestly believe him to be the smartest man on Earth.
• Comparisons to Apple.  Elon Musk and his fans frequently argue that they are reinventing the auto industry as Apple. with the implicit assumption that they will shift historically low auto gross margins to be like Apple's crazy-high gross margins.  How this will happen is left a little vague, but among other things there is a vision of the car as a software platform, where consumers pay recurring fees for a stream of over-the-air features and updates.
• Self-Driving.  Tesla fans are convinced that they are just days away from having full automated self-driving features in their Tesla.  Many paid thousands of dollars on faith for this feature and continue to wait patiently for it to be delivered (which it has not been), even years after paying for it.  It is an article of faith among Tesla fans that Tesla is years ahead of every other self-driving competitor because the smartest guy in the world is running the program.
• The sales process.  The sales process (which is mostly online) seems much friendlier and less intimidating than going in to a dealer, and non-commissioned Tesla employees in their small showrooms seem much more likeable to the average Tesla buyer than the average car salesman.
• Every quarter, promised new products.   Elon Musk is an absolute fountain of new product ideas.  Reading his Twitter feed is like looking through Popular Mechanics covers in the 1970s.  Solar roof tiles! Sending a man to the Moon! Martian colony! Electric Semi!  Electric pickup!  Electric coup!  Self-driving on-demand vehicle service!  A tunnel to Dodger Stadium!  A flamethrower!  The hyperloop!  A $35,000 Model 3!

But beyond all this is the cultural divide between skeptics and passionate Tesla supporters.  Tesla supporters online tend to have little or no financial knowledge or ability to analyze a company's balance sheets and operations, whereas the skeptics tend to be digging through details of balance sheets and pro formas.  One might think this would be a red flag for Tesla supporters, but in fact it just hardens their position.  All of us talking things like cash flow and quick ratios are just dinosaurs, captives of traditional narrow capitalist thinking -- exactly the sort of thing that the brilliant Elon is sweeping away.  We are the ones who are naive at best, or at worst paid short-selling agents of the internal combustion engine lobby.  I have never seen an investing situation like it, and the nearest analog I can come up with is the conflicts between Scientology supporters and skeptics.

So what exactly is the problem with Tesla?  I will name a few of the major ones here, but want to note that much of the credit for the hard investigation and analysis on many of these points go to many folks in the $TSLAQ community, a group often huddled around @teslacharts on Twitter.

Problem #1:  Tesla Has Tried to Disrupt Too Much

I have written about this before, when I said,

One of the hard parts about reinventing an industry is being correct as to what parts to throw out and what parts to keep.  Musk, I think, didn't want to be captive to a lot of traditional auto industry thinking, something anyone who has spent any time at GM would sympathize with.  But it turns out that in addition to all the obsolete assumptions and not-invented-here syndrome and resistance to change and static culture in the industry, there is also a lot of valuable accumulated knowledge about how to build a reliable car efficiently.  In Tesla's attempt to disrupt the industry by throwing out all the former, it may have ignored too much of the latter, and now it is having a really hard time ramping up reliable, quality production.

Ditching the ICE, throwing out assumptions that PEV's had to be silly little econoboxes, and thinking about cars as a software platform are all awesome disruptions and fundamental to the Tesla competitive advantage.  But at the same time Tesla was doing this, it also attempted to throw out 100 years of auto industry learning on manufacturing and selling cars.  On the manufacturing end, Musk promised an "alien dreadnought" with machines that moved so fast humans wouldn't even be allowed in the building.  Tesla has not been able to make this work, and as a result has had to try to relearn old rules of car manufacturing on the fly.  This has hurt both their capacity ramp as well as their product quality.

On the sales end, Tesla wanted to do away with traditional dealers, and the Tesla owners I know loved not having to buy from a car salesman.  But they did not come up with anything to replace the dealer system -- cars still need to be delivered, inventoried for sale, and repaired.  All of these have been huge problems for Tesla in what Musk has called "delivery hell."  Tesla has factory workers moonlighting delivering cars, it has inventory tucked away in all kinds of weird ad hoc lots, and Tesla owners often have to wait months for car repairs, usually because Tesla doesn't build enough spare parts.

Note that Tesla has also saddled itself with building out the entire world fueling network for the car.  ICE car makers can depend on already existing gas station infrastructure.  One could imagine that Tesla might have partnered with someone else to do this -- perhaps a large electric utility or a consortium of other car makers -- but instead has gone it alone building proprietary Supercharger stations across the country.  Time will tell if this makes sense -- it could create a competitive moat protecting it from new competition but it also costs a LOT of capital and leaves them vulnerable to being the odd-man-out of some sort of shared network.

I will end this section by recalling the comparison of Tesla to Apple that so many of its supporters make.  But as far as the iPhone is concerned, Apple is a design and software house.  It does not build the phones, it has a partner do it for them.  It does not write most of the applications, third parties do that.  And (at least in the early days) it did not see through its own stores, it sold through 3rd parties.  An Apple-like Tesla would NOT be trying to build its own manufacturing, service, and fueling capacity -- it would leverage its designs as its unique value-add and seek others to do these other lower-margin, capital-inensive tasks.

Problem #2:  Tesla is Out of Capital (to Operate or Grow) And Seems Unable to Raise More

Tesla has never been profitable and continues to burn through a lot of cash.  It burned through a couple of billion dollars in 2017 and more this year, and right now probably has less than $2 billion on hand with a lot of funding needs, including over a billion dollars of debt that is maturing over the next 6 months.  Tesla may not have the cash even to cover its operating needs over the next 12 months, as Tesla has not been able to prove it can produce the model 3, or any of its vehicles, at a gross margin that will sustain the company's fixed costs.

But forget about operating losses for a moment -- you can go to twitter and argue these to death, and I will address it again below.  But what of Tesla's growth?  Tesla's current factory space is maxed out, so much so that they are building some Model 3's in a big tent.  The Tesla growth story depends on the promised pickup truck and semi truck and coupe, but there is absolutely no place to build them right now -- a place to build them has not even been started and Tesla does not have the capital to create these assembly lines, or likely even to finish the product design.  And even ignoring these, what about the next generation Model  S and X?  In the auto industry, car designs are typically refreshed as a minimum every 4-5 years.  The Model S will be 5-years-old in December of this year.  Where is the new second generation model?  Tesla has enjoyed a 5-year head start on anything like comparable competitive vehicles.  Now, a slew of challengers have been announced and will start appearing in dealerships in 2019 -- Tesla has perhaps 1 more year to buff up its product line before it has real competition.

Besides the car development and production issues, remember we also discussed that Tesla has chosen to build out its own fueling, new car distribution, and car servicing network.  The current distribution issues and servicing complaints make clear that a LOT more capital is going to be needed in these areas.  Capital is needed to inventory parts, to create dedicated storage and delivery centers, and to add more servicing capacity.  Add to this Elon Musk's recent promise to bring body work on Teslas in house and thus create a whole body shop network, and that is a LOT of capital that Tesla does not have.  It is clear to me (though maybe not to Tesla fans) that this capital is not going to come organically through large positive cash flows from operations.

Tesla really needed to raise $5 billion in early 2018.  Its stock was riding high over $350 and its shareholders did not seem to care one bit about dilution.  Why Tesla did not do a capital raise when the money was there and the cost of capital was so low is a total mystery to pretty much everyone.  If nothing else, Elon Musk is absolutely obsessed with "burning the shorts" and the shorts all agree that the one thing that might hurt them in the short term and drag out their returns for years is a large capital raise.  So why not?

One prominent theory among short-sellers and Tesla skeptics is that there is some sort of grand secret inside Tesla -- an investigation or a bad set of numbers or even some kind of accounting fraud -- that prevents Tesla from making the disclosures necessary to go to the capital markets.   I am not sure this makes sense -- what secret could be so bad and still stay secret for so long?   The fact that Tesla seems to hemorrhage senior accounting officers, finance VPs, and controllers just adds to the mystery.  Whatever this mystery barrier to capital raises has been, it has only gotten worse with Tesla's recent SEC investigations and on-again-off-again settlements.  No matter what, the result is that Tesla is starved of capital and apparently cannot easily get more.

If you buy or sell Tesla, this is essentially the question you are betting on -- Can Tesla raise capital?  If they can't in the next 6 months, they are likely headed for bankruptcy or restructuring (but either way wiping out most of the equity holders).  On the other hand, if they were to announce a multi-billion dollar capital raise tomorrow, the stock would rocket back in to the high 300's and all the shorts would be at least temporarily burned (though Tesla would still have long-term structural challenges).  This is why it is inappropriate to have much more than a small piece of your portfolio either long or short Tesla -- you are effectively betting on whether this capital raise will happen and even the experts can't fathom it.  I think it won't happen for the simple fact that if it could have happened, it should have already occurred, but I could be wrong.

Problem #3:  Tesla is an Operational Mess and Not Good at Fulfilling Promises

Elon Musk makes a lot of promises, promises that get a lot of folks excited, but very few of these promises are ever met.  In the long list of promises I listed right up at the top, very few if any have been fulfilled.  For example, Tesla still is not anywhere near the production rates for the Model 3 that Musk promised it would reach over a year ago, a promise so clearly broken that Tesla is being sued over it.  Musk claimed as many as a half-million pre-orders for the Model 3 mainly on Musk's promise to sell it for net $27,500  ($35,000 less the $7,500 federal tax subsidy).  Now the $35,000 version is not even on the manufacturing plan (Tesla still can't figure out how to make money on it) and it certainly will never be produced before Tesla starts losing the $7500 subsidy after December.

For years Musk has pulled new product rabbits out of his hat every quarter, just when he needed them to complete financing or an acquisition.  After the the stock pops up in response, little is ever heard of the suggested product again.  The battery swap technology that got California to give Musk bigger subsidies has completely disappeared from the radar screen.  Musk demonstrated what he said was a completed solar roof tile technology just in time to sell Tesla shareholders on the idea of bailing out SolarCity, but again the technology has never materialized and SolarCity has essentially been shutting down, with fewer new installations each quarter.   The same was true of the Semi truck, released to great fanfare but totally MIA today.  And beyond these promises are crazy, clearly inaccurate promises from Musk that they are taking all body shop work in house immediately or that they are producing their own auto carriers to alleviate a supposed auto carrier shortage.  And even this does not include the small promises he has made almost every day to users to add this or that new feature.  It is almost as if Musk has a psychological need never to admit that there is a problem for which he has not already implemented a solution.

