Coyote Blog

From David Bernstein

The president went to Harvard, and barely defeated a primary opponent who went to Yale. His predecessor went to Yale and Harvard, and defeated opponents who went to Yale and Harvard, and Harvard, respectively. The previous two presidents also went to Yale, with Bush I defeating another Harvard grad for the presidency. And once Elena Kagan gets confirmed, every Supreme Court Justice will have attended Harvard or Yale law schools.

I know that Harvard and Yale attract a disproportionate percentage of America's talented youth, but still, isn't this a bit much? Are there no similarly talented individuals who attended other Ivy League schools, other private universities or (gasp!) even state law schools?

For what its worth, I have a Princeton undergrad degree and an MBA from Harvard and the number of Harvard-Yale-Princeton employees working for me in our 420-employee firm is ... zero.

Via the WSJ, on the Mortgage Banker's Association (MBA) being underwater on their real estate loan:

On Friday, CoStar Group Inc., a provider of commercial real estate data, announced that it had agreed to buy the MBA's 10-story headquarters building in Washington, D.C., for $41.3 million. The price is well below the $79 million the trade group says it paid for the glass-walled building in 2007, while it was still under construction. The price also falls short of  the $75 million of financing that the MBA received from a group of banks led by PNC Financial Services Group Inc. for the purchase.

John Courson, chief executive officer of the trade group, declined in an interview Saturday to say whether the MBA would pay off the full loan amount. "We're not going to discuss the financing," he said. A spokeswoman for the MBA added that the MBA has reached "an agreement with all relevant parties" regarding the outstanding amount on that loan but declined to provide any details.

...In an interview late last year, Mr. Courson said he believed mortgage borrowers should keep paying their loans even if that no longer seemed to be in their economic interest.  He said paying off a mortgage isn't only a matter of personal interest.  Defaults hurt neighborhoods by lowering property values, Mr. Courson said. "What about the message they will send to their family and their kids and their friends?" he asked.

Megan McArdle writes:

Let's be honest, coastal folks:  when you meet someone with a thick
southern accent who likes NASCAR and attends a bible church, do you
think, "hey, maybe this is a cool person"?  And when you encounter
someone who went to Eastern Iowa State, do you accord them the same
respect you give your friends from Williams?  It's okay--there's no one
here but us chickens.  You don't.

Maybe you don't know you're
doing it.  But I have quite brilliant friends who grew up in rural
areas and went to state schools--not Michigan or UT, but ordinary state
schools--who say that, indeed, when they mention where they went to
school, there's often a droop in the eyelids, a certain forced quality
to the smile.  Oh, Arizona State.  Great weather out there.  Don't I need a drink or something? This person couldn't possibly interest me.

People
from a handful of schools, most of them hailing from a handful of major
metropolitan areas, dominate academia, journalism, and the
entertainment industry.  Our subtle (or not-so-subtle) distaste for
everything from their entertainment to their decorating choices to the
vast swathes of the country in which they choose to live permeate
almost everything they read, watch, or hear.  Of course we don't hear
it--to us, that's simply the way the world is. 

I have written before that I go out of my way not to mention my
double-Ivy pedigree within my business dealings because it tends to cause my
employees (who often have no degree at all) to clam up.  I absolutely
depend on their feedback and ideas, and those dry up if my employees
somehow think that I'm smarter than they are and they start to be afraid to "look stupid."

But McArdle's post causes me to think of another reason not to be snobbish about my eastern degrees.  I meet a lot of rich and succesful people out here in the Phoenix area, and I can't remember the last one that had an Ivy League degree.  I am thinking through a few of them right now -- ASU, ASU, Arizona, Kansas State, Tulane, no college, San Diego State....  Getting uppity about my Harvard MBA around here only leaves me vulnerable to the charge of "Person X went to Montana State and is worth $10 million now -- what the hell have you been doing with that Harvard MBA?"  Here in flyover country, college degrees and family pedigree are not really strong predictors of business success.

New SEC rules being drafted by the Bush administration are set to declare that Paris Hilton is a fully "accredited investor" with full freedom to invest in any way she likes.  I, who graduated near the top of my class at Harvard Business School, shall likewise be declared not capable of investing and the government will limit my options "for my own good"

The U.S. Securities and Exchange Commission (SEC) has just proposed
that the amount of liquid net worth an individual must have before
investing in hedge funds and other so-called risky investments be
raised to as much as $2.5 million.

