For anyone who wonders if Apple can maintain its creative edge and remain on top without Steve Jobs, Bill Frezza, a fellow at the Competitive Enterprise Institute and a Boston-based venture capitalist, poses another simple question – Remember Polaroid?
As Frezza chronicles in Forbes, Polaroid was once the apple of Wall Street’s eye. Like Apple, Polaroid had a charismatic founder, Edwin Land – who is second only to Thomas Edison in the number of patents he received. “Where Jobs was the impresario of form, function, and business model, Land was the wizard of optics, chemistry, and physics,” writes Frezza. He also notes that Land’s patent victory over Kodak, a supplier that tried to steal Polaroid’s technology to launch a competitive instant camera, is strikingly similar to the recent Apple/Samsung battle won by, you guessed it, Apple.
Yet Polaroid’s time at the top was short-lived because the limited capabilities of Polavision instant movies couldn’t compete with emerging videotape technologies. And, today, little remains of Polaroid.
Could competition take a bite out of Apple’s seemingly untouchable market share? According to Frezza, the day Apple “stops building insanely great products, the day it loses its knack for thrilling loyal customers with new releases, the day a younger generation turns up its nose to chase a brand that’s fresh and new is the day the grim reaper goes to work. And this is as it should be, freeing up the capital and talent necessary to build the next great company, the consumer making the ultimate choice between winners and losers.”
He concludes with a simple statement that rings true throughout the decades. “Capitalism only works if companies are allowed to succeed and fail – on their own merits, in their own time, with their fate dependent on pleasing customers, not politicians.”
Clearly, Frazza is no fan of the notion that some companies are “too big to fail.” He notes, “The death of companies is always painful. But out of death comes rebirth, a cycle we interfere with at our peril.” I couldn’t agree more.
And, if you are interested in learning more about Polaroid’s founder, check out his biography Insisting on the Impossible.
Monday, November 19, 2012
Monday, November 12, 2012
Passive Beats Active, Again
Study after study confirms the same thing – passive investing beats active management. The latest data comes from financial advisor Harold Evensky, president of the financial planning firm Evensky & Katz, in the latest issue of the Journal of Investing. Along with Shaun Pfeiffer, a professor at Edinboro University in Pennsylvania, Evensky, who is also a professor at Texas Tech University in Lubbock, examined 20 years of mutual fund performance data, tracking expansions and recessions separately and collectively.
Specifically, the two researchers were interested in testing the widely held notion that actively managed funds outperform in bear markets. After all, an active manager could make defensive moves to protect portfolios and preserve investor capital in a significant downturn. However, a passive index fund would simply continue to own the stocks in the index and would fall victim to falling prices.
In fact, the researchers found that active fund managers do indeed generate enough outperformance to cover their fees in recessions. However, in bull markets, active managers’ returns do not beat passive index funds. And, in addition to underperforming passive strategies in periods of economic expansion, active managers also fall short of passive managers over longer investment horizons that encompass both expansions and recessions.
The study’s findings further weaken the case for active management by reporting on the wide variance among actively managed portfolios and their inconsistency across business cycles. Generally speaking, the top decile of actively managed funds generated alpha, but the bottom-decile funds performed poorly.
The bottom line is that the alpha generated by active managers in recessions isn’t enough to justify their under performance across full market cycles.
Specifically, the two researchers were interested in testing the widely held notion that actively managed funds outperform in bear markets. After all, an active manager could make defensive moves to protect portfolios and preserve investor capital in a significant downturn. However, a passive index fund would simply continue to own the stocks in the index and would fall victim to falling prices.
In fact, the researchers found that active fund managers do indeed generate enough outperformance to cover their fees in recessions. However, in bull markets, active managers’ returns do not beat passive index funds. And, in addition to underperforming passive strategies in periods of economic expansion, active managers also fall short of passive managers over longer investment horizons that encompass both expansions and recessions.
The study’s findings further weaken the case for active management by reporting on the wide variance among actively managed portfolios and their inconsistency across business cycles. Generally speaking, the top decile of actively managed funds generated alpha, but the bottom-decile funds performed poorly.
The bottom line is that the alpha generated by active managers in recessions isn’t enough to justify their under performance across full market cycles.
