I’m Glad I Live In New Zealand

The passing of the US Presidential Election makes me glad I live in New Zealand. Despite the poor economy, high cost of living and negative culture there are a lot of things going for us down in the South Pacific. We truly don’t know how lucky we are.

If you hurt yourself playing sport or at work, you aren’t going to be rendered destitute in New Zealand. If that does happen, you’ll get a couple of operations courtesy of ACC and the public health system first. As a fan of efficiency, I find it amazing how so many Americans could think that everyone being able to get to a hospital or specialist when they need to is a bad thing.

With the re-election of Barack Obama, the Affordable Care Act, which funnily enough is based on Mitt Romney’s health plan he set up when he was governor of that state, the United States marginally edges towards becoming a first world country that cares about its citizens.

After the Christchurch earthquake we learnt the hard way not to trust the insurance industry. The Earthquake Commission might have caused drama with deciding which quake caused what damage, but where would the billions of dollars it will pay out have come from if there was no earthquake levy?

Insurance companies have returned to profitability while Christchurch families struggle to get on with their lives. Even if they did the right thing and took out insurance on their contents, their homes and their businesses many of them are still significantly out of pocket. Some insurance companies are even taking their clients to court to challenge the contracts they entered into with altered meanings and eloquent arguments advanced by Queen’s Counsel.

Imagine having to deal with insurance companies looking to cut costs when it comes to your health. The US health insurance industry has replaced doctors as the most important decision makers. Have you ever met someone who works in insurance? I sure wouldn’t want them deciding whether or not to operate. But I’d trust the Tauranga Hospital orthopaedic surgeon who repaired my broken arm when I was 8.

There’s a lot of risk when you buy an insurance policy and pay your premium. If it wasn’t for taxpayers, AMI policyholders could have been plain out of luck because AMI directors didn’t purchase enough reinsurance and focused on cheap premiums over building a substantial asset base “just in case”. You could find yourself at the mercy of an insurance adjuster whose incentives are the opposite of yours.

The outcome of the US election makes me glad I live in New Zealand. I like the idea that John Key can’t decide who lives and dies with drone missile strikes. I like the idea that if I have an accident I won’t be staring through the glass of the emergency room while a credit check or wallet biopsy is performed. And I like the idea that only when you are really injured or ill do bureaucrats at ACC start calling the shots.

I’m glad I live in New Zealand, but with the economy the way it is and the difficulty of creating opportunities for yourself I don’t know how much longer I can justify staying here. That means I’ll have to interact with health insurance companies overseas. That’s something I’m not looking forward to.

Book Review: A Matter Of Principle By Conrad Black

A Matter Of Principle By Conrad Black

My interest in the Conrad Black case was sparked by an article that appeared last year in Vanity Fair. I quickly forgot it, but when the disgraceful interview conducted by Jeremy Paxman appeared on my YouTube recommended list I was keen to explore the Conrad Black case in more detail. Jeremy Paxman was completely uninformed and came across as a numpty.

According to the initial trial by media, Conrad Black was an entitled, pompous corporate thief in the vein of Kenneth Lay or Dennis Kozwolski. He had stolen hundreds of millions of dollars from shareholders and deserved a life sentence in US prison whilst forfeiting all of his worldly possession.

While you have to take the words of a convicted “criminal” with some caution, the case of Conrad Black and the availability of court judgments on the internet enable the reader to perform “due diligence” on the case he makes for his innocence.

At first skeptical, I am now convinced that he was the victim of a terrible persecution. It all started when a non-shareholder and former SEC chairman Richard Breeden filed a 13D form with the SEC.

It set in motion a series of events where people who had no business interfering in the private affairs of Hollinger were able to cause shareholder losses of more than US$2 billion dollars.

These hangers-on even paid themselves millions of dollars with Hollinger’s money after taking it hostage. Tens of millions of dollars was wasted on high priced lawyers who couldn’t do much more than demand payment in advance from Conrad Black and his fellow defendants.

The corporate governance crew were able to greenmail, bully and intimidate the other directors into allowing a full-blown investigation of Conrad Black and his business partner David Radler’s “wrongdoing”. They included a former Chairman of the SEC and numerous powerful lawyers who cared more about getting paid than getting to the bottom of whether or not fraud had been committed.

It turned out David Radler really was a crook. He took the coward’s way out with plea bargain, serving up Conrad Black on a platter. The actual turn of events, which can be independently verified with a few hours Google searching, was completely different from the Murdoch media narrative.

