Further Proof That College Is A Waste Of Time And Money

March 23, 2012

Modest upbringing. Zero excuses.

 

This week saw the retirement of the kind of American whom Horatio Alger, Jr. used to write books about. Today, that same American could get blamed for everything from childhood obesity to animal cruelty to profiteering off the backs of the downtrodden to increasing income disparity. Here at Control Your Cash, we’ve chosen to find him remarkable. And a shining example of what do to after high school.

Jim Skinner was one of America’s foremost CEOs. The 67-year old spent 8 years as McDonald’s’ chief executive officer.

Big deal. He took the reins of a company that was already a titan. Any business school graduate could do that.

First, it’s not easy to take over a company that’s supposed to thrive. The downside of such a position vastly outweighs the upside, and if you don’t believe that ask John Sculley (Apple CEO, 1983-1993), Roger Enrico (PepsiCo CEO, 1996-2001), or Antonio Perez (Eastman Kodak CEO, 2005-whenever this bankruptcy finally goes through.) Heck, even Apple’s current CEO Tim Cook is 0-for-1 in presiding over groundbreaking product launches since Steve Jobs’s death. (If there’s an appreciable difference between the resolutions of the iPad 2 and its successor, we can’t see it.)

Phil Jackson coached a record 11 NBA championship teams, and was similarly disregarded for the allegedly failsafe situations he was placed in. If you think it’s easy to coach capricious superstars such as Michael Jordan and Kobe Bryant – guys who take sadistic pleasure in exposing and exploiting the weaknesses of their teammates, never mind their opponents – go ask the coaches who were placed in even better situations, the coaches who replaced Jackson himself. The complete list includes Tim Floyd, who finished his career more games under .500 than any coach in NBA history; Rudy Tomjanovich, who lasted barely half a season before quitting; and Mike Brown, who’s presiding over open mutiny as we speak.

Don Thompson, Skinner’s replacement, will need all the help he can get.*

Skinner never graduated from college. He spent 2 years taking night courses at something called Roosevelt University, a private school in Chicago. Its most famous living alumni are former Black Panther Bobby Rush and the guy who plays keyboards for Chicago, the band.

Skinner wasn’t on a regular college schedule, seeing as he had enlisted in the Navy as a teenager. His Navy tenure lasted a decade, and included stints in Vietnam. He saw combat. And returned home at 27 to…flip burgers.

Restaurant management trainee. The kind of job that lots of people scoff at, down to and including many of the baristas and sales associates who make less money per hour than fast-food restaurant managers do. We’re guessing the discipline and responsibility Skinner learned in the Navy meant more to the bosses he answered to on the way up than did anything he learned during his brief tertiary education.

As Skinner himself put it, concerning succeeding generations of management trainees:

They know they have to perform. You don’t get a bye because you walked in off the street and went to Harvard. (New York Times)

Skinner expanded the product line, keeping busybody interest groups and irresponsible parents happy with apples and milk. He slowed down the company’s fanatical growth, concentrating more on expanding profits at the existing stores than colonizing new territories. (Ray Kroc famously said he was in the real estate business, not the food business. Perhaps, but that real estate needs to cash flow.) Skinner even managed to fuse “gourmet coffee” with “McDonald’s” in the public consciousness without anyone laughing.

McDonald’s’ stock price was less than $30 when Skinner took over. Today it’s flirting with $100, and its financial statements are almost perfect: fat profit margins, relatively little debt, growing retained earnings, and tons and tons of treasury stock.

Including everything, Skinner earns about $10 million a year. He still sits on the boards of Walgreens and of Illinois Tool Works. And he owes it all to not spending 4 extra years stagnating in a classroom.

Some of our slower readers will doubtless take the headline literally. Fortunately we no longer have to read their ignorant comments (or anyone else’s, ignorant or otherwise.) Sure, college is great if you use it for its sole purpose – leveraging those 4 (or however many) years so you can make even more money in the subsequent years. Getting a humanities degree isn’t going to do it.

How gauche and philistine of you. College is about expanding one’s horizons, learning for learning’s sake, maturing in an unfamiliar environment, etc.

1. Bullcrap. For most students, college is about getting drunk, sleeping in late, terrorizing the weaker kids in the dorm, wearing togas, vomiting, asking for extensions, making awkward sexual advances, drinking some more, smoking pot, staying up way too late, drinking, vomiting again; and for the exceptionally unattractive and underworked kids, protesting everything from nuclear power plants to U.S. involvement on Johnston Atoll.