Monday, November 5, 2012
Who are the 1%?
Nina Easton’s recent article “Stop Beating Up the Rich” begins by quoting the French historian Alexis de Tocqueville who chronicled American society’s often contradictory pursuit of both equality and the almighty dollar. “The love of wealth is at the bottom of all that the Americans do,” he wrote.
Between the Occupy Wall Street movement and the Presidential campaign, we’ve certainly heard a lot about the wealthy 1%. All the rhetoric encourages us to conjure images of powerful executives who make hundreds of times what the average worker earns, fly about the country on private jets, and would rather take federal bailout money than pay their fair share of taxes.
But, as Easton points out, it’s inaccurate to categorize the 1% as “greedy, tax-avoiding, selfish capitalists.” In fact, she notes that most of the 1.4 million taxpayers who comprise the top 1% gained their wealth through hard work rather than by inheritance. “This group consists of a large number of doctors, lawyers, engineers, and small-time entrepreneurs, many of whom are working hard to create jobs. To vilify them is the wrong debate,” she writes.
Yes, the number of millionaires has grown over the past decade. In fact, a 2011 study by the Deloitte Center for Financial Services found that over the past decade the number of millionaire households rose from 7.7 million to 10.5 million. And the number of American millionaires is expected to double by 2020.
However, Easton suggests that pitting Americans against one another “distracts from the harder and far more important conversation: how to jump start the escalator for 23 million unemployed and underemployed -- and for those whose incomes were stagnating well before the 2008 recession.” She also shares the perspective of Harvard Business School professor Michael Porter, who studies competitiveness in the United States. Although he is critical of unfair executive compensation practices and corporate America’s failure to invest in the entire American workforce, he says, “It’s not a good idea to declare that people who are successful are bad. The better question is: Do we have a fair system for getting that education and skill? Are people unfairly handicapped? Are we doing enough to open the gateways?”
That’s food for thought.
Between the Occupy Wall Street movement and the Presidential campaign, we’ve certainly heard a lot about the wealthy 1%. All the rhetoric encourages us to conjure images of powerful executives who make hundreds of times what the average worker earns, fly about the country on private jets, and would rather take federal bailout money than pay their fair share of taxes.
But, as Easton points out, it’s inaccurate to categorize the 1% as “greedy, tax-avoiding, selfish capitalists.” In fact, she notes that most of the 1.4 million taxpayers who comprise the top 1% gained their wealth through hard work rather than by inheritance. “This group consists of a large number of doctors, lawyers, engineers, and small-time entrepreneurs, many of whom are working hard to create jobs. To vilify them is the wrong debate,” she writes.
Yes, the number of millionaires has grown over the past decade. In fact, a 2011 study by the Deloitte Center for Financial Services found that over the past decade the number of millionaire households rose from 7.7 million to 10.5 million. And the number of American millionaires is expected to double by 2020.
However, Easton suggests that pitting Americans against one another “distracts from the harder and far more important conversation: how to jump start the escalator for 23 million unemployed and underemployed -- and for those whose incomes were stagnating well before the 2008 recession.” She also shares the perspective of Harvard Business School professor Michael Porter, who studies competitiveness in the United States. Although he is critical of unfair executive compensation practices and corporate America’s failure to invest in the entire American workforce, he says, “It’s not a good idea to declare that people who are successful are bad. The better question is: Do we have a fair system for getting that education and skill? Are people unfairly handicapped? Are we doing enough to open the gateways?”
That’s food for thought.
Monday, October 29, 2012
Caring -- One of the Six Cs
Theodore Roosevelt once said, “Nobody cares about how much you know until they know how much you care.” That old adage has become almost a customer service cliché, but nowhere does our 26th president’s advice ring more true than in the financial planning profession. Make no mistake -- It is impossible to provide useful financial advice unless you really know -- and care about -- your clients. Simply, our knowledge of our clients’ current circumstances and future aspirations serves as the essential foundation for building both portfolios and solid, long-term, caring relationship.
“Caring” is the third of the six core characteristics I mentioned in What Makes a Great Financial Advisor? (I’ve written blogged about character and chemistry; competence, cost-effective and consultative round out the list.)
