Justin Fox The Curious Capitalist
The Curious Capitalist makes it into Keith Kelly
So there it is in Keith Kelly's column in today's New York Post, the news that this blog (which has probably had about 10 readers in the past month, since I 've had my head in a book and haven't been posting) is leaving Fortune.com (and CNNMoney.com) for Time.com. Kelly fails to mention that I'm also leaving Fortune magazine to write a weekly business and economics column (working title: "The Curious Capitalist") for Time. But hey, print's dead, right?

Actually, I sort of thought the latter news was more important, given that I've been writing this blog since September and I've been at Fortune for almost 11 years. Plus I'm told a few million people still read Time magazine. On paper!

Anyway, yes, this blog is moving to Time.com. (And I'm making the big, scary move today from the 15th floor of the Time & Life Building to the 24th.) The current plan is to maintain some ties with CNNMoney, but I'm not exactly sure how that's going to work or what my URL will be at Time.com. In any case, you can always find the blog at curiouscapitalist.com. Not that I'll be posting a lot before the week of Jan. 22. Still got that book to finish first.
Posted by Justin Fox 7:01 AM 1 Comments comment | Add a Comment

Holiday extravagance at Samsung
Okay, so I said I wasn't going to be posting much. But this is too good not to share:

I got a DHL Express Letter the other day sent straight from "Samsung Main Building" in Seoul. What could be so important that the Korean electronics giant would spend $30 or $40 to get to me? (According to the DHL website, it would cost me $44.10 to send such a letter to Korea; I'm willing to allow that Samsung gets some sort of bulk discount.)

Why it was a holiday card, signed by Samsung CEO Jong-Yong Yun, whom I met last year at the Fortune Global Forum in Beijing. I truly do appreciate the sentiment. But it's interesting to see that, for all the impressive changes that Samsung and other Korean corporations have gone through since the country's financial crisis almost a decade ago, the whole idea of frugality doesn't seem to have really hit home. Glad I'm not a Samsung shareholder. Oh, wait--I imagine that, by way of one of the international funds in my 401(k), I am. This is an outrage!
Posted by Justin Fox 10:51 AM 0 Comments comment | Add a Comment

Work slowdown at the Curious Capitalist
I haven't been posting much lately, and won't post much (if at all) over the next few weeks because I'm taking some time off to finally really and truly finish the book I've been working on for the past few years.

The book is tentatively titled The Myth of the Rational Investor, and it grew out of an article I wrote for Fortune's annual Investor Guide four years ago. It's an intellectual history of the rise, impact, and partial fall of the ivory-tower idea that financial markets can be relied upon to rationally and perfectly set prices for stocks, bonds and other securities. It will make you laugh, it will make you cry, it will render you capable of discussing the ideas of Gene Fama and Dick Thaler at cocktail parties. But only if I finish it.
Posted by Justin Fox 10:11 AM 1 Comments comment | Add a Comment

Mastercard wins a big legal (and soccer) victory
Unlike my friend and fellow CNNMoney blogger Roger Parloff, I don't spend a lot of time reading legal documents. But I'm still pretty sure that the "Findings of Fact and Conclusions of Law" issued last night by U.S. District Judge Loretta A. Preska (and passed on to me this morning by a friend) in the case of Mastercard (MA) v. FIFA were a heckuva lot more incendiary than your average legal ruling.

Mastercard is suing FIFA, the global governing body of soccer, for reneging on a World Cup sponsorship deal. The company (with its ubiquitous spokesman Pele) has been a key sponsor of the world's biggest sporting event for 16 years, and had right of first refusal for future sponsorships. FIFA, however, went and signed an eight-year deal with Mastercard archrival Visa that was due to start in January. Chicago's IEG estimates that such sponsorships cost $35 million a year (far more than similar Olympics deals), but the card issuers presumably see all the publicity as worth it.