Conrad Black very clearly sets out how the plea bargain process works – in exchange for false testimony, you can bargain with the prosecutors to save your own skin. In terms of game theory it makes perfect sense. For non-sociopaths it is morally repugnant behaviour.

One of the reasons that Conrad Black was so misrepresented in the media was that he refused to plea bargain with the US Justice behemoth.
For his insolence, the FBI seized the proceeds of a New York apartment sale. They had no claim to it but stopped $10 million from going to his defence lawyers.

Although convicted on “honest services” grounds and for obstruction of justice, Conrad Black didn’t back down. His appeal to the Supreme Court led to the “honest services” clause being struck out and very stern comments on how the original judge should review his reasoning in the case.

The author of the “honest services” conviction was Richard Posner of the Chicago 7th Circuit Court of Appeal. Black rails against Posner’s megalomania and refers to his reputation on the bench for a lack of attention to detail.

The case against Conrad Black had shrunk from an enormous alleged fraud to a handful of technicalities. But despite the Supreme Court effectively overturning his convictions, Posner ignored them and issued another judgment that still incorporated the unconstitutional “honest services” nonsense.

In order to save face for the US Department of Justice, the SEC and the greenmail corporate governance activists his sentence in Federal prison was reduced to 42 months in 2010. He had to serve another 7 and a half months before he could be released.

His time in prison wasn’t completely in vain. In this book Conrad Black clearly explains how US justice is not justice at all. He rails against the plea bargaining system, civil asset forfeiture, intimidation of witnesses and the implausibly high success rate of US prosecutors.

He talks about how upskilling in prisons is non-existent, why there are major incentives for prison populations to keep on growing and with his signature style mounts a convincing argument that the entire US justice system now operates on the basis of “guilty until proven innocent”.

If Conrad Black was not a multi-millionaire with the willingness to fight and the financial capacity to do so, he was facing a life sentence for a vendetta by corporate governance greenmailers.

The cost of this injustice has been the destruction of a career, the destruction of more than $2 billion in shareholder wealth and the enormous cost incurred by the SEC, DoJ and FBI in hounding Conrad Black for almost a decade.

This book completely altered my thinking on the role that corporate governance plays in public companies. The ability for an outsider to essentially hold an entire company hostage and bill it for the privilege shocks me.

The real world evidence of regulatory capture, rent seeking, miscarriage of justice, abuse of due process, judicial over-reach and a whole plethora of other abuses makes A Matter Of Principle a solid read for anyone interested in how the US justice system can pummel even an entrenched member of the 1%.

Due Diligence Questions For Investors

If you are thinking about investing in something, you have to do your due diligence. The finance company collapses, ponzi scheme failures and property investment scams that have been revealed following the global financial crisis ram home the fact that most investors don’t do their due diligence.

How can an average investor perform due diligence on a prospective investment? The truth is they probably can’t. If you don’t have above average knowledge of the relationship between risk and return, how probability actually works, what the law is surrounding investments and standard procedure for legitimate investment firms you should stick to investing in index funds.

The inability of the average investor to perform due diligence is why we have to make silly statements like “taking my investment advice without consulting a financial advisor or 3rd party solicitor first is really stupid”. The development of “plain English” product disclosure statements prepared in the format preferred by the Financial Markets Authority can’t account for how stupid some people are.

If you can’t explain to a reasonably clever teenager concepts like diversification, correlation of returns, the risks and rewards of Kiwisaver accounts, performance relative to benchmarks, impact of performance and management fees on long-term returns and answer questions that dullards send into Mary Holm every week you have no business going anywhere near the financial markets.

Armed with your above average knowledge of basic financial topics, you should be able to pigeon hole investment products you’re looking at. When you know the category of investment you are dealing with you can then ask the best questions for that category of investment. The Financial Markets Authority actually has some great information on its website. As does the Retirement Commission’s “Sorted”.

For example the Moa Brewery IPO can be filed under “new listing backed by guys with a track record of selling NZ brands for a premium to large corporates and non-trivial likelihood of success”. Examples of questions you’d want to answer before investing here would be:

  • How are the founders and IPO participants incentives aligned?
  • Who is managing the listing and what fees are they getting? Do they have to support the initial listing price?
  • What do the back-of-the-envelope calculations look like for the premium beer market?
  • What is the worst-case scenario if I put my money in the IPO?
  • What are the risks I am exposed to here? Currency risk? Distributor solvency risk? Consumer tastes and preferences risk?
  • Can I build a basic model in Excel that resembles what the Moa guys have put in the prospectus and test their assumptions?