Caring factors into the advisor/client relationship because financial decisions are always about more than money. In that regard, it helps to have someone on your side who really understands you. Because we know and care about your family, values and goals, when we discuss your investments, we view your finances in the context of who you are as a person rather than allowing your net worth to define you and dictate a particular course of action.
Without an advocate, someone who really cares about you, it can be easy to let daily life get in the way of pursuing your dreams. We guide clients through a financial planning process that aligns their dreams with their financial resources. And, our ongoing planning ensures they have the freedom to dream big for tomorrow.
(Note: For a discussion of the six core characteristics--Six Cs--an advisor should have, read What Makes a Great Financial Advisor? and the Six Cs blogs on this topic.)
“Caring” is the third of the six core characteristics I mentioned in What Makes a Great Financial Advisor? (I’ve written blogged about character and chemistry; competence, cost-effective and consultative round out the list.)
Caring factors into the advisor/client relationship because financial decisions are always about more than money. In that regard, it helps to have someone on your side who really understands you. Because we know and care about your family, values and goals, when we discuss your investments, we view your finances in the context of who you are as a person rather than allowing your net worth to define you and dictate a particular course of action.
Without an advocate, someone who really cares about you, it can be easy to let daily life get in the way of pursuing your dreams. We guide clients through a financial planning process that aligns their dreams with their financial resources. And, our ongoing planning ensures they have the freedom to dream big for tomorrow.
(Note: For a discussion of the six core characteristics--Six Cs--an advisor should have, read What Makes a Great Financial Advisor? and the Six Cs blogs on this topic.)
Monday, October 22, 2012
Too Big for a Single Regulator?
Think back to America History class. Do you remember learning about the Glass-Steagall Act? The law dates back to the Great Depression and enforced a strict separation between banks that take deposits and those that invest in capital markets – that is until it was repealed in 1999.
Ironically, former Citigroup chairman Sanford "Sandy" Weill, who was the architect behind the 1998 merger of Citigroup and Travelers Group (which also owned the investment firm Salomon Smith Barney at the time) that resulted in the repeal of Glass-Steagall recently suggested adopting a new two-tiered banking model. Weill would split banks into the traditional deposit takers who could make loans and more “creative” institutions that could take more risk. In a recent interview, he urged, “Let's have a creative banking system, like we always had, where the financial industry can again attract the best and the brightest young people like they do in Silicon Valley, so that we can lead innovation that is necessary and [encourage] the entrepreneurship that's necessary. We can't have a world where it is impossible to make a mistake."
Allowing bankers to makes mistakes will be a tough sell in the wake of the recent financial crisis, and with the recent London Whale trades and Libor scandal now playing out. While Weill’s unlikely to garner much support to allow bankers to operate in a more risky fashion, the question of just how commercial banking and investment banking should be regulated will persist.
In an article in Knowledge@Wharton, Wharton management professor Mauro Guillén expressed his preference for central regulation for the big banks, noting, "When a bank is in 10 kinds of financial services, it does not need more regulation; it needs one regulator." He says the Dodd-Frank Wall Street Reform and Consumer Protection Act “hands more powers to the Fed, the Treasury and other agencies with authority over systemically important financial institutions. But owing to political pushback, none have full powers.”
Let’s hope that financial regulation and reform stay at the forefront of Washington’s agenda because, as Guillén wisely notes, “Untrustworthy banks are the last thing that’s needed if we are to overcome this crisis.”
Ironically, former Citigroup chairman Sanford "Sandy" Weill, who was the architect behind the 1998 merger of Citigroup and Travelers Group (which also owned the investment firm Salomon Smith Barney at the time) that resulted in the repeal of Glass-Steagall recently suggested adopting a new two-tiered banking model. Weill would split banks into the traditional deposit takers who could make loans and more “creative” institutions that could take more risk. In a recent interview, he urged, “Let's have a creative banking system, like we always had, where the financial industry can again attract the best and the brightest young people like they do in Silicon Valley, so that we can lead innovation that is necessary and [encourage] the entrepreneurship that's necessary. We can't have a world where it is impossible to make a mistake."