Anyway, the judge found last night in Mastercard's favor, and ordered FIFA to cancel its deal with Visa and put Mastercard back in the saddle. With Mastercard now publicly traded and Visa planning an IPO soon, this is a big deal--although it's hard to put a dollar value on it since Mastercard was suing for the privilege to pay FIFA money.There will be much more informed coverage of this to come from journalists who have actually been following the case (here's a brief month-old summary from the Times of London and here's one from the WSJ by way of the Kansas City Star). But no one seems to have noticed yet that the ruling is out, so I figured I'd let the judge's somewhat incredulous words speak for themselves. You can get the entire 125-page ruling here, but this is my favorite part:
FIFA's negotiators lied repeatedly to MasterCard, including when they assured MasterCard that, consistently with MasterCard's first right to acquire, FIFA would not sign a deal for the post-2006 sponsorship rights with anyone else unless it could not reach agreement with MasterCard.

FIFA's negotiators lied to VISA when they repeatedly responded to the direct question of whether MasterCard had any incumbency rights by assuring VISA that MasterCard did not.

FIFA's negotiators provided VISA with blow-by-blow descriptions of the status of the FIFA-MasterCard negotiations while concealing from its long-time partner MasterCard both the fact of the FIFA-VISA negotiations as well as the status of those negotiations - an action VISA's president admitted would not be "fair play."

FIFA's marketing director lied to both MasterCard, FIFA's long-time partner, and to VISA, its negotiating counterparty, to both of which FIFA, under Swiss law, owed a duty of good faith. When, pursuant to his engineering, VISA raised its bid to the same level as MasterCard's, he declined his subordinates' suggestion to give MasterCard the opportunity to submit a higher bid based on his concern for his own reputation with the FIFA Board. He also declined his subordinates' recommendation that he recommend to the FIFA Board that it continue with its prior approval of MasterCard as the post-2006 sponsor. Instead, he told the board it was difficult for him to make a recommendation and never mentioned MasterCard's first right to acquire the post-2006 sponsorship.

On the morning of the first of March 2006 FIFA board meetings and after all three FIFA boards had previously approved MasterCard as the post-2006 sponsor, FIFA's marketing director called VISA to say that if VISA increased its cash bid by $30 million to the level of MasterCard's bid, VISA "would be the partner."

Even after MasterCard had signed the "FINAL version" of the post-2006 sponsorship agreement and returned it to FIFA, FIFA's negotiators delayed telling MasterCard that the FIFA Board had chosen VISA; instead they waited for the VISA board to ratify the VISA agreement.

After the FIFA boards had approved MasterCard as post-2006 sponsor and after MasterCard had agreed to FIFA's asking price and agreement had been reached on all other terms and after FIFA's in-house counsel had solicited FIFA members for items that might be used to claim that MasterCard breached the Agreement, FIFA pointed to a trademark issue that had been present since 2000 or 2001 to justify granting the post-2006 sponsorship to VISA and sent a letter to MasterCard--after the commencement of this lawsuit--purporting to terminate the Agreement and thus MasterCard's first right to acquire.

After MasterCard and FIFA waived, under Swiss law, both the 90-day time periods set out in section 9.2 by their "conclusive conduct," FIFA now seeks retroactively to revive one of the 90-day periods, but not the other, to justify its choice of VISA for the post-2006 sponsorship.

While the FIFA witnesses at trial boldly characterized their breaches as "white lies," "commercial lies," "bluffs," and, ironically, "the game," their internal emails discuss the "different excuses to give to MasterCard as to why the deal wasn't done with them," "how we (as FIFA) can still be seen as having at least some business ethics" and how to "make the whole f***-up look better for FIFA." They ultimately confessed, however, that "[I]t's clear somebody has it in for MC."
Posted by Justin Fox 10:07 AM 0 Comments comment | Add a Comment

Can you make a great business magazine without socialists?
The American Enterprise Institute, a conservative Washington think tank, has just relaunched its magazine (formerly known as--get this--"American Enterprise") as The American.