The largest program the government has for protecting us from our own investing incompetence is called Social Security, which takes retirement savings from us by force and has the government invest it for us.   As I showed in previous posts, Social Security is returning -0.8% a year on our savings.  Thank god the government is investing this money for us - no way I could have beaten a -0.8% a year return during the greatest 20-year bull market of all time.

Tinfoil Hat Observation:  I use Google search to find old posts on my site.  Usually it is flawless.  For some reason, though, my post titled Social Security Ripoff is not indexed by Google.  A follow-up post on the same day is indexed, as you can see from this search, but not the original.  I have never failed to pull up a post before, even with inexact search words, and have never failed with the exact title in the search.  Weird.   Maybe something in the comments, I will have to check.

Mitt Romney promised his state a health care free lunch, and everyone believed him.  So much so that other states are copying his plan.  Well, the charade is ending:

Last year, then-Gov. Mitt Romney made headlines by signing legislation
to cover all the state's uninsured. . . Romney suggested that annual
premiums for a single worker might total $2,400. But when insurance
companies recently provided real estimates, the cost was much higher:
$4,560.

Arnold Kling cries "I told you so."    And, I did too.

Low-deductible health care insurance (Massachusetts does not allow, by law, any other kind) is nuts, but it is what everyone is used to.  For some reason, people have a huge aversion to paying for medical costs directly, even if it is demonstrably cheaper.  Samuelson gets at this in his article when he says:

For decades, Americans have treated health care as if it exists in a
separate economic and political world: When people need care, they
should get it; costs should remain out of sight

Let us take a quick example.  Let's say that the average family generates $1000 in medical costs in a normal year, that is, without any major hospitalizations.  This would mean that if I got an insurance policy with a $1000 deductible, my coverage should be (relatively) cheap, since I am only really insurance against catastrophes -- I am effectively paying my normal annual costs out of pocket.

Now let's say I switch to a zero deductible. The premiums are going to have to be at least a thousand dollars higher a year.  And, in fact, they are likely to be more, given markups and administrative costs.  And that extra $1000+ will now be unavoidable to me, whereas I might have managed my own out of pocket spending lower if I am paying the bills.  Paying for a health care plan that covers one's normal annual medical costs is a dead loss.  There is no free lunch  (except for tax -- historically, medical costs payed by the employer were tax deductible, whereas costs paid out of your own pocket were not, which is one reason our health care market is structured in such a silly manner).

A while back, I switched from a $500 deductible plan to a $3500 deductible plan (I pay for my own health care).  You know how much I save in annual premiums?  $3000!  Talk about the biggest no-brainer ever.  Even if my annual health care spending was $3500, this would still be a break-even decision.  But since my actual spending in a normal year is probably $1000-$1500  (depending mainly on whether my wife or I get sent for some weird test) this was a huge financial gain.  And remember, this decision would not have been available to me in Massachusetts, because they do not allow high-deductible health insurance.  For some reason we are all caught up in this paradigm that health care expenses remain out of sight.  Even my wife, the Harvard MBA  (but from Massachusetts!) took some time to get comfortable with the concept of paying medical expenses out of pocket -- you're not supposed to do that, that's what insurance is for!

While I sometimes get grouped into economics blogs, I actually don't have a degree in the subject.  I have an MBA, some practical experience, some hobbyist reading, a few undergraduate courses, and, as my wife can attest, a willingness to pretend I know what I am talking about.  Unfortunately, that is not enough in this case.

Over the last 6 months, I have observed an interesting phenomena in the Phoenix area, one which I am sure I am not the first to discover, but I don't have enough background to put a name on it.  Here is what is going on:

Over the last year or two, the Phoenix real estate market has been red hot.  This has caused a lot of individual investors to make local real estate investments (I discussed more about this here).  The preferred type of investment seems to be to buy an old house on valuable land, tear it down, and sell the new house for a profit.

All fine and normal so far.  The interesting part comes when the investor chooses the style and appearance of the new home.  Remember that these are typically highly leveraged investments.  Investors take out a large mortgage, and that mortgage has to be paid every month that the investor cannot sell the home.  It is critical, then, that the investor build a home that is designed in a way to be most likely to sell.