2. Fine. It’s all those things you mentioned. You’re right and we’re wrong. College still costs money, in case you thought the millions of people who complain about and default on their loans are just doing so for show. An investment needs some hope of return. Otherwise it’s just an expense.

You’re saving for your own kid’s college tuition right now, aren’t you? Or bankrolling a kid who’s already there, taking English and psychology classes. The Navy doesn’t just give you a better education than Yale’s women, gender, and sexuality program does, it’s also free. Trade school isn’t free, but it’s a lot closer to free than it is to college tuition.

Everyone talks about the benefits of college and dismisses the costs, even though the latter are tangible and the former are not. Jim Skinner knew from an early age to cut through the nonsense. How many of the rest of us are smart enough to do so?

*We kid. Thompson will be fine, even though he went to college. Why? He has an electrical engineering degree (from Purdue.)

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IPOs for Beginners

March 21, 2012

 

You mean a site where people give their opinions about restaurants is worth billions? Sure, sounds good to me.

This article appears in drastically different form on Investopedia.  

“IPOs for beginners”. As a concept, that’s similar to “International Space Station repair for beginners.” No less an authority than Benjamin Graham, author of the definitive investing guide The Intelligent Investor and mentor of Warren Buffett, believed that initial public offerings were way beyond the neophyte investor’s level. He was largely right, but why?

Who wouldn’t want to be among the first to enjoy a promising new stock, one that no one else at the cocktail party had the privilege of investing in as early as you did? IPOs are tempting, if you’re the kind of person who loves shiny new toys and the general feeling of exclusivity that accompanies them. But at least you can physically show off your iPad 3 or PlayStation Vita and receive tangible oohs and aahs. That’s considerably different than telling everyone you meet that you hopped aboard the Groupon bandwagon when the rest of the world was still showing their IDs at the ticket counter. There’s little that’s conspicuous about a particular new entry in an online brokerage account.

Graham thought IPOs were only for seasoned investors for several reasons, one of them being that the previous private owners are often looking to cash out much of their holdings. The underwriters set the price of the typical IPO at a premium specifically to take advantage of a seller’s market. With limited supply, and highly publicized if not unlimited demand, what would you expect to happen to the price of a stock when it’s first offered to the public? (It’s a rhetorical question, and if you really need the answer, you shouldn’t even be considering investing in an IPO.)

Graham died a quarter-century before the original dot-com bust, and everything that’s happened since would only reinforce his position regarding who should invest in an IPO. Almost by definition, most initial public offerings are of companies that haven’t been around a long time. Lately, the companies haven’t even needed healthy records of revenue growth and profit, either. But with a proliferation of aggressive venture capital firms looking to back winners, and the financial media having ever more reach among amateurs looking for an exciting place to put their money, one thing is certain: the next Pets.com or eToys won’t be hurting for investors on its opening trading day.

Last November, Groupon “finally” went public after endless rumors. (“Finally” is in quotes because while most of Groupon’s existence as a private company was spent anticipating the IPO, that existence was only three years. The company was founded in November of 2008.) The company was on top of the collective consciousness as the hottest of all possible IPOs, at least until the day that Facebook goes public. Groupon acknowledged in SEC documents that it was on pace to lose half a billion dollars a year, and investors still kept coming. Once the institutional investors got paid, and GRPN finally became available to the ordinary public, the stock had fallen from its introductory price. A scant 4 months later, Groupon stock has lost almost a third of its value, which is fairly impressive seeing as earnings are about a negative dollar per share. Groupon’s never reached its IPO level after a couple of weeks of trading, and might never again.

Of course, all IPOs aren’t Groupon. VISA went public after decades of renown and profit, but even its IPO wasn’t available to anyone but institutional investors at the start. The same will go for Facebook. The company’s primary stockholders will profit the most – the very day it goes public, in fact. The initial lenders will get on their knees and thank the God of their parents’ choice. After a few more iterations, the most anticipated stock in recent history will trickle down to average investors at a price that could be a bargain, or could be a local maximum. There are more prudent ways to invest.

Take an example of a company whose stock is about as far removed from an IPO as possible – United Technologies. The Hartford-based aircraft engine and elevator conglomerate has been a component of the Dow since before World War II, and probably hasn’t been above the fold in any story in The Wall Street Journal since then. Most people have never heard of United Technologies, and the company brass prefers it that way, thank you very much. Nothing, not even a fire alarm, will clear out a room faster than telling people you recently went long on UTX stock. But an interesting thing about United Technologies’ performance is that you can examine its price movement over almost any arbitrary period,  and the graph will consistently move up and to the right.

