Thursday, March 15, 2012

The right way to make money

A critical point totally lost on the non economists…. 

by RUSS ROBERTS on MARCH 14, 2012


People are making fun of this piece by Greg Smith where he talks about his disillusionment with the culture at Goldman Sachs. Smith claims the only focus at GS is making money and people openly disdain the customer. He’s being mocked for thinking it could possibly be otherwise.

But I was reminded of this 1950 quote from George Merck who was president of the pharmaceutical company:

We try never to forget that medicine is for the people.  It is not for the profits.  The profits follow, and if we have remembered that, they have never failed to appear.

If you focus on making money, you end up making a lot of bad decisions. Paradoxically, if your goal is to make money, it’s better to think about making a great product, making the customer happy and so on with the constraints of making money along the way. The best corporate cultures encourage excellence, not the bottom line.

The bottom line matters of course, but if that’s your focus your long-run results may be quite poor. No corporation that I know of has as its motto: make as much money as possible! And I don’t think it’s just public relations. A great corporation with great profits gets its workers to focus on the consumer and uses other mechanisms to make sure the employees don’t bankrupt the company by being too generous with prices or quality.

EconTalk listener Andrew Hedge points out that Smith’s time at Goldman began when Goldman had just gone public noting that Emanuel Derman also views the post-IPO Goldman as a less attractive company than when it was a partnership.

I suspect that when Goldman was a partnership risking more of the partners’ own money their bets were more prudent than today when they are able to use a lot more leverage with a lot less equity. I’m sure their culture was different and that it eroded slowly at first.


Saturday, March 10, 2012

Buffett and Bono turn bozo

Just as rock stars ought to stick to music and eschew politics so investors – no matter how great – should stay away from public policy analysis and prescription.

Warren Buffett’s venture into tax policy has been an unmitigated disaster as well as an embarrassment because he broke his own rules  - he erred and strayed into areas he knows nothing about.

I guess it helps to know your favourite investment analyst is human, but…..

The lawsuit against the IRS by Warren Buffett's Berkshire Hathaway subsidiary NetJets to avoid paying $643 million in taxes that the IRS said it owed was the subject of a post here back in November. Now, the Huffington Post reports, NetJets paid $2.5 million to lobbyists who got Congress to change the law so the company doesn't owe the tax. From the bio of Jeff Munk, who the Huffington Post says led the lobbying effort:

Prior to joining the firm, Jeff served as Legislative Counsel to U.S. Senator Kay Bailey Hutchison (R-TX). Today, Sen. Hutchison is Ranking Republican of the Senate Commerce, Science & Transportation Committee. While with Sen. Hutchison, Jeff developed and executed the senator's major legislative initiatives and counseled the senator on policy issues and floor procedures. He was the Senator's key counsel on taxes, trade, appropriations, environment, and regulatory issues.

The revolving door strikes again.

Let it be said, too, that a $643 million return on a $2.5 million lobbying investment is a pretty good return on investment even by Warren Buffett standards.

Never mind the hypocrisy of the fact that the tax savings Mr. Buffett realizes here far outweighs whatever additional he would pay under the proposed "Buffett Tax."

From Future of Capitalism