Quotulatiousness

August 19, 2017

How bad can a business graphic get? This bad

Filed under: Business, Humour, Media — Tags: , — Nicholas @ 03:00

Found on Colby Cosh’s Twitter feed:

August 18, 2017

What Do Banks Do?

Filed under: Business, Economics — Tags: , — Nicholas @ 02:00

Published on 28 Jun 2016

This week: Dive deeper into one type of financial intermediary: Banks.

Next week: Sticking with macroeconomics, we’ll take a look at the next intermediary: Stock Markets.

Some people want to save and invest, others want to borrow. Sometimes, savers and borrowers link up directly. But most times, they don’t know each other. So they rely on institutions that bridge them together. These bridges are called financial intermediaries, and this video will show you one kind—banks.

How do banks operate?

On the savings side, they attract depositors by paying interest on deposits. On the borrowing side, banks make loans, for which they charge interest. The key to a bank’s profit is in charging a higher interest for loans than the interest paid out to depositors. Of course, to make sure that loans are as productive as possible, banks have specialized staff and systems for evaluating loan applications.

That sort of due diligence, and specialization is central to what a bank does. Not only does a bank coordinate the savings of many, but it also undertakes the task of studying borrowers in order to determine the most qualified. And then, to further minimize risk, a bank will spread its money out across a whole portfolio of loans. Thus, if one loan goes bad, the bank won’t go bankrupt.

In this way, you can see how banks provide valuable services—they allow you to earn interest on your savings, while also turning those savings into loans, which help economic growth.

Notice though, that as a depositor, your savings won’t just rest in a vault. But then, what happens when you decide to make a withdrawal? Banks account for that by having reserves. Banks keep an eye on their reserves so they can cover the withdrawals of various depositors. Predictably, problems arise, when there aren’t enough reserves to cover withdrawals. In the words of our previous video, that’s one kind of failed intermediation.

In the next video, we’ll look at a different kind of intermediary — stock markets.

There, we’ll show you how stock markets turn savings into investment. Hang tight, and see you then!

August 17, 2017

The Most Important Invention You Never Thought About

Filed under: Business, Economics, Technology — Tags: , — Nicholas @ 02:00

Published on 26 Jul 2017

One entrepreneur’s invention cut world poverty and revolutionized manufacturing. Learn more with Steve Davies: https://www.youtube.com/watch?v=7QLoeehMw0w&list=PL-erRSWG3IoBe1BsaqgTwYx0nS4nl2m_N&index=2

LEARN MORE:
How to Sabotage Progress (video): During the earliest part of the Industrial Revolution, workers worried about losing their jobs to machinery would throw their shoes into the machines in order to sabotage production. We’re seeing recurrence of sabotage again today, but there’s no more successful saboteur than regulation. Duke University Professor Michael C. Munger explains. https://www.youtube.com/watch?v=K0nSiwnbv4o

The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger (book): Economist Marc Levinson delves into the history of the shipping container and how the invention changed the world. https://www.amazon.ca/Box-Shipping-Container-Smaller-Economy/dp/0691170819/ref=as_li_ss_tl?ie=UTF8&qid=1502034038&sr=8-1&keywords=The+Box:+How+the+Shipping+Container&linkCode=ll1&tag=quotulatiousn-20&linkId=ca8f280248e61c2c42aaae2b3c5f1395

An Awesome Map of World Trade and Shipping (article): Daniel Bier uses UCL Energy Institute’s timelapse of global shipping to illustrate spontaneous order. https://fee.org/articles/an-awesome-map-of-world-trade-and-shipping/

TRANSCRIPT:
For a full transcript please visit: http://www.learnliberty.org/videos/the-most-importa%E2%80%A6er-thought-about/

August 16, 2017

QotD: Management

Filed under: Bureaucracy, Business, Quotations — Tags: — Nicholas @ 01:00

I am no great admirer of management as a science or of managers as people. The latter tend to speak a strange language, a jargon neither elegant nor poetic; they buy very dull books at airports, they are often shifty and ruthless, and they seem to me to live in a constant condition of bad faith. They are bureaucrats pretending to be entrepreneurs even when they work for the state, an organization that secures its solvency by the simple expediency of printing more money — in fact, not even by printing it anymore, simply by adding a few naughts on computer screens. We live in a regime of paper money without the paper.

