Drewloid's Blog

Posts Tagged ‘return on investment

Some years ago I undertook the effort to educate myself about financial trading. Eventually I decided to try my hand at commodities trading, and I opened an account. When I was opening the account I had an interesting conversation with the broker representative, the person who would be handling my trades. Itʻs important to have these “getting to know each other” conversations with people who are going to be doing things with your money. You get to know a bit about them and they get to know a bit more about you.

One useful topic to cover is about trading strategies and expectations. The broker rep told me a story of another client who was upset with the rep. Apparently the rep put the client into a corn trade that produced a 30% profit. Unfortunately, the move continued and the client felt shortchanged because he did not get the total profit potential of the trade.

My response was “Wow. Iʻd dance naked in the street for a 30% profit.” The other client was suffering from an overabundance of greed. I have some context to add which I believe will support my point. First, commodities are traded as contracts for relatively short terms. 1 month or 3 months are common. While it is possible to roll a contract for a longer holding period, letʻs just assume that this contract was held for no longer than 6 months. Worst case, you wouldnʻt hold such a contract for more than a year. So the other client was complaining about a 30% return over a period of a few months. Thatʻs an awesome return.

Second, itʻs a well established rule of trading that a disciplined trader gets out of a trade when heʻs made all the money he thinks he can make. Sitting on the trade any longer is just incredibly risky. A disciplined trader who trades a system that works can make a lot of money. A greedy trader will get wiped out.

Being greedy in the area of financial trading is a really really bad idea. The vast majority of the general public who trades their own account suffers from greed and eventually learn to put their money with someone else who is less greedy.

Today I ran across an interesting story in one of the blogs I read on a regular basis. Apparently there is some group called “The National Center For Public Policy Research”. I have no idea what this group does. I only know of what I read about today. They are engaged in an effort the call the “Free Enterprise Project”. I always love the way that people who want to create influence for their way of thinking use completely innocuous generalities when then label their stuff. Who in the United States would argue against something called the “Free Enterprise Project”?

Anyway, the short version of the story is that some dude who represents these guys went to the Apple Inc. shareholder meeting to support a proposal for shareholder vote. It didnʻt pass. The guy did ask a couple of questions, the second of which was (paraphrased in a news report in “The Mac Observer”) “the NCPPR representative asked Mr. Cook (the CEO of Apple Inc.) to commit right then and there to doing only those things that were profitable.” Mr. Cook essentially told the guy to suck eggs.

Actually, the report states that Mr. Cookʻs response included “that there are many things Apple does that are right and just, and that a return on investment (ROI) was not the primary concern on such issues.” Additionally, it is reported that Mr. Cook said “When we work on making our devices accessible by the blind I donʻt consider the bloody ROI.” Finally, “He didnʻt stop there, however, as he looked directly at the NCPPR representative and said ʻIf you want me to do things only for ROI reasons, you should get out of this stock.ʻ”

So here is a guy who is criticizing Apple for potentially leaving some profit money on the table. Apple is the most profitable company in the world right now (2/28/14). They make just an awesome amount of money and there is not really any comparison I can draw to the amount of money that they are making except maybe to compare them to the “robber barons” of the late 19th century. They are pulling in a  massive shit load of money.

And some dude has the temerity to come in and complain that Apple is not protecting “shareholder value” properly because they might be doing something that isnʻt justified on a pure numbers basis. Damn, that is some serious greed. This is a company that in the prior quarter produced just over $13B in operating income (thatʻs net cash profit). For the quarter they also paid $4.6B in income taxes. Whatever these items are the NCPPR is concerned about, the cost must be inconsequential pocket change.

So right there on the surface, the only reason to have this sort of concern is flat out greed. But there is more. There is ego. I donʻt know why this happens, but you know whenever someone is successful there are no shortage of Monday morning quarterbacks hanging about. And there sure are a lot of people who want to tell Apple how to run their business. It appears to me that Apple knows how to run their business just fine, thank you very much.

Iʻm also the sort of person that doesnʻt believe in delegating a task to someone whom I have to micromanage. Thatʻs just nutty. If I buy stock in a company, Iʻm hiring them to do something useful with the money invested in the company. Iʻm delegating that task to them. If I donʻt trust them to accomplish the task to my liking, then I donʻt delegate it to them in the first place. Apple has attracted some exceedingly rich investors who want to micromanage Appleʻs operations. “Start your own company” is what I say to them if they really believe they know how to do it better.

Being the curious sort of person that I am, I decided to dig a little deeper into what is up with these NCPPR people. I actually clicked through the links and read the proposal they submitted for shareholder vote. By the way, to submit such a proposal, you really do have to own only one share of stock, which at todayʻs close was $526.24. A bit pricey for a share of stock, but still, not a giant amount of money.

