A med & grad student who used to work the line in LA, NYC, SF and Napa talking about the science of cooking and cooking with science. Harold McGee's On Food And Cooking - The Science and Lore of the Kitchen never satisfied my kitchen curiosity and more than one Chef grew exasperated with my asking "Why?" I'll try to stay on topic, but you may see a kvetch or two about the school & hospital.
My posts are presented as opinion and commentary and do not represent the views of LabSpaces Productions, LLC, my employer, or my educational institution.
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There was a rush in a job well done. Not just any job well done. The rush we got was like rocketing down I-5 at well over 100 miles an hour between Livermore and Bakersfield. Just open road and octane. A friend used to say my job "wasn't nice." His dad's company had been targeted by a competitor. And they'd come to us to help them proceed with a leveraged buyout. After all the research done, we passed. They were in too strong a position. The client paid us our fee and we were on our way. A younger, newer, hungrier outfit tried after us. They were eaten alive in a fierce fight. I don't think those other guys ever found new jobs in our sector. It was that brutal. See, what we did was "Private Equity." A pleasant, sterile name for a very ruthless sector. If our company was sniffing around your doors, chances are someone else wanted to buy you. And when they bought you, we got first pick of all the good stuff. Your corporate retirement and pensions? Gone. Employee Stock Ownership Plan? Not anymore. Jobs? Probably liquidated. All of that stuff was ransacked to pay our salaries and bonuses. You remember in 2008 when Goldman Sachs was still paying bonuses? Yeah, that's how they were doing it. Not from bailout money.
I cleaned out my desk for the last time in 2007. There would be no more late night meetings and brain storming sessions. No more chatting up rank and file employees of target companies. No more expense accounts. No more sleeping in my office. No more racking up personal frequent flier miles on the company dime. No more sifting through bankers boxes of receipts, scrawled notes and printouts trying to piece together acquisition numbers. No more surprise investigations by the SEC. I was done. The thrill and rush were too far and in-between. I also wasn't keen on sticking around when the shit hit the fan. The West Coast offices were fighting with the East Coast. Only instead of Tupac and Biggie, they were names you'd read in the Wall Street Journal. The West Coast saw trends the East didn't want to see. Many of us left, for other firms or quit the field completely. The traders accused us of being too cautious. I hadn't made an active trade in a long time before that, but I still remembered how to read the big boards. And what COMEX and Nikkei were showing did not look good to me.
Still, there are times when I miss it. I sit in class listening to lectures, and my mind starts to wander. Assigning values to the things around me. Playing with making a leveraged buyout of the school. Or maybe the Financial Aid Office or Accounting does something that makes me raise an eyebrow, and I walk into the offices demanding explanations. A few times I've seen fellow co-workers or former bosses. Some of the latter have pictures and nameplates around the hospital signifying donations. Senior faculty glare at me for "disturbing" the donors. I shrug it off. Seriously? After my previous life, there isn't an MD or PhD that could intimidate me. I stared down meaner, scarier and more powerful.
I like to think I could still slip into the job. Probably not. I don't read the financial papers as closely. I don't have access to the information I used to. But, I still jump in when I hear people exchanging bad investment advice. My bit on taxes and reassignment nabbed me a few questions on Twitter. Most of the questions came down to "What do I think is a good investment"? Honestly, I think anything has the potential to be a good investment, within certain parameters. You just have to know how to treat these potential assets and how to classify them. So, my primer follows.
Real estate can be a good investment. "Can be" being the operative term. To realize property as an asset, much less an investment, you have to understand that your family home is not an asset. Under no circumstances should you ever treat it as an asset or an investment. That first home you buy? The home you move to when your family grows? Your grandparents' house that you inherited and moved into? They all have the possibility to be a wonderful environment to live in, but they are not an asset. You get a tax break on the mortgage. You can borrow against it, but no matter what area you live in, the value of your property will never outstrip inflation or the cost to maintain. Not unless you strike oil while digging for the backyard pool. Or the coming of another housing bubble. Let's avoid that one though, ok?
That being said, real estate can make an excellent investment in one of three ways - flipping, development or rent. If you can flip houses competently, you can make some easy cash and avoid both inflation and mortgage payments. This of course requires knowing how to do general and specific repairs and improvements to an existing building. Development is turning empty or rundown property into something that can attract foot traffic and potential buyers. This is how Donald Trump made his money. Even if he declared bankruptcy a few times to do it. Rent is surefire income. You buy a second home and rent it out, or a multi-unit. Either way, you collect income. But in the case of development and rent, you are responsible for that property and all maintenance until it's sold.