The editor is James K. Glassman, who will never be able to escape the fact that he co-authored the book Dow 36,000 in 1999 but is otherwise a pretty great journalist of both business and ideas, and he has big plans for the endeavor. To quote from his editor's letter in the inaugural issue:
Business magazines have gone tiny. Clearly, there are readers who want nuts-and-bolts stories on how to climb the corporate ladder or how to find the best mutual funds. I have read--indeed, written--such stories myself. But by going tiny, business magazines have provided us with an opportunity that Henry Luce recognized when he proposed the original Fortune magazine: "The field which lies open is as immense and as rich as was ever offered to journalistic enterprise.... Industry is a world in itself ... and this World is more macrocosm than microcosm, is, in fact, the largest of the planets which make up our system."

Fortune, in its original incarnation from the 1930s through the 1960s, largely fulfilled this mission. It made business a macro subject and used business reporting to illuminate society and culture. Fortune was also a beautiful magazine, an artifact in itself, and, without embarrassment (but also without sycophancy), it celebrated American accomplishment.

I like to think that we retain some of that Lucian approach in the pages of Fortune, but Glassman is right that we now put far more emphasis on the nuts and bolts of corporate life than did the Fortune of the 1930s and 1940s. (I'm not so sure I agree about the 1950s and 1960s.)

What Glassman fails to mention, though, is that the people who produced that magazine he admires so much were lefties: critic (and lapsed Trotskyite) Dwight MacDonald, poet and playwright Archibald Macleish, novelist James Agee, economist John Kenneth Galbraith. As Galbraith put it in his autobiography (I lifted the quote out of Richard Parker's massive new biography, John Kenneth Galbraith: His Life, His Politics, His Economics):
It had been Harry Luce's reluctant discovery that, with rare exceptions, good writers on business were either liberals or socialists. To this he was reconciled. Better someone with questionable ideas who wrote interesting and readable English than a man of sound view who could not be read at all.

So there you have it. The American Enterprise Institute, that bastion of respectable conservative thought, is publishing a magazine modeled upon the work of a bunch of liberals and socialists. To quote my old boss, the late, great Ron Casey: Is this a great country or what?
Posted by Justin Fox 10:19 AM 0 Comments comment | Add a Comment

Still wondering what corporate boards are good for
UCLA law professor and one-man-media-empire-in-the-making Stephen Bainbridge has responded to my response to his critique of my very first post on this blog, "Who needs a board of directors, anyway?" (Dizzy yet?)

Bainbridge's essay is highly erudite, with footnotes and everything. Reading it will, to quote an ill-fated Fortune ad campaign of a few years back, "make your brain bigger." But no way am I giving Professor B the last word.

His main point is that corporate boards are useful because groups make better decisions than individuals. He concludes:
Team production is imperfect, whether the product is a manufactured good or a corporate decision. Teams are subject to unique cognitive biases, such as groupthink, and unique sources of agency costs, such as social loafing. With respect to the exercise of critical evaluative judgment, however, groups have clear advantages over autonomous individuals. Not only do groups clearly outperform average individuals in a given sample, there is considerable evidence that the process of group interaction has synergistic effects allowing groups to outperform even the best decision makers in the sample.

Now surely corporate boards serve some purpose, or we wouldn't have them. But is it really because small groups are so great at making decisions? In his fascinating new book Infotopia: How Many Minds Produce Knowledge, University of Chicago law professor Cass Sunstein offers ample evidence of the flaws of what he calls "deliberating groups." Such bodies do well on questions where there is a clear correct answer. But on less definitive matters--like most of the questions that corporate boards have to deal with--group deliberation often has less to do with finding the right answer than with imposing the views of the most outspoken (or powerful) members of the group.

Consider the experiment that Sunstein and two other scholars conducted recently in Colorado. They gathered residents of conservative Colorado Springs and liberal Boulder in small groups, segregated by city, to discuss global warming, same-sex civil unions, and affirmative action. Participants were asked to state their opinions anonymously before and after the discussions. Recounts Sunstein:
In almost every group, members ended up with more extreme positions after they spoke with one another. ... Aside from increasing extremism, the experiment had an independent effect: It made both liberal groups and conservative groups significantly more homogeneous--and thus squelched diversity.

