The Business Sensei

Mercky Research

Not long ago, an article in the New York Times discussed how Merck created what appeared to be an independent, peer-reviewed journal, and then used that journal to convince doctors to prescribe Merck products.

What is particularly amazing about this story is that Merck is the same company that 20 years ago created a cure for River Blindess, even though they knew that the people most in need of that cure would never be able to pay for it. At the time, the cost to the company was estimated at $200,000,000. Then CEO Roy Vagelos said that he felt that there was really no other choice: he was living up to Merck’s ideals of “health before wealth” and “do good and good will follow.”

As things worked out, the long-term benefits to the company, in terms of prestige, being able to attract top-notch researchers, and access to emerging markets, were immense. Merck did good, and good did indeed follow for the company and its shareholders. It just wasn’t obvious at the time that things were going to work out that way.

So what happened?  How did a company that lived up to its ideals as Merck did come to be the same company that used rather questionable practices to convince doctors to use its products?

Now I have no particular contacts or channels into the brains of the people at Merck, so what follows is purely supposition based on observing similar patterns of behavior in sports and business.

It’s well known in sports that athletes who are solely focused on winning do less well than those who are focused on personal excellence and skill mastery as well as winning. Indeed, a total focus on the outcomes and not the process can lead to a number of problems, including depression, burnout, and reduced enjoyment in the activities. Failure, instead of being a learning experience or an opportunity to evaluate and adjust, becomes something to avoid at all costs.

Ways of avoiding failure might involve only facing easy opponents, or it might involve cheating in various ways. Fear of failure is a very powerful force; the most successful athletes are those who master the art of learning how, and when, to not care if they win or lose.

When a business becomes totally focused on making money, it falls into a trap similar to that of the athlete. Milton Friedman to the contrary, a business cannot be solely about making money. Rather, a business is about producing innovative, or at least useful, products and services. These products and services must, in some demonstrable fashion, provide value to people. Money is how the business knows it’s succeeding.

Like sports, however, when the focus becomes too short-term and too outcome oriented, it becomes increasingly easy to justify behaviors that make money now instead of behaviors that maintain the product pipeline. It’s really no different from the athlete who sacrifices long-term health or career for a victory today. Living up to ones ideals is easy when things are going well; it’s when things get difficult that the real test comes.

Being a successful athlete, at any level, takes a great deal of work and dedication. There are always people who are looking for short-cuts. Being a successful company takes work and dedication as well; staying successful is, arguably, even harder. Over the years, very few have managed it. The tendency to take short-cuts is always there. It’s the businesses that stick to their ideals and are not captured by the fear of failure that last the longest and are most likely to survive the inevitable tough times.

Just as in sports, it’s all about learning how, and when, to not care.

We’re Doomed!

It’s the end of the world! There’s clearly no chance that the US will escape from the current economic downturn. Doom is at hand.

More and more people are telling me that they no longer listen to the news. They are finding the steady drumbeat of negativity too depressing. Their response is to shut out the noise.

Now, there’s something to be said for that approach. After all, if you don’t listen, you don’t have to pay attention to how bad things are. On the flip side, you might also miss something useful. Back in 1910 or so, legendary stock trader Jesse Livermore always read the newspapers, no matter how bad things were. When the economy finally turned, he was ready. Inside a year, he went from a million dollars in debt to a million dollars in the black. During the Great Depression, IBM’s Tom Watson always stayed current on the news: when conditions changed, his swift actions made IBM a huge success.

Perhaps ignoring what’s going on is not the best course of action, especially for CEOs and other business leaders.

The fact is, though, it is hard to listen to the news without feeling discouraged. It’s even worse in a world where the news is always on, as close as our computer or cell phone. Being tough and bucking up only works for so long. Eventually, even the toughest will get tired: a steady diet of discouraging words can undermine anyone’s confidence in a variety of subtle or not-so-subtle ways. So if the answer is not playing ostrich, and it’s not toughing it out, what does work?

The most important thing is to reframe excessively negative news into something more neutral or even positive. This is actually less difficult than it sounds, mainly because the news frequently appears worse than it actually is. In Edwin Lefevre’s classic, “Reminiscences of a Stock Operator,” he observes that the news media is always most excited and positive at the top of the economic cycle, and most dire and pessimistic at the bottom. Lefevre’s book was written in 1923, and his observation remains true today. Just because it’s easier to get the news doesn’t mean that the psychology has changed.

