The Good Idea Paradox


No one has ever lost big money with a bad idea. Because no one can get big money to lose with a bad idea.

The danger is in good ideas. You can get money for them and pretty well everyone has a good idea that won’t work.

Implementing a good idea is far harder than having the good idea. Note a recent case where the brothers who purportedly dreamed up the idea for Facebook and sued to get value for it, received $66,000,000. About one 1600th of Facebook’s IPO value.

The judge pointed out that the implementation was the value, not the idea.

The paradox explains why so many businesses fail. People think a good idea and a few tactical steps are all that matters. Location, Location, Location, comes to mind. Tactics are important but the real problems are in logistics. Having the right product at the right place, at the right time, at the right price, with the right margin, offered by the right staff for the right customer is difficult. I have only just thought about it, but I would be willing to bet that Wal-Mart’s logistic system is worth more than their real estate. Does anyone know?

Business ideas are like poker hands. Bad hands cost little because you don’t play them.  The only really expensive poker hands are the second-best ones.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

How Institutions Survive


Never give a problem to someone who will be harmed if they solve it.

If you do this, the organization or department tasked with solving the problem, will make the problem bigger and harder to measure. That is how they can justify their continued existence.

They are what Peter Drucker calls ” budget funded organizations.” A budget funded organization has no market based limit on their spending because there are no customers. They have no external measure of their proficiency either. No complaints, no repeat orders, no price competition, no requests for special services, no applause from customers. They are isolated and can only fund themselves by selling their problem to concerned people.

A perfect solution for them is to make their particular problem impossible to measure, but apparently growing.

There are several government agencies who fit this category. In 1980 I testified before the Ontario government committee on the Human Rights Act and raised this exact point. To no avail. Where are we today? The Ontario Human Rights Tribunal may have already solved their problem, because I hear them talking about the problem being more subtle and more pervasive. Could be true, but I doubt it.

The same thing happens with many (all?) medical and environmental foundations and charities. If I could reliably cure air pollution for $100 per province or state, the only way it would happen is if I just did it. If I took it to any agency tasked with fixing air pollution, they would study it for a 1,000 years before implementing the solution. Who wants to give up their corner office and the conference in Geneva?

You know that is true, don’t you?

Others have noticed this same condition. One of them, Clay Shirky, is a leading thinker of our time. Notice the Shirky Principle – “Institutions will try to preserve the problem to which they are the solution.” Preserving problems is dumb, both for individuals and for societies.

Shirky studies and writes about the effects of the internet on society. You can see his books here Shirky Books and his blog here Shirky Blog.

Worth a look.

Give some thought to institutions, and in your business to the departments, that live on a budget. Assess if they have already completed their task to a reasonable level. They will be aiming for 100% solved because that preserves the problem. You probably can live with 90% or so. At a tiny fraction of the cost.

Perfection is an expensive outcome and one we can ill-afford.

PS:  This column appeared a couple of days after this post.  It just adds the exclamation point.  You could not make this stuff up if you were trying to write a book.  It is almost too bizarre.

National Post 17 December

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Invisible Works


Mark Carney, governor of the Bank of Canada recently resigned and moved to the Bank of England as their governor.  The most common response to this news, was, “Who’s he?”  That speaks well for him.

If you are a referee, umpire, manager, parent, spouse, politician, you can tell when you are doing your best work.  No one notices you.

If the folks notice, you are adding something to the mix that is not required.

Could be:

  • Ego
  • Personal point of view
  • Ignorance
  • Demand for attention
  • Mistrust of others

You can only be invisible while you are doing a good job.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

What is Hotchpot?


Hotchpot, noun, Law

“A returning to a common lot or fund for subsequent equal division, especially of advances received by heirs of a person dying intestate.”

If while the parent is living, there have been advances against an estate share to an heir, it will be important to consider those in calculating a final disposition of estate assets.

