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In my business, good accounts are sticky. Every client often has an ‘alpha’ broker that does most of their business and these brokers are normally pretty senior folks.

Junior brokers often look up at those great accounts an think to themselves: “well that guy (they’re usually dudes) is like 60 and I’m 30. I can wait him out and grab that account”.

Well have a look at this:

Some 74 percent of professors aged 49-67 plan to delay retirement past age 65 or never retire at all, according to a new Fidelity Investments study of higher education faculty. While 69 percent of those surveyed cited financial concerns, an even higher percentage of professors said love of their careers factored into their decision.

“While many would assume that delayed retirement would be solely due to economic reasons, surprisingly 8 in 10 — 81 percent — cited personal or professional reasons for delayed retirement,” said John Rangoni, vice president of tax exempt services at Fidelity.

For people who are the best at what they do, retirement is a banishment. They’ve made countless sacrifices to get to where they are and aren’t going to give it up. They have status, money, purpose. Everything everyone wants.

If you want to eat their lunch you’re going to have to take it from their warm, live hands.

From the always excellent Mark Suster:

So the buying company usually wants to pay $0 for the company. And wants to structure a huge payout for the employees that will remain. That way investors (dead money for the buyer) and founders (flight risk) don’t get all the spoils while the faithful staff who will stick around get nothing.

and…

You have been at Google, Salesforce.com, Yahoo! for years. You have worked faithfully. Evenings. Weekends. Year in, year out. You have shipped to hard deadlines. You’ve done the death-march projects. In the trenches. You got the t-shirt. And maybe got called out for valor at a big company gathering. They gave you an extra 2 days of vacation for your hard work.

And that prick sitting in the desk next to you who joined only last week now has $1 million because he built some fancy newsreader that got a lot of press but is going to be shut down anyways.

What kind of message does that send to the party faithful who slave away loyally to hit targets for BigCo?

I’ll tell you what is says.

It says if you want to make “real” money  – quit.

Much as I enjoyed the piece, I feel my contrarian hackles rising.

It’s incredibly fashionable to write passionate pieces about how culture should be central to any company’s strategy. It makes us feel good. It makes us think “hey, my feelings DO matter and I deserve to be heard. I’m frustrated. If they don’t watch out I’ll show ’em”

And I believe it, of course, and I believe my firm does a pretty good job of protecting culture. But we need to fess up to something, people.

Most large successful companies you can think of today got that way via acquisitions.

The dirty reality of growing businesses is that it is effing hard to do. Shortcuts are always welcome. There are lots of dirty ways to grow your firm via acquisition and profit from it, let’s call it Druckiavelli’s* list.

1. Buy out your competition and lobby regulators to raise barriers to entry
2. Develop one hotshot product and mask the outrageous profit margins by squandering the money on acquisitions or underpricing complementary products, driving competitors out of business or into your arms. Then do #1.
3. Float a minority share of your company and use the proceeds (other people’s money) to buy everything you can get your hands on.
4. Run a mutual insurer and instead of returning profits to policyholders dump them into acquisitions and corporate jets (related to #2).

None of these are taught in business schools. Because they’re mean. But they work.

*A portmonteau of Peter Drucker and Machiavelli

I don’t necessarily endorse this, but it’s interesting:

1. Social networks are free, or at least bundled with things like work, family, school and housing.
2. We’d never pay for technology that supports a new network.
3. Facebook’s investors gave us another free network but without being able to make money on the bundle.
4. It therefore takes something from us that we don’t value very much (private information) and sells it to others.
5. The day may come when we regret this.
6. Then again, maybe that information is actually worthless.

Inspired in part by a recent Econtalk.

 

Tad Montross recently tried to throw some cold water on the cat bond party:

“With interest rates being where they are, I don’t think it’s a surprise that a cat bond with a yield of 350 or 500 basis points over Libor looks attractive. People are drooling for those.”

“What happens after the $150 billion earthquake, when Nevada is basically coastline to the Pacific? This whole issue that it’s a non-correlated asset class, which makes it so attractive as people look at their risk-return profiles, is one that really needs to be thought through very, very carefully.”

