Put the Onus on the Company

I’ve recently been getting real cool and studying for the CFA (Chartered Financial Analyst) test. Going through the accounting sections can be mind numbing. But I have gotten a better idea of some hairy details of accounting for financial statements and reporting to the SEC. This by day and hearing about financial troubles by night has got me thinking about transparency and reporting. I’m going to provoke a bit of a thought experiment in financial reporting from a stance that no one else seems to be willing to take (especially at these times). However, I am at liberty to take such a stance mainly due to ignorance, inexperience, and maybe a hint of stupidity.

Ever since the SEC was formed, shortly after the crash of 1929, there has been push toward the mandating increasing transparency on public companies. Seems like a great idea. The more information people have the better investment decisions they should be able to make. I am going to hit the issue from another perspective, however, and argue it may not be such a good idea, especially as the economy becomes increasingly dynamic. The main thrust being; what if we put the onus on companies to supply us information and not on regulators? Instead of regulators trying to devise ways for every public company in every industry to conform to some universal standards what if companies decided to choose a way that fit their company and industry best? Well, I’ll admit, so far this sounds like idealistic horse-manure, but there are some hidden incentives here.

Investors will demand information of companies. If they don’t provide information, they will receive no capital. And in this way, this approach may unleash a competition for the most accurate and transparent disclosure. Companies may be more directly compensated for excellent standards than in today’s environment where essentially everyone is given either the stamp of approval or are under investigation. With the SEC model there are only two options, yes or no, good or bad. A company may have an incentive to cheat as much as possible while staying approved. Once approved all companies are basically on the same playing field. Information quality is viewed by most (but not the savvy) as uniform in quality. Do we really want uniformity in quality? What is the incentive for providing superior quality?

Cheating as much as one can while staying within the guidelines can be found in off-balance sheet accounting. It is perfectly legal, although it may be perfectly deceptive. There are loopholes to be exploited as there always will be. Especially as the nature of business changes more rapidly—the only thing we can be sure of in the future.

So let’s put the onus on the corporation. “No, I’m not going to give you rules. You give me the information. If I don’t like it I won’t invest. Furthermore, I’m going to see what your competitor does. If it does it better, well fat chance you’ll get anything.”

You may say this is too much of a burden for an ordinary investor. And it may well be. But there is already an industry for this, and this industry (one that I am quite fond of, to include my bias) is independent research. If there is no SEC, then independent research would become all the more important. This private industry is capable a moving at the speed of its focus industries. Specialization, superior flexibility (in comparison to a legislative timescale), new entrants, quick adoption of technology, etc. are all reasons why this industry could perform quite well. Will there be conflicts of interests? Sure, there always are (even at the SEC). But just as there is pressure to exploit conflicts of interest, there is always pressure to decouple conflicts of interest in order to enhance reputation.

That Damn Fed

Here's a good quote from Steve Forbes:

"One reason the Fed is feeding inflation is that it thinks it's grappling with a conundrum: Inflation is rising, and the economy is weakening. How can our central bank stimulate the economy without risking even more inflation? Rotten ideas never seem to die. The Fed's notion that it must choose between economic growth and inflation is absolutely false. Experience has repeatedly shown that there is no tradeoff between inflation and a vigorous economy. We can have both excellent growth and a stable currency"

Stevie Ray Vaughan

This is awesome to see him just play like this

"From the very first instance, automation replaced human work"

Here's a passage from Out of Control by Kevin Kelly:

Ktesibios was a barber who lived in Alexandria in the first half of the third century B.C. He was obsessed with mechanical devices, for which he had a natural genius. He eventually became a proper mechanician--a builder of artifactual creations--under King Ptolemy II. He is credited with having invented the pump, the water organ, several kinds of catapults, and a legendary water clock. At the time, Ktesibios's fame as an inventor rivaled that of the legendary engineer Archimedes. Today Ktesibious is credited with inventing the first honest-to-goodness automatic device.

Ktesbios's clock kept extraordinarily good time (for them) by self-regulating its water supply. The weakness of most water clocks until that moment was that as the reservoir of water propelling the drive mechanism emptied, the speed of emptying would gradually decrease (because a shallow level of water provides less pressure than a high level), slowing down the clock's movements. Ktesibios got around this perennial problem by inventing a regulating valve (regula) comprised of a float in the shape of a cone which fit its nose into a mating inverted funnel. Within the regula, water flowed from the funnel stem, over the cone, and into the bowl the cone swam in. The cone would then float up into the concave funnel and constrict the water passage, thus throttling its flow. As the water diminished, the float would sink, opening the passage again and allowing more water in. The regula would immediately seek a compromise position where it would let "just enough" water for a constant flow through the metering valve vessel.

Ktesibios's regula was the first nonliving object to self-regulate, self-govern, and self-control. Thus, it became the first "self" to be born outside of biology. It was a true "auto" thing--directed from within. We now consider it to be the primordial automatic device because it held the first breath of life-likeness in a machine.

