In Search of the Perfect Investment

Harry contrary: The day I take a holiday (Friday), the market goes through the roof.

It’s hard to find “buys” when the market is so strong. Better to buy when it crashes. Today put in Limit orders to buy your favorite stocks. Pick a price at least 8% below where it is now. Wait for the stock to “come in,” i.e. fall.

Cramer talked about his favorite fund for dummies — Vanguard’s VFINX — an S&P 500 index fund. Curious, I checked. He’s right. It makes sense for busy people who haven’t the time to research individual stocks. There are two caveats (which he didn’t mention):

+ Buy it only from Vanguard. Fees are much cheaper. Fees are three times more expensive if you buy it through Fidelity, for example.

+ Buy VFIAX which is the Vanguard Admiral fund and needs $100,000, but has even lower fees.

The merger and de-merger road:
The road to rack and ruin often begins with an ill-conceived merger, often encouraged by Wall Street bankers motivated by fees. Once Hewlett-Packard paid me a huge amount of money to talk on the glorious future of computer telephony, a smart form of telecommunications. My audience was heavy on employees of Compaq which HP had acquired. I remember asking many of them if they knew the new game plan for the company in general, and them in particular? They professed zero idea, and looked confused as to why they were attending my lecture. Most lost their jobs a few months later and their company, of course, no longer exists. It was just another of the mergers in American business that cost the acquirer billions and the shareholders even more billions in lost stock price.

I developed a rule at the time: Sell companies who made big mergers that made no sense. Most of them made no sense. Now we have a new boom — de-merger. Once again, the motivation is fees for Wall Street. Here you may find some rewards. Some of the newly-free companies might actually do well, better than under their previous yoke.

A New Yorker piece by my favorite James Surowiecki this week sums it all up:

For most of this year, corporate America has exhibited a full-blown case of merger mania. Deals worth more than a trillion dollars have been announced. But there is also something odd going on: the urge to merge has been accompanied by an urge to purge. According to S. & P., the number of spinoffs announced so far this year is nearly thirty per cent higher than the number for the whole of 2013, and, in the past month, three big tech companies announced breakups. Hewlett-Packard and Symantec are both dividing their operations in two, while eBay is spinning off PayPal-all dramatic changes of direction. Between 2001 and 2011, Hewlett-Packard spent almost sixty-six billion dollars on acquisitions in the hope of making itself a one-stop shop for tech customers. Symantec is effectively reversing its 2005 acquisition of Veritas, which it said at the time would create great “synergies” among its products. As for eBay, as recently as January it was telling investors that “we have been successful exactly because PayPal and eBay are together.” Now all these companies are saying that the parts are more valuable than the whole.

No one’s upset about the U-turns, because breakups, unlike mergers, have a solid track record. Studies have found that spun-off stocks have consistently beaten the market by a wide margin. Emilie Feldman, an assistant professor of management at Wharton who has done a series of studies of divestitures, told me, “It isn’t just the stock price. Spinoffs also improve the short- and long-term performance of the companies themselves.” In companies with lots of divisions and product lines, it’s hard for executives to concentrate on the core business. “When you’re mixing and matching and trying lots of different things at the same time, it’s just a constant drain on executives’ attention,” Feldman said. In a study she conducted of the reasons companies give for splitting, ninety-two per cent said that improving “managerial focus” was key.

Breaking up has other advantages, especially if one part of your company is growing faster than the rest, or is significantly more profitable. These days, PayPal is likely more valuable, in investors’ eyes, than eBay. So, if you’re working for PayPal but getting compensated in part with eBay stock options, you’re being paid less than if the companies were separate. Feldman, in a study of more than two hundred spinoffs, found that people running higher-earning divisions were undercompensated relative to performance. After a spinoff, she said, “everything falls right into line, and people get paid based on their performance.” Especially in a place like Silicon Valley, that makes it a lot easier to hire and keep the right people.

The success of divestitures doesn’t mean that mergers are always a mistake. The acquisition of PayPal by eBay, in 2002, was the kind of deal that often works-the purchase, at a reasonable price, of a young company that truly complements the buyer’s core business. (Google’s acquisition of YouTube is another example.) Being bought by eBay gave PayPal credibility and access to a huge customer base. But, as PayPal got bigger and eBay became less important to its business, the ownership structure got to be a burden. It limited PayPal’s ability to form partnerships with eBay’s competitors, like Amazon and Google, and, many have argued, made the company less innovative than it could have been. The decision to split is a recognition that PayPal has outgrown its parent.