Worse, the products Tesla is making are not fulfilling Tesla's early promise.  Specifically, Tesla fan boards have been full of stories about delivery defects in new Model 3's, including parts that fall off and body panels painted the wrong color.  Leaks from inside the factory have hinted at first-pass yields on the model 3 that are close to the worst in the entire auto industry.  To try to keep investors happy, Tesla has promised that they would produce 5000, and later 6000 model 3's a week, but rather than achieve sustainable production at these levels the factory has engineered a couple of crazy push weeks where production is juiced to these levels, and then falls back to lower rates.  This is probably one reason for the quality problems, and certainly is not a recipe for reducing production costs.

Problem #4: Q32018 May be Tesla's High Water Mark

Which brings us to the 3rd quarter results, which should be announced in just a few weeks.  Musk has been vociferously promising for months that Q3 and Q4 would be GAAP profitable and cash flow positive.  He went so far as calling out the Economist Magazine for having the temerity to suggest that this did not sound realistic.

Perhaps as a result of this very public commitment, Tesla has very clearly pulled out all the stops to really juice the third quarter.  For example:

• It carried over a lot of inventory from Q2 to be sold in Q3
• It has mined its order book to find all the folks who have ordered the most profitable cars.  It abandoned the promised first-come-first-served manufacture-to-demand approach to focus on batch producing cars for those who ordered the highest margin versions.
• It has mined two years of orders and sold them all in one quarter
• It has reportedly done a sale and leaseback of all its demonstration and loaner fleet
• It has reportedly taken full payment from multiple people for the same car, delivering it to one person and holding the money from the other for a 4Q delivery.
• It has stretched out the time it takes to repay deposits for cancelled orders to 45 days
• It has stretched its payment to vendors, resulting in a number of vendor complaints.  As a result its net working capital has gotten more and more negative.
• It has had special end-of-quarter sales of inventory
• It has used expensive promotions (e.g. free Supercharging for life) that it promised earlier not to use again in order to move inventory at the end of quarter
• It has switched to batch production from produce to order in the factory, presumably to cut costs and increase throughput but having the effect of creating inventory for which there is no current buyer.
• Once it was too late for manufactured cars to get sold in the quarter, it cut way back on production in the last days to conserve cash.
• Tesla has some undisclosed number of government ZEV credits it can sell, which would lead to a one-time increase in profits and cash flow.  Tesla takes advantage of a loophole in GAAP accounting to leave these off their balance sheet, presumably so they can act as Musk's personal burn-the-shorts slush fund.

It is not clear if this will result in a small profit or positive cash flow.  The problem is that whatever Q3 results are, they will be almost impossible to duplicate in Q4.  Tesla will likely talk about what a growth trajectory Q3 represents over previous quarters, and they will be right, but what will be missing from the story is how nothing will be left in the tank for Q4.

The following is essentially speculation, because Tesla refuses to answer any questions about their order backlog.  In fact, Musk famously blew off an analyst in a previous conference call who tried to inquire about the order backlog.  But there are good reasons to think that the backlog of profitable customer advance orders and deposits is tapped out, that Tesla in Q3 has serviced everyone in the backlog who wanted a car that could be produced at a reasonable gross margin and everyone else in the backlog are folks who ordered cars, particularly the $35,000 Model 3, that Tesla has no intention of building any time soon because they would lose their *ss doing so.  In this context, Q3 is not an organic quarter in the midst of a growth trend but a manufactured quarter where over 2 years of pre-orders were tapped in one three month period, leaving nothing in the tank for the future.

The evidence for flattening demand for Tesla is pretty compelling.  Model S and X sales volume has basically been flat for over a year.  And as for Model 3, the unsold inventory tucked away in random locations combined with the desperation fire sales at the end of Q3 point to a saturation of demand.

Note that a flattening of demand has a double whammy for Tesla.  First, it means that their stock valuation will likely crash.   Tesla's valuation at huge multiples of revenue (there is no profit) only makes sense for a rapid growth company.  If the rapid growth tails off, the valuation will come to Earth.

And this is not even the biggest problem.  Let's take a step back.  In the old days, say in the 1980's, growth was a consumer of cash.  This is because manufacturing and inventory cycles were long.  Growth meant investing in more parts and production now, only to get higher revenues later -- working capital skyrocketed with growth and could nearly bankrupt otherwise healthy growing companies.

Today, however, supply and manufacturing chains are much shorter.  Products can be produced and sent to customers before the vendors are even paid.  Dell computer was an innovator on this, getting paid by customers for a PC before Dell itself had paid for any of the parts.  Combine this with Tesla's innovation of having customers put down deposits on their cars months or years before the sale, and this means that growth actually creates cash for Tesla as working capital becomes more negative.

I have the same thing happen in my seasonal business.  Through the spring, as I hire people and visitation to our campgrounds increases into the summer, we get big increases in revenue immediately while we don't have to pay new hire salaries for a couple of weeks or expenses like trash for months.  Growth generates cash because we get the revenue before we pay the expenses.  But the whole thing reverses itself at the end of season, as revenues fall and all the bills come due.  This negative cash flow effect as revenue growth reverses at the end of the operating season almost bankrupted me the first couple of years until I learned to plan for it.

In the same way Tesla has been getting positive cash flow (via negative working capital) from growth, but this will reverse the moment that growth slows.  When their growth inevitably slows in the fourth quarter, no matter how well they claim to have performed in the third quarter, Tesla is going to see a huge cash crunch.   I am not sure they will have the cash to cover it, and smarter people than I are betting on a Tesla bankruptcy or restructuring in the next 2-3 months.  Any such event will largely wipe out equity holders.   Which is why I am advising you to keep away.  Elon Musk and Tesla may have some double-secret plan to avoid this cash crunch, but are you willing to bet your savings on it?

Problem #5:  Elon Musk is NOT the Smartest Man on Earth

The ultimate answer to all these concerns about Tesla by Tesla fanboys is that they have confidence in Elon.  I see people write on boards, dead seriously, that Elon is the smartest person in the world.  One wrote two days ago that they thought he was the smartest guy in history.  They have confidence that Elon will make things work out, and that Elon will always be able to attract new capital because everyone in the world feels the same love for Elon that they do.

Here is the problem:  Elon Musk is not the smartest guy in the world.  He is clearly a genius at marketing and brand building.  He has a creative mind -- I have said before he would have been fabulous at coming up with each issue's cover story for Popular Mechanics.  A mile-long freight blimp!  Trains that run in underground vacuum tubes!  A colony on Mars!  But he suffers, I think, from the same lack of self-awareness many people develop when they are expert or successful in one thing -- they assume they will automatically be equally as brilliant and successful in other things.  Musk creates fanciful ideas that are exciting and might work technically, but will never ever pencil out as profitable business (e.g. Boring company, Hyperloop). Musk is not good at managing operations or manufacturing.  He does not seem like a very good planner, which should be a must in a business with long lead times and billions in capex.  He has brought too much of the "fake it before you make it" culture from the web world, where the stakes attached to unsuccessfully faking it are so much lower than they are in, say, the car business.  This natural tendency to overestimate one's abilities is just made worse by all the fan attention that constantly tells him he is the real Tony Stark and the Smartest Man on Earth.

SpaceX works pretty well because someone who is not-Musk and actually knows that business runs the operations and designs the product.  Even in Tesla, the Model S was designed by someone else, as much as Musk would like to claim credit.  I have said for over a year that Tesla needs to find the right role for Musk and it is NOT CEO and COO and CTO and chief Tweeting Officer all in one.   Tesla needs Musk at this point as their face to the public.  He would be a good chairman and could help lead the company's product road map.  He is great at communicating exciting things to the public -- within limits.

The "within limits" proviso in the last line is based on what is surely Musk's worst flaw -- he can be a petulant, impulsive, unreliable child on Twitter.  I won't go into all the stories, most of them made the national news, but  he tried to insert himself into the Thai cave rescue story and when his contribution was not useful, called out one of the rescuers as a pedophile.  He frequently is obsessed with short-sellers and taunts them with promises to burn them.  He reacts poorly to criticism and bans a lot of critics on Twitter.  And, most disastrously, he tweeted that he had funding secured for a $420 buyout of Tesla that caused the stock to shoot up, only to fall back to Earth when it was revealed that no such offer existed.  This latter event was a clear violation of SEC rules, and after an SEC investigation Musk and Tesla settled with the SEC.  But even that was not the end, as Musk then repudiated the settlement, and then two days later signed a new more onerous settlement, and then a few days after that mocked the SEC over twitter in a clear violation of the terms of the settlement he just signed.  Which is where we sit today, waiting to see how the SEC responds to this latest outburst and with rumors swirling that other SEC and justice department investigations may be in progress at Tesla.

Which leads to the question -- is Musk just immature on Twitter, or is he actually corrupt ala Elizabeth Holmes at Theranos or the smartest guys in the room at Enron?  People might respond that Musk is a brilliant, visionary guy -- he can't be corrupt!  But my wife who has to have her blood tested a lot loved Elizabeth Holmes and her vision.  I personally worked with Jeff Skilling briefly at McKinsey before he went to Enron and he was both visionary and a real genius.  The way he introduces new products right when he needs an external boost, and then drops them, looks a lot like a stock-pumping operation.  And I personally think the Tesla bailout of SolarCity was completely corrupt -- it benefitted Musk and his friends and family at SolarCity and did less than zero for Tesla shareholders.

*     *     *

That is the situation as I understand it.  If you still want to make a big bet on Tesla, one way or other, hopefully you are a bit better informed of the risks.  Trade carefully, as the saying goes.  Or do as I do, and just watch the show because it is enthralling.

If you plotted my "certainty" curve over time, it probably hit a low point in high school, climbed to peaks during college and just afterwards, slid over time as my face got pressed up against the glass of the real world, and dropped even lower when I discovered RSS readers and put a wide variety of feeds into it.  That is not to say I am not confident -- at least as long as we are talking about intellectual and not social skills -- but I am more open to being wrong than I have been since I was about 18.  I am fairly sure I still greatly overestimate my own correctness.

