Milton Friedman

Today is the 100th anniversary of Milton Friedman's birth, born on July 31, 1912.  He was a true champion of human economic freedom, and one of the clearest voices on behalf of the individual's right to choose that the world has ever known.

We have written many times in the past about the importance of Milt Friedman and his arguments for economic freedom, including:


We have also linked to many of his films and videos, and above is a link to the beginning of his superlative 1980 television series, "Free to Choose," which is well worth watching in its entirety.

Today, there is a powerful essay on the impact of Professor Friedman written by Stephen Moore of the Wall Street Journal's editorial page entitled, "The Man Who Saved Capitalism."  In it, the author notes that there are many who have recently "tried to tie Friedman and his principles of free trade, low tax rates and deregulation to the global financial meltdown in 2008."

However, as we wrote in 2008, that crisis was "A failure of government, not of private enterprise."  Ironically, that quotation -- "a failure of government, not of private enterprise" -- came from an essay that Dr. Friedman and his wife Professor Rose Friedman wrote in 1979 about the Great Depression, in which they noted that the tragic misreading of the Great Depression as a failure of the free enterprise system (when in fact it was a failure of government) led directly to the rise of tyrants such as Hitler and Mussolini (and later Mao as well).  It also led, they wrote, to the conviction among many intellectuals that capitalism was inherently unstable and needed the active and constant intervention of government.

That debate continues to rage to this day, and it is a critically important one that affects us all.  We believe that Milt Friedman was right on this crucial subject, and that the events of the 20th century provide conclusive proof that he was right -- as do the events of the 21st century thus far.

Milt Friedman was truly a champion of human freedom and one whose voice is as important as ever today, one hundred years after his birth.

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Roger McNamee on "time horizons"

Here's a thought-provoking video of venture and private equity investor Roger McNamee being interviewed a few months ago and discussing some of the things that he looks for in an investment. 

As interviewer Emily Chang brings up beginning at 10:15 in the video, Mr. McNamee is a very focused investor -- his first fund at Elevation Partners had $1.9 billion in assets and invested in only eight private companies.  He calls diversification "the bane" and argues that "it minimizes your returns and it raises your risk."

While this is contrary to the conventional wisdom most investors have heard from Wall Street and the financial media, it is actually a point we agree with and one we have written about in the past (see for example the post on "Deworsification").

Another important subject Mr. McNamee touches on can be found in the discussion that begins at around 15:00 in the video.  While he is ostensibly discussing the development of negotiated buyers and sellers of private (not listed) shares in a company that has not yet gone public, the general heading that we would put on this discussion would be "time horizons."  

The subject of time horizons for the investor is extremely important.  In his discussion at this point, Mr. McNamee explains that there were venture investors who were pushing for a sale of Facebook at a valuation of about $1 billion, when the company was still private, and were only over-ruled in this effort by the veto of CEO Mark Zuckerberg (this discussion takes place around 15:26)*. 

Mr. McNamee notes that negotiated private sales enabled those investors who wanted to sell to do so, and buyers (in this case Mr. McNamee's fund and another fund) to buy, which had the effect of moving "a lot of that stock into the hands of people whose time horizons were much closer to the management team."  In other words, he means the new investors had an investment horizon that corresponded more closely to the longer-term horizons of the management team, not the shorter-term time horizons of the venture investors who wanted a payout now and were less interested in the future of the business.

This is a critical point for investors to consider, and one we have written about many times in the past (see for example the post entitled "Wise words from Reid Hoffman").  While investors may not always have the opportunity to invest in innovative private businesses, and while even those who do may not wish to do so with all of their investment capital, it is at least important to "think like a private investor" in some ways, and particularly like the type of private investor that Mr. McNamee is describing who has a longer-term horizon focused on the business success, and not the shorter-term horizon focused on getting a quick return or payback.

The biggest problem with the landscape of Wall Street is that it is increasingly dominated by a short-term mindset interested in quarter-to-quarter time-frames (and even shorter periods than that, down to day-to-day or even minute-to-minute).  Investors of all levels have not helped this environment either, as the mindset of investing for many years has become more rare.  The decrease in a longer-term focus is somewhat understandable, given the constant short-term focus of most of the commentary coming out of  both Wall Street and the financial media since the dawn of the 24-hour news cycle.