The proposal has a supporting statement. “Some trade associations and business organizations have expanded beyond the promotion of traditional business goals and are lobbying business executives to pursue objectives with primarily social benefits. This may affect Company profitability and shareholder value.” Holy crap, Scrooge has returned to life. I supposed these NCPPR people never read “A Christmas Carol”.

So these folks are acknowledging that they are so greedy that simply the fear of the possibility that Apple is a member of a group that might consider social goals worth pursuing is a bad thing. That they are afraid some of the profit money is supporting an organization that cares about people over profits. Thatʻs damn greedy.

I mean I got to be honest here. Iʻm one greedy mother fucker. I like my money. I like my money a lot. But I canʻt hang with that shit. A company that doesnʻt stay focused on making a profit wonʻt be around for long. Iʻm a very strong supporter of businesses making money and being profitable. But letʻs not forget that the community of customers supports the company in making those profits, so it is inherently necessary when running a business to balance the needs of people with the need to make a profit. Too much emphasis one way or the other will lead to an ailing and then dead enterprise.

So these NCPPR people are nutty and greedy. No big news about that I suppose, there are plenty of those people in the world.

But letʻs not stop there. Here is the real truth behind this whole tempest in a teapot.

The truth is these people donʻt give a rip about shareholder value. What they care about is getting big companies to stop investing in preventing global warming. They yammer on about return on investment and shareholder value, but what they are really fighting is anybody making an insurance bet on the risks of global warming.

They are pretty damn proud that they extracted an concession from General Electric on that point. Now thereʻs a huge change in the world. General Electric, the giant international conglomerate, has kowtowed to some whiners about how they should run their incredibly large, profitable, and successful business. And Apple, the company started by smelly hippies in a garage in California in the 70ʻs, has the Giant Fucking Man Balls to say “Fuck off”.

You see, the NCPPR is claiming that the free market should deal with environmental and social initiatives. That is an idea that has been long proven to not work. But then I guess they never read “The Tragedy of the Commons”. But Iʻm not going to pull that out just now, there is not need to get into long philosophical debates about economics. Letʻs just use a well accepted example. Insurance.

Thatʻs what I said, insurance. There is no way to demonstrate a certain return on investment for insurance. Itʻs based on a guess. You have a risk, and you get someone to insure you against that risk for a premium which is less than the anticipated cost of suffering the risky event. Simple. Thatʻs why you buy car insurance. Thatʻs why your mortgage company requires you to buy homeownerʻs insurance. On and on.

Spending a little money to help with the issue of global warming is an insurance bet. Of course we donʻt know with 100% certainty if climate change is real. I also donʻt know with 100% certainty that my house wonʻt get burned down or that my car wonʻt get stolen. So we buy insurance. Itʻs way the heck cheaper.

And by the way, allowing smart managers of enterprises to make those bets is what we pay them for. Itʻs called free enterprise. You make an investment, spend money to make money with an uncertain return. No amount of MBA numbers mashing will ever change the fact that business decisions are always based on trying to position yourself as well as you can for an uncertain future.

Trying to reduce every business decision to some kind of numerical analysis and then believing that you have the data to prove you will make money is really nutty and silly. Itʻs just attempting to help make a best guess about doing the right thing. Which is what Apple is doing. And what every other enterprise is doing when they spend money in alignment with an environmental cause or a social cause. They are making free enterprise business decisions to position themselves as best they can in an uncertain future.

Any company that makes itʻs business decisions based *solely* on an ROI analysis is the one to *not* invest in. That one is going to fail eventually. They are deluding themselves into believing they can predict the future. Stay away.

Oh, and by the way, Appleʻs investments (if they have any) in environmental and social good do produce a return on investment. For the people who buy Apple products, these investments build brand value. People pay a premium to own Apple products. Apple is more profitable because of that. It would certainly be possible to produce an analysis that shows a positive ROI for this sort of investment. It would also be the same kind of smoke and mirrors that any forward-looking analysis is; an attempt to predict the future which has a possibility of being wrong.

I am totally in favor of numerical analysis to guide thinking and decision making. Itʻs great stuff. But it is no substitute at all for smart people making gut decisions about what is right according to solid values that take people, communities, and the planet into account. I vastly prefer to do business with the smart people.



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  • Roberta Koral: Hey Drew..Andrew ar Andy, whichever you prefer. I just found your blog. Roberta here.
  • globularity: Sharp analysis. -Davoid
  • Stephanie: What a marvelous article, thanks for writing it "friend."

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