Bigger waists cause waste

November 23, 2009

Want to think of an investment growth theme? How about obesity? Seriously, we are all getting steadily fatter, and the problem offers lots of opportunities to ingenious entrepreneurs.

Why is surplus weight a problem? Well, what do you think is probably the biggest contributor to premature death, disability and unhappiness in the Western world? You might think cigarettes – but you would be wrong. The truth is that obesity is a massive epidemic that makes the fears about Aids in the West look like madness.

The economic cost of obesity and excessive weight runs into billions of pounds – leaving aside the suffering. Not only is it a huge burden on the health service, but millions of days a year are lost from work owing to illnesses arising from excessive weight, and fat workers are likely to be less efficient. Moreover, slim people tend to be happier – they have fewer social and health problems than overweight people.

Surveys have been conducted that ask women what single thing they would change about their lives if they could. The most popular answer is their weight.

Over three-quarters of Americans are overweight – and 80m of them are classified as obese. We are catching this habit from America, like so many others. And as we become a nation of fatties like the Americans, we copy them in our attempts to shed weight as well – by spending money on dieting.

The diet industry is colossal. Amazon.com lists more than 2,000 books on losing weight, while in the US, diet books, videos and audio cassettes sell over $1bn a year. Diet drinks such as Slim-Fast are big business, as are weight-loss centres and multi-level marketing organisations such as Weight Watchers International, Herbalife, Jenny Craig and Nutri/System, Inc.

The pharmaceutical industry sees obesity as a huge source of potential profit. It is busy trying to invent drugs that both suppress appetite and speed up metabolism. Plastic surgeons report that liposuction procedures are booming.

The various slimming systems have failed to penetrate the UK market with the exception of the Weight Watchers programme. In fact research shows that most people who successfully lose weight and keep it off don’t just eat less; they also exercise more. So it seems that in the UK we are being rational by joining gyms and attending aerobics classes to keep in shape – rather than just buying low-calorie meals and attending self-help classes.

There is no doubt that an increasingly sedentary existence helps us put on weight. In previous generations, a majority of the workforce undertook manual labourl; now must of us have white-collar occupations in offices. We drive rather than walk – everything is mechanised. In relative terms food has become steadily cheaper – despite the fact that we eat ever more, spending on food has been falling as a percentage of overall consumer spending.

Unfortunately, the steady disappearance of the family meal means people tend to snack more and eat far more fast food. All of this promotes obesity.

The restaurant and catering industries just add to the general agony; we eat out much more than we used to – and the trend shows no sign of slowing. People eat more when they eat out – and often the food is high in fat; portions are larger than they used to be as everything from sandwiches to burgers is getting bigger – thanks to demand from the public, and competition from other eating places.

There is a slight tendency to consider ruthless honesty about overweight people to be non-PC and “fattist”. But it is important to remember that obesity is “an important chronic, degenerative disease that debilitates individuals and kills prematurely” – according to the National Academy of Sciences. Yet some believe that those who call obesity an epidemic are part of the “fascist, orthodox medical establishment”.

It is curious how intolerant America has become of smoking, yet how little is really done there to encourage sensible eating. A majority of us in the West would be happier if we consumed fewer calories and ate more roughage and fibre. Government and industry should consider the economic benefits of promoting such a lifestyle before we end up with the obesity crisis threatening to overwhelm America.

Are you middle class too?

November 23, 2009

Later this month the BBC is to broadcast a documentary about the spread of the middle classes. In this country we are more interested in class than most, and we love to debate just what it means and how important class really is. In literature and conversation we tend to focus on the trivia, such as accents, social habits and manners. But the subject is more serious than that.

Evidence suggests that the most prosperous and stable countries all evolve by developing an educated middle class within a capitalist democracy. Britain was perhaps the first modern society to have a middle class, and an increasing number of Britons consider themselves middle class – yet few of us could agree on what exactly the phrase means.

Industrial capitalism has probably been the greatest engine ever invented by which the middle classes have grown in numbers and influence. It was no coincidence that the Industrial Revolution and the concept of a middle class both originated in Britain.

Marketers, economists, historians and sociologists each have their own definitions, which they use in their own sphere. Traditionally only a quarter of the UK population was seen as belonging to the middle and lower middle classes. I suspect the percentage in those categories has now grown to perhaps a third. Rising affluence and expectations mean more of us own shares, take two overseas holidays a year and have children at university.

Two important changes have made the most difference in recent decades. The first is the inexorable growth in home ownership. The second has been the explosion in numbers of those receiving higher education.

So it seems time to introduce a new set of criteria. Here are my five crucial tests as to whether you belong to the middle classes:

1. Income is the inevitable first test. You need to earn at least £20,000 per annum to be middle class. This might be unearned income.