Consider the case where a parent has $3 million and three heirs each entitled to 1/3 each. Heir 1 has an opportunity to use their share now and parent advances $1,000,000 not as a loan. When the parent dies much later, the $2,000,000 of the estate that parent retained has grown to $3.6 million. How much should Heir 1 receive from the estate?

Option 1 Ignore the advance. Heir 1 gets 1/3 of $3.6 million = $1.2 million, as do the other two heirs. This does not seem fair, but under many wills, this is what would happen.

The will may be silent about the advance or it may contain a clause that requires no consideration of previous distributions for purposes of equalization. Either can be a problem.

When the will includes a clause to consider the advances, the result can still be unexpected.

Depending on the method used to calculate the remaining shares, the differences are potentially quite large. Certainly, large enough to cause conflicts and bad feelings. More probably litigation. There are at least two choices:

Option 2 Hotchpot – adds back the original advance to the estate making it $4.6 million, divides that amount by 3 = $1,533,333 each; then subtract the original advance of $1 million. Leaving $533,333 for Heir 1 and $1,533,333 for the others

Option 3 relates to an English case, Marquess of Abergavenny’s Estate where the court held that the advance must be considered in proportion to the estate at the time of the original advance. Consequently, a beneficiary who has received the maximum possible advancement in percentage terms cannot receive further payments later under the will. This ensures that an heir who has already received an advance will not benefit, at the expense of his co-heirs, from a subsequent rise in the value of the remainder of the estate. In this case, at the parent’s death, Heir 1 had received his 1/3 so would get no more.

Estate Assets

  • Estate Value When Advanced $3,000,000
  • Advance $1,000,000
  • Estate Value At Death $3,600,000

Distribution of Estate To Heir 1

  • Option 1 Ignore Advance $1,200,000
  • Option 2 Consider Absolute Amount $533,333
  • Option 3 Consider Proportionally $0

There is another problem, of course! Nothing is ever simple.

Suppose Heir 1 returned all or some of the advancement to the parent. You should consider repayments in proportion to the estate at the time they were made. If they were not proportional, then presumably a crafty heir would return the $1,000,000 advance the day before the parent passes on and get back $1,533,333 from the estate. If they paid earlier without proportionality, they may do badly.

Superficially simple situations can lead to mind-blowing complexity. It makes me pleased that I am not a lawyer. On the other hand, seeing the potential for fees from the probable legislation, perhaps I would like to be a lawyer. Hard call. I could be convinced either way.

The message. Constructing successful wills is not the work of amateurs.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

How A Visiting Martian Evaluates Candidates For Political Office


A visiting Martian has an advantage over Earthlings. He is objective. He has no history with us. How things came to be the way they are is not relevant to his decision making. He examines what is objective reality, calculates what should change and chooses a method to get there.

In choosing a political candidate he would examine six characteristics.

Character. Warren Buffet has said “that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy.  And if you don’t have the first, the other two will kill you.  You think about it; it’s true.  If you hire somebody without [integrity], you really want them to be dumb and lazy.”

People without integrity are unpredictable.  Anything is possible because they have no limits.  People of character are predictable. They act within their standards.  People of character tell you the truth even when it is unpleasant for them to do so.

Competence as an executive. Many people think executive competence is common. Many also think anyone who can barbeque a hamburger or cook spaghetti can operate a restaurant. People learn executive skill. It is not given and only a few are excellent.

Consensus Builder. If you govern to display your power, you do not care about consensus. If you govern to get the most for the people, you need to involve everyone and to connect with the best ideas. Agreeing with the opposition shows the ability to use the best ideas, wherever they may come from. Disagreeing with good ideas, because they are the opposition, is wrong.

Creed. A candidate with an unshakeable creed is a menace. A politician serves all the people, not just those with whom he or she shares values. Theoretical systems tend to be narrow. Many are untried. A politician must use the best ideas, or in times of restraint the most practical ideas. Jan van de Snepscheut has said, “In theory, there is no difference between theory and practice. But, in practice, there is.”