In a recent news report, one economist was claiming that hyper-inflation and total social collapse is just around the corner. Is that likely? I’m no economist, but I have to wonder how many people today remember “Dow 36,000?” James Glassman’s book was published at the height of the Internet boom: in October 1999, just a few short months before the market crashed in March 2000. Today, we’re hearing the equivalent of Dow 3600. The predictions of a rosy future stretching into forever were loudest, and most believable, at the top; what does that say about the news today?

What then is the best way to listen to the news and keep your outlook positive? There are several strategies used by master stock traders and other business leaders:

·        Be contrarian: it’s always most euphoric at the top and grimmest at the bottom.

·        Look for the hidden opportunities. When it looks like we’re doomed, that’s when things are turning.

·        Don’t listen to every news broadcast or read every paper or website. Hearing the same stories over and over reinforces the feeling that you’re getting new information. In fact, you’re getting the same information, and it’s all usually from the same original source.  Hearing something through multiple channels “tricks” us into giving it too much credence.

·        For some reason, negative news frequently sounds logical and good news foolish. Stop and take a larger perspective. Don’t let your point of view become narrow.

·        Each day, set aside some time to get away from the computer. Shut off the TV, put down the newspaper. Do something fun. Give yourself perspective.

·        Don’t be afraid to act. It’s easy to get stuck looking for the perfect move. Sometimes, the important thing is just to move. Once you’re moving, it’s amazing how much more positive the news becomes.

While it’s certainly true that we can’t control the economy, we can control how we react to it. You can be sucked into the doom and gloom, or reframe and seize the opportunities that are out there. Tom Watson chose the latter. What’s your choice?

Published at FreudTV.com

Killing the Goose

Despite claims to the contrary, lack of regulation does not cause people to commit crimes or engage in foolish actions. Nor is the presence of regulation a guarantee that people won’t violate the law or do something stupid: remember Long Term Capital Management for a perfect example of the latter. Just as no lock can keep out a thief who is determined to rob your house, regulation will not stop someone who is determined to cheat: remember Enron? How about Bernie Madoff? Regulation will, however, provide the grounds to prosecute those who do cheat. Attempting to prevent all forms of cheating merely overburdens the system.

So, if this is true, why do we have the toxic financial mess that has shaped the news for the past several months? After all, didn’t that come because of a lack of regulation on Wall Street? Well, not exactly. While better regulation might well have prevented things from getting as bad as they have, the lack of regulation is not the cause, in much the same way that the lack of a safety belt does not cause an accident; however, the use of safety belts reduces the harm caused by an accident.

What then is the cause? Sure, we’ve all heard the news about subprime loans and toxic mortgages. But those instruments had to come from somewhere. Wall Street tycoons? It’s easy to think of Wall Street as being dominated by wealthy investors who are making millions by selling bad loans, but even that’s not true. The vast majority of people on Wall Street are people just like everyone else: working men and women whose job it is to make money. Quite simply, just like any other employee in any other company, folks on Wall Street go to work each day and worry about paying the bills, taking care of their families, and doing their jobs.

Here’s the problem: what do you do when you are told to make money and the financial markets aren’t offering up opportunities? You can’t go to your manager or your investors and say, “Sorry.” That’s not what they want to hear, and if your goal in life is to keep your job, you are not likely to go there. Instead, you get creative. Just like any employee in any job, you look for an innovative solution to your problem.

Now the fact is most people are not evil. Most people will not knowingly and deliberately break the law. If there are clear regulations telling people not to go somewhere, they usually won’t go there. But if there are no regulations, or if the existing regulations are honored in the breach, that’s a different story. It’s not that people will set out to cause harm or do stupid things, it’s that focused on the short-term needs of solving their particular problems, they are easily blinded to the larger ramifications of their actions. Regulations, optimally, map out the territory: they define the box in which people should work. They prevent you from falling off a cliff and taking everyone else along with you.

So then is the cause of the problem people just doing their jobs and the financial meltdown all a tragic “oops?” No again. The problem is that the cause is not what we have but what we don’t have.

Each bull market, each economic boom, is carried forward by some form of leadership. In the 1950, it was the electronics boom. In the 1960s, it was companies like IBM and Polaroid. In the 1990s, Cisco, Intel, Microsoft, Amazon.com, Yahoo, etc. Technology leadership leads to a flowering of innovation, and a flowering of innovation leads to technology leadership.  Improvements in technology lead to greater productivity and a stronger economy.