2. Home ownership. You need to own your own home to be middle class. Some members of the middle class rent their homes, but they are rare.

3. Education. At least one of the household’s earners should have been educated beyond the age of 16. In years to come this will change to those educated beyond the age of 18, as more pass through higher education.

4. Credit. Not only should every member of the middle class have a bank account (remember 20 per cent of the population does not), but they should also have a credit card.

5. A belief in opportunity. The middle classes believe they can improve their status through education and training. They see home ownership as a better long-term bet than renting. They try to invest. They follow Adam Smith’s great dictum: “The natural effort of every individual to better his own condition . . . is so powerful a principle that it is alone . . . capable of carrying on the society to wealth and prosperity.”

In the past, class was defined by the occupation of the head of the household – who was inevitably male. Class distinctions were dominated by considerations of traditional male professions such as the Army, the Navy, and the Church. That method of categorisation has become outdated, since I believe people’s behaviour is more influenced by their actual income and education than simply their job.

Moreover, the rise of women in the workplace means that many families have two wage earners. The decline in popularity of marriage means there are now many thousands of unmarried middle class couples living together.

My first four tests are fairly scientific, but the final one is rather more vague. It distinguishes the middle class from the strivers who are simply getting by from month to month and cannot plan. Members of the middle class save and invest because they believe the future holds promise and improvement. They realise that an existence dependent on state handouts is likely to mean stagnation. They are willing to defer immediate pleasure and put effort into learning for the promise of greater benefit later on. Their voting behaviour reflects these concerns.

Over recent years a number of catch phrases have emerged to describe certain segments in society, such as “yuppies”, or new ones from the US such as “Bobo” for bourgeois bohemian, to complement the social grades A, B, C1, C2, D and E. But these descriptions are all too subjective and imprecise. I like the idea of an overall “middle class”, as do a lot of people it seems. Research in America has shown that many of those both above and below usual definitions of middle class see themselves as belonging to it!

Daniel Defoe summarised the best reason for being middle class in Robinson Crusoe: “He bade me observe it, and I should always find, that the calamities of life were shared among the upper and lower part of mankind; but that the middle station had the fewest disasters.”

Why partners break apart

March 18, 2001

Some make it by themselves, others prefer to work with partners. But few partnerships are permanent. Individuals change and their ambitions clash. People become bored or rich or tired and want to do something else. I find the history of such relationships fascinating.

A brilliant study of two partners and friends who fell out is Charles Gordon’s The Two Tycoons, about Charles Clore and Jack Cotton. They merged their empires in October 1960 to create the world’s largest property business. But although the financial details seemed straightforward, the working relationship was never discussed before the merger.

Both men were “very rich, very clever and very famous” but they had quite different characters and ways of doing deals. Cotton had a natural instinct for property development and ran his company, City Centre, on flair and charm from his suite at the Dorchester. Clore was a melancholy sceptic who carried out business on a methodical and pragmatic basis. Within three years the differences between the two were apparent. Eventually Cotton overreached himself, and Clore ganged up with the Pru and the Pearl and forced “Big Daddy” out. Within a year Cotton was dead – killed, they say, by the loss of power and prestige.

Another telling description of the collapse of a corporate partnership is given in Ray Kroc’s autobiography, Grinding It Out – The Making of McDonald’s. Kroc had been a milk-shake blender salesman who became first a licensee, and then owner of the McDonald’s restaurants. He recruited a first-rate numbers man called Harry Sonneborn who joined so early he ended up with a third as much stock as Kroc.

But while Sonneborn was an introvert and financial genius who said, “I didn’t care about the quality of the food or the cleanliness of the unit”, Kroc was outgoing, couldn’t read a balance sheet but was obsessed by hamburgers.

Unfortunately for Sonneborn, Kroc was a hard man who once said: “You have to be ready to carry your cross if you want to become the head of a big business. You’ll lose many of your friends along the way.” In 1967, after 12 years of partnership and a hugely successful public offering, Kroc used his 43 per cent shareholding to force Sonneborn, the president and chief executive, to leave. Sonneborn resigned aged 51 and sold his 11 per cent stake. If he had held on, it would now be worth about $1bn.

A more recent entrepreneur who has broken with key partners is Sir Richard Branson. In 1981 he split up with Nik Powell, co-founder of Virgin and childhood friend. In his autobiography, Branson says the tell-tale sign was Powell’s unwillingness to go on staff holidays. Branson certainly got the better end of the divorce: Powell received £1m in cash and a few assets for his 40 per cent. The “bearded pullover” made that stake worth perhaps £500m within 15 years. Branson seemed unemotional about severing the tie. He said: “Nik had no particular skills to contribute to the company as it was at that stage.”

