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Working Until You Drop

October 30, 2014

Many entrepreneurs love what they do and rarely think about retiring.  However, unless they plan on working until they drop, they need to consider what they really want for themselves.

I never try to push or lead clients into retiring since it is a major life-altering event and needs to be made personally and wholeheartedly.  However, I do offer some comments to consider when making that decision.

Retiring doesn’t mean retiring from life.  It is entering the next stage of your life.  Assuming good health, regardless of age, someone retiring can look forward to at least fifteen to twenty or more productive years in which to pursue another interest devoid of the need of having to make a living.  The pressure is gone and the only concern is the desire to follow a path that could create a benefit, fuel interest and lead to involvement with new people, ideas and causes.  It will also enable you to extricate yourself from any problems when running a business, having people depend on you for too much and being forced to make decisions many times under stress and without adequate information.

Running a business is work.  Work is done to earn a living and acquire sufficient funds to live securely when no longer needing to work.  It would seem work should end when the security is obtained, based on anticipated future needs.  

Many people are conflicted on what they would be doing after giving up running their business.  Each has their own interests.  Rarely does someone have any other interests.  They may have no hobby oroverwhelming desire to accomplish something or they may be afraid they will sit around doing nothing.  We all hear stories about people dying soon after retiring because they lost their passion, feeling of importance or identity.  I do not know if this is so, since neither have I or anyone I know ever spoken to one of these people.  Life itself is a passion and should be enjoyed.  If someone lost their passion for living because they gave up work, well, how exciting was the life they lived?

When talking about retiring, I always think about Benjamin Franklin who retired at age 42 by selling his business for half of its earnings for 18 years.  By surrendering half of his income for all of his time, he was able to spend the remaining 42 years of his life developing the theory of electricity, helping found the United States of America, inventing bifocals and watching the first manned balloon ascend and descend in Paris, among a great many other things.  He did not go mad as many in business assume they will if they retired.

Retiring is a very personal decision and no one can make that decision for you, but it is certainly something to consider.  While considering it, think about deciding how you want to spend the rest of your life knowing you do not have to work Otherwise, work until you drop.

The Speech That Caused Warren Buffett to Be Ridiculed

October 28, 2014

Buffett was the closing speaker at the super prestigious and exclusive Sun Valley, Idaho, July 1999 conference speaking to many of the technology company leaders.  The following has been adapted from The Snowball © 2008 Alice Schroeder.

Buffett gave a chatty introduction and investment “lesson” background and closed with a direct discussion about their businesses.

“It’s wonderful to promote new industries, because they are very promotable.  It’s very hard to promote investment in a mundane product.  It’s much easier to promote an esoteric product, even particularly one with losses, because there’s no quantitative guideline.  And people will keep coming back to invest, you know.”

He then told a story about the power of a completely unfounded rumor and how people know it is unfounded but follow it anyway with their investing misguidedly believing that continuous investing will make it true.

“Well, that’s the way people feel with stocks.  It’s very easy to believe that there’s some truth to that rumor after all.”

He then said there is no new paradigm.  Ultimately, the value of the stock market could only reflect the output of the economy.  He showed slides illustrating how the market’s valuation for several years had outstripped the economy’s growth by an enormous degree. He said very directly that this meant that the present stock values were way too high, he was not a buyer and recommend selling before it was too late.  He told a joke that intimated that the people that bought stocks at the present levels were about to get screwed.

The audience said in stony silence.  Nobody laughed. Nobody chuckled or snickered or guffawed.  They were “embarrassed” for him, but because of his prior record they gave him the respect to not tell him he was behind the times, out of touch and while the past was his, the future was theirs.  They felt that this speech was the last roar of an old lion – that the speech was a tour de force.

This was in July 1999.  The year of 1999 began with the NASDAQ index at 2193.  On July 31, the Index was 2638. On Nov 3 the Index broke 3000 closing at 3028, on Nov 29, 1999 it closed at 4041 and on March 10, 2000 it closed at its all-time high of 5408.  On December 31, 2000, it was 2471. On Sep 21, 2001 (just 2 years after Buffett gave that speech) the index was 1387 (a shade more than half when he gave his speech) and on Oct 10, 2002 it hit the low point of 1108. It closed this past Thursday at 4453.

Steve Ballmer’s Interview with Charlie Rose

October 23, 2014

Two nights ago, I watched former Microsoft CEO Steve Ballmer be interviewed by Charlie Rose and saw many of my ideas confirmed by Ballmer.

Steve Ballmer just retired from Microsoft, is its largest individual stockholder having been there almost from its beginning and has a reputed net worth of $20 billion.  He also just purchased the Los Angeles Clippers basketball team for $2 billion.  Here is some of the things he said.