I was thinking a while back about why I perceived myself to have had this period in high school when I was less certain of my infallibility.  One reason had to be my finally coming to terms with nagging questions about the religion I grew up with.  Another was probably due to high school debate, where after vociferously defending a policy position for an hour one immediately had to walk into another room and defend the opposite side.  Even then high school debate was becoming broken, but being forced to argue both sides of every issue was a great experience.

All this is an introduction to a nice work by Charles Chu called "The Ideological Turing Test: How to Be Less Wrong."  It is hard to excerpt, because it covers a lot of ground, but I wish in retrospect my high school had printed something like this on my locker door.  If I had a billion dollars and wanted to found a new university**, I would make the ideological Turing test the core of the educational philosophy.  Think of what goes on in colleges nowadays and being a professor and saying "OK, class half over.  Nice discussion.  Now everyone switch sides."***

** Name a major private university with a national reputation or that your friends' kids have considered attending that was founded after 1900.  I can come up with only a couple: Rice University in Houston and several of the Claremont Colleges (e.g. Claremont-McKenna) in California.  Only one school in the Ivy League is less than 250 years old. Most folks can perhaps name one in their local city (ie Grand Canyon University here in Phoenix) that is newer but does not have a national reputation.  I guess that it could take a while to develop a national reputation, but 100 years?  Really?  In the art school world (which aren't generally considered universities) I can name at least 4 schools with a national reputation (at least in the art world) that were founded much more recently, several in my lifetime (SCAD, Ringling, Art Center, Cal Arts).

*** I did very well at Harvard Business School, better than I have done at anything else in my life (they did not have class ranks but I was pretty damn close to #1 out of 900, after being literally the last person they let in off the waiting list).  It helped that I love the format and loved the subject matter.  Also, to be honest it helped that I could do math (which held back half the class but led to my marrying someone I was tutoring) and that English was my first language (I had great respect for foreign students who even attempted to survive the case method in a second language).  But the real trick to success was to shine in the discussions, which were 70% or so of the grade.  And I did so with a simple trick.  I watched the discussion, and jumped in on whatever side was losing or had the fewest supporters, irregardless of what I might believe.  Not only was this a ton of fun, but it was appreciated by the professors -- they did not want to intervene in a discussion but felt like they had to if the argument got too unbalanced.  I took all kinds of positions against my true beliefs.  I argued that the only mistake "neutron" Jack Welch made at GE was not firing more people.  I slammed Steinway for ignoring new technology and fetishizing hand craftsmanship.  And I convinced everyone I must hate Canada when I opened a rant on the nation with "Canada is like a whole other state," riffing off the then-current Texas travel ad that said "Texas: It's Like A Whole Other Country."  I am not sure how one would do such a thing today when comments in class are seen more as virtue-signalling to your crowd than they are thought-out policy positions, and when taking the "wrong" side, even as an intellectual exercise, can lead to nationwide social media shaming.  By the way, my keys to succeeding at HBS are embedded in my novel BMOC, currently free on Kindle.

Apparently, European investment banks will have to start charging for research that, apparently, no one reads (emphasis added)

"The global investment research market is on the cusp of major disruption," said Benjamin Quinlan, CEO of Hong Kong-based Quinlan & Associates and author of a report on the challenges facing the research sector.

Forcing the change are new rules, known as Markets in Financial Instruments Directive, or MiFID II, due to take effect in January 2018 aiming to make European securities markets more transparent.

A key aspect of these rules is that investment banks must charge fund managers an explicit fee for research rather than bundling the cost into trading commissions charged to clients, as at present.

...For example, about 40,000 research reports are produced every week by the world's top 15 global investment banks, of which less than 1 percent are actually read by investors, according to Quinlan.

When I was there, an enormous number of Harvard Business School grads got their first post-b-school job as analysts writing just such reports.

Ellen Pao's supporters are blaming her departure from Reddit on sexism, despite the fact that the much of the opposition to her inside Reddit resulted from her termination of a popular female employee.  I don't know what is inside her head of course, but after reading her piece in the WaPo, it sure doesn't look like she blames anything she did at Reddit for her failure there.

It is certainly possible to build a case that her decision-making at Reddit was ham-fisted and reactionary and not what the organization needed.  I am the first to acknowledge that the dialog over large swaths of Reddit is toxic, but that is not a new thing.  The odd bit to me is that Pao seems to have jumped right into the fray and immediately started swinging randomly.  Why?  What was the rush?  I have never heard of a new leader jumping into an organization and immediately firing off culture-changing orders (there are a few exceptions to this, such as there-are-only -6-weeks-of-cash-in-the-bank crises, but this was not one of those).  Even if you think you know what ails the company, you have to show the organization some respect and talk to a lot of people first.   To me, it looked like a classic impatient arrogant technocrat's mistake -- but what does she think?  Does she acknowledge error at all, even privately?

I say all this because I know quite personally what it is like to fail in business, and more importantly, just how very hard it is to acknowledge that such failure is one's own fault.  To explain it, I have to give some background that will seem self-promoting.

I was always top in my class at school.  I had my choice of Ivy League schools to attend, and graduated Princeton just a few hundredths of a GPA point (on the north side of 4) from being top of my department.  Five years later, I did graduate first in my class at Harvard Business School.  I write all this to say I entered the business world with supreme confidence.

The first signs of trouble were there in my very first job, though I only see them now.  The engineering work at Exxon was easy, but I tended to drag my feet on tasks that required I seek out and pull together coalitions of experts.  Ditto for my consulting work at McKinsey, where my analytical work and modelling were first-rate but my client building work was mediocre.

It was hard, really impossible at this point in my life, to accept I was failing at something.  Even McKinsey's sending me to executive charm school (I kid you not, such things exist) was not a wake up call.  I KNEW my analysis was awesome.  I figured that was all that mattered.  McKinsey was instead seeing an ADD guy with awkward people skills who would wander around the room eating off the side-board while in a formal meeting with a Fortune 25 CEO.

Things finally fell apart when I was working for a guy, really a legendary guy, named Chuck Knight at Emerson Electric.  Again, I kept telling myself the analytical work I was doing was awesome, and I am sure it was.  But even I couldn't fail to figure out that somehow my other people skills were totally wrong for corporate America.

And even then, when the organization made it abundantly clear I was not going to get any further promotions, pressing my face against the glass so to speak, I STILL could not fully face reality.  I blamed my failings on a culture clash and similar things.  You have heard this before -- "I left that company because it was totally screwed up."  But it wasn't screwed up.  It was a very solid, well-managed organization and a great place to work for the right people.

I was allowed to continue to avoid reality because I continued to fail upwards, getting an even larger job at a new company after Emerson based on my academic record and ability to do fabulous interviews (don't ask me why as an introvert I could do interviews but not one-on-one business discussions with my superiors, or why I thrive at speaking to large audiences but can't handle a cocktail party -- I don't know).

Again, at a large aerospace company, I had more great insights but little impact on the company.  I created this awesome presentation -- it is still the best description of how profits are and are going to shift within the aerospace industry I have ever seen -- but I was being paid to do stuff that improved this year's sales and it wasn't happening (though to be a little fair to myself, making change in the aerospace business is a bit like trying to turn an aircraft carrier by pushing on the prow with a fishing boat).

It took me a couple more jobs and a taking a year off around the age of 40 to finally acknowledge all of this.  After the pain of accepting failure, though, things really improved.  I thought about what I did well and what I don't, and built my own company in large part based on those insights.   Examples:  Sales in my business are based more on creating huge, analytical written bid documents rather than face-to-face persuasion.  Management is more about creating a great process and implementing that process consistently in scores of locations using technology and training.    Most importantly, I am the boss, and many of my past interpersonal failures had to do with interacting with people with more authority, of which there are none in my company.

I don't deny that women or people of color in business likely face obstacles I have never faced, and I long for a world where that will no longer be true.  But in trying to be sympathetic to women and people of various races and the discrimination they face, we also may be doing them a disservice, making it harder for them to gain self-awareness of their own abilities.  After all, if I had been able to play the race or gender card as an excuse, I likely would never have gained what self-awareness I have today.

Via Reason, a college rugby team has been banned because, gasp, they sang boorish songs when drunk:

The University of Mary Washington permanently cancelled its student rugby team after evidence surfaced that team members had engaged in sexist chanting at an off-campus house party. All members of the team were also required to attend sexual assault training.

But while UMW's rugby team has 46 players, only 8 of them were even in attendance at the party—meaning that not only did a public university punish a few students for engaging in inappropriate (though constitutionally-protected) speech, it also punished other students who had nothing to do with said (again, constitutionally-protected!) speech.

The microaggression unfolded last November at a house party near the Fredericksburg, Virginia, campus, according to Jezebel's Erin Gloria Ryan. Some students, likely drunk, sang a demeaning song about raping corpses and "wiggling it" inside whores—inappropriate stuff, to be sure, though not really targeted at a specific entity in a threatening way. The chant apparently has its origins in rowdy "pub" songs. It's a curious tradition, though not one intended to inspire actual malice, it seems.

I played rugby for several years (for Harvard Business School, of all places) and never encountered a rugby club that did not have a repertoire of raunchy pub songs.  It was a tradition, which I presume was copied from the mother country, that teams would share in singing of these songs over many drinks after a match.   While often crude and offensive, they were known to all to be so.  I can't remember anyone being somehow confused between what was in those songs and what was a correct way to comport oneself in society.  We sang crude songs for a few hours, and then went back to crafting strategies for water meter manufacturers.

Leaving aside the first amendment issues and whether there is really any harmful behavior here, think for a moment about the nature of crime and punishment here.  College rugby teams have comported themselves as such for literally scores of years without any blowback except for occasional disdain from the blue bloods (the inciting of which is probably half the reason for the exercise in the first place).  No laws or written rules were broken and the team was comporting themselves in a way that had been at least implicitly tolerated for generations.  Then all of a sudden the team is disbanded.  No advance warning, no discussion in advance that such behavior would now be treated in the future as illegal.

Brink Lindsey of Cato is on the topic "If you could wave a magic wand and make one or two policy or institutional changes to brighten the U.S. economy’s long-term growth prospects, what would you change and why?"  I am by no means in the distinguished academic company that were invited to contribute, but I thought it was an interesting topic.  Here is my (uninvited) contribution.