Counselors. Leaders need people to show them the practical way to achieve goals and they need to listen to them. They need people with a different viewpoint and a different set of experiences. They need people who disagree with them. They need people who have done similar things not just written or talked about them.

Charisma is important in getting other people to follow you and accept your ideas. If character is not present at the same time, then it is a serious flaw. Charisma without character is a deal breaker.

The future needs a leader who can supply the six C’s. It is time politics took second place behind good governance.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

On Pleasing Everyone


“You see, you can’t please everyone, so you’ve got to please yourself.”

“Garden Party” by Rick Nelson

According to Wikipedia, “he wrote Garden party in disgust after a Madison Square Garden audience booed him, because, in his mind, he was playing new songs instead of just his old hits.”

Sooner or later, everyone gets booed.  When we are unhappy with the audience response, we take it personally.  “They” are ungrateful, dumb, or uncaring.  We should instead notice that we could not possibly know enough about a person to estimate successfully that which will please or impress them.  That changes from hour to hour anyway.  It is our own fault if we are disappointed.  We expected something that may never have been going to happen.

Pleasing others is a difficult idea to evaluate.  Pleasing others has both good and bad aspects.

There is nothing wrong with doing a favor or buying a gift or spending time solely to please another.  We should do that.  When we do that, we please the other and by doing so we please ourselves.  The payback to us should be their being pleased, not their gratitude to us.  Under this condition, an anonymous gift would be as valuable to the giver as the gift that the recipient acknowledged.

It becomes problematic when we do things in the hope the other will applaud.  (Show gratitude or adulation)  Not that anything is wrong with applause, but it can be problematic if we begin to do only those things that bring us the notice of others.  Eventually, we lose track of our self, our values and the things that please us.

At the extreme, we become unable to accept rejection or to tolerate disagreement.  Those are both skills we should possess to a high degree.  They will help us far more than most other skills.  Trying to please others diminishes those skills.  We learn to compromise instead.

Rather than seeking the applause of others, we should find what pleases us and do more of it.  We can still please others but only so that we derive satisfaction from their pleasure, not from their noticing us.  Pleasing or impressing others then becomes incidental, a byproduct of excellence.  Our emotional responses become within our control.  Disappointing failure becomes a step on the learning curve rather than rejection.

Some years ago, someone asked Bill Cosby, “What is the secret to success?”  His reply, “I don’t know what the secret to success is, but I do know that the secret to failure is trying to please everyone.”

Give up trying to please everyone.  You cannot.  Be yourself and do what pleases you.  Ultimately, you will find that what you do best is also what pleases you the most.  Relate to those who value your input and activity and by their response can help you refine it.  In Seth Godin’s words, “Your Tribe.”  Do things that provide excellence to them and pleasure to you.  You will find that excellence is its own reward and the tribe will draw personal benefit from you.

Find a focal point for your motivation.  Make the decision that if you cannot please yourself, in the end, you will not please anyone.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

When I Grow Up


 “When I grow up I want to be a little boy.”   Joseph Heller,  “Something Happened”

We should all work toward that theme.  I can’t speak for the girls, but there may be a similar thought for them.

  • Be curious.
  • Find pleasure in new things.
  • Retreat to the familiar when stressed.
  • Express your feelings.
  • Forgive quickly.
  • Eat until you are full.
  • Sleep when you are tired.
  • Enjoy your friends and family.
  • Get excited.
  • Focus focus focus.
  • Do what you like because you like it.
  • Everyone can be my friend.
  • Believe
  •  Add some more in comments please.

I wonder when we learn a new method.  Probably a better question is why do we learn a new method.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Complicate Your Investments. Here’s How.


You can make investing complicated and not very successful . You can do it with an ignore list and a focus list.

Ignore

  • Volatility
  • Liquidity
  • Income taxes
  • Transaction costs
  • Time
  • Leverage effects

Focus On

  • Rate of return
  • Relative rate of return
  • Publicity regarding your investment

I will guarantee bad results if you do all of these.