  • His personal wealth before he purchased the Clippers was primarily in index funds and Microsoft stock.  I have been recommending index funds since before they became as popular as they are now.
  • He looked at the Clippers as an investment that has a cash flow equal to or greater than what he is now getting so he does not see any drop in his income because of the acquisition.  Dividends are always an important consideration in investing.
  • Assuming the Clippers will need to provide him with a 2.5% cash flow, he can value the team at a much higher amount than a typical business investor who might look for an above market return on investment needing to earn 15% to 25% depending upon risk.  The way Ballmer determined the value makes him more of a strategic investor than a traditional investor eschewing rather than following a traditional “fair market value” based valuation.
  • Ballmer believes the risk to owning the LA team is lower than owning stocks and that over time, e.g. thirty years, the team would appreciate at least as much as the market but probably greater.  Therefore he made a nontraditional investment with 10% of his portfolio with no loss of cash flow, a potential for greater long-term wealth creation, a diversification of his assets into an area that he feels will have increasing investor demand for the limited supply of teams and an opportunity to have fun.  He also pointed out that the business has competent in-place management so there will not be an inordinate demand on his time.
  • Ballmer’s reply to Rose’s comment about the drop in market cap of Microsoft under his reign as CEO was that it he took over at a time when the valuations were not logical, were not based on earnings and were spurious and nonsensical.  The present market cap is solid and based on earnings and a reasonable dividend yield and P/E ratio.  His views are exactly what I said about value in my blog posted earlier that day.  See
  • Ballmer also pointed out that Microsoft’s earnings tripled under his tenure to approximately $22 billion.  Something he is extremely proud of.
  • Ballmer was hesitant to criticize any specific company with high stock valuations but did point out that he feels the only way to properly value a company is based on earnings and future earnings potential. Temporary infatuation with a company that sends their stock prices sky high cannot have those values maintained without eventual sustainable earnings.  Also my views.

I watched the interview after the first World Series game ended and was enthralled enough to stay up to see it completely.  If you get an opportunity to see it, watch it – it is a treat.

What Determines Value?

October 21, 2014

Last week, the stock market took a tumble. Not pretty! What happened to cause so much loss of value?

News happened. Some of it was shocking, scary and upsetting. On January 28, 2014, I posted a blog entitled, The Market Tanked Last Week – Does it Matter? I suggest you re-read it. Today, I want to take a different approach and discuss what determines value for stocks.

Many things determine value on a short-term or temporary basis for stocks, but I submit that sustainable earnings growth determines value for the long haul. With some weird exceptions, the expectation of a payout either in the form of growing dividends and/or stock growth will determine the value. Temporarily, anything can happen and values can and do fluctuate widely, but on a long-term basis it is sustainable earnings growth. For investment purposes, I consider periods under seven years as “temporary.”

Steady and measured dividend growth is a good way to assess valuation. So does the expectation that the shares can be sold at a later date at a profit. Analysts and economists contend that the price of a stock is the present value of expected dividends plus the growth in the value of the stock. Statistically, periods longer than a dozen years do not have much weight in the present value calculations. Dividend and stock price growth over about the next 10 or 12 years are what should be looked at when assessing current stock prices. Differences in thinking and evaluating data cause people to buy or sell creating trading activity. There are also traders, not investors, looking for temporary inequities that go in and out as they see it creating some sort of balance to the current stock pricing.

An exception is Warren Buffett’s Berkshire Hathaway (BRK) that does not pay dividends. Mr. Buffett believes he can invest the money at much greater returns than his stockholders, so BRK keeps growing and growing and growing. There is also a self-created floor on the value with Buffett’s stated indication that BRK will buy back shares if the price drops below 120% of book value. However, a return on investment from BRK can only be realized when the stock is sold.

Besides traders and company performance, there are many outside factors affecting valuations on a short-term basis such as price to earnings ratios, interest rates and yields, meeting or missing earnings’ expectations, the overall level of the stock market, volatility of trading, prices of raw materials, currency exchange rates, availability of suitable labor, company and economy growth expectations, tax rates and policy, profit margins, competition, and continued viability of the company and its products – current and new ones in the pipeline, its management and its role in the overall marketplace, to illustrate just a few value drivers.

The issue is that investors generally do not always agree. Valuing stock too high has you giving up growth for a period of years. Too low can provide you with an opportunity to make an extra buck. There have been protracted periods when the overall market or sectors were simply valued too high, and we know the effects of this [The NASQAQ is still lower than its high of 5408 on March 2000]. But over the long-term, the current price needs to provide a reasonable dividend that will grow and a reasonable stock valuation that will also grow. Not tomorrow, or a year from now, or even five years from now, but over a long-term because at the end of the day – most of us invest to assure our long-term financial security. That is what needs to determine the value of what we buy today.

Managing Risk

October 16, 2014

Investors need to consider calculated risks based on their needs and goals with the understanding that no matter what is done, there will be risk.  Risk avoidance is impossible – what is possible is avoiding certain risks over others. 

Prudent investing requires choosing the risks you feel comfortable with and avoiding the risks you are most uncomfortable with consistent with pre-stated goals.  Uninformed choices of what risks to avoid in many instances will not get you where you want and need to be.