If you are performing due diligence on a specific asset manager, there are lots of things you can do to lower the risk of getting “Madoffed”. Reading the disclosure documents very carefully is the first step. Then, conducting a detailed Google search on the asset manager, entities they are associated with, similar investment products, credit checks, background checks if you are investing a lot of money with one manager and testing whoever is trying to sell you the investment product with aggressive lines of questioning are all part of investigating whether an asset manager’s track record is plausible or someone is taking the mickey.

A clear understanding of probability and investment returns is also essential. Past performance does not predict future performance. Just because a hot-shot asset manager has beaten the NZX50 for the past decade doesn’t mean they possess some amazing ability. Never discount the possibility that someone has had really good luck and is rationalising their success by pointing to their “track record” and “investing acumen”.

If you’ve been reading this article and don’t understand every single concept I’m referring to, you have no business actively investing. The Financial Markets Authority should restrict investment products to people who are capable of performing due diligence independently.

Why is this? Well, it’s because in New Zealand we privatise profits and socialise the losses. If someone makes a bad investment and loses their retirement savings they will become a burden on every other Kiwi by accessing superannuation when they previously would have been able to decline it. They’ll also become eligible for nursing home subsidies if they haven’t stashed the rest of their assets in trusts.

Behavioural finance studies have proven that very few people are capable of making rational investment decisions. They are subject to enormous biases, under-estimate the likelihood that they are making a poor decision and over-estimate the likely returns from investment products they are considering. We think we know more about investing than we actually do and cry to the media when we make really dumb decisions.

I am not currently in a position to make substantial investments in hedge funds or pick individual stocks. My strategy at present is pure capital preservation and hedging against inflation. An index tracking product like the NZX SmartShares is the most reasonable level of risk I’d be comfortable with at this stage. Taking long-term bets with out-of-the-money options is too risky at present.

Handing over your entire investment strategy to a person whose incentives are not aligned with yours (think : commissions, kickbacks, golfing trips, liquid lunches at restaurants you’ve never heard of) and then losing it all is proof positive that financial darwinism exists.

If you are not prepared to do enormous groundwork in analysing potential investment products, doing the due diligence, clarifying things you don’t understand with your solicitor, asking your accountant whether claimed tax benefits are likely to result in an IRD audit or even performing a Google search on the potential investment provider and associated entities, you shouldn’t even consider index funds.

You could choose the conservative option on your Kiwisaver and keep all of your money in term deposits. But even then you’re an unsecured creditor to the Big Four banks and will get clipped if Open Bank Resolution is ever implemented. Do you even know how Open Bank Resolution will work? If not, you should take five minutes from your busy day to read about it.

I think you should read dozens of books before you go anywhere near the shark-infested waters of investing. If you don’t have a broad understanding of investing, risk and probability you are a mark for shysters who will take advantage of your naivety. Just because you have achieved success in one area of your life, namely having enough money to invest, doesn’t mean that success will transfer to your investing efforts.

I am reasonably smart. I read extremely widely in economics and finance. I have extremely low levels of confidence in the financial markets and the “professionals” who work there. Commingling of client funds and business funds, expenses being charged to investors and exceptionally poor after tax and after inflation returns make me wonder what excess return can be earned from assets even marginally more sophisticated than index funds like ETFs.

NB: For the illiterate I’m not an Authorised Financial Advisor and this shouldn’t be taken as financial advice tailored to your specific situation. If you actually don’t do your own research you are a dunce who deserves to lose everything. Search for an independent financial advisor who won’t charge commissions on investment products or read a few basic investing books before even visiting a sharebroker’s website or requesting information on something you’re unlikely to understand.


Leaky Homes Fiasco and FAP

The multi-billion dollar assistance scheme for leaky home victims is called the Financial Assistance Package.

It is clear no one at MoBIE realises how funny this is.

Mr Rainey asked the Ministry of Business, Innovation and Employment for details of FAP payouts, and was shocked to discover that although 1232 victims had lodged expressions of interest by the end of September:

Only 186 homeowner agreements had been finalised by the claimants and the ministry.

35 claims were proceeding, of which 31 had received one or more contribution payments.

Only 12 had received their final payments.

The FAP scheme, started last year, is a joint Government and local council plan to help people avoid having to sue and to enable them to get their houses fixed.

Are the government having a laugh with respect to leaky home owners getting assistance? Or do they really want them to just have a FAP?