More plus commentary here.

So here’s a chance to think a bit about all kinds of issues.

Number 1, and most importantly, Montross is biased. Incredibly biased. He competes against cat bonds. If his comments move their marginal prices up he can make more money.

So beware, Dan Kahneman teaches us that we systematically underestimate the effects of bias on others. I could (should?) end the post here because all of his comments should be interpreted as naked self-interest even if it’s not consciously intended.

Number 2, correlation is a brutally simple statistic that glosses over a lot of complexity in risk management. At the link, Steve Evans makes the point that many investors are too sophisticated to actually take the “non-correlation” line at face value with cat bonds. Or any other asset class for that matter.

But I’ll try to make a stronger stand. Low correlation is real and here to stay. Forget sophistication, if you have a portfolio of cat bonds diversified by region and peril, even if a 150bn EQ hits, ripping California from the mainland or whatever ridiculous sci-fi fantasy you want, your cat bond portfolio will vastly outperform every other asset class. It’s diversified, people. There’s US wind, there European perils, Japan, etc, etc. The general economy, on the other hand, would be toast.

Which takes me to point 3: the ONLY source of meaningful correlation to other assets is through the holding portfolio of treasuries or Money Market Funds. If these tank, cat bonds follow. This got found out in the financial crisis where some bonds got into real trouble because Lehman stuck the assets into garbage “AAA” mortgage CDOs. Luckily it was a small subset and we got a chance to learn the lesson (allow me to say that all collateralized deals we did pre-crisis used super-safe assets and didn’t blink in the crash).

Anyone can imagine a sufficiently unlikely scenario where all assets correlate (asteroid destroys earth and it’s correlation city: all assets go to 0). The key is that you need to tie it into your own risk management system. On a 1-in-100 portfolio basis tresauries are still liquid and as risk-free as possible and so cat bonds are non-correlating. End of story.

For his soccer tournament:

I also have a network of friends and buddies who are doormen around the city. They tell me who’s around. That’s how it falls into place.

Awesome.

I liked this article a lot, which is nominally about investors (Venture Capital) on a board of directors. But I think that it has a lot to offer to a similar idea I like: thinking about higher levels of management/ownership hierarchy as productive tools for building the business.

Here’s a great quote:

VCs crave the ability to help portfolio companies. We’re all secretly paranoid we’re not helping enough and want to know how to be more helpful. When a company gives you a discrete action to carry out – it’s gold dust – I promise you. If board members start joking amongst themselves (as we at DataSift do) that you “got another Rob assignment” you know you’re on the right track.

USE the VC who, normally, is the “boss”.

I work in a business with fairly flat organizations where, when the culture is healthy, everything is subordinated to the deal, even the ego of the CEO.

So to generalize a bit from the article, different members of the organization should drop in and out of the team as needed. We think hierarchically (you’re my boss, etc) and of course that’s necessary in many contexts. But the hierarchy of the team on an account need not always mirror that of the organization as a whole.

The key is for the ‘owners’ of the outcome of specific projects (account execs) to be able to identify problems and willing to search for the best available resource in the organization to solve it.

It takes leadership to break free of hierarchy when doing this and, echoing Dan Rockwell (see here but this is a constant theme for him), takes even more leadership to encourage a subordinate to do it.

Georgia Tech throws the first stone:

The Georgia Institute of Technology plans to offer a $7,000 online master’s degree to 10,000 new students over the next three years without hiring much more than a handful of new instructors.

Georgia Tech will work with AT&T and Udacity, the 15-month-old Silicon Valley-based company, to offer a new online master’s degree in computer science to students across the world at a sixth of the price of its current degree. The deal, announced Tuesday, is portrayed as a revolutionary attempt by a respected university, an education technology startup and a major corporate employer to drive down costs and expand higher education capacity.

Very exciting.