The question of skills and the American workforce is typically tackled in only one direction:  that we need more high-skilled workers to meet the challenge of emerging industries and business models that are increasingly driven by technology.  A recent report by the OECD, and as summarized in the New York Times, is a typical example of this concern.  As Eduardo Porter writes in the Times:

To believe an exhaustive new report by the Organization for Economic Cooperation and Development, the skill level of the American labor force is not merely slipping in comparison to that of its peers around the world, it has fallen dangerously behind.

The report is based on assessments of literacy, math skills and problem-solving using information technology that were performed on about 160,000 people age 16 to 65 in 22 advanced nations of the O.E.C.D., plus Russia and Cyprus. Five thousand Americans were assessed. The results are disheartening....

“Unless there is a significant change of direction,” the report notes, “the work force skills of other O.E.C.D. countries will overtake those of the U.S. just at the moment when all O.E.C.D. countries will be facing (and indeed are already facing) major and fast-increasing competitive challenges from emerging economies.”

A lot of head scratching goes on as to why, when the income premium is so high for gaining skills, there are not more people seeking to gain them.  School systems are often blamed, which is fair in part (if I were to be given a second magic wand to wave, it would be to break up the senescent government school monopoly with some kind of school choice system).   But a large portion of the population apparently does not take advantage of the educational opportunities that do exist.  Why is that?

When one says "job skills," people often think of things like programming machine tools or writing Java code.  But for new or unskilled workers -- the very workers we worry are trapped in poverty in our cities -- even basic things we take for granted like showing up on-time reliably and working as a team with others represent skills that have to be learned.  Amazon.com CEO Jeff Bezos, despite his Princeton education, still learned many of his first real-world job skills working at McDonald's.  In fact, back in the 1970's, a survey found that 10% of Fortune 500 CEO's had their first work experience at McDonald's.

Part of what we call "the cycle of poverty" is due not just to a lack of skills, but to a lack of understanding of or appreciation for such skills that can cross generations.   Children of parents with few skills or little education can go on to achieve great things -- that is the American dream after all.  But in most of these cases, kids who are successful have parents who were, if not educated, at least knowledgeable about the importance of education, reliability, and teamwork -- understanding they often gained via what we call unskilled work.   The experience gained from unskilled work is a bridge to future success, both in this generation and the next.

But this road to success breaks down without that initial unskilled job.   Without a first, relatively simple job it is almost impossible to gain more sophisticated and lucrative work.  And kids with parents who have little or no experience working are more likely to inherit their parent's cynicism about the lack of opportunity than they are to get any push to do well in school, to work hard, or to learn to cooperate with others.

Unfortunately, there seem to be fewer and fewer opportunities for unskilled workers to find a job.  As I mentioned earlier, economists scratch their heads and wonder why there are not more skilled workers despite high rewards for gaining such skills.  I am not an economist, I am a business school grad.   We don't worry about explaining structural imbalances so much as look for the profitable opportunities they might present.  So a question we business folks might ask instead is:  If there are so many under-employed unskilled workers rattling around in the economy, why aren't entrepreneurs crafting business models to exploit this fact?

A few months back, I was at my Harvard Business School 25th reunion.  Over the weekend, they had dozens of lectures and programs on what is being researched and taught nowadays at the school.  I can't remember a single new business model discussed that relied on unskilled workers.

Is this just the way it is now?  Have the Internet and computers and robotics and complex genomics made unskilled work obsolete?  I don't think so.  I have been running a business for over a decade that employs more than 300 people in unskilled positions.  I will confess that the other day I came home tired from work and told my wife, "Honey, in my next company, I have to find a business that doesn't require employees."  But that despair doesn't come from a lack of opportunities to deliver value to customers with relatively unskilled labor.  And it doesn't come from any inherent issues I might have running a large people-driven service company -- in fact, I will say there has been absolutely nothing in my business life that has been more rewarding than seeing a person who has never had anything but unskilled jobs discover that they can become managers and learn more complex tasks.

The reason for my despair comes from a single source:  the government is making it increasingly difficult and costly to hire unskilled workers, while simultaneously creating a culture among new workers that short-circuits their ability to make progress.

The costs that government taxes and rules add to labor have been discussed many times, but usually individually.  Their impact is clearer when we discuss them as a whole.  Let's take California, because that state is one I know well.  To begin, the minimum wage is $9 (going to $10 an hour in 2016).  To that we have to add taxes and workers compensation premiums, both of which are high because because California does little to police fraud in unemployment and injury claims.  For us, these add another $3.15 an hour.  We also now have to add in the Obamacare employer mandate, which at a minimum of $3000 per full-time employee (accepting the penalty is cheaper than paying for health care) adds another $1.50 an hour.  And the new California paid sick leave mandate adds another 45 cents an hour.  So, looking just at core requirements, we are already up to a minimum of $14.10 an hour, less than 2/3 of which actually shows up in the employee's paycheck.

But these direct costs don't even begin cover the additional fixed costs of hiring employees.  We pay a payroll company thousands of dollars a year to make sure that regulations on taxes and paychecks are followed.  We spend so much time making sure our written plans and documentation on safety meet the requirements of OSHA and its California state equivalent that we barely have the capacity to actually focus on safety.  In California we have to have complex systems in place to make sure our employees don't work through their lunch break, that they have the right sort of chair and that they sit in them frequently enough, that they follow all the right procedures when the temperature outside goes over 85 degrees, that they get paid for sick leave and get their job back after extended medical leave.... the list goes on and on.

In a smaller company, we don't have lawyers and a large human resource staff.  In fact, we tend to have little staff at all.  If some new compliance issue arises -- which happens about every day the California legislature is in session -- the owner (me) has to figure out a solution.  In one year I literally spent more personal time on compliance with a single regulatory issue -- implementing increasingly detailed and draconian procedures so I could prove to the State of California that my employees were not working over their 30 minute lunch breaks -- than I did thinking about expanding the business or getting new contracts.

Towards the end of last year I was making a speech to a group of business school students, and someone asked me what my biggest accomplishment had been over the prior year.  I told them it was probably getting the company down from hundreds of full-time workers to less than 50, converting everyone to part-time.  And it was a huge effort, involving new systems and a number of capital investments to accommodate more staff working fewer hours.  And it had a huge payout, saving us hundreds of thousands of dollars a year in Obamacare penalties and compliance costs.  But come on!  How depressing is it that my biggest business accomplishment was not growing the business or coming up with a new customer service but in cutting the working hours for good employees?  But that is the reality of trying to run a service business today.  The business couldn't be profitable until we'd adjusted our practices to these new regulations, so there was no point in even thinking about growth until we had done so.

Labor-based business models that work at a $7 or $8 total labor cost may well not work at $15, and they certainly are not going to grow very fast if the people responsible for seeking out growth opportunities are instead consumed in a morass of legal compliance issues.  But there is perhaps an even more damaging impact of government interventions, and that is to the culture of work.  I will confess in advance I don't have comprehensive data to prove my hypothesis, but let me tell a couple of stories.

Until 2010, we never had an employee sue us.  We had over 8 years hiring 350 seasonal workers a year, mostly older retired folks, without any sort of legal issues.  Since 2010, we have had eight employee suits threatened or filed, all of which we have won but at a legal cost of $20-$25 thousand each (truly Pyrrhic victories).  So what changed around 2010?  Well, our work force composition changed a lot.  Before that time, we typically hired older retired folks, because the seasonal nature of the job is simply not very appropriate for a younger person trying to support themselves without other means (like retirement or Social Security).   However, after 2009 when a lot of younger folks were losing their traditional jobs, they began applying to our company.  Our work force shifted younger, which actually excited me because I felt it would help us in attracting a younger demographic to the campgrounds we operate.    But all eight of these legal actions were by these new, younger employees.  I asked one person who was suing us over what was a trivial slight, really a misunderstanding, why they did not just call me (my personal number is in their employee handbook) to fix it.  They said that if I had fixed it, they would have lost the opportunity to sue.

I mentioned earlier that we had struggled to comply with California meal break law.   The problem was that my workers needed extra money, and so begged me to be able to work through lunch so they could earn a half-hour more pay each day.  They said they would sign a paper saying they had agreed to this.  Little did I know that this was a strategy devised by a local attorney who understood meal break litigation better than I.  What he knew, but I didn't, was that based on new case law, a company had to get the employee's signature every day, not just once, to avoid the meal break penalties.  The attorney advised them they could get the money for working lunch AND they could sue later for more money (which he would get a cut of).  Which is exactly what they did, waiting until November to sue so they could get some extra money to pay for Christmas bills.  This is why -- believe it or not -- it is now a firing offense at our company to work through lunch in California.

Hopefully you see my concern.   I fear that we have trained a whole generation that the way one gets ahead is not to work hard and gain new skills but to seek out and exploit opportunities to file lawsuits.  That the way to work in an organization is not to learn to manage the inevitable frictions that result from different sorts of people working together but to sue at the first hint that you have been dissed.  As an aside, I think this sort of litigiousness, both of employees and customers, is yet another reason employers are reluctant to hire low-skilled employees.  If as a business owner one is absolutely liable for any knuckle-headed thing your most junior employee might utter, no matter how clear you are in your policies and actions that such behavior is not tolerated, then how likely are you to hire a high-school dropout with no work experience?

Is it any surprise that most entrepreneurs are pursuing business models where they leverage revenues via technology and a relatively small, high-skill workforce?  Uber and Lyft at first seem to buck this trend, with their thousands of drivers.  But in fact they prove the rule.  Uber and Lyft are very very careful to define themselves and their service in a way that all those drivers don't work for them.  I would go so far to say that if Uber were forced to actually put all of those drivers on their payroll, and deal with they myriad of labor compliance issues, their model would fall apart

We cannot address the skill gap unless people have entry level, low-skill-tolerant jobs to take the first steps up the ladder of success.  If the government continues on its current course, it will become impossible to run a business that employs unskilled workers.  The value of the work performed will simply not justify the cost.  We may be concerned about income inequality today, but if we kill off the profitability of employing unskilled workers, then we are going to be left with a true two-class society -- those with high-skill jobs and those on government assistance --and few options for moving from one to the other.