This sort of groupthink is potentially disastrous for a corporate board, which is there in part to keep the CEO from driving a company over a cliff. To be effective, boards need to foster diversity and dissent. The practice of meeting regularly without the CEO in the room, which has become standard since the scandals of 2001 and 2002, is a big step in this direction.

But too much diversity and dissent can be a problem, too, as HP's recent board troubles indicate. It's a delicate balance, and my bet is that most boards fail to achieve it. That's not to say that the two other possible methods of governing corporations in a free economy--shareholder democracy and self-perpetuating autocracy--are any easier to get right. Just that we shouldn't expect too much of the setup we've got, and shouldn't be afraid to tweak it in ways that might improve it.
Posted by Justin Fox 10:47 AM 0 Comments comment | Add a Comment

So the stock market is irrational. So what?
Michael Kinsley has a new piece in Slate this week purportedly offering "proof that the stock market is irrational." As the someday-to-be-author of a book tentatively titled The Myth of the Rational Investor (due out early next year, if I get cracking on the rewrite), I ought to agree with him. But I just can't bring myself to. Maybe it's because he unfairly disses my buddy Milton Friedman. Or maybe it's because, after dumping on the stock market for 900 words, he offers no plausible alternative.

Kinsley bases his argument on the current boom in private equity, and the fact that the private equity guys are almost always able to resell the companies they buy for more than they paid for them.
The details are different, but the principle is the same. Private investors buy a company from its public stockholders. They have a letter from an investment bank saying the price is a fair one. They usually have the support of management, or they actually are the management. The public stockholders have little choice. But time and again--surprise, surprise--the investment bank turns out to be wrong. The company is actually far more valuable! (And any bank that can't be counted on to get this wrong will not be in this profitable line of work for long.) Soon, the company is sold at a large profit, either to another company or back to the public.

So far, so indisputably true. And Kinsley is right to say that this state of affairs casts some doubt on the efficient market hypothesis, the theory that the stock market always accurately reflects all available information about the companies traded on it. If the market is efficient, he asks, how can the same company sell at three different prices depending on who happens to be doing the buying and selling?

Actually, you can make an efficient-markets argument to explain the price discrepancy, as scholar Michael Jensen has been doing for the past quarter century: Private-equity-owned companies (a.k.a. leveraged buyouts) avoid a lot of the conflicts between owners and managers that plague publicly traded companies. The owners (the private equity guys) are clearly in charge, and therefore their companies are run better, and worth more. Kinsley allows that this might be true, but then argues:
[I]f these deals aren't a swindle, then the stock market itself is a swindle. It does not maximize value for its working- and middle-class investors. The stock market leaves money on the table waiting for "private equity" to swoop down and pick it up. Furthermore, Milton Friedman was wrong, and the other famous economist who died this year, John Kenneth Galbraith, was right: The free market in corporate shares doesn't produce well-run companies.

I wasn't aware that Friedman had ever claimed that it did. He was not a believer in the efficient market hypothesis, at least not in the extreme version of it that held sway at the University of Chicago Graduate School of Business (and a lot of other business schools) in the 1970s and 1980s. As he put it to me a couple of years ago:
We all know the market is not efficient in a descriptive sense. But that doesn't mean that the efficient market is not the best approximation if you don't have anything else to use.

And that's really the key. In our current system of stock-market-driven capitalism, corporate insiders make out like bandits, investment banks skim millions for themselves, and private equity firms profit repeatedly off the mispricing or mismanagement of public companies. Yet, somehow or other, stock market investors have made more than 10% a year since 1926.

That doesn't necessarily mean they will in the future--but I also wouldn't be surprised if a lot of the private equity deals being closed these days go sour, too. There's just too much money flowing into the sector for all of it to be invested wisely. Over time, though, private equity will continue to serve as a useful alternative to the inevitably conflicted management model of the publicly traded company. And without the public equity markets, the private equity guys would never be able to cash in. It's a symbiotic relationship.