Instead, think about buying businesses not stock. Good businesses may not always reflect their value in the stock price, but over time, they tend to move toward higher value and better dividends.

I noticed recently that Bill Gates’ investment management firm holds a large stake in John Deere. Interesting. The company is a dominant one in its field (pun intended,) and has been so for more than 140 years. It pays a comfortable dividend and it does not seem to be under attack from other well financed and innovative competitors. Nice deal. No drama.

Drama is the hard thing to avoid. For some people the drama is the part of the investment they seek. I suppose most tax shelters and initial public offerings would be difficult without this aspect. If you invest for excitement and social status you are in trouble. You will have given up other values to get these. There is nothing free in the investment world. If you get more of one thing, you gave up something else to get it.

Private equity is the most difficult. Everyone wants in on the ground floor of a successful business. It is not that easy.

Even professionally managed venture capital firms, exposed to well understood and rational projects, analyzed by people with years of experience and superior skills, lose their money more often than they make money. 4 times as often! The expectation of success with your idea for a better dog harness or an ipad app or a Tanzanian theme restaurant are in the 1 in 100 range if I am being generous. More likely in the 1 in infinity range.

There was an interesting piece in USAToday which dealt with why athletes go broke. They point out three reasons.

  1. They invest in private equity deals,
  2. They buy real estate,
  3. They spend too much.

You knew about the third one.

Better to invest in boring businesses with a track record, competent managers, and a transparent, liquid market. It will not be as exciting to talk about at the bar at the golf club but it will generate more net worth.

If you change the ignore list to focus and the focus list to ignore, you will be okay. You can buy a nice trip or a new car (with cash) to impress the folks at the club.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Employee Count


40 years ago, I moved to a new office in the accounting firm.  A year or so later, I happened to run into a former client whose business had been growing quickly when I left.  I asked, “How many people are working for you now?”

“About half I suppose.”

I thought that reply was quite witty and meant to be only that.  Over the years I have found that it was likely true for him because it is close to true for others.

It is not that the employees work for themselves or someone else, although that could be a little true.  It is that the system often prevents them from working at all, never mind for you.

Five or six years after the first encounter I happened to be having lunch with some people in the consulting business.  One of them had just finished a major project that analyzed the productivity of the civil service in a South American country.  He was very excited.

“Do you know that the average civil servant in XXXXXX spends 15 minutes per day working productively.”

The cynical reply.  “What did you expect?”

“No!  You are missing the point.  If we can figure out how to get 30 minutes a day we could fire half of them.  We modeled it.  If we fired half of them, they could not possibly do so badly as 30 minutes productive from the rest.”

Huh?

“There would be many fewer (and shorter) meetings and internal memos and expense reports and so on.  Improved productivity would be a given.”

He was probably right but I don’t think they ever did the rest of the job.

A slightly undersized, well trained, well-equipped workforce is always more productive.  There are many factors but one obvious one is the number of ways they can connect.

If you have 10 employees there are 45 ways to create pairs.  Not everyone will say hello and ask about the family every day but the number of pairs is material.  What if you have 40 employees?  Now there are 780 possible pairs.  Possible meetings of 3 people of 10 grows from 780 unique arrangements to 9,880 when 40 workers are available.  Just for fun, there are 658,008 different 5-person meetings possible in a 40-person workforce.

Every system has non-monetary overhead that increases with the number of workers. 

You can overcome some of the effects in simple ways.

  • Have a standard. “Use social media if you must.  We see it and casual conversations, to be a valuable workplace sanity thing.  Please do not let it interfere with the work you need to do.”
  • Minimize the number of meetings.
    • Never have a meeting with a general purpose
    • Never have a meeting without an agenda
    • Never have a meeting without material circulated prior to it.
  • Empower people to make decisions.  Fewer reports and memos will be the result.
  • Encourage people to socialize in a structured way.  Perhaps a games room.  Certainly a lunchroom or kitchen.  Google and most high tech businesses have recognized the value of this.
  • Use an internal website for company news, awards, and other notices
  • Train people better so they don’t need to ask for help as often
  • Use capital spending to make the work easier to do.  Fewer people needed.
  • Rely on the people to police each other.