I believe that many of yesterday’s rules regarding risk that suggest that as you get older you need to reduce your equity position in favor of fixed income and reduced bond terms are outdated.  The rules you need to follow are new ones that recognize longer life expectancies, all time low interest rates, an intertwined global economy, almost instant availability of news and individual inflation rates based on older people’s spending patterns.  A husband and wife both 70 have a life expectancy where at least one of them will live 27 years.  A couple at age 75, 23 years and age 80, 18 years.  You can outlive your money if you invest using yesterday’s rules and the feelings and tolerance you had yesterday.  Anyone with a greater than ten year time horizon should consider taking on greater “risk” dictated by the changed conditions.  This can mean longer-term fixed income investing periods or more funds allocated to equities than previously suggested by the old rules.  Properly considered, this can actually come out to be less risky in the long run.

Knowledge, understanding and clear goal-setting also help allay fears and insecurity.

The ultimate test is to understand whether the types and levels of risk you assume will get you to your goals.  If not, then you will need to consider different risks – or change your goals.

Understanding Risk

October 14, 2014

Many people are concerned about risk, but don’t really understand it.  Risk is ubiquitous – it is always there.  There just are different types or forms of risk.

Risk is also unknown because it is a gauge of something that will happen in the future.  What you need to do is make your decisions based on what you know, what you might be able to control and your expectations of the future and then hope for the best.  This does not mean you should ignore what has happened in the past because it is a guide – or a warning – of what can occur in the future.

Another thing to consider is not only how secure you will be in the future, but also how secure you will feel. You can be fully secure but not know or recognize it and feel insecure.  “Secure” means that you strongly feel you will not outlive your assets after withdrawing sufficient amounts to live your life the way you want.

If you need more than what you presently have to feel secure, then pick a targeted amount at a given time and set a plan to reach it.  If your plan is attainable, good for you.  If not, then you might need to change your goals or current or planned spending.  But, at some point, you will either be there or you won’t.  That is how you will determine whether you feel secure.

Risk will always be there and just because you are uncomfortable or insecure about certain forms of risk doesn’t mean you are making the right investment decisions bypassing them.  In my opinion, it does mean (in most cases) a lack of knowledge about investing and a lack of understanding about those types of risk.  Risk cannot be avoided.  It can be reduced, transferred, accepted, decreased or increased, but it cannot be avoided.  One simple illustration is the prevalence of inflation.  You accumulate an asset base to provide cash flow to be spent.  If your earnings are lower than the inflation rate, over any reasonable period of time, your asset base will eventually be reduced.  Right now, short term Treasury Bills, perhaps the most risk-free investment in the world is yielding less than 10% of the inflation rate.  One year insured bank CDs are paying less than 25% of the inflation rate.  Things may change, but they may not, and if they don’t, you will run out of money unless you have a humongous amount where this is not a concern.  This is not the case for more than 99% of the people in the United States.  Investing risk-free can possibly drive you into the poor house.

A second illustration is to assume that investing “risk free” will not permit you to attain the degree of security you need, but undertaking a measured risk such as investing in the same items but for longer terms providing higher yields might.

Risk needs to be considered, but measured against realistic priorities.

Will Your Successor Be a Caretaker, Innovator or Empire Builder?

October 9, 2014

Businesses reach a point where they can no longer be maintained by the present owners and leaders.  If that is not recognized, then the leaders will work until they drop.  No problem for them.  Their heirs will dispose of the business in some manner and take what they can get for it. 

If the present owners realize they cannot handle it forever, no longer want to and do not feel they have people who can carry on afterwards, they can sell it.  They will be exchanging the continuing income from the business for the sale proceeds and a substantial part of their life, i.e. time, they can use for other endeavors.  However, if they want the time, continuing cash flow and eventual sale proceeds they can transfer the business to successors.   One question to consider is the type of successor the business will be trusted to.

Certain businesses can continue without the original guiding force.  Those continuing it can include key employees, long time consultants, a child or grandchild, spouse or a group of these people able to work together to continue the business.  This is particularly important if the owner dies suddenly without prior plans being made. 

Even with careful plans and a successful transfer it is still difficult to assess beforehand what type of new owner will take over.  Will they be a caretaker, innovator or empire builder?  I have seen all three (and many others) and under the right circumstance, each type of person can be appropriate.  For instance, a caretaker can maintain a business and its cash flow and while not expanding the business, can work to maximize the earnings, streamline production capabilities, increase efficiency and improve product or service delivery and customer service.

An innovator will look to grow the business and be willing to assume measured degrees of risk.  They might need additional financing and while trying to expand the business might not pay as much attention to the details a caretaker would losing opportunities that might be easier to achieve.

An empire builder is usually someone using the business as a stepping stone – something that makes him a player.  His interest might be much less than either a caretaker or innovator.  This business is just the ante in the pot for bigger gains.  These feelings can sometimes be latent in employees who bide their time for an opportunity they crave but do not usually feel will materialize.

Everything in business needs care, consideration, careful planning and the upmost thought.  There are many ramifications and nothing should be overlooked, especially the type of successor.


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