The key distinction we believe that investors should take away is that between a focus on business and a focus on markets.  We believe that Mr. McNamee's comments reveal an intense focus on business, and that he brings out some of the real problems with the short-term market focus that prevails in many parts of the investing world today. 

By carefully considering these insights, investors can put themselves in the position to benefit from widespread short-term focus, just as Mr. McNamee and his fund were able to benefit by purchasing shares from those whose time horizons were much shorter, in the illustration that he cited above. 

* At the time of publication, the principals of Taylor Frigon Capital Management did not own securities issued by Facebook (FB).
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Open House at our new offices in San Luis Obispo

Taylor Frigon Capital Management hosted an Open House with wine and hors d'oeuveres at our new offices in San Luis Obispo on July 12, 2012.  If you were able to attend, these were the slides that were displayed on the circular walkway.  If not, you can view them as a slideshow in the above window or by visiting this link.
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A response to Roberto Mangabeira Unger

Above is a video from Harvard professor and Brazilian politician Roberto Mangabeira Unger, containing his declamation against what he sees as the problems with the American economy and with both political parties, and his prescription for setting the conditions to allow "the voice of democratic prophecy to speak once again in American life."

Central to his critique is his allegation that one side in the US (the Republican party) threatens freedom and prosperity -- primarily through what he sees as a reckless reduction of taxation -- and that the opposition (the Democrat party) doesn't offer anything better but merely seeks "to put a human face" on the rapacious policies of the Republicans.

We have stated in many previous posts that our perspective here is for the investor, and not for one party or another -- see for example this previous post, in which we wrote:
We do not make these suggestions as representative of one political party or another -- we are speaking on behalf of investors, and for policies that we believe are good for overall economic growth, innovation, and the investors whose capital fuels that growth and innovation. After all, we actually are investors and professionally represent investors.  
However, we do feel that Professor Unger's video, which has received over 200,000 views as of this writing, requires a brief response, particularly in light of his statements in the first thirty seconds of the diatribe, in which he lays out his most important beef with the position of those who believe that "if only government became less costly and restrictive, with lower taxes and fewer regulations, economic growth would make up for inequality."

He argues that this recipe is actually disastrous, because "inequality would become even greater than it is now."

Professor Unger's unstated assumption is that "inequality" is the primary evil that must be eliminated, and he seems to take it as a given that all of his listeners agree that the reduction or elimination of inequality is the primary criterion by which to judge all policy.

While it certainly would not occur to any politician to argue that inequality is good, and while at first glance it seems the reduction of inequality is something that we should all support, we believe it is important to examine that assumption carefully.

First, we would point out that in many countries -- including Professor Unger's home country of Brazil -- there is tremendous inequality, with a huge population of very poor and a tiny population of elites.  This situation is extremely common worldwide, especially in tyrannies and in countries without the respect for the "rule of law" that the United States has traditionally enjoyed.

Under the "rule of law," the same laws  are supposed to apply to everyone regardless of status, and we believe that in the US (however imperfect) this still takes place to a far greater extent than in most other countries on the planet.  Inequality that has been created by forcibly stealing from or oppressing a large portion of the population is a great evil, and one that should be addressed (through the introduction of the rule of law and the elimination of different legal treatment for different groups).

However, if we were to imagine a situation in which the rule of law were perfectly applied (admitting that there is no nation today that is perfect in this regard, including the US), we could then ask ourselves, "is the elimination of inequality the primary goal to be pursued?"

Put another way, we might phrase the question by asking, "Should individuals be entitled to try to make as much money as they can legally make, given their talents, skills, and willingness to work?"  If my talents and past hard work have made me into the world's greatest basketball player, should I be entitled to try to make as much money from those skills as I can legally make?  Likewise, if my talents and past preparation have enabled me to become a highly sought-after writer, speaker, or actor, or if they enabled me to start a company such as Apple or Intel or Intuitive Surgical* (or to be an indispensable executive at one of those companies or at one of the thousands of other great companies in the world), should I be allowed to do so?  If I am not incredibly talented but I simply work harder than another worker at the same company with similar skills to mine, should I be entitled by my harder work to seek better compensation?