The workhorse of the "safe investment" world is the humble treasury bill. UK or US, France or China, every government offers treasury investments. And they're almost always snapped up. Currently, investors are shedding Euro-zone and UK treasuries amidst fears of a spreading Euro-zone crisis. Someone willing to take a risk on long term, could make a killing if they were willing to buy up some of these cheap securities. The downside is, what happens if the government defaults on these securities? Investors will be left holding the bag and no real way to recoup their initial investments.
Which is a real fear in the run-up to the deadline for the US debt ceiling. There's no fear that the US won't pay its bills. It will, one way or another, but the interruption of an investment schedule is not anything anyone wants. No matter how much the GOP insists investors won't mind. If the interest stamp on my t-bills aren't applied in a timely manner, I will drop those things for a fraction of their worth and so will investors with a lot more money than me. Don't believe me, Boehner? Go ahead and try it. Default on a payment means higher interest rates later on. Which means liquid capital is harder to come by. That, in turn, means it becomes a lot more expensive to borrow the capital the government needs to operate daily.
The t-bill is a safe investment, but you'll never get any real returns on it. This is the kind of investment you make for retirement. Your money just sits there collecting interest. Once the life of the bill is up, you can roll over the money into new securities or cash out.
Corporate bonds are bonds issued by a corporation instead of a government. Because they are not guaranteed by a government, their risk is higher. This also means the return on investment can be higher. Obviously, returns fluctuate depending on the corporation in question. A bond floated by Wal-Mart or Microsoft will have much lower interest, because there's less likelihood of the company up and folding tomorrow. On the obverse, a bond issued by GM may have great interest potential, but I'd stay away from that thing like it was a cobra with nine heads whose bite could give you HIV and Ebola. At the same time.
The Money Market is a slight play on the previous Bond and Treasuries. The investors here are much more short term. They still loan out money, and collect payments on the loans. Typically these loans are shorter, no more than 13 months. Colloquially known as "paper." This is typically how banks, financial institutions, governments and corporations keep liquid assets on hand. It's easier to sell off a few short term assets for quick cash than it is to unload longer term investments.
Stocks. Almost everyone knows about these. You buy these and own a part of a company. Most people are unsure of how to make money with these, however. Yes, you can buy low and sell high, but that's only part of the investment potential of shares in the corporate world. Corporations can also issue dividends to their investors, this is a portion of the profit a corporation has made which is now being shared with shareholders. Public companies usually pay dividends on a fixed schedule. If you're going to invest in stock, it's a good idea to concentrate on a single sector. Preferably one you know well, maybe the one you work in. And then hedge those bets against standards like IBM or Microsoft or Coca-Cola.
Stocks also do things called a "split." This is where a company splits stocks. For example, let's say LabSpaces, Inc. has 1000 shares on the market valued at $75 a share. CEO Brian decides he wants, instead, to have 3000 shares on the market. LabSpaces, Inc. splits the stock in 3. Meaning there are now 3000 shares on the market valued at $25 each. Every investor who had 1 share, now has 3. It may sound like an odd practice, but there is usually sound reasoning behind announcing a split. If the company fully believes that its future is going to take off, then the split can actually be used as a vehicle to drive up the price of the stock, which can attract investors. Splits don't always pay off with higher value, but the possibility is always there.
Unlike treasury securities and real estate, shares of stock have a very real chance of being completely worthless. The good news is that you'll only lose your initial investment. The bad news is that you'll lose your initial investment. Because of this, I always caution people to never invest more than they're willing to lose.
Gold is historically one of the most treasured substances on the planet. Just the shine and feel of it is transformative. That secure, heavy weight in your hand. The slightly oxidized luster. It's also one of the most useless investments on the planet. Unlike the previous investment options, gold has no investment income. You don't collect interest, rent or dividends for owning gold. It just sits there. And while that's great if you want a secure place to keep your money in light of worrying global markets, it really can't do anything but sit there anymore. Really. Gold (and other precious metals) really have no intrinsic value anymore. If you don't believe me, you go out and try to pay for something directly with some jewelry. How many people do you know of that will take payment in gold? You think my dentist will let me get those Invisalign retainers if I drop a couple ounces of gold dust in his hand? Pay for groceries with a ring and a few links hacked off a silver bracelet? Probably not.