Let's imagine that the pool of possible house buyers have the following preferences (I am making these numbers up):

1. Tuscan / Mediterranean style, 40%
2. Santa Fe style, 25%
3. Santa Barbara style, 20%
4. New England style, 10%
5. Ultra modern style, 5%

With only limited information on what is going on in the market around them (ie what others are planning to build) all of these investor-builders pick the most popular style on the list, thereby apparently maximizing their ability to sell the home.  As a result, every tear down / rebuild / remodel I see in our area is a new Tuscan home.  So, while 40% of buyers (or whatever the number is) want Tuscan, 100% of the supply is Tuscan.  By the way, the same thing apparently happened in the last big Phoenix real estate boom back in the 1980's, since nearly every house in our neighborhood that was built in the early eighties was built in what we call the "santa barbara" style.

This is obviously some type of market failure, but I don't know what it is called.  I might call it the "variety failure".  To a large extent, this dynamic is made possible by the fact that many of the investors in the real estate market are only entering the housing market for a single transaction, and are not well informed of the actions of other sellers in the market.  In most other industries, investors need to make money over multiple transactions over many years, which mutes this effect.  For example, there are always farmers who try to plant this year what was earning good money last year, but these players in the market are usually weeded out over time as last year's shortage leads to this year's glut and financial losses.  Also muting this failure nowadays are changes in manufacturing techniques, which allows low cost production of greater variety, as well as expansion of specialty retail space (e.g. category killers like Petsmart or Borders), which allows display of more product variations.

Since I went to two Ivy League Schools (Princeton undergrad, Harvard MBA), I get asked by parents a lot about how to get their kids into an Ivy League school.  My answer is the same one that I think many of my friends from college give:  "I'm not sure I could have gotten into Princeton if I did it today, rather than 20 years ago".  While the number of bright, qualified students seems to have gone up tenfold over the last decades, the number of admissions spots at Ivy League schools has hardly changed, and few new schools have emerged as Ivy League equivalents (if not in fact, at least in the perceptions of the public).

I have recently discovered this really nice blog by Kurt Johnson, who recently got accepted to attend Wharton business school next year.  He has several good posts about school rankings and admissions, including this one here.  The curves showing that only about 20% of applicants in the top 1 percentile of test scores get into Princeton is scary.  Yes, I had good SAT scores, somewhere in the 1500's  (I would never have believed at the time I would have forgotten the number, but I seem to have).  At the time, that was pretty much a layup for getting into the Ivy League, though I had some decent sports and activities as well.  Now, the odds are I wouldn't make it.

Today, parents are downright crazed in trying to figure out what it takes to get in.  For example, any of the 11 year olds at our elementary school do community service, which I guess is fine though it seems to be driven more by setting up early resume wins rather than saving the world.  Things like piano and violin are out:  Parents are pushing their kids into more unique, differentiated instruments like bagpipes or the xylophone.  My old college roommate, whose kids go to a college prep school in DC, joked that he planned to send the other school parents into a jealous hysteria by telling them his kids were competing in falconry.

Kurt also makes a good point about one of my pet peeves of performance measurement:  that is, measuring a process based on inputs rather than outputs.  You see this all the time, for example, when the department of homeland security talks.  They say things like we have xx thousand agents making xx checks with xx equipment blah blah.  Yes, but are we safer?

Postscript: By the way, after reading Kurt's work, he is basically going to Wharton for a piece of paper.  He already appears to be at least as thoughtful an analyst of business issues as most poeple I know with Ivy League MBA's.  OK, this is a bit unfair.  I learned a lot that was useful in my first year of busienss school, then I entertained myself in the second year with a lot of material that was interesting but I never used much.  My MBA was sort of a 1-year technical degree with an extra year in "business liberal arts".  I have talked to lawyers that say the same thing about law school.

The Onion has a dead-on spoof of how major media selects "experts" for their articles.  The spoof is worth reading in total, but to give you a taste:

Dr. Gary Canton, a professor of applied nuclear physics and
energy-development technologies at MIT and a leading expert in American
nuclear-power applications, was rejected by MSNBC producers for being
"too boring for TV" Monday....

"[Canton] went on like that for six... long... minutes," ...
"Fact after mind-numbing fact. Then he started spewing all these
statistics about megawatts and the nation's current energy consumption
and I don't know what, because my mind just shut off. I tried to lead
him in the right direction. I told him to address the fears that the average citizen might have about nuclear power, but he still utterly failed to mention meltdowns, radiation, or mushroom clouds."...

MSNBC chose Skip Hammond, former Arizona State football player, MBA holder, and author of Imprison The Sun: America's Coming Nuclear-Power Holocaust. Hammond is best known for his "atomic domino" theory of chained power-plant explosions and his signature lavender silk tie.

