Sunday, March 10, 2013

We Need A New Format

Starting the Businesses

Jackie and Clint each open up a Cuban restaurant on different sides of Albany. They choose similar neighborhoods with similar income levels, and each gets a spot in a different busy, high-end commercial development near important intersections of high-income master-planned communities. Each invests $1,300,000 in the same suite of ovens, tables, decorations, uniforms, furniture, grand openings, and established advertising. They agree to name their restaurants Domingas, and to not overlap their advertising. They swap staff to cover different shifts, save money by maintaining the same menu, and occasionally help co-manage the other's restaurant, so they can have vacations.

Jackie and Clint each have successful grand openings. Business normalizes. Then, a problem develops: their industrial ovens each break. Clint buys a new one; Jackie, frantic, takes out a second mortgage on her house for the cash to buy herself a new one. It gets installed, and things seem to be going okay. In year 1, they're each down $900K overall, but they're on track to recover their investments and do very well.

XX% of New Businesses Fail Within XX

Inexplicably, business drops off. People stop having interest in Cuban food in their particular spots of Albany. The next year, Jackie and Clint each barely turn a profit on that year's expenses alone. They come nowhere near recovering the remaining $850K of their initial investment. Their landlords raise the rent.

Jackie checks the community data, and realizes that more and more people of Peruvian backgrounds are moving into the area. She lets Clint know, and she and Clint pull a few all-nighters, thinking.

Jackie Goes Down

In Year 3, mortgaged to the hilt and low on cash-flow, Jackie talks things over with her partner, and is forced to bail. She sells her Domingas to Barry for $1.1 million, taking a huge hit. In tears with her financial adviser that day, she manages to stretch the money enough to barely pay off the second mortgage, along with her initial business loan. She decides business is too risky for her, and goes back to teaching.

Jackie's Ten Year Evaluation

Seven years later, making $55K a year as a teacher and part-time soccer coach for the local high school, Jackie has a net personal gain of $350K in total assets for the ten year period. She lost about $270K in her three years of the restaurant venture.

Clint Stays In

In Year 3, struggling with a $270K loss on paper, Clint faces a similar situation to Jackie. Luckily, he has that extra $6 million his dad set aside for him. Dipping into some of the cash, Clint tells his manager, "We need a new format." They rip his restaurant apart, turn it into a Peruvian restaurant, switch the staff and the menu, and spend another $350K during that year. The place is closed for remodeling, so he takes in nothing. After another much-publicized grand-reopening, things start to go well again.

Clint's Ten Year Evaluation

Seven years later, the restaurant generates between $300-400K a year in revenue. Clint has a net personal regular gain of around $600K, and with Domingas' established revenue, the restaurant is now worth not $1.3M, but about $2.5M, so he has an unrealized capital gain of about $1.2M. Clint lost about $800K in the first three years of the restaurant venue, but he's now massively up, and going up every year in the amount of the restaurant's net revenue. Even if he still had any debts, the restaurant's capital gains would triply or quadruply cover them upon sale, since its value will appreciate every year.

We Need A New Format

Without peeking into the way Clint was able to come up with that extra cash, the story above is the traditional story of how Jackie is jumpy, unprofessional, and not intelligent or risk-taking enough for business. Clint, though, is a go-getter, able to stick with something until it pays off. Things looked tough, but Clint saw it through, and deserves the rewards of his risk-taking.

Of the myriad types of unfairness in simply having inherited wealth, the simplest are understandable by most people: having the money. E.g., Bill inherits ten million bucks, and Sal doesn't, ergo Bill is rich. That's relatively easy to get, although a lot of people do still miss that connection. A little more refinement of thought brings the understanding that elites inherit not only wealth, but social connections, education and job placement, institutional respect, et cetera.

At a higher level of thought, we realize that, in the above situation, Clint can't lose. In Year 3, when things look bad, Clint can always dig into his pockets and invest more. If the Peruvian makeover fails, he can remake the place into a pizza shop, an organic juice co-op, a faux-dive tavern that supports local poetry readings, or just three nearby Subways. Clint's ability to constantly remake and remarket his venture ensures that it will not fail: he is not subject to "market forces."