Presumably most managers want to be managers; it is their ambition to become such, though some, I think, are sucked into management from other activities without a full realization of what is happening to them. At any rate, they soon come to have a sense of importance and entitlement by comparison with everyone else in society, even the nominal owners of the enterprise in which they work, for they believe themselves to be doing the world’s real work, as it were. James Burnham, in his book The Managerial Revolution, pointed this out as long ago as 1941:

    The managers’ training as administrators of modern production naturally makes them think in terms of co-ordination, integration, efficiency, planning; and to extend such terms from the realm of production under their immediate direction to the economic process as a whole. When the managers think about it, the old-line capitalists, sunning themselves in Miami and Hawaii or dabbling in finance, appear to them as parasites, having no justifiable function in society….

They therefore appropriate shareholders’ funds (or public money) with a good conscience, reasoning that without them there would be no such funds in the first place.

Theodore Dalrymple, “Flying Off the Handle”, Taki’s Magazine, 2015-10-10.

August 15, 2017

Cathy Young talks to James Damore

Filed under: Business, Liberty, Politics, USA — Tags: , , , , , — Nicholas @ 04:00

At Reason Cathy Young interviews former Google employee James Damore, who was fired after an internal memo he wrote criticizing the company’s diversity policies “went viral”:

James Damore, a former software engineer at Google, was suddenly propelled to fame after an internal memo he wrote criticizing diversity policies at the company leaked to the media. The document, sometimes labeled a “manifesto” (and, less kindly, a “screed” and a “rant”), asserted that the gender disparities in tech jobs are at least partly the result of innate differences between the sexes (primarily of women being more people-oriented and less attracted to such work) and that the diversity programs intended to boost the number of women at Google are counterproductive and possibly illegal.

While the document proposed alternative ways to make the workplace at Google more female-friendly, it was widely labeled “anti-diversity” and “anti-woman.” After 28-year-old Damore was identified as the author of the memo, he was fired for “perpetuating gender stereotypes.”

Since then, the controversy has raged unabated — perhaps unsurprisingly, since it touches on many hot-button, polarizing issues from gender equity in the workplace to freedom of speech. A few days ago, I wrote about the debate for USA Today. I interviewed Damore via Google Hangouts text chat on Friday. The transcript has been lightly edited for style, flow and clarity.

Cathy Young: All this must be a little overwhelming?

James Damore: Yes, especially since I tend to be pretty introverted.

CY: Did you think when you wrote the memo, that it could become public at all, let alone as such a huge story?

JD: No, definitely not, I was just trying to clarify my thoughts on Google’s culture and use it to slowly change some of our internal practices.

CY: You’ve mentioned in other interviews that you decided to write this memo after attending a staff meeting on diversity at Google.

JD: Yes, I decided to write my thoughts down after attending a particular “Diversity and Inclusion Summit,” although I had seen many of the problems in our culture for a while.

CY: Who was this summit for? All employees, or employees at a certain level?

JD: It was generally for high level employees in my organization that were interested in diversity efforts.

CY: Does Google have a lot of diversity events? Do any of them have mandatory attendance, or is it primarily for those interested in the issue?

JD: Google has many diversity events, including many during our weekly company-wide meeting (TGIF). They’ve also recently made “Unconscious Bias” training, which is ideologically similar, mandatory for those that want to evaluate promotions, all managers, and all new hires.

CY: You’ve mentioned that the summit that prompted the memo had some material that you found disturbing and offensive. I don’t know how specific you can be, but any examples?

JD: They outlined some of the practices where employees were being treated differently based on their gender or ethnicity at Google and during the hiring process. For example, there’s special treatment during the interviews (like more being given) and there are high priority queues for team matching after an employee gets hired. Also, there were calls to holding individual managers accountable for the “diversity” of their team, which would inevitably lead to managers using someone’s protected status (e.g. gender or ethnicity) during critical employment situations.