I wrote Dean Nohria in response to this story

Ben Edelman is an associate professor at Harvard Business School, where he teaches in the Negotiation, Organizations & Markets unit.

Ran Duan manages The Baldwin Bar, located inside the Woburn location of Sichuan Garden, a Chinese restaurant founded by his parents.

Last week, Edelman ordered what he thought was $53.35 worth of Chinese food from Sichuan Garden’s Brookline Village location.

Edelman soon came to the horrifying realization that he had been overcharged. By a total of $4.

If you’ve ever wondered what happens when a Harvard Business School professor thinks a family-run Chinese restaurant screwed him out of $4, you’re about to find out.

(Hint: It involves invocation of the Massachusetts Consumer Protection Statute and multiple threats of legal action.)

Here was the letter I sent, which was significantly more mature in tone for having waited 24 hours before writing it

My wife and I are both HBS '89 grads.  We own and actively manage a small to medium size service business.  I was encouraged at our last reunion to hear a lot of the effort HBS seems to be placing on small business and entrepreneurship.

However, I was horrified to see an HBS professor (prof Edelman) in the news harassing a small business over a small mistake on its web site.  I don't typically get worked up about Harvard grads acting out, but in this particular case his actions are absolutely at the core of what is making the operation of a small business increasingly impossible in this country.

Small businesses face huge and growing compliance risks from almost every direction -- labor law, safety rules, environmental rules, consumer protection laws, bounty programs like California prop 65, etc.  What all these have in common is that they impose huge penalties for tiny mistakes, mistakes that can be avoided only by the application of enormous numbers of labor hours in compliance activities.   These compliance costs are relatively easy for large companies to bear, but back-breaking for small companies.

So it is infuriating to see an HBS professor attempting to impose yet another large cost on a small business for a tiny mistake, particularly when the proprietor's response was handled so well.  Seriously, as an aside, I took service management from Ben Shapiro back in the day and I could easily see the restaurateur involved being featured positively in a case study.  He does all the same things I learned at HBS --  reading every customer comment personally, responding personally to complaints, bending over backwards to offer more than needed in order to save the relationship with the customer.

As for the restaurateur's web site mistake -- even in a larger, multi-site company, I as owner do all my own web work.  Just as I do a million other things to keep things running.  And it is hard, in fact virtually impossible, to keep all of our web sites up to date.  Which is why Professor Edelman's response just demonstrates to me that for all HBS talks about entrepreneurship, the faculty at HBS is still more attuned to large corporations and how they operate with their enormous staff resources rather than to small businesses.

Large corporations are crushing smaller ones in industry after industry because of the economy of scale they have in managing such compliance issues.  If the HBS faculty were truly committed to entrepreneurship, it should be thinking about how technology and process can be harnessed by smaller businesses to reduce the relative costs of these activities. How, for example, can I keep up with 150+ locations that each need a web presence when my sales per site are so much less than that of a larger corporation?  This is not impossible -- I have learned some tools and techniques over time -- and we should be teaching and expanding these, rather than spending time raising the cost of compliance for small business.

Grade inflation is back in the news, as the Harvard Crimson reports that the median grade at Harvard is an A-.  This is clearly absurd.  It reminds me of some of the old Olympics judging where they had a 10 point scale but everyone scored between 9.7 and 9.9.  The problem is not necessarily that the mean is skewed, but that there is almost no room left to discriminate between high and low performance.

There is one potential way to combat this, and it was invented by colleges themselves.  Consider grading in high school.  My kids go to a very tough-grading private school where A's are actually hard to get.  The school sends (for Arizona) a fairly high percentage of its students to Ivy and Ivy-level schools, but the school produces someone with a perfect 4.0 only once every four or five years.  Compare that to our local public school, that seems to produce dozens of perfect 4.0's every year -- in fact since it adds a point for honors classes, it produces a bunch of 5.0's.

Colleges understand that a 3.7 from Tough-grading High may be better than a 5.0 from We-have-a-great-football-team High.  They solve this by demanding that when high schools provide them with a transcript, it also provide them with data on things like the distribution of grades.

Employers should demand something similar from colleges.  This is a little harder for employers, since colleges seem to be allowed to legally collude on such issues while employers can get sued over it.  But it seems perfectly reasonable that an employer should demand, say, not only the student's grade for each class but also the median and 90th percentile grades given in that same class.  This will allow an employer to see how the school performed relative to the rest of the class, which is really what the employer cares about.  And schools that have too many situations where the student got an A, the median was an A, and the 90th percentile was an A may get punished over time with less interest from the hiring community.

One way to get this going is for an influential institution to start printing transcripts this way.  The right place to start would be a great institution that feels it has held the line more on grade inflation.  My alma mater Princeton claims to be in this camp, and I would love to see them take leadership on this (the campus joke at Princeton during the Hepatitis C outbreak there was that at Harvard it would have been Hepatitis A).

Postcript - An alternate grading system from Harvard Business School:  When I was at HBS, they did not give A's and B's.  We had three grades called category I, II, and III.   By rule, the professor gave the top 15% of the class category I, the bottom 10% category III, and everyone else got a category II.  I actually thought this was a hell of a system.  It discriminated at the top, and provided just enough fear of failure to keep people from slacking.

The New York Times has a long article on  Harvard Business School's effort to change its culture around women.  Given that both my wife and I attended, albeit 25 years ago, I have a few thoughts.

• I thought the article was remarkably fair given that it came from the NYT.  Men who are skeptical of the program actually are allowed to voice intelligent objections, rather than just be painted as Neanderthals
• I would have abhorred the forced gender indoctrination program, as much for being boring as for being tangential.  I am fortunate I grew up when I did, before such college group-think sessions were made a part of the process everywhere.  I would presume most of these young folks are now used to such sessions from their undergrad days.   I would not have a problem having an honest and nuanced discussion about these issues with smart people of different backgrounds, but I thought the young man they quoted in the article said it really well -- there is just no payoff to voicing a dissenting opinion in such sessions where it is clear there is a single right answer and huge social and even administrative penalties for saying the wrong thing.
• I went to HBS specifically because I loved the confrontational free-for-all of the classes.   It was tailor-made to my personality and frankly I have never been as successful at anything before or since as I was at HBS.   I say this only to make it clear that I have a bias in favor of the HBS teaching process.   I do think there is an issue that this process does not fit well with certain groups.  These folks who do not thrive in the process are not all women (foreign students can really struggle as well) but they are probably disproportionately women.  So I was happy to see that rather than dumb down the process, they are working to help women be more successful and confident in it.
• It is interesting to see that the school still struggles to get good women professors.  When I was there, the gap between the quality of men and women professors was staggering.  The men were often older guys who had been successful in the business and finance world and now were teaching.  The women were often young and just out of grad school.  The couple of women professors I had my first year were weak, probably the two weakest professors I had.  In one extreme case our female professor got so jumbled up in the numbers that the class demanded I go down and sort it out, which I finally did.  I thought it was fun at the time, but now I realize how humiliating it was.
• To some extent, the school described in the article seems a different place than when I was there.  They describe a school awash in alcohol and dominated by social concerns.  This may be a false impression -- newspapers have a history of exaggerating college bacchanalia.   At the time I was there, Harvard did not admit many students who did not have at least 2 years of work experience, such that the youngest students were 24 and many were in their 30's and 40's.  A number were married and some even had children.   To be there, they not only were paying a lot of money but they were quitting paying jobs.  The school was full of professionals who were there for a purpose.  I had heard that HBS had started to admit more students right out of college -- perhaps that is a mistake.
• The fear by the women running the school that women would show up on Halloween wearing "sexy pirate" costumes represents, in my mind, one of the more insidious aspects of this new feminist paternalism (maternalism?) aimed at fellow women.  Feminism used to be about empowering women to make whatever choices they want for their lives.   Now it is increasingly about requiring women to make only the feminist-approved choices.
• I actually wrote a novel where the protagonist was a confident successful female at HBS.   So I guess I was years ahead of the curve.

Postscript:  Below the fold is an excerpt from my novel.  In it, the protagonist Susan describes how an HBS class works and shares my advice for being successful at HBS.

Continue reading ‘Harvard Business School and Women’ »

Apparently the news of the week is that the letter grade "A" is now the most common.  Mark Perry has more on college grade inflation.

I am actually a fan of the grading system at Harvard Business School when I was there.   15% of the students in each course get the top grade (category I) -- no more, no less.  10% get the bottom grade (category III) -- again by rule, no more and no less.  All the rest are in the middle.  It effectively acknowledges that for most folks, the point is to demonstrate you have satisfactorily learned the course material, while still allowing folks to distinguish themselves on both ends.  Budding young executives who complain that it is unfair to automatically "fail" the bottom 10% of each course are reminded that this is exactly how many Fortune 500 companies run their HR systems, seeking to constantly weed out the bottom 10%.

Update:  The argument usually is that students need high grades to compete with other kids from grade-inflated schools in the marketplace.  I just don't think this is true.  Colleges themselves deal with this all the time in admissions.  When they get a high school transcript, attached to that transcript is a fact sheet about the high school that gives its distribution of grades.  That way the recipient can discount the GPA as appropriate.  Every company doing hiring should demand the same of colleges.

Here is a personal anecdote.  My son Nic's school grades hard.  Something like 2 kids over the last 2 decades have graduated with a 4.0.  One could argue my son's grades could have been higher at another school, but knowledgeable consumers of high school GPA's know how our school works and we have never felt he somehow was at a loss due to the school's grading policies (but Oh God can type A parents fret about this incessantly among themselves).   [edit:  took out brag about my son.  Nothing more boring than other people bragging on their kids.]

Well, it appears that Solyndra has not scared solar companies off from feeding at the state trough

More subsidies for the solar industry in Arizona are crucial to avoid being left behind by other states and China, a Phoenix business leader said today at a solar-power conference.

Tax incentives and loan guarantees "make a lot of sense" right now in Arizona, which is already a leader in the industry, said Barry Broome, president and CEO of theGreater Phoenix Economic Council at the Solarpraxisconvention.

Despite the high-profile financial failure of the Solyndrasolar plant this year in California, Broome told a packed conference room that solar power is destined to be a major force in Arizona and elsewhere. The only question, as he sees it, is whether sunny-skied Arizona will take full advantage....