Another broken partnership was that suffered by Roy Thomson. He had worked with Jack Kent Cooke for 13 years as partners and friends in Canada in the radio business. Then Jack decided to go off and run one of the biggest radio stations in Canada. That move, and the death of Thomson’s wife, persuaded Roy to emigrate to Britain in 1954 and among other things, buy The Scotsman and The Times, start Scottish TV, drill for oil in the North Sea and start Thomson Holidays. All of these things the later Lord Thomson of Fleet did on his own, after reaching 60.

The founding partnerships at both Microsoft Corporation and Apple Computer – the two defining companies of the Silicon Valley revolution – have similar stories. In each case, one partner dropped out but remained a supportive shareholder. With Microsoft, Paul Allen left active management in 1983 but remained a director and kept most of his shares – leaving the irrepressible Bill Gates to build the company into the world’s largest. At Apple, Steve Wosniak became disenchanted with big business and let Steve Jobs run the show. Jobs himself later left but then sold NeXT to Apple for $400m and eventually took back the reins as CEO.

In all the examples above, the break-up of a partnership led to extraordinary further success. It seems many great companies require two founders, but only one leader.

The first American Tube boss

February 25, 2001

THERE have been some raised eyebrows at the arrival of Bob Kiley from New York as Ken Livingstone’s supremo for London’s transport system. How outrageous that an American should be in charge of the Underground! But the true founder and first boss of the Tube was an American, Charles Tyson Yerkes.

Equally, there have been cries of distress at the prospect of a privatised Underground. Yet the Tube was built as a venture for gain by private enterprise, effectively only taken under state control in 1933.

So what of the first American Tube supremo? Yerkes was born in 1837 in Philadelphia of Welsh ancestry and Quaker parentage. He became a clerk in a flour business and then a stockbroker in 1858. A few years later the ambitious financier bought his own investment bank. He was successful and well connected, and started dealing in railway stocks and bonds, such as the Seventeenth and Nineteenth Street Railway Company. He had discovered his calling – financing railways.

But in 1871 the youthful stockbroker suffered a setback when the great Chicago fire triggered a nationwide financial panic and Yerkes’ firm was plunged into bankruptcy. It was revealed that his business had stolen money from the city of Philadelphia and lost $400,000 of it. Yerkes was jailed for 33 months. Yet the irrepressible Yerkes was quoted as saying while in prison: “I have made up my mind to keep my mental strength unimpaired and think my chances for regaining my former position, financially, are as good as they ever were.”

The discredited financier received a pardon after serving seven months of his sentence. Somehow by 1875 he had bought an interest in the Continental Passenger Railway Company and saw the stock climb from $15 to $100 a share. During this period he also posed as a colonel in Dakota. In 1881 he decamped to Chicago, where he saw great opportunities in urban transport.

By 1886 he and various associates had bought control of a North Side streetcar company, and his career as a mass-transit tycoon really took off. Within seven years he ran an empire that spanned the largest cable railway system in the United States with 290 miles of track and 7,000 staff. Scientific American described him in 1893 in the following terms: “Mr Yerkes now resides in Chicago, in the full enjoyment of his vast wealth and a sound mind and body, with a constantly increasing circle of business connections upon which to exercise his tremendous ability.”

But not all the media were so kind. Yerkes was reputed to have bribed the city council to obtain transport franchises, and used “professional vamps” to seduce and then blackmail politicians. They apparently “openly sold Yerkes the use of the streets for cash”. He also “issued large flotations of watered stock, heaped securities upon securities and reorganisations upon reorganisations”. He was bold in his promotions, stating: “The secret of success in my business is to buy old junk, fix it up a little and unload it upon other fellows.”

His name will be known forever in Chicago not because he owned rail lines but because he funded the building of the world’s largest telescope in an attempt to become respectable and break into society. After he donated over $500,000 to the Yerkes Observatory, the Chicago Evening Journal ran a headline saying: “Street Car Boss Uses Telescope as a Key to the Temple Door.”

But despite his philanthropic endeavours in the field of astronomy, he remained vilified and an outcast in the Windy City. He started building the Loop Elevated system but was criticised and obstructed, so he gave up and sold all his US transit interests to New Yorkers Ryan and Whitney, and moved to London in 1900.

The so-called robber baron arrived in late Victorian London to find a nascent underground railway system powered by steam. The Metropolitan line had opened in 1863, but there was little coherence to the various routes. Several lines had obtained building permissions but lacked funding. The arriviste railway promoter saw some old junk to buy and fix up. Yerkes quickly recruited Edgar Speyer, an American-born son of a German-Jewish banker, as a principal backer, together with the Old Colony Trust of Boston, and moved into action.