August 13, 2017

No one Everyone (now) expects the Google Inquisition

The decision by Google to fire dissident engineer James Damore over his “Google’s Ideological Echo Chamber” memo will likely have several divergent effects. One, of course, will be to encourage tech workers who may sympathize with some or all of Damore’s views to be more circumspect about expressing them (or even to be suspected of harbouring them). It will probably also encourage a more prosecutorial attitude among those most offended by Damore’s memo. We’re probably not far from the establishment of an inquisition-like body to sniff out the heretics:

What Damore’s termination tells you is that many in your field consider people with your beliefs to be unfit to work with. They hold opinions of you similar to those of former senior Google employee Yonatan Zunger, who wrote about Damore, saying:

    “Do you understand that at this point, I could not in good conscience assign anyone to work with you? I certainly couldn’t assign any women to deal with this, a good number of the people you might have to work with may simply punch you in the face, and even if there were a group of like-minded individuals I could put you with, nobody would be able to collaborate with them.” (Emphasis mine.)

If you are on the right, you probably find it hard to imagine that any reasonably person could read Damore’s memo and think that it reveals the author to be sexist, punchable, or a danger to women’s careers. It appears to you that Damore was excommunicated for questioning the progressive diversity narrative in a most respectful manner.

[…]

Many on the right fear SJWs. The website Breitbart, highly influential among conservatives and the Trump administration, interviewed an anonymous Googler who said in part:

    “Several managers have openly admitted to keeping blacklists of the employees in question, and preventing them from seeking work at other companies. There have been numerous cases in which social justice activists coordinated attempts to sabotage other employees’ performance reviews for expressing a different opinion. These have been raised to the Senior VP level, with no action taken whatsoever…There have been a number of massive witch hunts where hundreds of SJWs mobilize across the corporate intranet to punish somebody who defied the Narrative…I always fear for my job and operate with the expectation that I will be purged unless something changes…”

Many Business Insider readers won’t trust an anonymous Breitbart interview, but for what’s relevant to this article, please do trust that this Googler’s views accurately reflects how many on the right think about SJWs.

Interestingly, this is similar to how the original Inquisition came about:

The Inquisition was not born out of desire to crush diversity or oppress people; it was rather an attempt to stop unjust executions. Yes, you read that correctly. Heresy was a crime against the state. Roman law in the Code of Justinian made it a capital offense. Rulers, whose authority was believed to come from God, had no patience for heretics. Neither did common people, who saw them as dangerous outsiders who would bring down divine wrath. When someone was accused of heresy in the early Middle Ages, they were brought to the local lord for judgment, just as if they had stolen a pig or damaged shrubbery (really, it was a serious crime in England). Yet in contrast to those crimes, it was not so easy to discern whether the accused was really a heretic. For starters, one needed some basic theological training — something most medieval lords sorely lacked. The result is that uncounted thousands across Europe were executed by secular authorities without fair trials or a competent assessment of the validity of the charge.

The Catholic Church’s response to this problem was the Inquisition, first instituted by Pope Lucius III in 1184. It was born out of a need to provide fair trials for accused heretics using laws of evidence and presided over by knowledgeable judges. From the perspective of secular authorities, heretics were traitors to God and the king and therefore deserved death. From the perspective of the Church, however, heretics were lost sheep who had strayed from the flock. As shepherds, the pope and bishops had a duty to bring them back into the fold, just as the Good Shepherd had commanded them. So, while medieval secular leaders were trying to safeguard their kingdoms, the Church was trying to save souls. The Inquisition provided a means for heretics to escape death and return to the community.

As Karl Marx wrote in The Eighteenth Brumaire of Louis Napoleon:

Hegel remarks somewhere that all the events and personalities of great importance in world history occur, as it were, twice. He forgot to add: the first time as tragedy, the second as farce.