It truly was a "self" because of what it displaced. A constant autoregulated flow of water translated into a constant autoregulated clock and relieved a king of the need for servants to tend the water clock's water vessels. In this way, "auto-self" shouldered out the human self. From the very first instance, automation replaced human work.

Some may call me evil, but I find great beauty in getting humans out of the picture.

Each time a new device is created, human toil is replaced with non-human toil. And in this way human capital is released. Released to take on a new task that inconveniences lives. Ad infinitum.

Have You Ever Loved A Woman

Obviously, one a my favourite blues artists of all time.

Thoughts on Income

How does one make money in this world? Who is best at it? Are the wealthiest the most intelligent? The hardest workers? The most determined?

I will argue that the wealthiest people are those that serve the greatest number to the greatest extent. Intelligence, work ethic, and determination certainly contribute to this ability, but these are traits rather than an essence. In fact, in my experience many highly intelligent people choose not to make a great deal of money since this service requires a sacrifice of their time towards nurturing their intellect, which may be a greater motivational force, marginally, than increased income. Although, most, if not all, would choose greater income than less, tradeoffs exist in the allocation of time towards intellectually stimulating endeavors and thrifty endeavors.

Take the case of an individual sitting on the sidelines and observing the economy. He then decides that he too would like to enter the game and create personal income. How would he create income, or make a profit?

In the most general terms, he has to provide a product that is “better” than some current product. Better is a relative term of course. There are two general characteristics of goodness in the economic sense: cost and quality. The “better” product is that product (or service) which provides the higher quality to cost ratio. This ratio, however, is unique for each individual. For both components may be different for each individual. It may cost more to provide a product for individuals in different geographic locations. But even if we assume the cost of providing the good are equal for all individuals, each ratio will still be unique.
Measures of quality differ based on unique personal preferences. Furthermore, the distributions of subjective quality for certain goods vary.

[As an aside I have to talk about willingness to pay. Willingness to pay is equal to an assessment of quality of items. An individual’s differences in willingness to pay represent his/her preferences in goods. However, it is not correct to compare willingness to pay across individuals for purposes of comparison of subjective value. Since some possess greater wealth, their absolute willingness to pay in nominal terms may be much greater than a poorer person’s nominal willingness to pay who may in fact value the item more. Therefore, a correct representation of willingness to pay will be willingness to pay as a percentage of wealth (wtp%w). This distinction is necessary only for my discussion of different “desires” for similar goods.]

For example, take a washing machine vs. a piece of modern art. If you were able to plot a population of individuals’ assessments of the quality (wtp%w) of these two items I suspect you would find the distribution to be much tighter for a washing machine than a piece of modern art. (In fact I suspect the range for the modern art piece would be a one extreme highly positive and at the other highly negative, essentially trash.) Therefore, the value in a good varies with subjective assessment.

Ok, once we know what to make, who shall we target? Two general groups look promising: masses and niches.

Masses are the dominant force to getting rich. If a profit margin is fixed, the only way to earn more wealth is to provide your product to more people. The masses approach is the one observed in TV commercials, mass marketing schemes, and generally anything to do with mass media. In being an approach that sells to a huge number and variety of people, mass campaigns try to appeal to common characteristics. These common characteristics often appeal to generally superficial qualities. Beauty is constant theme of mass marketing. It is easy to grow frustrated with the shallowness of advertisements based purely on sex appeal. But, sex appeal is a trait common to all human beings and, therefore, it shouldn’t be surprising that marketers are relentless plug sexual themes.

In general campaigns to the masses tend to ignores individualism and focus on collectively human themes. The larger the audience the more a company can be expected to engage in this type of activity.

But there is another driver of profit: individual interests. Rather than increasing the customer base, servicers to niche groups try to increase profit margin. Certainly there exists a tradeoff between advertising to unique interests and to large numbers. There is value in providing goods for unique interests taking advantage of higher willingness’s to pay due to increased desirability. As transactions costs decrease, an increasing number of niche groups will be provided to on profitable terms. The internet is a great facilitator towards desires of niches. Therefore, the niche influence (profit margin influence) places greater emphasis on individuality and customization. Future improvements in technology can only be expected to increase the amount of unique interests provided for.
The reason I have gone through discussion is that I think many people, especially thoughtful people, are disgusted with mass commercialism and its inherent superficiality. And what’s more, if you’re an intelligent, curious person seeking to pursue your intellectual desires often you’re left with few alternatives to both satisfy your curiosities and provide income. When this marriage happens it is a beautiful thing. I often think of engineers and scientists pursuing new creations. But even a great engineering achievement does not promise commercial success without mass-desirability. The value of the creation is in many ways unique to the creator and his peers.

As a strong advocate of individualism, I am also frustrated with difficulty in monetarizing my unique desires and ideas. Career paths can seem limited since creating income can reduce or eliminate time spent on personal interests. The internet and similar technologies provide hope, however, by connecting those with weird, wacky, and unique interests. Business in the future will increasingly segregate consumers. As transactions costs fall, entrepreneurs will seek to further differentiate their product.

Go To The Mirror!

Here's a goodnight post. A bit shitty on the quality.



Check on the heels on Daltrey