In a flurry of acquisitions, Yerkes’ American consortium took control of the District line in 1901, and later the Charing Cross, Euston & Hampstead Railway interests, the Brompton & Piccadilly Circus and the Great Northern & Strand – and then the Baker Street & Waterloo. By 1902, the conglomerate had been renamed the Underground Electric Railways Company of London Ltd and Yerkes was appointed its chairman. This organisation became the basis for the Northern, District, Bakerloo, and Piccadilly lines. It is reputed that Yerkes decided on snap to extend the Northern line beyond Hampstead after a casual trip with his coachman.

For 60 years, no other Tube lines were constructed. There are theories that Yerkes employed similar tactics of corruption to those he had adopted in Chicago in order to acquire his London underground network and keep out competition. The truth has never emerged, but Yerkes was quoted as stating: “It’s the straphanger who pays the dividends.”

The new system did not open as a whole until 1907, but Yerkes died in 1905 and never saw it in full flow. Nevertheless in five years he had welded together a chaotic group of half-completed lines, started the process of electrification and found the money to get them built. He may have been a convicted embezzler and an American, but he knew how to get the Tube working.

Let all of us who continue to use his creation hope that he set a precedent for efficiency and vigour that Kiley can follow.

Investors need ‘sex magick’

February 4, 2001

I think I have discovered where I’ve been going wrong in making investments. I’ve been undertaking fundamental analysis, talking with managements, studying industries, financial ratios and so forth. What I really should have been doing is financial psychicism.

This is a new method of investment management as practised by a New York stockbroker called Marcus Goodwin – who also happens to be a “veteran mystic” and author of a new book called The Psychic Investor.

Apparently he uses the supernatural power of candles, incense, crystals and feng shui to pick shares. He states that stock market success comes from the age-old oracles of astrology, numerology, the tarot, the pendulum, and “sex magick”.

Inevitably I was especially intrigued by Guru Goodwin’s latter system of investment. Supposedly this works by having sex with a fellow holder of a particular stock, and jointly chanting that you both want the shares to rise – while simultaneously having an orgasm. I wonder if this is what used to be quaintly called “technical analysis”?

All sorts of curious theories are advanced in this fascinating volume – for example, that shares decline during a waning moon and rise when the moon waxes. He suggests that you will increase your ability to telepathically influence share prices if you eat the right sort of foods – lots of eggs but no sugar.

Yet another wacky view is that facial psychometry (staring at photo portraits in the annual report) and handwriting analysis of the chief executive will reveal whether he or she is honest and has vision! In other words, don’t buy shares in a company run by an ugly boss with an illegible signature! I wonder if Goodwin thinks you should cast evil spells over shares you have shorted?

Another far-out, but possibly valid investment philosophy is put forward by a certain Edward Allen Toppel in his book Zen in the Markets – Confessions of a Samurai Trader. He uses inner-game trading techniques and blames the ego for poor investment performance. He asserts that egotism encourages you to take profits early, double up on bad positions, let losses run and invest more than you can afford. He believes the market humbles arrogant investors who show off and think they know better. I rather think his ideas have a little more relevance than those put forward by Mystic Marcus.

There is always plenty of irrational behaviour in stock markets, particularly when they are as volatile as they have been over the past year or so. Frequently valuations and price movements have been impossible to justify on any sane basis. In these conditions amateur investors might be tempted to believe in exotic investment methods such as those outlined above.

As John Maynard Keynes once remarked: “Money is one of those semi-criminal, semi-pathological properties which one hands over with a shudder to the specialists in mental disease.”

It is strange that despite the vast computer and intellectual power hard at work in the City and Wall Street, experts are not necessarily very good at predicting share prices. That is why such imaginative and financially eccentric advisers as Goodwin and Toppel can prosper.

They exploit the fragile emotions of investors, and understand the importance of behavioural finance in determining investment success. Gustave Le Bon, the famous writer on mass psychology, said: “A chain of logical argument is totally incomprehensible to crowds, and for this reason it is permissible to say that they do not reason or that they reason falsely and are not influenced by reasoning.”

Part of the problem for private investors is that even the professionals talk stock market mumbo-jumbo much of the time. They employ esoteric formulae and equations projecting discounted cashflows into the hereafter. They are so buried in mountains of data about a company that they fail to notice that the chief executive is a bandit.

Some of their predictions and double talk might as well be the prophecies of Nostradamus for all the common sense they employ. When such stockbroking witch doctors and alchemists are endlessly quoted touting wildly overvalued rubbish, why shouldn’t the amateur believe bizarre stuff like psychic investing?

Even if you never indulge in “sex magick” to boost your portfolio, you should not ignore intuition when looking at investments. Do not just use the left hemisphere of your brain – the deductive and rational side. Employ your right hemisphere as well, and never just ignore your gut instincts. After all, even Albert Einstein said: “I never discovered anything with my rational mind.”