August 12, 2017

Troll the Patent Trolls

Filed under: Business, Government, Humour, Law, USA — Tags: , , — Nicholas @ 05:00

Published on 11 Aug 2017

Patent trolls are on the run. Let’s finish them off.
———
It’s been a bad year for patent trolls, from a Supreme Court decision squelching their ability to funnel lawsuits to East Texas, to this week’s ruling that Personal Audio LLC can’t claim it owns a patent on the entirety of podcasting. In the latest Mostly Weekly, Reason’s Andrew Heaton explores what patent trolls are, the damage they do, and the next step in driving them out of courtrooms and back into dank caves.

Trolls camp out on piles of weak and frivolous patents, hoping to one day sue inventors and businesses. Many of the patents they register or buy are vague, representing novel ideas only insofar as trolls are innovative at finding things they didn’t invent to claim legal ownership of. It doesn’t matter that these patents wouldn’t hold up in court, because a business is more likely to pay off a troll than to hire an expensive attorney to fight them. Trolls suck more than twenty billion dollars out of the economy each year.

The parasitical nature of “non-practicing entities” (the PC term for trolls) has raised questions about whether the modern patent system helps or hinders innovation, and if the best solution is for comprehensive reform or just to burn the whole thing down.

Heaton has an idea to hinder patent trolls. It may not be a silver bullet, but it will definitely piss them off.

Mostly Weekly is hosted by Andrew Heaton with headwriter Sarah Rose Siskind.
Script by Andrew Heaton with writing assistant from Sarah Siskind
Edited by Austin Bragg and Sarah Rose Siskind.
Produced by Meredith and Austin Bragg.
Theme Song: Frozen by Surfer Blood.

End supply management in one swell foop!

Filed under: Bureaucracy, Business, Cancon, Economics, Government — Tags: , — Nicholas @ 03:00

As always, Colby Cosh can express my thought far more eloquently than I can myself:

Mad Max tried to sugar-coat it as much as possible. They rejected that option with great vigour. Now let’s just burn the whole thing down … before Trump forces us to.

August 10, 2017

Words & Numbers: Has Tipping Gone Out of Control?

Filed under: Business, Economics — Tags: , , — Nicholas @ 04:00

Published on 9 Aug 2017

In 1922, famed etiquette writer Emily Post advised her readers that 10% is the standard for tipping your waiter. Since then, “gratuity creep” has been so steady that tip jars are now ubiquitous and 25-30% is considered the rule in New York City. Uber once resisted this trend, but recently added a tipping feature to its app.

What is the economic rationale behind tipping? Does the usefulness of tipping diminish the more that a certain rate becomes an expectation? At a certain point, would it be better to do without the fuss involved and simply include that portion of a service-provider’s compensation in the wages paid by the employer?

Our valiant hosts, Antony Davies and James Harrigan explore these questions and more!

QotD: The comfortable shoe revolution

Filed under: Business, Quotations, Randomness — Tags: , , — Nicholas @ 01:00

When I was a kid back in the 1960s and early 1970s, “shoes” still meant, basically, “hard leather oxfords”. Ugly stiff things with a high-maintenance finish that would scuff if you breathed on them. What I liked was sneakers. But in those bygone days you didn’t get to wear sneakers past a certain age, unless you were doing sneaker things like playing basketball. And I sucked at basketball.

I revolted against the tyranny of the oxford by wearing desert boots, which back then weren’t actually boots at all but a kind of high-top shoe with a suede finish and a grip sole. These were just barely acceptable in polite company; in fact, if you can believe this, I was teased about them at school. It was a more conformist time.

I still remember the first time I saw a shoe I actually liked and wanted to own, around 1982. It was called an Aspen, and it was built exactly like a running shoe but with a soft suede upper. Felt like sneakers on my feet, looked like a grownup shoe from any distance. And I still remember exactly how my Aspens — both of them — literally fell apart at the same moment as I was crossing Walnut Street in West Philly. These were not well-made shoes. I had to limp home.

But better days were coming. In the early 1990s athletic shoes underwent a kind of Cambrian explosion, proliferating into all kinds of odd styles. Reebok and Rockport and a few other makers finally figured out what I wanted — athletic-shoe fit and comfort with a sleek all-black look I could wear into a client’s office, and no polishing or shoe trees or any of that annoying overhead!