Behind Broome on an overhead screen, a chart showed that Texas, Oregon, Nevada and other states provide more "aggressive economic development tools," (a.k.a. public money), for solar power than Arizona, and the state can't compete without doing the same thing.

What is this, a football game?  This strikes me as turn-of-the-century small town boosterism updated to the 21st century, with a dollop of tribal rivalry thrown in. He's talking mainly about manufacturing of solar components.  I am left with a couple of questions

• Why should the fact that Arizona has sunny skies have any bearing on whether or not it is an appropriate spot to manufacture solar panels.   Should Seattle subsidize umbrella manufacture because it is rainy there?   My sense is that transportation costs are a small part of the price to end users.  Arizona clearly will be a great spot for solar panels to be installed -- why does that mean we need to manufacture them?
• If other states like Oregon or China are subsidizing solar products that we might buy, shouldn't we celebrate that?  Thanks, taxpayers of Oregon, for forking over your tax money so we can buy solar panels cheaper in Arizona.  Why in the hell should be try to out-do them at this?  Now we can go invest our capital in a business that actually makes money.
• I am obviously not a fan of government-led economic/industrial policy, but if I were, why in the hell would I want to direct my state's capital and manpower towards a business that requires subsidies, ie can't make a profit  on its own in the marketplace?

Its just too easy to snipe at about everything in this article, but this caught my eye in particular

To help move the industry's message, Broome said, solar advocates must stop infighting over their competing technologies and present a unified and positive position.

Normally, I think an economist would argue that in an immature (both market-wise and technologically) product, competition and creative destruction between various competitors is critical to ultimate success.  So in fact this advice is totally senseless, unless you see the industry as a taxpayer-money-magnet rather than a real business, and then it makes perfect sense.  Politics, after all, demands simple sound bytes and a unified front.

Update:  In the first week of Harvard Business School, I learned a lesson from strategy class, in a series of two cases, that still may be the most important thing I learned there.  The cases were a hot, sexy electronics company, and a boring, dull as dirt water meter company.  To cut to the chase, the electronics company sucked as an investment, and the water meter company was a gold mine.  The moral, among several takeaways, is don't get fooled into thinking the hot, sexy business of the moment is necessarily a good investment.  Our development agencies in AZ are making this mistake in spades.  In fact, the entire history of government economic development efforts in Phoenix has been to chase sexy businesses at the top of the market, spend taxpayer money to get some plant relocations, and then see the businesses struggle.  We certainly did this with semiconductor fabs a couple of decades ago.

Ten years ago, for the first and only time in my life, I invited my wife to come along on a business trip from Seattle to New York.

On 9/11, I was sitting in the restaurant at the W hotel in Midtown Manhattan having breakfast with some bankers. I had recently been hired to see if I could make something out of a startup that was trying to manage aircraft parts sales and inventories over the web. My incredibly ill-timed pitch to the bankers was that the commercial aviation business, which had been somewhat in the doldrums, was on the verge of a turnaround. Oops.

My wife came down to breakfast to tell us something funny was going on in the news. We ended up going to one of the banker's hotel rooms -- he had a penthouse suite with a balcony from which we watched the now-famous and horrible events play out.

The rest of the day was odd to say the least. People on the street flinched whenever a plane flew over. The entire island emptied out, such that in the evening, we walked through Times Square and not a single care came through in 5 minutes. Someone was skateboarding in lazy circles, I suppose just because he could.

For us, 9/11 fortunately was only a hassle. We scrambled to find someone to watch our kids in Seattle, and found the last rent car in the city and ended up driving all the way back to Seattle from New York. We still made it back before air travel resumed.

Many of our friends were not so lucky. As both my wife and I were grads of the Harvard Business School, we knew scores of people who worked in the WTC. Over the coming weeks, word floated in of friends that had died that day, including our friend Steve who did not work there but got talked into going to a training session he really did not want to be at. I actually think of him many times, when I am asked to do tedious business trips I see not value in. I have learned to skip a lot of them. Life is too short.

My novel BMOC is now $0.99 at Amazon.  With my second book coming out sometime soon (I hope) I thought I would experiment with online pricing models.  I sold about 30 a month at the old price, but Glen Reynolds linked an article praising the 99-cent Kindle price point.  So what the heck, let's try it.  My loss is your gain, as the ads say.

Reasons you might like the novel:

• It's a sort of combination of Harvard Business School case study and murder mystery, with some humor thrown in
• The business at the center of the novel is actually the good guy (err gal, I guess, since the protagonist is female). While sympathetic to capitalism, the book is primarily a light crime novel, not some sort of Randian morality tale.
• The villains include a media mogul, a tort lawyer, a local news anchor, and a US Senator  -- just like life!
• Several of the business models were made up on the fly when I attended boring cocktail parties and entertained myself creating whimsical businesses for myself.  Since that time, readers of the book have emailed me with news stories of recent startup companies following almost identical strategies.
• 4-stars at Amazon

From the Chronicle of Higher Education via TaxProf Blog

If you want to get a job at the very best law firm, investment bank, or consultancy, here’s what you do:

1. Go to Harvard, Yale, Princeton, or (maybe) Stanford. If you’re a business student, attending the Wharton School at the University of Pennsylvania will work, too, but don’t show up with a diploma from Dartmouth or MIT. No one cares about those places. ... That’s the upshot of an enlightening/depressing study about the ridiculously narrow-minded people who make hiring decisions at the aforementioned elite companies. ... These firms pour resources into recruiting students from “target schools” (i.e., Harvard, Yale, Princeton) and then more or less ignore everybody else. Here’s a manager from a top investment bank describing what happens to the resume of someone who went to, say, Rutgers: “I’m just being really honest, it pretty much goes into a black hole.”

Being, I suppose, an insider to this process (Princeton - Harvard Business School - McKinsey & Company) I'd like to make a few comments

• First and foremost, this problem cuts both ways.  I can imagine outsiders are frustrated with the lack of access.  But as an insider I can tell you  (cue Admiral Akbar) It's a Trap!  You go to Princeton, think, wow, I did well at Princeton, it would be a waste not to do something with that.   You are a competitive sole, so getting into a top grad school is an honor to be pursued just like good grades.   So you go to Harvard Business School (it could have been Harvard Law) and do well.  And what is the mark of achievement there? -- getting a job at a top consultancy or top investment bank.  So you take the McKinsey job, have your first kid, and what do you find out?  Wow, I hate this job!  In fact, the only thing I would have hated more is if I had taken that Wall Street job.   Eventually you find happiness running your own company, only to discover your Ivy League degrees are a liability since they intimidate your employees from sharing their ideas and most of the other guys you know successfully running businesses went to Kansas State or Rutgers.
• My only data point inside this hiring process is from McKinsey about 15-20 years ago, so it may be out of date.    But at that time, the above statement would be BS.  Certainly hiring was heavily tilted to the top Ivies and a few top business schools.  But we had people with undergrad degrees from all over - in fact most of our office in Texas had undergrad degrees from the Texas state schools  (at lot from BYU too -- McKinsey loved the Mormons).  At the time, McKinsey was hiring hundreds of people out of business school around the world each year.  No way this could have come from only a few schools.
• My hypothesis is that this may be more a regional than an industry bias, limited to Boston/New York/East Coast.  Since many top law firms and consultancies and investment banks are in NYC, they reflect this local bias.  But I would bet these same firms and industries hire differently outside of the East Coast.
• There is some rationality in this approach - it is not all mindless snobbism.   Take Princeton.  It screens something like 25,000 already exceptional applicants down to just 1500, and then further carefully monitors their performance through intensive contact over a four year period.  This is WAY more work and resources than a private firm could ever apply to the hiring process.  In effect, by limiting their hiring to just a few top schools, they are outsourcing a lot of their performance evaluation work to those schools.

This is a reprise of a much older post, but it struck me as fairly timely.

I had a conversation the other day with a person I can best describe as a well-meaning technocrat.  Though I am not sure he would put it this baldly, he tends to support a government by smart people imposing superior solutions on the sub-optimizing masses.  He was lamenting that allowing a company like GM to die is dumb, and that a little bit of intelligent management would save all those GM jobs and assets.  Though we did not discuss specifics, I presume in his model the government would have some role in this new intelligent design (I guess like it had in Amtrak?)

There are lots of sophisticated academic models for the corporation.  I have even studied a few.  Here is my simple one:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA*.  And DNA is very hard to change.  Walmart may be freaking brilliant at what they do, but demand that they change tomorrow to an upscale retailer marketing fashion products to teenage girls, and I don't think they would ever get there.  Its just too much change in the DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you still have a culture aimed at big box low prices, a logistics system and infrastructure aimed at doing same, absolutely no history or knowledge of fashion, etc. etc.  I would bet you any amount of money I could get to the GAP faster starting from scratch than starting from Walmart.  For example, many folks (like me) greatly prefer Target over Walmart because Target is a slightly nicer, more relaxing place to shop.  And even this small difference may ultimately confound Walmart.  Even this very incremental need to add some aesthetics to their experience may overtax their DNA.

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one.

I don't know if GM will fail (but a lot of other people have opinions) but if it does, I am confident that the end result will be positive for America.

* Those who accuse me of being more influenced by Neal Stephenson's Snow Crash than Harvard Business School may be correct.
** Gratuitous reference aimed at forty-somethings who used to hang out at the mall.  In my town, Merry-go-round was the place teenage girls went if they wanted to dress like, uh, teenage girls.  I am pretty sure the store went bust a while back.

This is a reprise of a much older post, but since I have limited time for blogging, I thought it might be timely to reprise it:

I had a conversation the other day with a person I can best describe
as a well-meaning technocrat.  Though I am not sure he would put it
this baldly, he tends to support a government by smart people imposing
superior solutions on the sub-optimizing masses.  He was lamenting that
allowing a company like GM to die is dumb, and that a little bit of
intelligent management would save all those GM jobs and assets.  Though
we did not discuss specifics, I presume in his model the government
would have some role in this new intelligent design (I guess like it
had in Amtrak?)