January 28, 2001

What do business people do all day? Well, they talk on the telephone, they send emails and they might even read balance sheets, but what they really do is attend meetings.

Meetings are the very essence of business existence. They are the time and place where deals are done and negotiations happen. Very few of us dare to question the importance of these gatherings, but perhaps we should. Mainly they serve to prevent executives getting lonely or from doing any real work.

For many managers and organisations, meetings are an end in themselves. The reason you go to a meeting is that it is being held. While capitalism is about action, meetings are mostly about inaction. According to one survey, the average American chief executive spends 17 hours a week attending corporate meetings.

What is happening at all these meetings? As Fred Allen said: “A committee is a gathering of important people who singly can do nothing, but together can decide that nothing can be done.” I admit that I attend far too many meetings of all types, and a number of obvious facts emerge from my experience.

Firstly, the more participants who attend the meeting, the less productive it is. The best meetings are one-on-one, and up to five in a group can be worthwhile. But I sit on one board with over 20 attendees of the great and the good. The meetings are pure ritual – almost more of a waste of time than the majority of annual general meetings. But it is a non-profit organisation, so the objectives are altogether rather woolly anyhow.

Another type of meeting that is next to useless is one lasting more than two hours. Virtually everyone’s attention span wanes after that much time sitting in an airless room opposite the same ugly faces.

If something cannot be decided in two hours, the group having the meeting should be replaced. The meeting has probably boiled down to various members showing off to each other, arguing or larking about. Frequently meetings take too long because the participants have inadequately prepared beforehand.

An awful lot of meetings are held because it seems the right thing to do – when in reality a phone call, fax, email, or letter would resolve the issue much more quickly and at less expense.

With the cost and stress of travel and the rise of more powerful and mobile forms of communication, the requirement to hold across-the-table meetings has waned. These remote discussions are inevitably more to the point and ramble less. After all, many meetings drag on simply because you have actually travelled to a place and a five minute chat would mean it was a wasted journey, wouldn’t it?

One of the most successful entrepreneurs I have ever known never really met anyone – he conducted all communication by phone and consequently made much more efficient use of his time.

I am immediately suspicious of committee meetings. They reek of bureaucracy and buck-passing and should be avoided at all costs. Such meetings are especially bad at coming up with original ideas or undertaking bold initiatives. If you are preparing anything creative – designs, documents, products, whatever – do it alone and then present it fully formed for a meeting to approve or otherwise.

Chairmen and agendas help decide how worthwhile a meeting can be. A poor chairman allows the gathering to squander time on trivia and permits irrelevant debate. A good chairman ensures the most important matters are dealt with first, while people are fresh and listening properly. Whoever writes the agenda can manipulate the proceedings to suit their personal objectives.

Conferences are, of course, an extension of meeting mania on a grand scale. They encourage endless socialising and discourage work. The fact that they are accounted for as a commercial expense and carried out on business time seems an irrelevance. They might be an annual in-house bash, or an industry-wide series of talks. Most delegates see conferences as a jamboree and a distraction, but in general I find them tedious and economically unrewarding.

A large and profitable industry has grown up around such jollies and puts great effort into ensuring the conference culture continues to grow. Across corporate America they have become an absolute way of life. God knows how efficient the United States could be if it only cancelled all the big conferences and seminars!

Now if you will excuse me, I really must rush – I’ve an essential meeting to attend.

The blueprint for progress

January 21, 2001

At this time of year the annual budget is fresh and entirely achievable. So January is a disappointment so far? Hey, you’ve got the rest of the year to make up the difference. December turned out worse than expected? Of course last year there was a shortfall – but there were plenty of specific reasons (which will not recur) why targets were not met. 2001 is going to be different! Sales targets will be beaten and costs will be kept under control – or I hope they will, anyhow . . .

The annual budget is the most important document a company’s directors prepare – next to last year’s actual results. It is the year’s manifesto with which they press their cause and measure themselves. It is a combination of the tension between the natural optimism of the sales department and the orthodox conservatism of the finance department. In other words, the bullish chief executive and the cautious finance director have an annual battle about whether to shoot for the stars or under-promise and over-deliver.

Both sides of this endless debate have good arguments in their favour. All new business is about the triumph of hope over experience, since statistics show that most start-up endeavours fail. Without the confidence to believe that things will improve, that sales will rise and that competitors will be kept at bay, capitalism does not function. It needs the initiator, brimming with dreams and motivation. As Emerson said: “Nothing great was ever achieved without enthusiasm.” But unfounded optimism and unscientific plans normally lead to insolvency.

The easy option is to under-cook the budget and set simple objectives. That way no one gets in trouble and the business can coast. But an enterprise that never strives soon stagnates and dies. There is always an excuse as to why sales cannot expand, why costs will rise and consequently why profits will fall. But successful managers know that growth is everything. Set feeble goals and watch the vigour seep out of an organisation. Human existence is about progress, not retreat!