I look around me today and I see that athletic-shoe tech has taken over. The torture devices of my childhood are almost a memory. Thank you, oh inscrutable shoe gods. Thank you Rockport. It’s not a big thing like the Internet, but comfortable un-fussy shoes have made my life better.

Eric S. Raymond, “Eric writes about the shoes”, Armed and Dangerous, 2005-09-09.

August 3, 2017

QotD: Improved quality of life doesn’t always show up in GDP figures

Filed under: Business, Economics, Quotations, Technology — Tags: , , , , — Nicholas @ 01:00

We economists marvel, too, but we also wonder how free apps fit into GDP. They do have their long-run downside, as we forget how to read maps and plot routes ourselves. (Anybody out there remember how to work a slide rule? No? That’s not a loss for computation but it does mean lower average numeracy.) But in the short run they save billions of hours in wrong turns not taken and trillions of cells of stomach lining no longer eaten up by travel anxiety. Not to mention their entertainment value.

But hardly any of that very big upside shows up in GDP. In one respect, in fact, GDP goes down. I used to buy maps, including travel atlases. I’m unlikely to do that anymore. Maps purchased by consumers are a “final good or service” and thus do enter into GDP. Maps I interact with online but don’t pay for aren’t GDP. So well-being has gone up — a lot — as a result of Google Maps. But GDP may well have gone down.

In fact, apps do produce some GDP. Google sustains itself in part by selling ads, including to retailers and restaurants looking to pay for prominent mention on its map display. Its ad revenue is an intermediate input into GDP. Many of the entities buying Google ads are in the business of selling “final goods or services” and if they’re money-making, the prices of their goods have to cover the cost of their ads. So by that circuitous route the “value” of the apps does end up in GDP.

But what’s the relationship between what advertisers pay for my eyeballs and the value of the app to me? The two are not completely unrelated. The more I use the app the more I’m likely to buy the advertised products, presumably. But in practice, the probability of my buying is pretty small while my benefit from the app is pretty big. How strange that miracle apps can change our lives but not our GDP.

William Watson, “How using Google Maps on your summer road trip messes with the GDP”, Financial Post, 2017-07-18.

August 2, 2017

Ontario has scared off foreign home-buyers, but bureaucratic delays still make housing more expensive

Filed under: Bureaucracy, Business, Cancon, Economics — Tags: , , , , — Nicholas @ 04:00

Josef Filipowicz and Steve Lafleur explain why Ontario’s recent crack-down on foreign home-buyers in the Greater Toronto Area still leaves one of the biggest barriers to affordable housing untouched:

The Ontario Legislature in Queen’s Park, Toronto. (via Wikimedia)

According to a recent announcement from Queen’s Park, 4.7 per cent of properties purchased in Ontario’s Greater Golden Horseshoe (between April 24 and May 26) were acquired by foreign individuals or corporations. This in the wake of the raft of measures announced in April including a 15 per cent “Non-Resident Speculation Tax” ostensibly aimed at improving housing affordability.

It’s difficult to say how this portion of the housing market — foreign buyers — ultimately impacts the cost of buying or renting in Canada’s biggest urban region, and it’s far too soon to estimate the effects of the myriad of policy changes the Ontario government is introducing. But what we do know is that the laws of supply and demand apply to housing, and it’s hard to believe that a small percentage of buyers are responsible for the massive appreciation of housing prices in the GTA over the past decade. Rather than focus on a small tranche of buyers, we should focus on ensuring that regulations don’t prevent the supply of new housing from meeting demand.

[…]

So what’s preventing cities in the Greater Golden Horseshoe from issuing more building permits?

In short, red tape at city hall. Between 2014 and 2016, Fraser Institute researchers surveyed hundreds of homebuilders across Canada to better understand how government regulation affects their ability to obtain permits. In the Greater Golden Horseshoe, it typically takes one-and-a-half years to obtain a permit in this region, and per-unit costs to comply with regulation amount to almost $50,000. Approval timelines can also be affected by the need to rezone property. Approximately two-thirds of new homes in the region require this procedure, which adds 4.3 months (on average) before builders can obtain permits.

