It's Been A While

I am here, nonetheless. Capsized a sailboat and spent about an hour in 65 degree water (more about that later). My grandmother fell through the ceiling while trying to organize the attic. Been doing well trading the market--still have my head above water anyway. Watched the International Space Station fly almost directly overhead. Went to the Daytona 500, which was actually more like the Daytona 380 this year. Since the last post, I have been in two weddings (one in Palm Beach; one in St. Augustine) and attended one other wedding (Austin) and one bachelor party (Florida Keys). I finally applied for a job . . . yesterday. Tonight NASA is launching a Delta II rocket. The payload (a spacecraft named Kepler) is designed to spend the next 3 to 6 years searching for earth-like planets near the constellation Cygnus (the Swan), a.k.a. the Northern Cross. Anyhow, I should be able to see the launch from my back porch in Ocala, which is awesome.

In the realm of serious pontifications, I have a theory about the stock market. It's just a fringe theory and the argument may not even be valid--actually it's more like a brainstorm than a theory, so take it with a grain of salt. Anyhow, here it is: The stock market may actually be in place primarily to benefit the "High Ups." Think about it. People who run corporations may be entrepreneurs who own lots of stock in companies they started, or they may be executives with lucrative stock options. Either way, they need liquidity. What better way to get liquidity than to sell a "piece of the pie" to the masses via pensions, mutual funds, retail investors (traders, IRAs, 401(k)s), and even hedge funds? If one looks at long term charts of the major indexes, it is apparent that the "buy and hold" mantra preached by the pros for so long just doesn't work for the average investor, and yet the "High Ups" seem to have generally benefited from it--they are immune. To that extent, our markets seem manipulated from the outset. In other words, there seems to be a systemic bias against the average investor. This idea is nothing new, of course, as efficient market theories have long held that such a bias would exist if insiders could trade on non-public information. But luckily we have laws to prevent that and people like Bernie Madoff from operating too.

In The Great Crash, 1929 (a great book that I will review in the near future), John Kenneth Galbraith talks about "The Bezzle," or the ease with which fat cats embezzle money when times are good--how the "High Ups" exploit markets far beyond the systematic biases during bull markets--and the way those greedy hucksters cause market crashes and widespread pain. Until the "The Bezzle" is fixed, until all the bastards responsible literally burn at the stake, there can be no confidence in the market. Good people will not throw money after bad for very long. Lose money once, shame on you; lose it twice, shame on me.

With all that in mind, I really do think that we have failed free market capitalism (not the other way around). Take the CEO of any major bank as an example. Most of those guys pull in $10 million plus per year. Normally four to ten others in the organization make close to that too. In a purely free market system, shouldn't the following question be asked of executives: Is there anyone capable of performing the same job function (e.g. CEO, CFO, COO, CIO . . . all the "C-level jobs") for less money? It's surely done on the ground level. If all employees were as over compensated as C-level employees, there would be no minimum wage, which effectively just keeps C-level executives from taking even more.

But does our system allow the free market to operate at the C-level--to ask if other qualified and capable persons would do the job for less money? NO!!! Why not? Because business is politicized. The CEO of company X sits on the board of directors of company Y, and CEO of company Y sits on the board of directors of company X. You scratch my back; I'll scratch yours. The whole system is inbred, which is why the market looks retarded right now. Surprise surprise, Gomer!

Executives of publicly traded companies should have compensation capped at 30 times the income of the company's average employee. Including bonuses. Hell, 30 is an arbitrary number, but it works for this example. Once a company goes public the number of stakeholders in the company expands dramatically, because "the public" is involved via pensions, mutual funds, IRAs, and 401(k). I am all for allowing executives to have the option of taking any portion of their salary in stock or options . . . but not options for stock to be issued in the future or newly authorized stock (in other words, not if shareholders are diluted by the stock or stock options). In fact, a portion of compensation should be through stock as a mandatory requirement, but not through options granted way in the money or stock awarded for free. Why should these people be given anything for free? When was the last time your boss gave you a few hundred of thousand dollars worth of stock options just for showing up to work? It happens every day on Wall Street!

No, compensation should be based on the value that executives add to a public company. So award executives half of their salary in stock bought through an open market transaction and half in cash. Then let them add value to the stock through their efforts.

Hey, if they can make more money in the private market, then stay there!!!! My hypothesis is that most executives could not make equivalent money in the private market, because the private market does not provide a systemic bias in favor of executives, namely removing risk from the venture and placing more value on politics than performance.

As an aside, I believe that the sky should be the limit for compensating entrepreneurs and executives of privately held businesses. These people are risk takers and should be rewarded accordingly. But the moment a company goes public, the game changes and so should compensation structures . . . even if the people running the business are the original founders, because their risk is diminished to the extent of public financing and they will be amply rewarded for the risk they originally took by large ownership interests in the newly public enterprise. In essence, going public is a way of cashing out, and continuing to run the business profitably and thereby raising the stock price should be the main component of compensation for such entrepreneurs turned executives.

Warren Buffett has operated under a similar system since the inception of Berkshire Hathaway, and he's doing pretty well. His annual salary is $100,000.00! None of the people on Wall Street making $10 million, $20 million, and upward have created nearly as much value as Mr. Buffett over the years, and yet they continue bringing in the huge salaries and bonuses. Once upon a time bank robbers used guns. Today they all have M.B.A. degrees. It's absurd, and that's all I have to say about that.