How does this philosophy match up to the concerns of the accountant, who sees the endless unpredictable hazards in front of every commercial undertaking? He knows that if he approves each capital expenditure request the company will run out of cash. He understands that many of the projections of new orders to be won are fanciful. He remembers the poor returns previous projects achieved long after the original, wildly optimistic budgets were presented. His job is to produce a realistic budget rather than a fantasy.

The legendary Ross Johnson, head of RJR Nabisco, pithily summed up the clash between the careful and the bullish. He was the anti-hero of Barbarians at the Gate and a high-spending supersalesman, who said: “An accountant is a man who puts his head in the past and backs his ass into the future.”

The number crunchers, however, might subscribe to the theory of modern psychology, which says that people should adopt a “good enough” view of life. These medical professionals believe that those who struggle endlessly for unattainable goals are doomed to an unhappy existence. In their view we should accept failure as an inevitable aspect of an imperfect world rather than allow ourselves to be perpetually dissatisfied with underperformance.

Accountants know that healthy businesses are well controlled and efficient, which only comes from a sensible plan. Yet experience shows that sales executives at least need bold, perhaps impossible targets which really make them stretch, rather than just doing the same as last year. Most great companies were built through truly audacious ambitions, rather than simply being adequate.

For public companies, the task is to set internal hurdles high enough to challenge the staff, but promote external projections sufficiently low that they can be beaten. Investors, like the rest of us, only want pleasant surprises. Analysts are ruthlessly unforgiving towards companies that miss estimates and are forced to announce profit warnings.

The market adores fast growing companies that exceed expectations, like Matalan, a clothing retailer which enjoyed a prospective p/e of more than 40. Yet its shares collapsed by more than 30 per cent in a day recently when it disappointed in the mildest of ways. Analysts are desperate to be the first to publish a higher earnings forecast than rival broking firms.

The best firms involve all parts of the organisation in the preparation of the budget. That means there is not too much bias in the end result. Such a set of forecasts is built from the bottom up and the reasoning and assumptions behind it are spelt out fully – and have been questioned. Just debating such qualitative and quantitative judgements can improve a business. A thorough budget process is a good indicator of a well-run company. It shows that there is a sensible balance between business-getters and cost-controllers, and that they communicate effectively.

Business and budgets are never about just “good enough” but neither are they about perfection. Success comes from a dynamic blend of realism and optimism – and a big dose of luck.

We are a nation of Edisons

January 14, 2001

The blue commemorative plaques attached to the former homes of the famous are a wonderful feature of London life. Near my home is the rather sad plaque celebrating Alan Turing, the mathematician who committed suicide in 1954.

Some argue that Turing was effectively the inventor of the computer with his “Turing Machine”. He was an example of how Britain has always been an inventive nation, full of pioneers in many fields, be it medical science, electronics, chemistry, genetic engineering or aeronautics.

A brilliant book has just been published which is an excellent reminder of our ingenuity. It is called Inventing the 20th Century by Stephen van Dulken (The British Library, £16.95). Its structure is clever. It features 100 important inventions, and for each gives a page of background to the idea and the inventors, and then on the opposite page an illustration of the original patent.

While by no means all the inventions included are British, an amazing number of groundbreaking ones are – given our relatively modest population. For example, Frederick William Lanchester from Birmingham filed the original patent for automobile disc brakes in 1902, even though his innovation was only widely adopted over half a century later. Harry Brearley of Sheffield filed a patent for stainless steel in 1915; Frank Whittle invented the jet engine in 1930; and five ICI scientists filed the patent for polythene in 1937.

In 1947 Dennis Gabor filed a patent for holograms, and received the Nobel Prize for Physics in 1971. In 1953 research workers at Pilkingtons invented float glass, which is the process now used for 90 per cent of the world’s glass production. Sir Christopher Cockrell, who only died in 1999, filed a patent for the first hovercraft two years later. In 1968 Godfrey Hounsfield at EMI patented computer-aided tomography – or body scanners. He also received the Nobel Prize for medicine in 1979.

In the past 20 years, among other things, we have pioneered genetic fingerprinting, the cloning of animals and sildenafil citrate – or Viagra, which was invented by Pfizer scientists at Sandwich, Kent. It is hard not to marvel at our contribution towards progress in the 20th Century.

But inventors are not the type to look backwards – they tend to want to look to the future. By their nature they threaten the status quo, and what has gone before – they desire change and improvement. Yet our history of scientific and technical advancements should encourage innovators, and give them confidence that we can produce new and exciting products. Edmund Burke may have said, “You can never plan the future by the past” – but you can surely gain inspiration from it.