The leaky buildings fiasco is one of the worst indictments of regulatory failure in the developed world. The ongoing cost that ratepayers and taxpayers will have to bear while culpable builders and industry executives waltz off into the sunset is appalling.

It is not a good thing that billions of dollars has to be spent fixing what should have been built properly in the first place. Anyone thinking that the rebuilding process will “save the construction industry” should read up on “The Broken Window Fallacy”.

The leaky homes fiasco represents billions of dollars in lost potential investment in higher productivity. It’s a major drain on the construction sector and with some homeowners saddled with hundreds of thousands of dollars worth of rebuilding expenses, a major drain on private sector consumption and saving.

NB: For those of you unaware of the meaning of “FAP” it’s a NSFW image search.

Bring Back The Bookies

It’s never hard to find a government agency wanting to rain on someone’s parade. The news that office sweepstakes on the Melbourne Cup could attract a $1,000 fine from the Department of Internal Affairs almost made me spit out my coffee this morning.

However, the Department of Internal Affairs warns that office sweepstake prize money cannot exceed $500 and those who breach the rules could face the long arm of the law.

This means tickets for the 24-horse race can cost no more than $20.83, according to a spokesman.

Any money raised must be returned as prizes and no one is allowed to profit from organising the sweepstake.

Violating these regulations could incur a fine of up to $1000.

Source: http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10845375

Has the Department of Internal Affairs ever considered that regulating gambling simply raises the cost of “problem gambling”?

Most Melbourne Cup office sweepstakes are an innocent little flutter. They have nothing in common with feeding $500 into a poker machine or spending all night playing blackjack without an edge.

The lower level of competition in the gaming industry means that occasional gamblers will look towards alternative options, including office sweepstakes. If it’s easier to organise an office sweepstake than go down to the TAB it means the odds at the TAB either aren’t good enough or aren’t advertised well enough for occasional gamblers.

By cracking down on naughty middle class office sweepstakes the Department of Internal Affairs is not only propping up the NZ Racing Board monopoly but raising the cost of gambling – more competition in gambling would lead to more competitive odds and thus lower the cost of gambling alongside lowering the cost of problem gambling.

It is also amusing that the Department of Internal Affairs has never considered the level of the fine. If the fine is only $1,000 that’s hardly an incentive against running an office sweepstake with prizes of greater than $500. If the expected profits to the promoter are greater than that, with a low probability that a random Internal Affairs inspector shows up, then it’s a rational crime under Gary Becker’s model.

I wish that New Zealand would bring back the bookies. The impersonal nature of online betting through the TAB is nowhere near as enjoyable as going to the races in Aussie and having a yarn with a quick witted bookie at Randwick or Rosehill Gardens. Who would bother with an office sweepstake when you can go to a race day event with a proper bookie?


Kim Dotcom And Pacific Fibre II

Lance Wiggs has a very good explanation of the hurdles any attempt to resurrect the Pacific Fibre project will have to overcome. He outlines the extremely risk-averse guarantees institutional investors want, the enormous amount of due diligence required and impact of the TelstraClear sale to Vodafone.

Kim Dotcom obviously loves the media attention. Offering to use his own money to finance Pacific Fibre is definitely an attention seeking statement. But does Kim Dotcom have the US$300 million Lance Wiggs estimates is necessary to complete the project?

Putting aside the fact that his assets are currently frozen, what is the likelihood of his new “Mega” project being the victim of US “guilty until proven innocent” seize? How credible are any commitments he would make to such a large infrastructure project?

Pacific Fibre shopped the prospectus to a large number of local and foreign investors. Some of those, perhaps government owned funds, may be regretting their decisions, but all will be far better informed for new player conversations. I believe those conversations need to be far deeper and collaborative – we are all in this together.

While it is encouraging to have a private investor offer to plug the financing gap, does the Kim Dotcom saga make it more likely or less likely that landing rights in the USA would be granted? Somehow I think there would be enormous opposition from Hollywood lobbyists on the US end.

It is very disappointing that institutional investors in New Zealand did not catch on to the enormous possiblities that Pacific Fibre could bring. International data is currently the major bottleneck that needs to be overcome. The Crown Fibre project will be for nothing if data transfer slows to a trickle as soon as international data is accessed.

Pacific Fibre II would be the ideal investment for the likes of the ACC fund or NZ Super Fund. Hell, if I was an NBR Rich Lister I would bet the farm on entering a duopoly with enormous demand increasing year-on-year at incredible rates.