Allowing bankers to makes mistakes will be a tough sell in the wake of the recent financial crisis, and with the recent London Whale trades and Libor scandal now playing out. While Weill’s unlikely to garner much support to allow bankers to operate in a more risky fashion, the question of just how commercial banking and investment banking should be regulated will persist.
In an article in Knowledge@Wharton, Wharton management professor Mauro Guillén expressed his preference for central regulation for the big banks, noting, "When a bank is in 10 kinds of financial services, it does not need more regulation; it needs one regulator." He says the Dodd-Frank Wall Street Reform and Consumer Protection Act “hands more powers to the Fed, the Treasury and other agencies with authority over systemically important financial institutions. But owing to political pushback, none have full powers.”
Let’s hope that financial regulation and reform stay at the forefront of Washington’s agenda because, as Guillén wisely notes, “Untrustworthy banks are the last thing that’s needed if we are to overcome this crisis.”
Friday, October 19, 2012
Consider These Three Tax Planning Opportunities
With all the talk of higher taxes when the Bush tax cuts expire at the end of the year, it’s important not to become so focused on future tax policy that we overlook some short-lived opportunities.
- Prior to the implementation of the Jobs Growth and Tax Relief Reconciliation Act of 2003 (JGTRRA or the second Bush tax cut), dividends were taxed as ordinary income. With the passage of JGTRRA, qualified dividends became eligible for the more favorable capital gains rate of 15%. At the end of this year, however, the qualified dividend rules will sunset, and dividends will once again be taxed at ordinary income rates. At the same time, the highest tax bracket will increase from 35% to 39.6%, and high wage earners will be subject to a new 3.8% Medicare tax on investment income. Therefore, the dividend tax could shoot up to a high of 43.4%, not including state tax. This means owners of closely-held businesses have a unique tax planning opportunity to pay dividends this year and take advantage of the 15% tax rates.
- Until the end of 2012, couples with taxable income up to $70,700 (or $35,350 for individuals) do not have to pay capital gains tax. That presents a great opportunity for parents to gift appreciated stock to their adult children. (Remember, children over age 18 are not subject to the kiddie tax.) However, it’s important to watch that parents’ gifts of highly appreciated mutual funds or stocks don’t push the child into the next higher tax bracket.
- If you have been thinking about converting your traditional IRA (where distributions are taxed at ordinary income rates) to a Roth IRA (where, after five years, distributions are tax-free), 2012 may be the year to convert. Why? If you convert this year, you will be taxed according to this year’s tax rates, which are scheduled to increase across the board when the Bush tax cuts sunset at the end of the year.
Monday, October 15, 2012
Short-term Thinking Magnifies Risk
We always talk about the harm short-term thinking can inflict on your investment portfolio. Now, a new study from Professors Francois Brochet, Maria Loumioti, and George Serafeim at Harvard Business School further explores the risks for companies and investors who are attracted to short-term results.
Not surprisingly, their research shows that companies with short-term mindsets attract short-term investors looking for quick payouts. This naturally puts pressure on the company’s executives to generate positive returns, and short-term oriented corporate managers are therefore more likely to take risks to deliver the performance their investors demand. In fact, the short-term companies studied had more volatile stock returns and higher estimated cost of equity capital, two characteristics that make them riskier than companies with longer-term investment views.
It follows, then, that investors looking to temper the volatility of their portfolio should consider the short- and long-term goals of the company before they invest. But just how does one determine whether a company thinks long- or short-term? The Harvard professors studied transcripts of 70,042 earnings calls held by 3,613 firms from 2002 to 2008. They searched for 14 terms used by management such as "latter half" and "weeks" that would suggest a short-term view, versus 15 words or phrases such as "long term" and "years" that likely would dictate a longer time horizon.
Harvard Business School Assistant Professor George Serafeim said one important takeaway from his research is that many companies are, in fact, being managed for the long term. he noted. According to the researchers, industries focused on long term include beverages, retail, pharmacy, and medical goods. In particular, they singled out Coca-Cola, Ford, and Nordstrom as long-term thinkers. Short-term-oriented industries included banking, electronic equipment, business services, and wholesale, with Cisco, Goldman Sachs, and Chevron on the short list.
Of course, investors should still focus on building a diversified portfolio with the proper allocation based upon their goals and risk tolerance.