Is it also a messy, wasteful way of doing things? You bet. Got a better alternative? Galbraith never did, which is why he will go down in history as a brilliant critic with few constructive economic ideas of his own (Thorstein Veblen with much better table manners) while Friedman's legacy lives on in policies and institutions that affect our lives every day.

As for Kinsley, he's still the cleverest political pundit of the past couple of decades (in print, not so much on Crossfire). But he had a seriously wrongheaded piece about stock option accounting in Slate a few years ago, and now this. Maybe it's time for him to take his business commentary private. (This should, of course, dramatically increase its value, enabling him to charge much more per column when he takes his opinions public again in a couple of years.)
Posted by Justin Fox 6:43 PM 6 Comments comment | Add a Comment

Why hits still matter (and will continue to do so)
Mrs. Curious Capitalist and I went to a performance Tuesday night by the Greatest Pop Singer of Our Age, Brazil's Marisa Monte. It was swell and all, but it was also deeply weird--for the simple reason that I had no idea which songs were her hits.

I think we own every CD by Ms. Monte, a mostly enchanting 39-year-old amalgam of pop diva, avant garde experimentalist, and Alan Lomax. But I've never heard one of her songs on the radio, never had her music recommended to me on iTunes, never known anybody else who was a fan. I simply heard a snippet of her singing on a Banana Republic ad in the late 1990s (yes, I know this is a lame way to discover music; it's a pattern with me), read an article about Brazilian music in the New York Times Magazine that identified her, and started buying up her work on Amazon.com.

Since then we've been listening pretty regularly but without any sort of context (or Portuguese language training). A few songs with clearly enunciated choruses (like "Passe em Casa," from Monte's Os Tribalistas collaboration with Arnaldo Antunes and Carlinhos Brown) or English bits ("Amor I Love You," from Memorias, Cronicas e Declaracoes de Amor) have stuck in my head, but mostly it all just runs (very pleasantly) together.

So at the concert Tuesday night it was invariably a surprise to hear which songs the mostly Brazilian crowd sang loudly along with (those were the hits) and which they did not. If only I'd known beforehand, I could have sung along too! (Well, maybe not.)

Because I've spent a lot of time lately talking to marketing professors about how consumers make choices, this got me thinking. Way out on the long tail of utopian opinion about the impact of the Internet is the viewpoint that each of us possesses entirely unique tastes that will for the first time be truly satisfied once those nasty Old Media companies and their marketing campaigns and distribution chokeholds get out of the way. I'm not sure anyone actually holds this extreme opinion (Mr. Long Tail himself, Chris Anderson, certainly doesn't), but I do think a lot of Web 2.0 types at least tend in that direction.

They're partly right: Individual tastes aren't nearly as homogeneous as the media output of the network-TV, top-40 radio, monopoly-newspaper era. But they are not of infinite variety, and are not arrived at independently. As French scientist Henri Poincare wrote almost a century ago,
When men are brought together, they no longer decide by chance and independently of each other, but react upon one another. Many causes come into action, they trouble the men and draw them this way and that, but there is one thing they cannot destroy, the habits they have of Panurge's sheep.

Panurge was a character from Rabelais's Gargantua and Pantagruel who caused a flock of sheep to jump off a ship by throwing the lead ram overboard. But I'm thinking of a more positive element of crowd psychology: If I had only known what other people liked (or which tracks Brazilian radio stations played a lot), I would have enjoyed the Marisa Monte concert even more.

Abundant and easily accessible content, and increasingly sophisticated means of steering us toward things we'll probably like (Jeffrey O'Brien has a great article about this in the current Fortune), are changing a lot about how the media world works. (For example, in the pre-Amazon.com era I probably never would have gone to the effort to acquire Marisa Monte's CDs.) But we humans will still want shared experiences--a.k.a. hits--and there will always be money to be made in manufacturing, distributing, and marketing them. Who's going to make that money? Now that's another question entirely.
Posted by Justin Fox 1:59 PM 0 Comments comment | Add a Comment

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.