Shoot the middleman!
July 27, 2011
In 1983, while pursuing my MBA at McMaster University, I took a co-op work term in Corporate Marketing at the TD Bank in Toronto. One of my functions was the study of usage data for an early stage program. By that time, the “Green Machine” (ATM) had been in place for a number of years, but the program was still struggling to get its bearings. Nowadays, ATMs are indispensable. Quickly after their introduction, ATMs transformed our world in the delivery of cash between our bank accounts and our pockets. Not only were tellers replaced and reassigned. Look at travelers cheques. Who needs travelers cheques anymore? Hey! Let’s carry that one step further. Who needs cash anymore? Debit cards now see me tripping across the continent with only enough cash to pass through highway tolls. Gee! Even Tim Horton’s now (finally!!!) accepts debit cards.
As recently as 1996, I’d awaken shortly after 4:00 a.m., reach out the door to my porch, and grab the Globe and Mail’s Report on Business. Sitting in my kitchen, I’d study the stock tables, manually calculating in search of opportunities for momentum trades. More than once, I’d be admonished by the broker on the other end of the telephone line, suggesting that this service was not meant to facilitate what is now known as day trading. “Too bad,” I would say. You’ve got your commission (and not a small one), and I’m making money. Sounds like the dark ages now, doesn’t it?
Recently, I wrote about Khan Academy, a new and free online tutoring program that promises to revolutionize how our children learn. In her spare time over a three week period, my eleven-year-old daughter pretty much mastered the next year’s math curriculum. Having already completed more than 30 of 125 practice tests, she’s thinking to finish the rest of the program by Christmas. I haven’t yet explained that quadratics, derivatives, and linear programming await her at the end of that line.
All of these advances reflect both changes in technology and a creative mindset always in search of better ways to perform everyday tasks. At the same time, an undercurrent on the relational front says, “Do the job and it’s yours. Don’t do it, and we’ll give it to somebody else.” Change that arrives in orders of magnitude like this don’t just happen because someone falls upon a new model. Frustration with the status quo often provides the impetus for change. People in positions of power know this and are careful (sometimes) to manage market frustration so as to be held within a sustainable range. In Saudi Arabia on business a number of years ago, I was told that the Saudis then preferred a price of oil in the range of $60-$70 per barrel. This was explained by their understanding that, as the price of oil goes up, so rises the will to find a better source of energy. Measuring elasticity of demand within a relevant range is one thing. In a time of rapidly advancing technology, understanding the limits of that range and what lies beyond is just as important.
Dictaphones replaced personal secretaries in favour of typing pools. Personal computers replaced typing pools in favour of do-it-yourself correspondence – not to mention texting – u no wut i mean. Just as email is destroying the business model for the post office… so, too, will technology, social networking, and education bring down the current model of stock market investment. Online trading was just the first step in this process. Much more remains to be seen.
Here’s the premise of what I see as a continually evolving model of investment. I am not proposing a revolution, though sometimes that itch calls for a good scratching. Lenin put the ‘r’ in front of Marx’s evolution. See how that worked out? Two words stand at the core of this model. Power and knowledge. One is a path to the other. Looking at those in power positions today, I’ll leave you to discern the direction of that path. Sir Francis Bacon is credited with one of my favourite axioms: “Knowledge is Power.” Alexander Pope’s line also finds its place on my list: “A little learning is a dangerous thing.” If learning can be equated with knowledge, then invoking a little algebraic tumbling (If A=B, and B=C, then A=C), a lot of power is a very dangerous thing.
Not many people would dispute that conclusion, though I’m not sure how many have seriously considered the implications of the relational dynamic of power and knowledge to a system. Let’s define a system as a collective of elements that, together, form a whole. In any collective, power tends to concentrate. Think of your childhood. Every group of kids eventually yields leaders and followers. In most cases, there is a jockeying for control, and ultimately, a small number of players bubble to the top. We even had a game for it every Winter. The ploughs would create great mountains of snow at the edge of our school parking lots. Recess, at a certain age, was filled with King of the Hill escapades, climbing, pushing, shoving, whatever it took to get to the top. Some things never change, do they?
Those of you who have engaged in strategic planning at any level understand the frustration with which these exercises are carried out. Those who have the power dictate the path… often the garden path, I’m afraid. Those who cede their power to the collective make a great and rare gift, and yet retain all of their power by virtue of this gift.
Those who jealously guard their power… those who see retention of this power as their primary purpose… are inevitably doomed to collapse. For any system to survive, it must be paramount over any one participant within it. Herein lies the dynamic tension. Every system needs leadership. Notwithstanding Skinner’s Walden II experiment, leaderless organization remains an oxymoron. As leadership emerges, however, power concentrates progressively to a point where the needs of the system are often pushed aside in favour of the interests of the few. This is not leadership. This is tyranny. Corruption and complacency in power, coupled with feelings of disenfranchisement below, lead invariably to change, sometimes in small increments, sometimes very dramatically.
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Okay, my preamble is finished. Here’s the nuts and bolts of the story.