What about the bull market that ran from 2003-2007? Volumes have already been written about how little “boom” this economic boom packed. Although we did see some technological innovation during this period, for example Google, Taser, the iPod, and GPS (a technology with its roots in government spending – we’ll come back to that), for most part what we had was a commodities boom. The problem with commodities is that they don’t fundamentally change the world in the ways that technology does. They don’t leave behind a world of greater productivity or improved communications.

Now, there are many reasons cited for the commodities bubble of the past few years: China, OPEC, developing countries, etc. Let me suggest a different, and more basic, reason: there wasn’t anything else. The small amount of innovative technology we saw during that period was hardly enough to drive an economy or a stock market. But people still needed to make money; investment had to go somewhere, and it went to commodities and mortgages.  What happened to the innovation?

Over the past hundred years, almost every economic boom and bull market had its roots in government spending on either innovation or infrastructure. Without providing an exhaustive list, a few highlights include: railroads at the start of the twentieth century: government investment in land and track; automobiles in the 1920s: government investment in transportation technology during WWI; electronics in the 1950s: government investment in radar and military technology in WWII combined with the development of the transistor; mainframe computers in the 1960s: investment in computer technology as part of the space program; biotech in the late 1980s: government research grants in life sciences; and, of course, the Internet, which started life as ARPANet: another government program.

Quite simply, the government investments that formed the seed of so many prior booms didn’t exist: the money wasn’t there. The argument is often, and loudly, made that low taxes are a boon to the economy because people get to keep more of what they earn and this stimulates growth. While there is a nugget of truth in this, in that if taxes are too high to being with, then lowering them will have the touted benefits. However, it is also a fact that the economy grew more under Bill Clinton than under George W. Bush. Was this despite the higher taxes during the Clinton presidency, or because of them? The traditional answer is the former; the truth, I believe, is closer to the latter.

If taxes are taken too low, then something has to give. Typically, what gets cut is basic research. Even the wars in Iraq and Afganistan are not producing remarkable new breakthroughs in technology; at least, if they are, those breakthroughs haven’t become commercial yet. For the most part, it seems as if these wars are being fought with refinements of existing technology or off-the-shelf equipment.

Some level of taxes, therefore, provides the fuel for investment in innovation and infrastructure that generates the next economic boom and bull market. This is a rather different perspective on taxes than what is traditionally said. When taxes are being funneled into the economy, they lead to growth. Taxes are an investment. Now, I don’t have exact numbers on this, but when taxes are reinvested, the money we pay in taxes is returned fivefold in our 401Ks. When taxes are cut to the bone and there is no money to invest in the future, the money we save is taken tenfold from our 401Ks. Now, again, the exact numbers are open to debate; however, I will venture to guess that most of us have lost far more in our 401Ks and IRA accounts this year than we gained in the previous two years, and far more than whatever we may have saved in taxes over that same time period.

Unfortunately, when the economy is booming, people tend to assume that it will never end: just look at any bull market in history for an example of that behavior! All markets are driven by fear and greed, and the latter dominates at the height of a boom. People start thinking about all the money they are paying in taxes; they start to see that as money being taken away, not as the price we have to pay to keep the boom going. Like fear, greed causes behavior that people would never imagine that they could possibly engage in… until they do.

Regulation provides the framework and the controls to keep the economic engine operating within tolerance. Just as a governor on an engine keeps it from redlining or stalling, regulations on economic behavior help to prevent the type of meltdown we are now experiencing. Like an engine, the governor causes a small amount of overhead; there is some loss of power. That loss is the price we pay to avoid catastrophic failure. However, regulations alone can’t do prevent all forms of failure; we need an ample supply of legitimate and economically safe ways of making money to prevent widespread fraud and abuse. On the other hand, we can’t entirely do without regulation because no matter how good things are, there will always be Enrons and WorldComs. Fear and greed both lead to illogical behavior; it’s vital to have the fences in place so that the economy won’t run off the cliff in a panic or fall victim to excessive greed.

Once we’ve prevented the economy from crashing, or at least made it less likely, we can get the engine running at capacity. Taxes feed innovation which feeds the economy: taxes are, in short, an investment in our own future. It’s time to recognize that investments are more than just something we put into a 401K and forget about. Regulation, taxes, and innovation: they are all connected. Mishandle one, you break the others.