Investing should have one solitary, overarching objective – to make money. Getting excited about an IPO for its own sake isn’t investing so much as it is flamboyance. The people who got in on Google’s ground floor, you can count on both hands. It’s tempting to think that you could have been one of them, or that you could be in a similar position when the next IPO comes available, but building wealth doesn’t have to be that capricious. Find an established, undervalued, temporarily wounded stock, and you’re far more likely to turn a long-term profit than someone starry-eyed over the latest company to be listed publicly.

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There’s a Millionaire Born Every Minute

March 7, 2012

 

Barnum had his own midget decades before having your own midget was cool

 

While planning for a long trip to Costa Rica this winter, your humble blogger needed a way to entertain himself in a land where the nearest bar showing NFL games is a dirt road and a ferry ride away. Fortunately there exists the Kindle Store, where you can not only buy the Greatest Personal Finance Book Ever Written for next to nothing, you can get dozens and dozens of classics free. Almost anything that’s out of copyright, Amazon makes available. Within minutes the complete works of Mark Twain, Middlemarch, The Wealth of Nations, Ulysses, The Man Who Would Be King, The Iliad, War & Peace, The Count of Monte Cristo and dozens of others found their way onto the Kindle, so many books that they left barely 96% of its storage available.

The last book downloaded was an afterthought, and like many an afterthought, has inspired something of substance. That book is Art of Money Getting or, Golden Rules for Making Money by Phineas Taylor Barnum.

Here’s everything we knew about Barnum before buying the book:

  • founded a circus that, via a couple of mergers, still exists a century and a half later
  • introduced Tom Thumb to the world
  • said “There’s a sucker born every minute.” It turns out that Barnum never actually said that, which doesn’t matter because his verifiable quotes are far more profound.

Barnum wrote Art of Money Getting at 70, which was only 9 years after he founded his circus. Barnum spent the first 2/3 of his adult life building theaters and producing shows.

Art of Money Getting is short at 128 pages (if pages are still the measurement you use for book length. It’s 504 Kindle locations long.) But its ideas resonate way out of proportion to its length. Right out of the gate, in fact. The opening line:

In the United States, where we have more land than people, it is not at all difficult for persons in good health to make money. 

Barnum wrote this in 1880. The nation had 50 million people spread over 39 states. The first electric streetlight was installed that year. Ohio congressman James Garfield won the presidential election by 1,898 votes, catching a bullet for his troubles a few months later. Helen Keller checked in, as did the University of Southern California.

The road to wealth…consists simply in expending less than we earn; that seems to be a very simple problem. 

(Bolding and italicizing ours.)

Barnum quotes Charles Dickens’s Mr. Micawber, who said that if you make £20 a year and spend £19/6, you’ll be “the happiest of mortals”. Spend £20/6, and you’ll be “the most miserable of men.”

One look at the Occupy Wall Street protestors, United States senators and congressmen who spend your money, indebted graduate students, degenerate lottery players*, underwater adjustable-rate mortgage holders walking away from their homes instead of honoring their obligations and clueless personal finance bloggers who carry 5-digit credit card balances yet can’t wait to plan their honeymoons might lead you to believe that you can indeed spend more than you earn and still be happy. Barnum knew that that kind of “happiness” is riddled with more holes than a Lindsay Lohan alibi.

More cases of failure arise from mistakes on this point than almost any other…many people think they understand economy when they really do not.

One says, “I have an income of so much, and here is my neighbor who has the same; yet every year he gets something ahead and I fall short; why is it?”

Barnum’s question was rhetorical, and even back then the concept of living within your means struck many people as somehow boring or square. Other people never reached beyond a pedant’s understanding of economizing:

There are men who think that economy consists in saving cheese-parings and candle-ends, in cutting off 2d. from the laundress’ bill and doing all sorts of little, mean, dirty things. 

Does this sound like anyone familiar? Seriously, does it? Anybody?

This class of persons let their economy apply in only one direction. They fancy they are so wonderfully economical in saving a half-penny where they ought to spend twopence. 

Barnum illustrates this with a tale of a woman who rents out her house to overnight guests. When one complains that it’s hard to read late at night, she explains how she can only afford extra candles for special occasions. The money she’d make by spending a few bucks and having happy repeat customers

would, of course, far outweigh a ton of candles.