It seems to me that inventors require three traits. Firstly, they need to be innovative thinkers who can devise a novel solution to a genuine problem. Secondly, they need to have the persistence to perfect the device so it actually works and can be sold. And thirdly, they need to understand how to exploit their invention so that the idea is translated into a successful commercial product. Inventors need to know economics as well as technology.

Inevitably, in recent decades, lone inventors have produced fewer major innovations than in the past. Serious research and development laboratories – academic, government or private sector – have achieved most advances. But the endless problem with large organisations is that they tend to regulate things and resist the creative impulses of truly original minds. As Thomas Edison, perhaps the greatest of industrial inventors, said: “There ain’t no rules around here. We’re trying to accomplish something.”

Unfortunately one of the most prevalent influences in any group of people is the “not invented here” syndrome. This applies in spades within a big business. Taking an idea from drawing board to prototype to finished product can take three or more years. Championing something radical and different over the many bureaucratic hurdles and convincing the sceptics can be tougher work than the inventing itself.

I’ve met a number of inventors over the years – many of them perhaps geniuses, even if their ideas have no practical application or hope of turning a profit. They all, I suspect, would take comfort in Jonathan Swift’s remark: “When a true genius appears in the world, you may know him by this sign, that the dunces are all in confederacy against him.”

The stock market’s love affair with technology and innovation may have cooled, but it is not over. Too much money and too many productivity gains have been made from early stage venture capital for investors to ignore emerging technology. And if investors want confidence that there is a talent for invention in our country, they only need study our history.

Trophy wives cost millions

December 17, 2000

MOSTLY this column is about making money by growing a business or through investment activities. But there is another way to get rich – by marrying money. Now quite often women’s magazines carry stories titled something like “How To Marry A Millionaire”. These features tell women how to win younger, single men who are loaded. But such pieces have a fatal flaw: most of the really rich men are older – and married already. Thus the way for a determined gal to get hold of a moneybags is to become a trophy wife.

It should be emphasised up front that becoming a trophy wife is no pushover. It takes serious work and continuing application. Men who have made it are by their nature demanding, and have to be sold. Moreover, they are often still married to a first wife, so the applicant trophy wife has to deal with her as well.

Rich men may well be frustrated and have a loveless marriage but to dump a wife for a newer model is an expensive and painful process, even for a billionaire. They have to go through the cost and publicity of a divorce. They are only going to do it for someone who really brings a lot to the partnership.

Trophy wives are important acquisitions for men who have everything. These tycoons have already got the yacht and Gulfstream jet. They frequently marry young and have worked obsessively to amass great fortunes. They have achieved wealth, fame and power, but they no longer find their first wives sexy or sophisticated enough for their new found status. Perhaps they never had time to sow their wild oats when they were young, since they were too busy empire building. They reach late middle age and they want to relive their youth – roll on the Harley Davidson and leather jacket, turn up the disco music – let’s party!

These magnates are rich enough to divorce and are used to getting the best. When they were poor and striving, the wife was supportive and brought their children up, but she was never much of a beauty. A trophy wife has to be much younger and prettier than the first, and understand sexual techniques which blow the tycoon’s mind (and much else).

Trophy wives are manic about keeping in trim and use personal trainers. They are also more ruthless and less romantic than the wives they replace. They understand their relationship is a bargain whereby they supply sex, glamour and youth, while their new husband supplies jewellery, a large house and endless expensive holidays. Often trophy wives are more exotic than the dowdy mothers they supersede – certainly better travelled, and quite possibly foreign.

Mostly, a trophy wife is not expected to have children – although she’ll often have to cope with resentful children from the first marriage. Rather her tasks will be to add new friends, new clothes, a new home and new interior decoration to her husband’s world. She will introduce modern fashion and art to his life, and host exotic parties – she will know how to spend serious money on their fabulous life together.

She will fuss about his health and get him on a fitness regime. She understands a lot about her husband’s business, probably because she did plenty of homework before she picked her target. Because trophy wives are usually successful career women themselves, they offer a contrast to their husband’s first wife, who spent years bringing up a family and making sacrifices for her husband’s business. The first wife didn’t have time to work out or become a high flyer – she was dutifully looking after the children and home.

The bad news for would-be trophy wives is that their husbands are more often than not boorish, sad figures. They are selfish and terrified of ageing, and have proved how disloyal they are when it comes to their own desires. All would-be trophy wives need to ensure a favourable pre-nuptial agreement is drawn up to protect them in the event that their rich husband wants yet another younger model.

Historically, the men who today acquire trophy wives had mistresses – pampered, younger women spoiled by their rich, older lovers. Big businessmen such as Robber Baron Jim Fisk and Henry Ford both had secret lovers. But these days divorce is more socially acceptable and intelligent, ambitious women are not satisfied being a mere courtesan. They insist on being installed as a fully-fledged partner. After all, the rewards can be substantial.