In other cases, spinoffs are the final verdict on mergers that should never have happened in the first place. Symantec’s acquisition of Veritas was predicated on that shakiest of justifications-“synergy.” Symantec was a data-security company and Veritas a data-storage company; they were supposed to be a natural fit because, well, we all want the stuff we store to be safe, right? But it was a hopeless fit: the storage and security markets were very dissimilar, involving completely different sets of buyers. Symantec wasted years trying to integrate operations before admitting defeat. The storage division is now worth twenty per cent less than it was a decade ago.

And Symantec is hardly alone. The brute fact is that most mergers don’t work. Aswath Damodaran, a finance professor at N.Y.U., has said, “More value is destroyed by acquisitions than by any other single action taken by companies.” Furthermore, a study of some thirty-seven hundred acquisitions between 1990 and 2007 found that big mergers, like the ones Symantec and H.-P. did, were less likely to improve the bottom line than small ones. “Even when you have a deal that looks lovely on paper, it’s a huge challenge,” Feldman says. “Getting cultures to fit together, getting people to stay on board, merging I.T. systems and back offices: all these things are really hard.” If we’re seeing a boom in corporate divorce, it’s in part because the past decade gave us so many bad marriages.

Still, it’s unlikely that corporate America will lose its penchant for getting hitched. Between Wall Street’s desire to keep the deal pipeline stoked and the unshakable conviction of C.E.O.s that they can beat the odds, the trend toward consolidation is sure to continue. In fact, as soon as eBay announced the PayPal spinoff people began saying that the ideal outcome would be for PayPal to be acquired by some big company. The projected synergies, you can be sure, will be amazing. 

An African photo safari in Africa is the best trip you’ll ever make. My favorite place is the Okavango Delta in Botswana. Here’s work by a brilliant photographer.

African elephants at twilight, Loxodonta africana, Chobe National Park, Botswana

Red lechwe running (aerial), Kobus leche leche, Okavango Delta, Botswana

Giraffes on short grass plains, Giraffa camelopardalis, Chobe National Park, Botswana

Warthogs sparring, Phacochoerus africanus, Chobe National Park, Botswana

I saw what he saw. But his photos are so much better than mine. All his are taken in the delta. Enjoy the other 52 here.

When you go to the polls tomorrow, please remember:

If God had wanted us to vote, he would have given us candidates. –Jay Leno

The problem with political jokes is they get elected.–Henry Cate, VII

We hang the petty thieves and appoint the great ones to public office. –Aesop

Politicians are the same all over. They promise to build a bridge even where there is no river. –Nikita Khrushchev

Politicians are people who, when they see light at the end of the tunnel, go out and buy more tunnel. –John Quinton

A politician is a fellow who will lay down your life for his country. –Tex Guinan

I have come to the conclusion that politics is too serious a matter to be left to the politicians. –Charles de Gaulle

Instead of giving a politician the keys to the city, it might be better to change the locks. –Doug Larson

There ought to be one day-just one-when there is open season on Congressmen. –Will Rogers

Harry Newton who has new admiration for Howard Schultz, Starbucks CEO. Read what he’s doing now. It’s wonderful:

From Sunday’s New York Times SundayReview by Maureen Dowd.

WHEN I close my eyes, I can easily flash back to a time when it was cool to call people in uniform “pigs” and “baby killers.”

If you had any family members in the police or military in the Vietnam era, you know how searing that was.

Now we give our veterans respect, early boarding at airports and standing ovations at ballgames. Yet it’s becoming clear that it’s not enough.

With no draft and fewer than 1 percent volunteering to serve, most Americans have no personal connection to anyone who went to Iraq or Afghanistan. There’s a schism between the warriors and the people they were fighting for.

Instead of ticker-tape parades, the veterans returned to find Americans in a crouch, wishing they could forget the military adventures of the last decade. Hollywood was turning out movies showcasing heroic veterans, but they were from World War II. And scandals scarred Walter Reed and an ill-prepared Department of Veterans Affairs.

“The government does a very good job of sending people to war,” Howard Schultz, the C.E.O. of Starbucks, told me in New York this past week, “and a very poor job of bringing them home.”

Howard Schultz, the chief executive of Starbucks, center, in May with leaders from the Third Battalion, 75th Ranger Regiment, at Fort Benning in Georgia. Credit Courtesy of 75th Ranger Regiment, U.S. Army

Schultz was more conversant with espresso shots than rifle shots when he was invited to speak to West Point cadets about leadership in 2011.

His father had served in the Army in the South Pacific during World War II but never spoke of it. As a teenager, he sat in front of the TV with his mother when it was announced that young men with draft numbers from 1 to 125 were going to Vietnam.