Not surprisingly, their research shows that companies with short-term mindsets attract short-term investors looking for quick payouts. This naturally puts pressure on the company’s executives to generate positive returns, and short-term oriented corporate managers are therefore more likely to take risks to deliver the performance their investors demand. In fact, the short-term companies studied had more volatile stock returns and higher estimated cost of equity capital, two characteristics that make them riskier than companies with longer-term investment views.
It follows, then, that investors looking to temper the volatility of their portfolio should consider the short- and long-term goals of the company before they invest. But just how does one determine whether a company thinks long- or short-term? The Harvard professors studied transcripts of 70,042 earnings calls held by 3,613 firms from 2002 to 2008. They searched for 14 terms used by management such as "latter half" and "weeks" that would suggest a short-term view, versus 15 words or phrases such as "long term" and "years" that likely would dictate a longer time horizon.
Harvard Business School Assistant Professor George Serafeim said one important takeaway from his research is that many companies are, in fact, being managed for the long term. he noted. According to the researchers, industries focused on long term include beverages, retail, pharmacy, and medical goods. In particular, they singled out Coca-Cola, Ford, and Nordstrom as long-term thinkers. Short-term-oriented industries included banking, electronic equipment, business services, and wholesale, with Cisco, Goldman Sachs, and Chevron on the short list.
Of course, investors should still focus on building a diversified portfolio with the proper allocation based upon their goals and risk tolerance.
Monday, October 8, 2012
Turner Gill, A Class Act
As many of you know, I am an avid Nebraska football fan. One of my favorite players is Turner Gill. Turner led the Cornhuskers to a 28-2 record as a starter and is one of the most beloved Husker players of all time. He was an incredible leader and athlete in college. Today, he represents everything that is good—he is an incredible role model, leader and coach; his integrity, character and values are beyond reproach; he is simply a very classy individual.
Turner is now in his first season as the Head Coach of the Liberty Flames in Lynchburg, Virginia. Since Lynchburg is only a few hours from Northern Virginia several Nebraska fans in the area decided to attend a Liberty football game to show our support for Turner Gill. After comparing the Liberty and Nebraska football schedules we decided to attend the Liberty-Lehigh football game on September 22nd.
We bought 20 tickets so that we would be able to have an assigned tailgate spot. Unfortunately, only 11 Husker fans committed to attend. Not wanting to waste any tickets we reached out to the Opportunity House and invited them to bring some of their young men to tailgate and attend the football game with us. We enjoyed sharing our experience with those young men and bought Nebraska T-shirts to give them.
Liberty University learned what we were doing and on game day came to our tailgate to take video and photos of us. Even Coach Turner’s wife, Gayle, came to our tailgate to thank us for our support. And Turner Gill met us after the game, talked with us, and signed autographs.
As a huge fan of Turner Gill, this is one of my fondest memories. However, the real reward was the reaction of the young men. Many of them told me after the game that it was the best day of their life. In fact, Martin Cox, the Casework Supervisor at the Opportunity House, sent me the following note:
Mr. Bernhardt,
Just wanted to thank you and your group of Nebraskans for showing our young men a great time. During the game, I received a few messages from Mr. Allen expressing how well they were being treated and about how well the guys were enjoying themselves. Also, I was present at the facility when they returned and their faces expressed what a great time they had even before they opened their mouths. When they did begin to tell me about their experience there was no doubt each of them was truly grateful.
You and your group have truly given these young men an experience they will not soon forget, and shown them that nice things can happen when you make good decisions.
Thank You Again,
I didn’t think many things could top meeting someone like Turner Gill but making an impact on these young men while meeting a class act like Turner Gill will make September 22nd stand out as one of the best days of my life.
Turner is now in his first season as the Head Coach of the Liberty Flames in Lynchburg, Virginia. Since Lynchburg is only a few hours from Northern Virginia several Nebraska fans in the area decided to attend a Liberty football game to show our support for Turner Gill. After comparing the Liberty and Nebraska football schedules we decided to attend the Liberty-Lehigh football game on September 22nd.
