“Real Growth Rises When Businessman Have Confidence About the Future”

By | July 2, 2014

I have been very busy lately with closing the second quarter in our fund and the preparations for releasing our semi-annual letter so I didn’t have much time to write. This is a short post that I thought would be of interest to some of you…

One of my favorite economists, Joel Stern of Stern Value Management is visiting Singapore and as usual, he gave an interview on CNBC: (click here to view the interview if the embedded video below doesn’t show)

For those who don’t know him, Joel has made many contributions in the field of corporate finance. He was among the first people who suggested that GAAP earnings do not always matter and said that investors should look at Economic Profits and he later put in place a system called EVA, that stands for Economic Value Added. This system was “adopted” by McKinsey and others, but Joel’s firm, Stern Value Management is the world leader in implementing value creation programs and putting in place effective incentive systems for companies around the world.

While I disagree with Joel on some things (efficient markets, risk measurement) I do think that he has makes a valid point about government interference. Many interest groups are asking for government help on what seems a worthy cause for them.  The problem, as Joel said, is that this money has to come from somewhere and at the expense of somebody else who might not necessarily think that the cause is worthwhile. An industrialist might oppose a subsidy to farmers and the farmers might oppose a subsidy to clean energy projects and so on. You can easily see how this gets very complicated because everybody’s concept of justice is different.

After the financial crisis some government agencies and regulatory bodies have overreacted and enacted many rules and regulations that as Joel said, lower productivity levels because these regulations are time and resource consuming. Also, since many of these regulations take forever to deliberate and finalize there is a lot of uncertainty in the business community. Uncertainty is the foe of economic growth because it makes it difficult to predict the after-tax rate of return on investment. As a result, businesses choose to delay investments until they have more visibility on what the rules of the game are.

I also attended Joel’s lecture about incentives at the Business School of SMU. Even though I’m familiar with the material, it is always fun to see Joel teaches, or as he puts it: “If you don’t understand anything, at least you get some entertainment” and entertaining it was. I think that studying incentives and their influence on behavior is a crucial thing  for anyone who does business. Business Schools do not devote enough attention to this highly important topic and I tip my hat to SMU who embedded this topic in their curriculum. Anyway, I may write more about incentives in a separate post in the future but for now, we will leave it at that.

During a dinner I had with Joel, I asked him about John Malone. Those who read the blog know that lately I’ve been paying a lot of attention to two companies that are under his control and I thought it would be interesting to hear what Joel thinks of him. First, unfortunately, Joel never got to work with Malone or even meet him (that’s very rare as he usually knows in person most prominent business leaders in the US). Second, he said that John Malone is an incredibly smart and capable manager who chose to operate in regulated industries. According to Joel, regulated industries, to put it in mild terms, usually do not attract the most brilliant managers so the fact that John Malone, smart as he is, mainly operates in such industry, gives him a huge advantage. I didn’t think of it that way so I found this observation very interesting.

Anyway, it is always fun to meet top-notch business leaders like Joel Stern and I’m lucky to have met him twice this year, once in Israel (where we had a full day of meetings with Israeli consulting companies) and then again in Singapore this week. I hope to write a similar post next year when he returns to Singapore.


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