If you think that individuals should be allowed to assess their talents and training and then try to find the place where those skills will be most valued -- and most well-paid -- then we agree with you.  However, please note that if you take that position, it is inevitable that there will be "inequality."  The harder worker may end up being paid more than his friend who doesn't work as hard.  The basketball player who spent more time developing his skills when he was growing up -- or who also combined hard work with greater natural talent -- might be able to command a higher salary in the NBA than another player could.

However, if you believe that laws should be written that stop people from being able to make as much as they possibly can in this world (without using force to steal from people or using fraud to deceive people), then you are, in our opinion, siding against the rule of law.

We say that because laws that stop some extremely high achievers (whether they are CEOs, NBA stars, or venture capitalists) from making as much as they can make are laws that create a system where one group has different laws than another group.  Presumably, those people who want to put a "cap" on the salaries of high-paid CEOs (or movie stars or athletes) do not argue that there should also be a "cap" placed on the salaries of restaurant busboys or hard-working but low-paid hair-stylists.

Why is it right for people to write laws which limit one person's ability to make as much as he can, while not limiting other people from trying to make as much as they can?  The hair-stylist may be making as much as he can possibly make (he may have found the place where his talents are best applied), but because he is not making very much, the law doesn't apply to him.  That path leads to different laws for different people, just based on how much they make -- how is this any better than corrupt countries where the ruling elites are "above the law"?  It just reverses the system and creates a new unfair situation, where some people are deemed "below the law" and some are deemed "rich enough to be treated unfairly."

Finally, the simple fact of economics is that the best way to create prosperity for everybody is to enable greater economic growth.  Real economic growth leads to greater "inequality" (as successful entrepreneurs create companies like Apple and thereby create groups of people with higher salaries than before),  but it also tends to lead to the situation where general standards of living improve across the entire spectrum of incomes.  This improvement in standards of living even at the lower income levels does not typically happen in places with low regard for the rule of law (including Brazil and many other Latin American nations), but it has taken place in the US, where large portions of those in the lowest income brackets can afford a better standard of living than the "middle class" could afford just forty or fifty years ago.  Professor Mark Perry has published statistics on this phenomenon in the past on his economics blog such as here and here.

While Professor Unger argues against lower taxes and fewer regulations and less costly and restrictive governments, and identifies calls for such things the Republican position, we would argue that lower taxes and fewer regulations and less costly and restrictive governments are what actually work in the real world to create greater economic growth and prosperity (and freedom!), which means that people and politicians of all persuasions should embrace these methods.  We previously linked to a video that provides ample evidence from history for this assertion -- see "Why can't we all just get along (on economic policy)?" from February 2010.

We would also point out that Republicans in the US have been guilty of cronyism and betrayal of these principles as well as Democrats.

We hope that Professor Roberto Mangabeira Unger will accept the reality that the rule of law is the real solution -- we would recommend to him the work of another South American thinker, Hernando de Soto, who champions the benign power of the rule of law on any continent, and with whom we heartily agree.

However, even if Professor Unger does not see the light, we hope that his 200,000+ YouTube viewers will not be misled by his faulty arguments.

* At the time of publication, the principles of Taylor Frigon Capital Management owned securities issued by Apple (AAPL), Intel (INTC), and Intuitive Surgical (ISRG).

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Taxes you already pay for things that you do not buy

It's been almost a week since the Supreme Court handed down their ruling on the constitutionality of the Affordable Care Act (aka "Obamacare"), and we're still digesting the impact of the ruling.

One acquaintance of ours whose opinion we respect has pointed out an observation that we don't believe is widely understood, which is that the majority opinion -- which declared the penalty on the individual mandate to be a tax and hence within the bounds of the legislative powers given to the federal government by the US Constitution -- serves to highlight the egregious nature of many other acts of Congress stretching back for decades.