Another deterrent to more supply is local opposition to new homes. Survey results show that council and community groups in Toronto, King Township and Oakville are more likely to resist the addition of new units in their neighbourhoods, effectively preventing newcomers from moving in.

Update, 3 August: Mission accomplished. Toronto home sales plummeted 40 percent in July.

July 31, 2017

Craft brewers are good examples of “evasive entrepreneurs”

Filed under: Business, Government, USA — Tags: , — Nicholas @ 04:00

Rosemarie Fike explains why craft brewers almost always push tours of their premises and souvenir glasses, mugs, coasters, and T-shirts:

This summer I’ve been enjoying a lot of microbrewery tours — even though the main attraction isn’t the “tour” I pay for, but the free beer that comes with it. In fact, the breweries must know that’s why people come. So why don’t they just drop this tour façade and sell us the beer?

Regardless of which brewery you visit, you pay a mere $10 for a pint glass with the brewery’s logo on it. As a thank you for purchasing the pint glass, they then grant three tickets you can redeem for free “samples” — which are actually full-sized beers.

There are also usually food vendors and live music. This atmosphere combined with the inexpensive libations draw sizeable crowds to these “tours” — where only a handful of patrons actually tour the facility.

But why do the breweries insist upon selling us the pint glasses, when most of us only really want what goes inside?

In conversation with the brewery owners, I learned that the breweries in my town aren’t legally allowed to sell beer directly to consumers in the way a bar can. But there’s nothing in the law preventing them from giving their product away.

In response to those incentives, they sell customers a pint glass (or charge them for the “tour”) and rent some of their property out to food vendors to subsidize the cost of getting their product into the hands of eager consumers without technically charging them for it.

It’s far from an ideal situation for these businesses, but it allows them to introduce new people to their product and to earn some revenue in the process — even if it’s less revenue than they could earn if they were allowed to just sell people the beer. It’s a clever arrangement and a perfect example of evasive entrepreneurship.

July 30, 2017

It’s time to eliminate the ethanol fuel mandate (and all those corporate welfare subsidies)

Paul Driessen explains why now might be the best time to get rid of the Renewable Fuel Standard (RFS) which requires a proportion of ethanol be incorporated/blended into almost all petroleum fuels in the US (Canada has similar requirements):

The laws require that refiners blend steadily increasing amounts of ethanol into gasoline, and expect the private sector to produce growing amounts of “cellulosic” biofuel, “biomass-based diesel” and “advanced” biofuels. Except for corn ethanol, the production expectations have mostly turned out to be fantasies. The justifications for renewable fuels were scary exaggerations then, and are absurd now.

Let’s begin with claims made to justify this RFS extravaganza in the first place. It would reduce pollution, we were told. But cars are already 95% cleaner than their 1970 predecessors, so there are no real benefits.

The USA was depleting its petroleum reserves, and the RFS would reduce oil imports from unstable, unfriendly nations. But the horizontal drilling and hydraulic fracturing (fracking) revolution has given the United States at least a century of new reserves. America now exports more oil and refined products than it imports, and US foreign oil consumption is now the lowest since 1970.

Renewable fuels would help prevent dangerous manmade climate change, we were also told. This assumes climate is driven by manmade carbon dioxide – and not by changes in solar heat output, cosmic rays, ocean currents and other powerful natural forces that brought ice ages, little ice ages, warm periods, droughts and floods. It assumes biofuels don’t emit CO2, or at least not as much as gasoline; in reality, over their full life cycle, they emit at least as much, if not more, of this plant-fertilizing molecule.

[…]

A little over 15 billion gallons of corn-based ethanol were produced in 2016 – but only 143 billion gallons of gasoline were sold. That means using all the ethanol would require blends above 10% (E10 gasoline) – which is why Big Ethanol is lobbying hard for government mandates (or at least permission) for more E15 (15% ethanol) gasoline blends and pumps. Refiners refer to the current situation as the “blend wall.”