Businesses that are completely unproductive, frequently try too hard to minimize socialization.  It reappears in different ways.  Usually absenteeism, group benefit costs,  and turnover.

Others go cheap on technology.  It is cheaper to have a faster network than to hire another person to accomplish the same work and to share the wait times.

Another sure sign of problems is frequent unstructured meetings.  If you have a meeting with 3 people earning $50,000 each in salary, all cost in, a 2-hour meeting is likely going to cost about $600.  How many meetings produce a result that is worth that much?

Most of lost productivity is just common sense.  If you want to get better, ask the employees what makes their jobs harder to do.  Then listen and act on it.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

On Regulation


One of my accounting firm partners was a big fan of wind-powered vehicles.  Ice racer, sail plane, and a 37-foot C&C sailboat.  The sailboat lived on Lake Huron.  He once told me that wearing a life jacket on the sailboat was a waste of time.  About the only thing they were good for was to make it easier to find the bodies.

That was likely wrong, but it does make for an interesting comparison to regulators.

No regulation and no regulator can prevent an individual from committing a criminal act.  Given that, what is the purpose or regulation?

There could be several, but the obvious ones are:

  1. The paper trail or the absence of it makes it easier to prosecute.  That is like the life jacket.  It gives people a feeling of security but in fact just makes it easier to find the bodies.
  2. It reduces the number of occurrences because advisers take more care.  A noble idea but as with registering handguns, the criminals seem not to care.
  3. It shortens the time within which an individual can do the deed.  That presumes that the overseers will review files and such on a regular basis.  That might be true but reviews are not frequent and often perfunctory.  Besides I have never seen an examiner check to see if the file is even real.

The question becomes, “Do regulations exist for the clients’ well-being or do they exist for the well-being of the regulators?”  The third group, “the regulated” are clearly not better off.

All regulation reduces the efficiency of business.  Not because the business reject the ideas, but rather because the good ones were doing the necessary work anyway and doing it in efficient ways given their priorities.  Regulation by regulators is different than honest, efficient businesses use to govern the particular transaction.  It is too fussy, less common-sense based and more paper oriented.  Plus the reporting, security, data collection and filing load.  Plus the overhead in upstream entities that have supervisory responsibility.

Recall two facts:

  1. There are existing criminal sanctions for transgressions.
  2. There are civil remedies to recover the losses.

An awkward to explain sidebar to the regulation question, is that clients are less well served when advisers are regulated.  Clients do not see all possible methods and theories.   No sane adviser will offer advice, or propose actions that are outside the “standard of practice.”  For example, how would an investment adviser tell a client that “Modern Portfolio Theory” and the “Efficient Market Hypothesis” are probably wrong?  Could he afford to provide a client with material that proposed other courses of action?  Could he even insist that a client learn about the choices?  Would his insurer believe the same story?

The adviser will be okay as long as the client suffers no losses.

Regulation runs contra to client financial literacy because some clients believe they don’t need to learn anything.  The regulators assume that the rules of behavior by both advisers and their clients are correct, unchanging and well known. They are not and they are evolving rather quickly.  Responsible and informed clients are the best regulators.

Does anyone study the cost-benefit of regulation prior to imposing the rules and the procedures?  Likely not.  If they did, it is probable that they would find the cost to provide the regulators, the rules and procedures, and the supervisory activity, exceeds the losses that would have occurred without them.  There may exist, but I have not seen, a study or survey of the regulated, that claims their business and their clients are better for the regulation. If these two groups are not better off, then the regulation exists for the regulators not for the rest of us.

Regulation for the sake of the regulators seems irrational.  Let’s find out.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

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