In other words, he believes that one "silver lining" to the majority opinion may be the fact that if this decision makes the electorate angry about being taxed as a penalty for not buying something (in this case, health insurance), then perhaps they will wake up and become angry about the many other egregious taxes and penalties which legislators have been writing into laws for decades in order to "encourage" various types of behavior among the citizenry.

Taking this idea and running with it a little ways, we'd like to point out that the government in the US has a long history of imposing taxes and other financial penalties on people who don't do things that the government wants to encourage.  There are all kinds of laws already on the books (at the federal, state, and local levels) which tax people for "not buying things," just as this new law proposes to do to people who do not buy health care.

For example, the tax code has for many years given a very generous tax writeoff to citizens who choose to buy a house or condominium to live in and who take out a mortgage, rather than buying it outright ("with cash").  This can be thought of as the federal government saying, "We want you to mortgage your real estate.  If you do not, we are going to make you pay taxes which those who mortgage their real estate will not have to pay.  You will pay a higher level of tax than they will.  In other words, mortgage your house or pay a 'non-mortgage tax' as a penalty for not doing what we want you to do."  This has been going on for decades.

We have also pointed out in previous posts that the US government has imposed sugar tariffs on  imports of foreign sugar virtually non-stop since 1816 (which would make this a bi-partisan policy if there ever was one).  Because of this, citizens in the US pay higher prices for sugar than those in the rest of the world.  By imposing these sugar tariffs, the federal legislature has essentially been saying to citizens, "We want you to buy domestic sugar.  If you don't buy it, we will impose a tax on you."  Again, the decision of the Supreme Court last week highlights the fact that the government has been imposing taxes intended to coerce citizens into certain types of behavior for almost the entire history of the Republic (although no doubt the pace of such social engineering has increased since the beginning of the twentieth century).

One more recent example and one that should be familiar to many readers is the institution of "high-occupancy vehicle lanes" or "carpool lanes" in many freeways around the country (one such freeway is pictured above).  These lanes are open to those who carpool (sometimes defined as two or more people in one vehicle, and in other places defined as three or more people in one vehicle), as well as to certain other types of vehicles that governments want to encourage, such as hybrid vehicles, flexible-fuel vehicles, and motorcycles.  Other drivers are not allowed to use these lanes (and if they try to do so, the government will stop them by force in the form of a police officer).  

In this example, the government is saying to citizens, "We want you to buy certain types of vehicles, and if you don't, we will penalize you.  We will make you pay taxes for the construction and upkeep of freeways, and we will make some portions of those freeways off limits to you, while allowing others (who do buy those types of vehicles) to use them.  We will similarly tell you to carpool -- a behavior we want to encourage -- and if you do not, you will be in the same boat of paying taxes for something that others use but which you may not use."  

In other words, the government is already taxing people for not buying things, as well as for not following behaviors that the government wants to encourage in its citizenry.  In light of this, perhaps it is correct that the solution is not for the Supreme Court to shoot down such laws but rather for the people to realize that such government engineering always causes inefficiencies, malinvestment, and economic dysfunction, and for the electorate to demand that their legislators stop engaging in such practices.

What does all of this mean for investors?  We are under no illusion about the fact that the lawmakers in the US are not likely to stop creating tax incentives and penalties to encourage various behaviors (and to help various constituencies at the expense of others).  It is (remotely) possible that the recent Supreme Court decision will help voters wake up and realize how many ways the government already taxes them for things they do not buy or for actions that they do not take, and that this wake up call will have an impact on future elections.  

However, in light of the fact that such behavior will continue to go on, and in light of the fact that the Affordable Care Act for the time being remains on the books, we think the most likely result that investors should be aware of is the certainty of future inflation of the currency as part of the price tag for a system that will prove to be anything but affordable.  Inflation is in many ways the cruelest and the subtlest tax of all, as we have explained in previous blog posts such as "Stand still, little lambs, to be shorn!"

Because of this assessment, we would say that investors have no choice but to continue to look for innovation and opportunity wherever it can be found.
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