“When I tell my story to my kids, they think I’m making it up: `What do you mean there was a lottery?’ ” he said. “And I remember it was literally a lottery where they picked out balls. And my number was 332, so I didn’t go. But I would have.”

After touring what he called “the sacred ground” of the military academy, he started to speak and choked up.

“It is I who should be learning from you,” he told the cadets. “You are the true leaders.”

It is good to cast your company in a patriotic glow, of course. But Schultz is also a man of open sentimentality, obsession with transformation and ferocious enthusiasms – be it for coffee, mermaids, basketball, biking, Israel or China. His epiphany at West Point led to an odyssey with veterans, a mission to get Americans to have more “skin in the game.”

“Before going to West Point, I had never even spoken to anyone in uniform,” he shares in a new book he wrote with Rajiv Chandrasekaran, a Washington Post war correspondent. “As I look back, I’m embarrassed.”

He put former Defense Secretary Robert Gates on the Starbucks board, committed $30 million from his family foundation to projects including research on post-traumatic stress disorder and brain trauma, and he visited the Pentagon, Walter Reed and military bases. He and Chandrasekaran produced “For Love of Country: What our veterans can teach us about citizenship, heroism, and sacrifice,” a slender volume with harrowing and heroic stories of war and coming home. Schultz’s proceeds will go to the Onward Veterans fund, which was created by the Schultz Family Foundation.

The coffee czar joined a growing list of corporations getting good P.R. by pledging to hire a million veterans, even though there are only about 200,000 post-9/11 veterans out of work, according to the Bureau of Labor Statistics. Schultz has hired 1,000 vets and spouses and committed to give jobs to 9,000 more by 2019.

He has organized a Concert for Valor on the Mall on Veterans Day, featuring stars from Bruce Springsteen to Eminem to Rihanna, a way to celebrate soldiers and urge the public to get involved with veterans’ groups vetted by Gates and Mike Mullen, the former chairman of the Joint Chiefs of Staff. The free concert, put on by Starbucks, HBO and JPMorgan Chase, will be shown live on HBO, even for those without subscriptions.

Schultz said that many vets he talked to had lost “a sense of core purpose.” He writes that tens of thousands of vets have grave injuries that will require a huge financial commitment and that healthy vets eager to join the work force “are too often viewed as damaged goods.”

There is a discernible P.T.S.D. bias among employers. Veterans Affairs estimates that 11 percent to 20 percent of the more than 2.4 million post-9/11 veterans suffer from P.T.S.D. I wondered if it was harder because of the sour view of the two wars. In a Washington Post-Kaiser Family Foundation Survey in April, 50 percent of the vets polled didn’t believe that Iraq was worth fighting and 41 percent didn’t believe Afghanistan was worth it.

Pfc. James Cathcart – suffering from P.T.S.D. and looking for work in Colorado in January – expressed his anguish to The Times’s Richard Oppel Jr. after ISIS raised its black flag over Falluja, Iraq, where so many Marines and soldiers died and were wounded capturing the city twice: “Lives were wasted, and now everyone back home sees that. It was irresponsible to send us over there with no plan, and now to just give it all away.”

But Schultz said that in his private chats with vets, “I never had one conversation where anyone brought up the politics. What I did hear, countless times, is, `I want to go back.’ “

Chandrasekaran said that we need to weave the vets, recovering from the strain of multiple tours and terrains strewn with I.E.D.s, back into the American narrative.

“In 1946, if your neighbor was watering the street at night because he was kind of crazy from shell shock, you knew that everyone coming back wasn’t crazy because your brother or son or husband had served and was successfully transitioning,” he said. “We don’t have that common understanding anymore. So if someone goes and shoots up Fort Hood, there are all those people who think all vets are a bunch of killers-to-be. And that’s not the case. So the aperture needs to widen.”

Schultz produced glossy film clips for the concert. One shows the macchiato mogul, wearing an Army-green down vest, greeting troops with his blonde wife, Sheri, as heart-tugging piano music plays. I note that it is bound to make viewers wonder if he’s partly motivated by a desire to run for president.

“I have an interest in trying to make a difference,” he said. “I don’t know where that’s going to lead.” He believes that “the country is longing for leadership and for truth with a capital T.”

The American dream is frayed, he says, adding: “We’ve lost our collective and individual responsibility, and to a large degree our conscience, and that has to be addressed. And that is linked to a dysfunctional government and a lack of authentic, truthful leadership. Am I depressing you?”