There are lots of sophisticated academic models for the corporation.  I have even studied a few.  Here is my simple one:

A corporation has physical plant (like factories) and workers of
various skill levels who have productive potential.  These physical and
human assets are overlaid with what we generally shortcut as
"management" but which includes not just the actual humans currently
managing the company but the organization approach, the culture, the
management processes, its systems, the traditions, its contracts, its
unions, the intellectual property, etc. etc.  In fact, by calling all
this summed together "management", we falsely create the impression
that it can easily be changed out, by firing the overpaid bums and
getting new smarter guys.  This is not the case - Just ask Ross Perot.
You could fire the top 20 guys at GM and replace them all with the
consensus all-brilliant team and I still am not sure they could fix
it. 

All these management factors, from the managers themselves to
process to history to culture could better be called the corporate
DNA*.  And DNA is very hard to change.  Walmart may be freaking
brilliant at what they do, but demand that they change tomorrow to an
upscale retailer marketing fashion products to teenage girls, and I
don't think they would ever get there.  Its just too much change in the
DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you
still have a culture aimed at big box low prices, a logistics system
and infrastructure aimed at doing same, absolutely no history or
knowledge of fashion, etc. etc.  I would bet you any amount of money I
could get to the GAP faster starting from scratch than starting from
Walmart.  For example, many folks (like me) greatly prefer Target over
Walmart because Target is a slightly nicer, more relaxing place to
shop.  And even this small difference may ultimately confound Walmart.
Even this very incremental need to add some aesthetics to their
experience may overtax their DNA.

Corporate DNA acts as a value multiplier.  The best corporate DNA
has a multiplier greater than one, meaning that it increases the value
of the people and physical assets in the corporation.  When I was at a
company called Emerson Electric (an industrial conglomerate, not the
consumer electronics guys) they were famous in the business world for
having a corporate DNA that added value to certain types of industrial
companies through cost reduction and intelligent investment.  Emerson's
management, though, was always aware of the limits of their DNA, and
paid careful attention to where their DNA would have a multiplier
effect and where it would not.  Every company that has ever grown
rapidly has had a DNA that provided a multiplier greater than one...
for a while.

But things change.  Sometimes that change is slow, like a creeping
climate change, or sometimes it is rapid, like the dinosaur-killing
comet.  DNA that was robust no longer matches what the market needs, or
some other entity with better DNA comes along and out-competes you.
When this happens, when a corporation becomes senescent, when its DNA
is out of date, then its multiplier slips below one.  The corporation
is killing the value of its assets.  Smart people are made stupid by a
bad organization and systems and culture.  In the case of GM, hordes of
brilliant engineers teamed with highly-skilled production workers and
modern robotic manufacturing plants are turning out cars no one wants,
at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the
right managers and a crisis mentality, to evolve DNA over a period of
20-30 years.  One could argue that GE did this, avoiding becoming an
old-industry dinosaur.  GM has had a 30 year window (dating from the
mid-seventies oil price rise and influx of imported cars) to make a
change, and it has not been enough.  GM's DNA was programmed to make
big, ugly (IMO) cars, and that is what it has continued to do.  If its
leaders were not able or willing to change its DNA over the last 30
years, no one, no matter how brilliant, is going to do it in the next
2-3.

So what if GM dies?  Letting the GM's of the world die is one of the
best possible things we can do for our economy and the wealth of our
nation.  Assuming GM's DNA has a less than one multiplier, then
releasing GM's assets from GM's control actually increases value.
Talented engineers, after some admittedly painful personal dislocation,
find jobs designing things people want and value.  Their output has
more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).
A LOT of Europe's productive assets are locked up in a few very large
corporations with close ties to the state which are not allowed to
fail, which are subsidized, protected from competition, etc.  In
conjunction with European laws that limit labor mobility, protecting
corporate dinosaurs has locked all of Europe's most productive human
and physical assets into organizations with DNA multipliers less than
one. 

I don't know if GM will fail (but a lot of other people have opinions) but if it does, I am confident that the end result will be positive for America.

* Those who accuse me of being more influenced by Neal Stephenson's Snow Crash than Harvard Business School may be correct.
**
Gratuitous reference aimed at forty-somethings who used to hang out at
the mall.  In my town, Merry-go-round was the place teenage girls went
if they wanted to dress like, uh, teenage girls.  I am pretty sure the
store went bust a while back.

Jane Galt makes a case against industrial animal husbandry, a position which she argues is not inconsistent with being a libertarian or classical liberal.  While I don't get as worked up about such practices as cruel, I don't think it is inconsistent for a libertarian to be so concerned.  And I don't rule out that I would be just as worked up if I were more informed about what was going on.

However, what really caught me eye was this:

This is an approximate description of what happens to industrially
farmed chickens . . . lifted, mind you, from a business school case
aimed at helping industrial farms be more efficient, by using rose
coloured chicken contact lenses to cut down on the need for debeaking
'em.

I can attest that this was indeed a real case that we studied at Harvard Business School*.  In fact, it so freaked me out at the time as a concept that I included it in my most recent novel.  From BMOC [warning, profanity lurks ahead]:

Poor, boring, earnest Julian
was always prepared, because he was always terrified, scared to death
that one night slacking off might somehow destroy his future Career
(always with a capital-C), and therefore future Life, much like the
fear of catching AIDS from a one night stand.  Julian participated
(unfortunately) all too much in class, droning on in that irritating
voice of his, advocating positions as spectacularly expected as
Susan's were non-conformist.

Julian,
therefore, was not really a candidate to get cold-called to open the
class discussion, particularly this late in the year.  However, it
was clear to everyone in the room, particularly the professor, that
Julian longed to open a case.  Every day Julian would look at
the professor with this hopelessly wistful expression, only to be
followed by a look of desolation when someone else was chosen.

So
today, letting Julian open was in the same spirit as the homecoming
queen giving a pity-fuck on the last day of high school to the geek
who has been mooning and sighing over her for four years.  And right
at this
moment, Julian had the same surprised and ecstatic look on his face
that the geek would have.

But it was not just the site of
Julian creaming all over himself at his chance to open that had Susan
longing for the piranha button.  Some satanic twist of fate had
Julian Rogers earnestly and painstakingly laying out a strategy and
plan for the new product roll out of ... contact lenses for chickens.
Contact fucking lenses for Christ-sake chickens.  Right this very
second he was outlining his sales pitch to chicken farmers,
explaining how putting contacts in chicken's eyes will somehow
reduce the number of chickens that have to have their beak cut off.
Did she hear that right?  This had to be a joke "“ but no,
everyone seemed to be taking it seriously, and certainly Julian was
taking it deadly seriously.

* I know those anti-capitalists out there will be using this as evidence that business school is crafted to keep us cold and heartless.  HBS consisted of studying 2-3 cases per day for about 200 days a year, which means that over two years one might read a thousand business cases.  This case was more in the spirit of breaking the monotony of yet another case on brass vs. plastic water meters rather than part of a consistent attempt to make us cold and heartless.

As a way to celebrate the holidays and perhaps compensate for a more relaxed pace of blogging for a while, I am beginning a serialization of my new novel BMOC.  If there is interest, I will keep it going for a while.  So, lets get started.  Enjoy!  (You didn't really feel like doing any real work today, did you?).   By the way, for you prospective business school students, though it may seem un-serious, embodies my best advice for you.  Chapters 3 and 4 continue here.

chapter one

Robert
Gladstone, multi-millionaire CEO of the M Group, looked around the
room at his fellow conspirators and longed for the piranha
button. 

Continue reading ‘BMOC, Chapters 1 and 2’ »

At least one homebuilder is predicting doom and gloom:

"It would be difficult to characterize the position of
home builders as other than in a hard landing," says Robert Toll, chief
executive of luxury home builder Toll Brothers Inc., which reported yesterday that net income fell 19% in the third quarter ended July 31. (See related article.)

In his 40 years as a home builder, Mr. Toll says, he
has never seen a slump unfold like the current one. "I've never seen a
downturn in housing without a downturn in employment or... some
macroeconomic nasty condition that took housing down along with other
elements of the economy," he says. "This time, you've got low
unemployment, you've got job creation, you've got a stable stock market
and relatively low interest rates."...

In much of the country, property markets began cooling
rapidly in the second half of last year. Home builders were still
turning out houses at a rapid clip, and the surge of new and previously
occupied homes on the market convinced buyers there was no need to
hurry. Over the past year, the number of previously occupied homes
listed for sale nationwide has risen nearly 40%. In some metropolitan
areas, including Orlando and Phoenix, the supply has quadrupled.

I never got that excited about the run-up in the price of my home, so I won't worry too much if it falls again.   For the average homeowner, the paper-price run-up of housing prices doesn't really have much meaning unless they are considering moving soon to a lower-home-price area or they are going to retire and downsize.  My house supposedly doubled in value in the last four years.  We went out shopping for a home in the area, and you know what?  All the other prices doubled too.  I could trade my current house for about the same house I could trade it for four years ago.  The only really beneficial effect was that the increase in home equity made for useful collateral in a business loan I took out.

Of course, the home speculators may take a bath - there are several latecomers to the speculation / spec home business in my neighborhood who are holding houses that won't sell for the huge prices they are asking.  I posted that this was coming over a year ago, using a model for contrarian investing I learned at the Harvard Business School:  Do the opposite of what doctors and dentists are doing.

I must say I was not at all surprised that the Solomon amendment (requiring private universities that accept federal funds to also accept military recruiters) was upheld by the Supreme Court.  I predicted months ago that the left had made its bed on this issue with its strong support of Title IX.

Various law school faculties argued in the case that the Solomon Amendment unconstitutionally violated their rights to freedom of association (by taking away their choice of who can and cannot recruit on campus) and of speech (by forcing the university to support speech, such as military recruiting pitches, that it does not agree with).  I must say that I am both sympathetic and unsympathetic to their argument.  Sympathetic, because there are in fact free speech and association issues here.  The majority opinion notwithstanding, its impossible to make a razor-sharp distinction between prohibitions on "conduct" and prohibitions on expression.  I can't accept Robert's blanket statement that "unlike a parade organizer's choice of parade contingents, a law
school's decision to allow recruiters on campus is not inherently
expressive."  What if, say, Al Qaeda wants to set up a booth?  My accepting their booth would sure as hell be a form of expression, one that I am sure the Right would blast me for. 