"Absolute Armageddon," Hammond said when asked about the dangers
increased reliance on nuclear power might pose. "Atoms are not only too
tiny to be seen, they're too powerful to be predicted. Three Mile
Island? Remember it? I do. Don't they?"

"Clouds of radiation, glowing rivers, a hole reaching to the earth's
core"”that's what we're facing, " Hammond continued. "Death of one in
four Americans! Count off, everyone: one, two, three, you. Millions of people gone. And no one's even mentioned terrorism yet. You have to wonder why not."

According to [MSNBC], Hammond was "perfect."

Dead-on.  Tell me you haven't seen this exact type of thing in stories on nuclear power, biotechnology, genetically modified crops, global warming, breast implants, Vioxx, etc etc.

Last Thursday I spoke at the the Phoenix Enterprise Network about buying your own business, a topic I discuss in more depth here.  The audience was pretty full, not for me, but in expectation of Sharon Lechter of Rich Dad, Poor Dad fame.  Since Ms. Lechter and her partner Robert Kiyosaki have become the chief evangelists of starting your own business, a lot of people were there who were interested in that topic.

I found that for at least one reason, I was probably the wrong person to speak at this function.  Many people in the audience seemed fixated on my Harvard MBA and felt intimidated that somehow they were under-qualified or undereducated to be entrepreneurs. 

I tried as hard as I could to convince folks that everything I learned at Harvard was virtually useless for running a small business.  I told them (truthfully) that my Harvard diploma hangs in my laundry room, since that was the only thing I really learned to do well at school.  I emphasized that knowledge and passion about the business you want to start is much more important, and that everything else could be learned.  Night courses in certain areas could help, and I would focus on two areas:

• accounting:  it is always good to know accounting.  It is never good to entirely trust someone else with the books.
• marketing and competitive advantage:  the one "framework" that still serves me well from my MBA is that I never look at an idea or business without asking what I am going to do with it that is different than competitors. 

In reality, the Harvard sheepskin on my wall actually hurts me running a small business as often as it helps me.  For example, many of my employees when they first work for me seem intimidated by the degree, and assume I must know everything and therefore they are afraid to raise concerns or share ideas.  Any of my managers who read this will probably laugh, because most have gotten some version of my speech on this topic:

DO NOT assume Warren has a secret plan or brilliant idea on any subject that he has not told you yet.  Assume that if you have not heard from Warren on a topic, he either has no clue there is an issue at all or else he has no idea what to do.  Therefore, do what you think needs to be done, and call Warren if you need help.

By the way, if you are in the Phoenix area, the Enterprise Network not only has one of those exceedingly rare and valuable two-letter URL's, but it is a great group if you are an entrepreneur or you business sells to entrepreneurs.

Welcome!  Thanks to Elise Bauer for ways to make this post sticky in TypePad.  Please, have a look around.  Here are some examples of what I do here:

Real-life small business experiences:  Buying a company;  Working with the Department of Labor

Economics:  Taxes and Class Warfare;  The Harvard MBA indicator

Libertarian political commentary:  Post election wrap-up;  Thougts on Kyoto

Frustration with runaway torts:  Jackpot Litigation; Coyote vs. ACME

Camping (my business):  New American nomads;  This RV is just wrong

Attempts at humor:  Replacements for Dan Rather;  Meyer's Law

ACME Products:  Instant Girl; Ultimatum Gun; Earthquake Pills

Enjoy.  And, don't forget to support small blogs by voting in the "best of the rest" category -- you can go vote here.  Coyote Blog (hint, hint) is in the middle of the list.

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.

When I describe what I do, the most common reaction is for people to ask "So how did you get into that?" The answer, as they used to say in the old electric razor commercials, is that it interested me so much, I bought the company.

Now, at some level, corporate acquisitions were not new to me -- I had worked with acquisitions and acquisition analysis in many of my corporate jobs. But these were large acquisitions - at least $20-$40 million in sales, and it was funded out of a large corporation's cash flow.

One fateful day, I decided that A) I hated working for other people and B) I had no groundbreaking entrepreneurial ideas of my own so that C) if I wanted to own a decent sized business, I would have to buy one.

Unfortunately, I had NO CLUE how to go find companies that were for sale and that I could afford. In fact, I was not sure at that point such opportunities even existed (again, when the rubber met the road, my Harvard MBA let me down). And, if the questions I get asked all the time are any indication, I was not the only one who didn't know how any of this worked.

So, let me share how it all worked for me. This is part 1. Also see part 2 and part 3.

Continue reading ‘Buying a Company Part 1 (or how I got into this)’ »