Jackie, though, is a toss-up. Jackie is actually taking a risk, because she doesn't have the resources to pay off her small business loan unless the restaurant succeeds. If the business does well, she's able to look as brilliant as Clint, but if it doesn't do well, she looks like a wimp. Clint, though, can weather any storm, start over, and look like a success eventually. Every bit of bad luck (or terrible planning) that happens to Clint will look like a "setback" in hindsight, and Clint seems like a brilliant, roguish investor once the story is all told. The Peruvian restaurant might've failed, too, and Jackie made the right choice, because for her, a bad return on that risk could've driven her to bankruptcy and prevented her from regaining her teacher's license and feeding herself, while Clint never had that risk to begin with.


Why focus on this? When we consider Jackie and Clint, the course of their story may seem obvious, but popular culture is dotted with paeans to great thinkers who are lauded for brilliance because they are Clint. When we see investors, administrators, market strategists, and political analysts being cheered in hindsight because they were rich and powerful to start out with, it's often easy for an intelligent person to realize, "That's unfair. That's hindsight. Those advantages guaranteed some kind of success."

If you're at that stage, and you're no longer impressed with Paris Hilton simply for being rich, then people like Donald Trump or Warren Buffet are the next challenge. We can look at them and easily say, "They're rich because they inherited a lot of money and connections." But it's easy to be deceived into allowing that, irrespective of their luck in birth, they nonetheless possess special skill at publicizing, negotiating, or investing. Again, Clint's example helps us: a deal with massive funds behind it is not going to fail, simply because any capital venture with a bottomless pocket can eventually come up with enough money to turn a profit. And, in hindsight, any terrible decisions will be attributed to the setbacks of the marketplace, while positive results will be attributed to savvy behavior. The victors write history, which is why people with money can always make more, then demonstrate how intelligent they were in doing so. Donald Trump can afford to tear apart and rebuild a shoddy building, and enough time will appreciate the investment, so he will always win. Warren Buffet can afford to tear apart and rebuild a shoddy company, and enough time will appreciate the investment, so he will always win.

(Similarly, how brilliant is Obama's campaign manager? When the Democratic Party decides to sell a product, and puts a billion dollars behind it in an institutional structure designed to require the choice of two things, is any functionary on either side more responsible for an election result than any other? Just like with Trump and Buffet, the thinker--Obama himself, or the campaign manager--is not actually doing any thinking. Trump and Buffet have a mild understanding of economics, and Obama has a mild understanding of politics, but the legions of underlings doing the standardized grunt-work within a framework create the results that later get attributed to any given icon. Any MBA graduate student at Brigham Young University knows more about theoretical business reorganization than does Warren Buffet, and any Assistant Professor of Political Science at Kentucky State knows more about theoretical politics than does Obama. Knowing, "me big, me see, me want, me eat," does not take, or make, brilliance.)

Assume that we've figured even that out. Where to next? Well, will Tim Burton or Michael Bay be direct/produc/assistant screenwrit/fart/attend-ing any movies this summer? Did Jeff Bezos and Michael Dell revolutionize online purchasing? None of these examples assume that the product in question is of fine, passable, or novel quality. Irrespective of the quality of the end result, the fact that these things happened at all is subject to the forces of Clint outlined above. Great power provides the ability to be associated with finishing and producing a product. Even though any of the above great cultural thinkers would have been unable to do more, divorced from context, than stumble through a clumsy five-minute interview with the personal loan officer at Bank of America, then fail to get approved for ten grand, or write a simple C+ program to produce multiplication tables, they're able to bankroll and banner highly complex movies with international distribution (and/or other products with which they are associated).

The ultimate lesson from Clint and Jackie, or Tim and Warren, is that, by examining the process of creation, rather than the hindsighted end-product--the means, rather than the end--we discover ourselves more free of the tyranny of idolatry, and better able to appreciate the actual production of value, rather than its capture. A baby butterfly landing on a bush is prettier than a butterfly stapled inside a frame, which is itself infinitely more valuable than the smug satisfaction of the guy who told someone else to go catch a butterfly, staple it in place, and hang it on his mantel. Or the congratulatory article in Forbes which describes how brilliant the guy in the chair truly is, once you get to know him.

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