I do understand that there is money involved, and the fatuous answer is that "well, they can just turn down federal funds."  Bullshit.  Like it or not (and I don't) the feds have made themselves so ubiquitous, particularly in certain research areas where they have crowded out all private funding, that it is unrealistic to tell them to take a hike.  Though I must say that it is interesting to see the left, which built this huge federal machine, hoist on their own petard.  Besides, the majority opinion said that the funding tie-in was not necessary to pass constitutional muster -- that the government had the power to just straight out compel private universities to accept military recruiters.

However, mostly I am unsympathetic.  Why?  Because these very same ivy league and faculty intellectuals have felt free in the past to step all over the free speech and association rights of the rest of us in similar ways.  As George Will asked in recent column, it would be fascinating to see what percentage of these same people who brought this suit in turn vehemently support, say, McCain-Feingold?  Or, public funding of election campaigns. 

As a business person, this ship sailed years ago.  Freedom of association no longer applies to business people.  The reason?  Well, freedom of association implies the reverse right of not associating with anyone you choose.  But there are phone-book-sized bodies of legislation today with detailed regulations telling me all the people and circumstances in which I cannot choose whom I associate with, or don't associate with (via employment decisions, for example).  For example, my business employs RV'ers who live full-time on the road and form a large transient labor force.  I have tons of applications every year from Canadian and Mexican citizens who would like to work for me, but I cannot hire them.  On the other side of the coin, I have had to actually go to court from time to time to justify why I chose not to hire or to fire someone who is a woman, or older, or handicapped.

And forced speech with which I don't agree?  My company has to, by law, maintain bulletin boards full of posters, messages, statements, etc. that I don't necessarily agree with but are legally required to post on my property as communication to workers.  And these bulletin boards have to be made a bit larger every year.  I don't have to accept any federal money to be absolutely required, at the penalty of heavy fines, to post these communications.

I would be a bit more enthusiastic in my support for these law faculty if I didn't suspect that they have been the very people out in the forefront of trashing my first amendment rights as a business person.

Postscript: By the way, is this even a problem anyway?  At Harvard Business School, the largest recruiters eschewed campus altogether, and conducted all their interviews at offsite hotels.  I would think the military could pretty easily work around these law schools prohibitions. 

I had a conversation the other day with a person I can best describe as a well-meaning technocrat.  Though I am not sure he would put it this baldly, he tends to support a government by smart people imposing superior solutions on the sub-optimizing masses.  He was lamenting that allowing a company like GM to die is dumb, and that a little bit of intelligent management would save all those GM jobs and assets.  Though we did not discuss specifics, I presume in his model the government would have some role in this new intelligent design (I guess like it had in Amtrak?)

There are lots of sophisticated academic models for the corporation.  I have even studied a few.  Here is my simple one:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it. 

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA*.  And DNA is very hard to change.  Walmart may be freaking brilliant at what they do, but demand that they change tomorrow to an upscale retailer marketing fashion products to teenage girls, and I don't think they would ever get there.  Its just too much change in the DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you still have a culture aimed at big box low prices, a logistics system and infrastructure aimed at doing same, absolutely no history or knowledge of fashion, etc. etc.  I would bet you any amount of money I could get to the GAP faster starting from scratch than starting from Walmart.  For example, many folks (like me) greatly prefer Target over Walmart because Target is a slightly nicer, more relaxing place to shop.  And even this small difference may ultimately confound Walmart.  Even this very incremental need to add some aesthetics to their experience may overtax their DNA.

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one. 

I don't know if GM will fail (but a lot of other people have opinions) but if it does, I am confident that the end result will be positive for America.

* Those who accuse me of being more influenced by Neal Stephenson's Snow Crash than Harvard Business School may be correct.
** Gratuitous reference aimed at forty-somethings who used to hang out at the mall.  In my town, Merry-go-round was the place teenage girls went if they wanted to dress like, uh, teenage girls.  I am pretty sure the store went bust a while back.

I don't have access to the right kind of data to decide whether there is a housing bubble in the US, though a lot of people are writing about it. 

In the Phoenix / Scottsdale area, housing values have really starting going up, up, up in the last 18 months, though whether this is just a catch-up to other desirable metropolitan areas (Phoenix real estate has been pretty sluggish for years, and way cheaper than other resort-type destinations) or a true bubble, I can't tell.  Certainly speculation activity is way up, with a lot of homes being bought and renovated by investors, but again, I could argue that Scottsdale was behind other suburban markets in the whole tear-down thing. 

So, to date, I have been unconvinced about the housing bubble, at least as it applied to our community.  After all, demographics over the next 20-30 years are only going to support Scottsdale area real estate. 

However, over the weekend I had a disturbing experience:   At a social function, I heard a dentist enthusiastically telling a doctor that he needs to be buying condos and raw land.  The dentist claimed to be flipping raw land parcels for 100% in less than 6 months. 

For those who don't know, this is a big flashing red light.  When doctors and dentists start trying to sell you on a particular type of investment, run away like they have the plague.  At Harvard Business School, I had a great investment management class with a professor who has schooled many of the best in the business.  If an investment we were analyzing turned out to be a real dog, he would ask us "who do you sell this to?" and the class would shout "doctors!"  And, if the investment was really, really bad, to the point of being insane, the class would instead shout "dentists!"  Marginal Revolution has another potential bubble indicator.  Angry Bear has a lengthy analysis.

Postscript: By the way, just so you doctors and dentists won't feel like I am picking on you, we small business owners are considered to be almost as bad, which is I why I get so many boiler room calls.

Update:  OK, in one of those great moments in timing, my wife just called me to say that one of the moms at school was trying to get other moms to invest with her in some condos, and should we join in?  Eeeek!

There is a price one pays for slipping into the Harvard Business School through some mysterious hole in the Harvard admissions process:  From time to time, one must be ready to be humbled by their peers.  Of course, with nearly 900 people in a graduating class, one expects someone in that group to distinguish themselves at some point.  However, this large groups is somehow indistinct - at HBS one spends most of their time with 90 people in their "section", spending the vast majority of waking hours, both in class and in the pub, with this group.  After a couple of years with the same 90 people, one gets the overwhelming impression of normality -- these people are just as full of shit as anyone else I have gotten to know.

So it is both expected and with some surprise that I have begun to see these 90 people start making headlines.  My section-mates have distinguished themselves as executives and industry leaders and entrepreneurs  and lifestyle writers and business writers and fashion moguls and artists even as the notorious.  Humiliating levels of fame and success seem to be the rule among these ostensibly ordinary people.

This week, however, another member of our 90-person section (1989-B, on the off chance you are a fellow alum and were wondering) has gone to the next level.  This week Time magazine named Jim Balsillie, CEO of RIM (the Blackberry people) to their list of the 100 most influential people.  Wow.  Congratulations Jim.  The bad news is we are all totaled humbled about our own success trajectories in comparison.  The good news is that Jim will obviously "draw fire" away from the rest of us when Harvard comes looking for money.  Its a funny combination of old and new to think about the CEO of Lili Pulitzer and the CEO of Blackberry sitting next to each other all through our first year.

Postscript:  By the way, for those of you who may be tempted to put me on suicide watch, I am pretty much joking, though not about my section mates - they are all as awesome as portrayed here -- but about any dissatisfaction with my career.  Several times in my life I have been presented with opportunities to pursue high-profile wealth.  In most cases, I have turned these down, with zero regrets.  In fact, since one of the first of these rejected opportunities involved following Jeff Skilling from McKinsey to Enron, I really, really have no regrets.   Each day I am out visiting my operations at some National Park or other, I will think about the rest of you filling out your TPS reports.

UPDATE:  Welcome to fellow sectionmate Karen Page, author of numerous Amazon 5-star rated books on food, wine and becoming a chef, who links to me today (oops, Karen is slipping - a few of the books only have 4-1/2 stars).  Not only is Karen part of that vast section B conspiracy to make me feel inadequate, she also has a much cooler blog than mine.

Roy Soifer recently suggested, as reported in Photon Courier, that the percentage of Harvard Business School graduates going to Wall Street jobs can be used as a reverse indicator of the market (i.e. lots of graduates going to Wall Street means the market is peaking and due for a fall).

As a graduate of that HBS in 1989, I have a few thoughts.  First, the vast majority of HBS graduates go into Wall Street, consulting, or the corporate world.  The relative popularity of these three destinations tends to vary over time.  To some extent this variation is due to what's "hot", and to some extent its due to simply to what jobs are available and what recruiters are showing up on campus. 

Second, though pride urges me to agree with this statement from Photon Courier, I really can't:

But one would hope that MBAs from a leading school--who have certainly studied business cycles--would reflect more on the principle of "buy low, sell high" before deciding among their various offers.

When I graduated from HBS, I don't remember having a clue what I wanted to do.  Its all fine and good to talk about trying to get in early on a growth sector, but that implies I am taking a job to maximize NPV of future incomes.  If that were the case, I would have gone to Wall Street, or remained a consultant.  But I also would have probably hated it.

A more interesting HBS graduate job indicator for me has been "how has the jobs people have evolved since they graduated".  When I graduated, everyone seemed to be investment bankers and consultants.  At our fifth year reunion, everyone was posturing as to how successful they had been, how far they had risen, etc.  Most people were still in the same type jobs, with only a few outliers who had switched careers already.  Our tenth reunion was totally different.  At our tenth, no one talked about their job - everyone talked about their kids.  The contrast was dramatic.  Many people were in different careers, including a number who were testing the dot-com waters. 

At the fifteenth reunion, everyone seemed much more relaxed.  Job performance stress at from the fifth and family starting stress at the tenth were mostly gone.  Many, many people (including me) had their own businesses, and few of these were ones anyone would have predicted;  I don't think anyone was a consultant anymore.  Here are a few examples just from our 90-person section of businesses graduates are running now:

• A camping business
• A children's media business
• A stereo equipment business
• A women's clothing business  (and don't miss this)
• A cooking and cookbook empire
• A succesful electronics startup

My observation - very few were the types of businesses that come recruiting at HBS.

My parting observation about career choices through life comes from Dan Simmons' great Hyperion series, where the prophet Aenea gives here famously concise advice to humanity:

Choose Again.

Certainly true with careers.