Udacity will receive 40 percent of the revenue from the new degree program, according to Georgia Tech, which will receive the rest. AT&T is subsidizing the effort financially to ensure that it will break even in its first year and is lending its name to the project

There will several kinds of students:

1. 6,000 students who meet the minimum standards will be admitted.
2. 2,000 students will take the courses but not be interested in the degree. Not clear whether these meet any standards.
3. 2,000 studnets who do not meet the minimum standards (GRE) who “do well in two core classes”. How do they take those core classes if they aren’t admitted? Well, they’re drawn from…
4. the unlimited number of students who can take the MOOC-version of the course with no instructor support and no real degree at the end.

Students will be assisted by instructors from Georgia Tech and Udacity employees who handle more run-of-the-mill questions:

Galil and Thrun both said that Udacity-paid staffers could answer most of the questions students in the courses come up with.

“In many cases, the questions are simple. In many cases these questions can be found in FAQs, even though students don’t find them in FAQs,” Galil said.

Thrun said there’s no reason to make a professor answer the same question 200 times for 200 students. He said his staff will free up Georgia Tech instructors to do more difficult work.

Oh, and everyone is getting paid. Welcome to the future!

…it seems that strong families tend to be good for people individually, but bad for the world as a whole. Family clans tend to bring personal benefits, but social harms, such as less sorting, specialization, agglomeration, innovation, trust, fairness, and rule of law.

That’s Robin Hanson.

In his post there are many quotes with interesting perspectives on this idea. I focused on this one:

Risk taking …in family firms … is positively associated with proactiveness and innovation. .. Even if family firms do take risks while engaged in entrepreneurial activities, they take risk to a lesser extent than nonfamily firms. … Risk taking in family firms is negatively related to performance. (more)

Interesting.

The essence of agency costs is that somebody else pays when something goes wrong. This encourages risky behavior.

Is risk really so great? Just hire some managers to bet the farm more often and everyone wins? What is “risk”, anyway? After a bit of digging I was able to find this definition of risk taking:

Thus, firms with an entrepreneurial orientation are often typified by risk-taking behavior, such as incurring heavy debt or making large resource commitments, in the interest of obtaining high returns by seizing opportunities in the marketplace…

Presently, however, there is a well accepted and widely used scale based on Miller’s (1983) approach to EO, which measures risk taking at the firm level by asking managers about the firm’s proclivity to engage in risky projects and managers’ preferences for bold versus cautious acts to achieve firm objectives.

Ok, so it’s survey data (ie watch out for bias!). Large, agent-run companies, remember, have their own risk-killing system which shrugs off survey results: bureaucracy. One can imagine a situation in which agents raise their status by boldly proclaiming a desire for risk with no hope of having to actually act.

These papers should say “professed desire for risk taking is associated with inferior results” for family-run companies. It’s my own view that real corporate strategy involves making lots and lots of small, decent bets.

Never swing for the fences. Never bet the firm. Big risks are unconscionably stupid business.

Here is a report by a UK equities research firm:

Changes are afoot inside the world‟s major central banks… After more than a decade of inflation targeting, monetary authorities are, it seems, increasingly minded to go for growth, as the problem is no longer rising prices, but unemployment.

The long-term consequences of this shift – which my colleague Jim Leaviss has termed “central bank regime change‟ – remain uncertain… With its incoming governor recognised as having one of the most informed understandings of the new regime, the Bank of England looks set to play an increasingly important role in the global monetary policy revolution. UK shares could stand to benefit.

I agree. When the central bankers get their act together, which they are doing, nominal incomes will rise, whipping up a tailwind for the recovery.

Now consider the price of of gold which, according to my view, should drop when the markets get comfortable with the bankers’ strategy. It has.

Humans are good at throwing things. In fact, we’re great at it; no other animal can throw stuff like we can.

Hm. How important is throwing? I wonder if Aliens, should they exist, throw? More here.

-=-=-

edit: the Randall Monroe post links us to this abstract (among others), which opens with this:

It has been proposed that the hominid lineage began when a group of chimpanzee-like apes began to throw rocks and swing clubs at adversaries, and that this behaviour yielded reproductive advantages for millions of years, driving natural selection for improved throwing and clubbing prowess.