Anna Nicole Smith in Texas was not the classic trophy wife, since she lacked serious sophistication. But she did hit the jackpot when she married J Howard Marshall. He was 89, wheelchair bound and worth hundreds of millions from oil. She was in her 20s and a dancer and topless model. He died within two years of their wedding – but it took her several more years of litigation before she got her share of the estate.

But to suggest her motivation might have been financial, rather than love, is seedy and outrageous. We all know that such romances would have happened even if the men had been paupers!

Time to ride the Asian tigers

December 10, 2000

The US-inspired love affair with technology, media and telecom stocks seems truly over. Many investors are afraid that there is still more pain to come and so they are searching for new places to put their cash. For those with an inclination towards the contrarian, a look at South East Asia markets might be fruitful.

The Tiger economies of Asia were the real emerging market stars of the 1980s and most of the 1990s. Their economies and stock markets almost without exception performed fantastically, with both corporate earnings and price/earnings multiples growing impressively. But in the second half of 1998 a financial crisis hit the region and Western investors bailed out in droves.

Most have not returned. Despite remarkable underlying economic recoveries, many Asian stock markets are down 30 to 50 per cent this year, thanks to a strong oil price, weak currencies, political uncertainty and apathy and fear from investors.

Effectively, many of these Asian markets have become irrelevant to global funds – and in many cases even specialist Asian funds. Badly burnt shareholders have despaired of crony capitalism, government bailouts, poor corporate governance and terrible liquidity. During the past two years, investors who sought risk found their fix in US internet plays and decided that Asia was too far away, too corrupt and too unstable. Silicon Valley was a wild enough ride. Institutional allocations towards many Asian markets have fallen virtually to zero.

There are many signs that markets such as Thailand, South Korea and Indonesia now offer compelling value for those who like to swim against the tide, and can cope with some risk and volatility. Both the Thai and Indonesian equity markets are down over 50 per cent in dollar terms this year. Many shares languish at the same levels they reached in the depths of the 1998 crisis – despite strong turnarounds in the meantime.

Jonathan Neill at Fabien Pictet and Partners, who has covered Asia for many years, says he has never seen such bargains. He and one or two other experts like the Asia/ Pacific team at Morgan Stanley believe that these share price declines have more than discounted economic, political and earnings worries.

A major factor creating value in these countries is technical weakness, caused by distressed selling from US mutual funds suffering redemptions. Asian/Pacific funds have seen redemptions of $1bn year-to-date, or 17 per cent of overall assets. In many cases analysts and fund managers have given up and are concentrating their emerging market resources in Latin America. Local brokers are downsizing and share volumes are pathetic. Issuance of paper has all but ceased, and initial public offerings are entirely absent. These are all excellent indicators of a market bottom.

Yet overall the nations of South East Asia are still undergoing rapid modernisation and sharp rises in population and gross domestic product. Their unloved currencies have made their exports super-competitive and many countries are running huge trade surpluses. Companies have been building up large foreign exchange reserves and improving the quality of corporate disclosure and accountability. If sentiment recovers, stock markets and currencies will appreciate.

One of the best ways to gain exposure to these bargains is via country funds. These are mostly listed, closed-end funds managed by specialists – there are a number traded in London and New York. They are easier to deal in than directly trading stocks quoted in places like Bangkok and Jakarta. They hold a portfolio of stocks and give shareholders balance through diversity. They also tend to trade at discounts to their underlying net book value. Given the unpopularity of Asian markets, the discounts have widened and are frequently 30 per cent or more.

If the Pacific Rim returns to favour among investors, not only will stock prices recover, but fund discounts will also narrow. Hence shareholders in these funds will get a double whammy on the upside. Funds worth a look include the Thai Prime Fund, Thailand International Fund, and the Thai Euro Fund. Find out more about closed-end vehicles at http://www.trustnet.com.

In many oversold Asian markets, large cash-rich companies in solid sectors like food and utilities stand on p/es of two or three. If the markets stage a comeback, such shares could treble rapidly.

Any one of several factors could trigger a revival. Domestic investors could switch their savings from the banking system to the stock market; mergers and acquisition activity could rise, fuelled by climbing corporate liquidity in many cases; companies could step up their share buyback programmes; or Western pension funds and other institutional investors could switch their asset allocations away from highly rated US stocks towards bombed-out Asian markets.

Investing in countries like Thailand, South Korea or Indonesia is not for the faint hearted. Emerging markets can be very volatile – as the extraordinary gyrations in the Turkish market this week have shown. But for those who have enjoyed the high risk/high reward of tech stocks and like betting against the crowd, now could be the time to take a punt on the Far East.


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