Anti Money Laundering And Barriers To Trade

Over at Offsetting Behaviour, Eric Crampton despairs over the difficulty of executing arbitrage trades with respect to the US election.

For just $8.88 he could make a guaranteed return of ~10% by purchasing an InTrade Romney contract and a BetFair Obama contract.

He quotes the terms & conditions at Intrade which make it hard to deposit money in order to comply with anti-money laundering rules.

But anti-money laundering requirements are not just barriers to performing arbitrage on electoral events.

They function as barriers to actual country-to-country trade. Just think about how hard it would be for a developing country exporter to have all the correct documentation and paperwork to open a US bank account and receive payment for commodities on account. Essentially, incumbent commodities firms have an edge because they will be able to put deals together faster than an ostensibly cheaper developing country supplier.

Imposing greater “know your client” rules functions as a barrier to entry. If you can’t get an account set up in the first place because you’re starting up a business in the developing world, you’ll have to rely on more expensive banking services.

You might even skip the mainstream banking system altogether, relying on immigrant cash transfer networks.

There are so many second-order effects of anti-money laundering legislation. Making it harder to take advantage of goods arbitrage opportunities is just one I can think of.


Instapaper Or Readability?

There’s no point writing something if it can’t be read by your potential customers.

Many websites fall short of the mark with readability.

I’m currently alternating between the Instapaper and Readability extensions in Chrome.

Why? Because I like large text when I’m reading longer articles or blog posts. I also like the minimalist interface.

But in 2012, should I really have to resort to a browser extension to make an article readable?

Of course not!

In the age of HTML5 & CSS3 it is completely ridiculous to make your content a minor part of your site’s presentation.

If you are writing a blog or producing regular online content, it should be really easy to read your content without squinting.

Maybe my eyesight is just rubbish, but having to use a browser extension to solve a failed user experience issue on almost all websites I visit regularly i.e. not in my Google Reader shows that a lot of UI designers need to go back to the drawing board.

Larger, clear fonts and clean navigation should be the standard for any website user interface.

Instapaper vs. Readability hopefully won’t be an issue in a few years. But for now it is a workable solution to paper over poor font size and layout choices that are almost de rigeur.

Diminishing Returns And User Experience

The primary goal for a website is to obtain a successful sale.

It’s not to highlight how inspired you were in choosing an expensive web design agency to implement the complex brand strategy dreamt up by an extortionately overpriced advertising agency.

Every little gadget and obstruction between the landing page and the “place your order” button is another spanner in the works that can stop a potential sale dead in its tracks.

For some industries, showing off product capabilities with videos and diagrams is essential as part of the educational selling process.

3 Things No Potential Customer Should Experience

  1. A pop-up form asking them for email details before they’ve had a chance to see what you’re all about.
  2. Auto-playing music or video that invades a potential customer’s eardrums and concentration on matching their problem with your solution.
  3. A complex user interface they haven’t used before that they need to jump through in order to place an order or make a sales enquiry.

Diminishing returns is a concept from economics – the more workers you put on the factory floor, the more you produce up until the point where they start tripping over each other and your productivity declines.

Diminishing returns applies to user experience – the more features you have on your website will improve conversion rates up until the point that you are actually reducing your conversion rate and putting your entire web marketing strategy at risk.

Less really is more. Reduce the friction in the sales process by making it as easy as possible to get from the landing page to the successful sale.

Large Organisations And Web Technology

The other day I was looking at IT vacancies on TradeMe and Seek. It’s clear that many larger organisations are behind the curve when it comes to web technology.

If your website is built on ASP.NET you are operating at a major flexibility disadvantage to smaller organisations. A smaller organisation can take advantage of essentially “better” tools without needing to convince 20 middle managers that the new platform is safe and secure.

For example, I am currently building a niche web application on the side. I’m using AngularJS and the latest in HTML5/CSS3 to make it as lightweight and flexible as possible.

If I was a front-end web developer, working for an organisation that requires “3+ years experience in ASP.NET”, I would not have advanced beyond the stage of wireframing.

As it stands, I have a working prototype I can work with in less than a month. Working backwards from this, I’ve redesigned how the whole application should work after seeing it work in my browser window.

The friction that large organisations must deal with in order to get projects that embrace better web technology means that small organisations have an enormous competitive advantage.

If you are a smaller organisation, you should be at the forefront of experimenting with web technology because you can achieve the greatest competitive advantages from light and flexible web technology.