For some people the just sitting there is a good thing. I'll concede that it can sit there and can weather most any financial storm better than any investment, but without a payment it's a lame duck for me. If you're looking to park your money long term, Treasuries may be a better bet. Unless you don't have faith in the governments whose treasuries you're buying into. After all, it's not like the United States Government is going to default on a coupon payment. Are they?
If you've got a 401(k) or IRA or some other retirement account, chances are a large part of it is held in a mutual fund. Mutual funds are sort of the relaxed approach to stock and bond investments. Each fund is managed by a fund manager, and they're in charge of making sure your investment is safe and secure. This is done by investing the fund's money in a wide range of stocks and bonds. There will be some safe bets to hedge against possibly riskier action. And hopefully the manager makes more money than he loses. At the end of each month, they give you information on how they did, how your fund(s) did. And you pay a fee. The upside is that you have a professional managing your money, so you don't really need to baby it every second of every day. The downside is that someone else is managing your money and charging you whether you make money or lose money. In general mutual funds are a decent investment. Just remember that it's not as nimble as owning individual stocks and bonds, but it is more secure.
There are times when I still try to keep my hand in. I have talked fellow students out of what I thought were colossally bad financial decisions. I taught my PI in grad school how to keep short paper available, rather than her usual trick of cashing in early on securities. I've done a big no-no and thrown financial aid money into short term, un-hedged bets before. Doing that with other people's money is fine and all, but there's no rush quite like using your own. Without a safety net. Maybe one day I'll use those skills again. But they are still fun skills to have, and those times were a rush. After all of that, nothing gets your blood racing quite as much anymore.
Or maybe I will get a new rush. After all, there are signs of further economic struggles. We never properly crashed out in 2000 or 2008. In 2000, the tech bubble burst, but the housing bubble was in full swing. And the housing bubble wasn't allowed to properly deflate. Industries were propped up. The wrong ones at that. A bank was allowed to fail, but manufacturing remained. It may have saved Main Street, USA, but that was the wrong play. Now, we're just sitting and waiting. Maybe I should revise my opinion on gold.
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That sounds like both an exciting and a terrible life. So basically these companies profit by buying up and selling off company assets for a profit? And leave people unemployed and penniless?
It wasn't always a leveraged buyout. A lot of our day to day operations were in venture capital or "growth" capital. The latter is where we made a cash infusion available for improvements to the company's infrastructure, in exchange we get a minority investment in the company. Sometimes firms use these minority investments to take a position to improve the company performance, and not raid it. Carl Icahn is a good example of a private equity investor who uses his minority positions to improve the standings of the company he has bought into. He isn't always well received by the Board of Directors in these bids, because there is a very good chance the Board will lose their jobs.
Other times Private Equity Firms are contracted to help facilitate a merger. If a parent company doesn't have the capital ready, chances are very good that PEFs do. Even if the parent had the cash ready, they would probably still turn to a PEF. The buyouts by Pharmaceutical Companies were almost all handled by PEF. Same with tech sector acquisitions such as Google buying YouTube. It doesn't make a whole lot of sense to deplete your cash reserves when you can "take out a loan," because low cash reserves could be seen as a sign of weakness.
The upside of private equity is that it can keep a company fit. The downside is that people lose out if an unfit company is made a target. A good example would be the Big Three Automakers. Even post-bailout they're not incredibly "fit" companies. Too much of their debt is taken up by archaic pension plans. Meaning that instead of spending money to modernize and streamline domestic production and sales, they're paying people who no longer work for them. This in turn drives down domestic wages, which the union that wants the pensions fights against. Leaving them little choice but to turn to overseas manufacturing or suffer through a series of strikes that further hurt the overall health of the company. Luckily for the Big Three, they're almost always shielded by the federal government, leaving them free to continue their economic and financial bumbling to the chagrin of their shareholders.
A lot of these firms remain in business because they're so profitable. So much so that a lot of the big firms - Goldman Sachs, KKR, TGP, Carlysle, Blackstone, etc - have investors that are as wide ranging and varied as Harvard University and University of California to Coca-Cola and Google. The returns are just too great not to pass up.
And buyouts don't always work out. Sometimes in buyouts the PEFs end up in fights with other shareholder groups. Both sides watching the company go into bankruptcy while attempting to resolve numerous proxy battles.
fantastic post thanks for sharing. I found what you had tosay interesting and a few new things like never considering a family home an asset.