But E15 damages engines and fuel systems in older cars and motorcycles, as well as small engines for boats and garden equipment, and using E15 voids their warranties. You can already find E15 pumps, but finding zero-ethanol, pure-gasoline pumps is a tall order. Moreover, to produce ethanol, the United States is already devoting 40% of its corn crop, grown on nearly 40 million acres – along with billions of gallons of water to irrigate corn fields, plus huge amounts of fertilizer, pesticides and fossil fuels.

Much of the leftover “mash” from ethanol distillation is sold as animal feed. However, the RFS program still enriches a relatively few corn farmers, while raising costs for beef, pork, poultry and fish farmers, and for poor, minority, working class and African families. Ethanol also gets a third less mileage per gallon than gasoline, so cars cannot go as far on a tank of E10 and go even shorter distances with E15.

The problem with getting rid of targeted subsidy programs is that the benefits are highly concentrated while the costs are widely dispersed. As a whole, the North American economies would benefit greatly from eliminating the RFS mandates, lowering overall fuel costs, improving international food availability, and reducing or eliminating crony capitalist benefits to “Big Ethanol”, but most individuals’ gains would be small — too small to gain much active support — and the current beneficiaries would have vast incentives to fight to the death to keep those subsidies flowing.

July 29, 2017

Things to keep firmly in mind before investing in legalized marijuana markets

Filed under: Business, Economics, USA — Tags: , , — Nicholas @ 04:00

There will definitely be money to be made as more and more jurisdictions move to legalize marijuana, but it’s not going to be like soup raining down from heaven — it’s not going to be a simple as just grabbing a bucket:

Here are Coyote’s first three rules of business strategy:

  1. If people are entering the business for personal, passionate, non-monetary reasons then the business is likely going to suck. When I say “suck”, I mean there may be revenues and customers and even some profits, but that the returns on investment are going to be bad**. Typically, the supply of products and services and the competitive intensity in an industry will equilibrate over time — if profits are bad, some competitors exit and the supply glut eases. But if people really love the industry and do not want to work anywhere else and get emotional benefits from working there, there always tends to be an oversupply problem. For decades, maybe its whole history, the airline industry was like this. The restaurant industry is this way as well. The brew pub industry is really, really like this — go to any city and check the list of small businesses for sale, and an absurd number will be brew pubs.
  2. If the business is frequently featured in the media as the up and coming place to be and the hot place to work, stay away. Having the media advertising for new entrants is only going to increase the competitive intensity and exacerbate the oversupply problem that every fast-growing industry inevitably faces as it matures.
  3. Beware the lottery effect — One or two people who made fortunes in the business mask the thousands who lost money (Freakonomics had an article on the drug trade positing that it works just this way — while assumes the illegal drug trade makes everyone in it rich, in fact only a few really do so and the vast majority are and always will be grinders making little money for high risk). Even those people who made tons of money in hot businesses sometimes just had good timing to get out at the right time before the reckoning came. Mark Cuban is famous as an internet billionaire, but in fact Broadcast.com, which he sold for over $5 billion to Yahoo, only had revenues in its last independent quarter of about $14 million and was losing money (that’s barely four times larger than my small company).

When I was at Harvard Business School, the first two cases in the first week of strategy class were a really cool high-tech semiconductor fab and a company that makes brass water meters that are sold to utilities. After we had read the cases but before we discussed them, the professor asked us which company we would like to work for. Everyone wanted the tech firm. But as we worked through the cases, it became clear that the semiconductor firm had an almost impossible profitability problem, while Rockwell water meters minted money. I never forgot that lesson — seemingly boring industries could be quite attractive, and this lesson was later hammered home for me as I later was VP of corporate strategy for Emerson Electric, a company that was built around making money from boring but profitable industrial products businesses.

[…]

** You can tell I have classical training in business strategy because my goal is return on investment. One can argue, perhaps snarkily but also somewhat accurately, that there is a new school of thought that does not care about profitability, revenues, or return on investment but on getting larger and larger valuations from private investors based on either user counts or just general buzz. I am entirely unschooled in this modern form of strategy. However, the general strategy of getting someone to overpay for something from you is as old as time. I mentioned Mark Cuban but there are many other examples. Donald Trump seems to have made a lot of money from a related strategy of fleecing his debt holders.

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