Her parsimony then reveals its true colors. It’s not about being cheap because of poverty, it’s about being cheap because:

Feeling that she is so economical in tallow candles, she thinks she can afford to go frequently to the village and spend $20 or $30 for ribbons and furbelows. 

If that’s not an admonishment to “buy assets/sell liabilities”, we don’t know what is.

(A furbelow, by the way, is not a Mediterranean woman. [Sorry. That was truly, truly horrible.] It’s a ruffle on a dress.)

Quoting Ben Franklin, Barnum writes:

“They are like the man who bought a 1¢ herring for his family’s dinner and then hired a coach-and-four to take it home.” I never knew a man to succeed by practicing this  

Contemporizing things, you can buy a 1¢ herring at Ross Dress for Less. You can buy a coach-and-four at your local university’s graduate school.

Barnum adds that if you want to build wealth, don’t make it hard on yourself.

Unless a man enters upon the vocation intended for him by nature, and best suited to his peculiar genius, he cannot succeed. 

What Barnum’s saying is simple. Don’t go to college out of obligation and then get an English degree because it’s the easiest one to obtain once you’re there. If you love sea kayaking that much, stop kidding yourself and become a tour guide. After a while, for less than the price of that college education, you can lease a storefront, buy a business license; advertising; and enough paddles, kayaks, helmets, life vests and tiedowns to keep your clients happy and yourself profitable and self-actualized.

Or you could just spend money on junk. And it doesn’t matter whether that junk is toys you have to finance, or an education that the marketplace offers no sufficient reward for:

There is scarcely anything that drags a person down like debt…
Debt robs a man of his self-respect, and makes him almost despise himself.

Barnum didn’t understand wasting money, but he did understand leverage:

I do not speak of merchants…who buy on credit in order to turn the purchase to a profit.

There’s another exception, too:

(quoting an underidentified “Mr. Beecher”) “Get in debt to a small amount in the purchase of land…safe to a limited extent, but getting in debt for what you eat and drink and wear is to be avoided.”

Barnum couldn’t stress it enough. If you’re dumb enough to have gotten into debt in the first place, live like a stowaway on a freighter bound for Cape Town before you incur any more debt. Sorry, but you get to neither eat your cake nor have it. That’s for people in the black.

Money…is a very excellent servant but a terrible master…It works night and day, and in wet or dry weather.
Do not let it work against you; if you do there is no chance for success in life

Also, don’t be an idiot. We don’t make it a habit of quoting Mohammed on this site, but Barnum references him, too. Camping in the desert, one of his tired followers said, “Screw this. I’m going to loosen my camel, and trust in God.” (Paraphrasing.) Mohammed came back with, “No, tie your camel and trust in God.”

Barnum explains how most quitting is done early. Perseverance isn’t easy, but it’s a lot easier than failure. And perseverance engenders momentum. Take the case of John Jacob Astor, whose fortune in constant dollars dwarfed what Bill Gates and Warren Buffett are worth today:

It was more difficult for him to accumulate his first thousand dollars than all the succeeding millions

Donald Trump’s first apartment building, Ted Turner’s first acre of ranchland, Timbaland’s first hit song…none of them were especially noteworthy at the time, but they each represented a milestone. Because going from 1 quantifiable accomplishment to 2 means merely doubling your success. Going from 0 to 1 means increasing your success infinitely. The first step really is the hardest, which is why most people never take it.

Which might be a singularly American concept. Upon visiting the United Kingdom, Barnum was shocked at the concept and understanding of class, and couldn’t wait to get back home:

In this Republican country, the man makes the business. No matter whether he is a blacksmith, a shoemaker, a farmer, banker or lawyer…he may be a gentleman. 

By “gentleman” Barnum doesn’t necessarily mean a guy who holds doors open for women and puts his hand to his mouth when yawning. He means a man of affluence, or at least comfort. In the U.K., comfort didn’t come without a pedigree.

We leave you with this, as apt a comparison of richness and poverty as any:

The poor spendthrift vagabond says to a rich man: 

“I have discovered there is enough money in the world for all of us, if it was equally divided; this must be done, and we shall all be happy together.” 
“But,” was the response, “if everybody was like you, it would be spent in two months, and what would you do then?”
“Oh! divide again; keep dividing, of course.”

*”I don’t really ‘play’ the lottery, I just buy tickets once in a while. Besides, it’s just fun!”

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