We bought 20 tickets so that we would be able to have an assigned tailgate spot. Unfortunately, only 11 Husker fans committed to attend. Not wanting to waste any tickets we reached out to the Opportunity House and invited them to bring some of their young men to tailgate and attend the football game with us. We enjoyed sharing our experience with those young men and bought Nebraska T-shirts to give them.
Liberty University learned what we were doing and on game day came to our tailgate to take video and photos of us. Even Coach Turner’s wife, Gayle, came to our tailgate to thank us for our support. And Turner Gill met us after the game, talked with us, and signed autographs.
As a huge fan of Turner Gill, this is one of my fondest memories. However, the real reward was the reaction of the young men. Many of them told me after the game that it was the best day of their life. In fact, Martin Cox, the Casework Supervisor at the Opportunity House, sent me the following note:
Mr. Bernhardt,
Just wanted to thank you and your group of Nebraskans for showing our young men a great time. During the game, I received a few messages from Mr. Allen expressing how well they were being treated and about how well the guys were enjoying themselves. Also, I was present at the facility when they returned and their faces expressed what a great time they had even before they opened their mouths. When they did begin to tell me about their experience there was no doubt each of them was truly grateful.
You and your group have truly given these young men an experience they will not soon forget, and shown them that nice things can happen when you make good decisions.
Thank You Again,
I didn’t think many things could top meeting someone like Turner Gill but making an impact on these young men while meeting a class act like Turner Gill will make September 22nd stand out as one of the best days of my life.
Wednesday, October 3, 2012
John Bowen Interviews Gordon Bernhardt
On August 24, 2012, I was interviewed via Skype by John Bowen, the CEO of CEG Worldwide.
Monday, October 1, 2012
In Celebration of Hard Work
When I came across the article People Who Worked Incredibly Hard to Succeed which celebrates the quintessential American trait of hard work, I was reminded of a quote from F. Scott Fitzgerald: “I never blame failure. There are too many complicated situations in life, but I am absolutely merciless toward lack of effort.” As the article points out, although successful people are often said to be “blessed with talent,” or just plain “lucky,” if you dig a little deeper into the stories of successful athletes, business people, and even government officials, you’ll find hard work and dedication at the core of their success.
I hope everyone, from our nation’s entrepreneurs who put it all on the line and work hard to build something to students just beginning the school year and looking to bright futures, can draw inspiration from these hard workers cited in the article:
And for inspiration from local CEOs, business owners and executives, you may want to read their stories at Profiles in Success.
I hope everyone, from our nation’s entrepreneurs who put it all on the line and work hard to build something to students just beginning the school year and looking to bright futures, can draw inspiration from these hard workers cited in the article:
- NBA legend Michael Jordan spent his off seasons taking hundreds of jump shots a day
- Starbucks CEO Howard Schultz continues to work from home even after putting in 13 hour days
- Dallas Mavericks owner Mark Cuban didn't take a vacation for seven years while starting his first business
- Phillies pitcher Roy Halladay's workouts are so intense, others can't make it halfway through them
- GE CEO Jeffrey Immelt spent 24 years putting in hundred hour weeks
- Apple CEO Tim Cook routinely begins emailing employees at 4:30 in the morning
- American Idol host Ryan Seacrest hosts a radio show from 5 to 10 AM and runs a production company while appearing seven days a week on E!
- Nissan and Renault CEO Carlos Ghosn flies more than 150,000 miles a year
- Venus and Serena Williams were up hitting tennis balls at 6 AM from the time they were 7 and 8 years old
- Lakers superstar Kobe Bryant completely changed his shooting technique rather than stop playing after breaking a finger
- German Chancellor Angela Merkel, the "Iron Lady" of Europe and the lead player in the eurozone economic drama, has vowed to do everything in her power to preserve the 17-country EU.
- Our own Secretary of State Hillary Rodman Clinton, a hardworking diplomat, has this year alone traveled to 42 countries.
- Virginia M. Rometty, IBM's president and chief executive officer, was recently elected as chairman of the board and has held senior leadership positions in IBM's services, sales, strategy and marketing units.
- Oprah Winfrey, who launched the Oprah Winfrey Network (OWN), now can be seen in 83 million homes.
And for inspiration from local CEOs, business owners and executives, you may want to read their stories at Profiles in Success.
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