The stock market was created to perform two primary functions. One was to provide a centralized facility for the raising of capital. The other was to provide investors with liquidity. End of story. Well, maybe not. Enter the brokers. As go-betweens, brokers earned their keep by facilitating decisions and transactions involving companies and investors. With growth in the number of listed companies, the broker focus shifted in weight toward transactions between individual investors. As more and more investors joined in, the broker function became as much an advisory role. An entire industry has grown up and matured based on the premise that you’re too stupid to figure out how to invest your own money.
For a time, stock investment activity was very narrow in participation. Only recently has investing come down market. Nowadays, anyone with a bank account can set up and operate their own online trading account, without even speaking to a financial representative. This fact has set the stage for a massive transformation in how the market works. Initially, it represented a windfall opportunity for the brokers, making a killing on each transaction. Trading by common folk also spawned a whole generation of newsletter writers, each claiming to be some manner of crystal ball gazer. Say you’re an expert and instantly, you are an expert. Between financial advisors and newsletter writers, the wall of “you’re too stupid” grew higher and thicker. Think about this for a moment. If these people really knew what they were talking about, why would they be doing it for you? Wouldn’t they rather be sitting on a tropical island, enjoying the fruits of their wisdom personally? Those who know don’t say and those who say don’t know. A generalization, I know, but for me, this has been a useful guidepost as I meander through life as an investor.
Can you read, count, and think? If yes on all three measures, you can and should become more involved in your investments. Your investments have the potential to rescue you from a cycle of living from paycheque to paycheque, paid by the hour. Your investments have the power to leverage your existence to an entirely new level. Work because you want to work, not because you have to work. Transform your work into play. Carve out and shape your life as you see it through successful investments. The challenge here, of course, is in turning off the TV and taking the first step toward taking control of your own investments.
We live in a world where technology has all but completely levelled the playing field for accessing information. There’s so much information out there that most people are easily overwhelmed by it. Those who can amass, organize, interpret, and understand the data hold immense power. The data is no longer controlled by an elite few. We all have access. What we lack is a framework for broadly managing all this data in aid of improved decisions. As individuals, we are limited in what we can do. Warren Buffett will tell you that diversification is only a hedge against ignorance. There is a trade-off, then, between the number of investments we hold and the number of investments we are able to understand. I would defy anyone anywhere to challenge my knowledge base on one particular investment I hold. I think it safe to say that I know more about this company than anyone who doesn’t work for the company. Here’s the thing. I can say this about only one investment. Such a model does not lend itself well to a broad base. I’ve made the mistake a few times of investing in companies based only on the recommendation of a friend. With few exceptions, the result has been disappointing. Moreover, the uncertainty of investing in something of which I know nothing, is troubling in itself. I like to sleep at night. The only way I can do that, surviving the ups and the downs, is to know what I’m talking about. Any other option is untenable for me.
At the other end of the continuum reside the so-called experts who spew out recommendations on many companies for which they have done inadequate homework, to be generous. Due diligence means so much more than what is pawned off as such these days. The concept entails full investigation so as to protect the interests of those considering an investment. The spewing and regurgitation of no more than what the target company management has told them does not define due diligence. What I read too often in this category makes me want to spit… and that’s putting it politely.
So, where does that leave us?
The space in the middle defines a land of opportunity. It’s a wide open space calling to us. As noted above, those who can amass, organize, interpret, and understand the data hold immense power. Technology has already pushed access down market. Social networking may offer the final missing piece to the puzzle of this new model. A capacity to connect with other people of shared interests, coupled with the initiative to take charge, should be empowering in the creation of the new model. Any group of people, lay investors, small enough in number to be nimble and large enough to bring the necessary breadth in skills to the table, can perform due diligence at a level far greater than is currently provided in the marketplace.
I’m not promoting a revolution here. What I’m doing is anticipating an evolution, one that I think is already now under way. Collectives of highly motivated investors will become successful investigative teams, and as a result, partners to promising young companies. Good projects find money. Taking the ineffective mechanisms now in place out of the equation (shooting the middleman), true due diligence will be enabled. Both investors and the companies they invest in will be the beneficiaries. Hundreds of shell companies will cease to exist in an environment of transparency and empowerment.
But wait. Perhaps the most important word here is initiative. Those who have it and exercise it can win. Those who sit on the sidelines, leaving control of their lives in the hands of others will necessarily lose. Period.
The risk in this dynamic, of course, is that participants in my anticipated model, people who take the initiative to seize opportunity, will bubble to the top, as is always the case, and become what they replace. And the beat of history goes on.
Instead of standing up and declaring myself as an expert, and telling others that I know what I’m talking about, I prefer to look at the process as one of conversation. This conversation is an exchange among equals, continually refined with the purpose of enriching all participants. The diversity of this collective is its source of strength. New members are not introduced with the instruction to assimilate into a melting pot, but rather welcomed to bring unique perspectives to a full and diverse and expanding conversation. A salad bowl rather than a melting pot.
I had a conversation on this topic with a good friend from south of here last week. His understandable concern with this particularly Canadian perspective was its apparent lack of unity. My answer is from Michael Adams’ book, Unlikely Utopia: The Surprising Triumph of Canadian Pluralism, in which he says, “We do suspect, deep down, that we’re superior to other countries precisely because we don’t think we’re superior.”
We’re a humble people, and proud of it.
Best,
Kevin