Friday, December 26, 2008

Hobbyists, Take Heart!

Please read this disclaimer before proceeding:

I don't have a diploma from Harvard like John Thain, Rick Wagoner, Barney Frank, Jamie Gorelick, Chuck Schumer, Ted Kennedy and Eliot Spitzer.

I don't have any high-level executive experience at rock-solid enterprises like Lehman Brothers, Pan American World Airways or Studebaker.

Most importantly, I do not have any special insight or intuition regarding arcane, high-yield investment opportunities like Bernard Madoff, Ivan Boesky and Carlo Ponzi.

No, I'm merely a poor, starving writer with a degree in theater arts from a humble municipal institution of slightly higher learning. However, I do know that a business has to take in more money than it shells out, provide products and services that customers actually want, and pay back money that it borrows. Call me naive. Call it 19th century thinking. Call it anything you want, yet these simple facts of life remain in force today as they have for more than 5,000years. Surprisingly, these concepts seem to have been lost on most graduates of high-tone universities.

This isn't a new phenomenon and you don't have to look back very far for parallels.

During the bubble we were told that "old economy" metrics like share of market and price-to-earnings ratio were no longer relevant.

No, in this new Gilded Age investors foamed at the mouth to invest in startups with high share of mind and price-to-concept ratios.

Then, when the inflow of new cash couldn't keep up with the outflow of marketing funds (i.e. Super Bowl commercials necessary to maintain high share of mind) the house of cards came tumbling down. These were companies with no tangible products, services or value. In short, investors had no reasonable expectation of profit--long term, near term, any term. Oops, forgot to ask.

How is the Madoff scam any different?

If there's any lesson to be learned it's that traditional business models and metrics matter.

Today, any objective observer looking at General Motors would determine that GM is not, by any definition, a car company.

No, it's the world's largest nursing home with a small money losing operation that makes cars.

In spite of the fact that they employ the greatest minds in the automotive industry every car that rolls off the GM assembly line sells for an average of $900 less than it costs to produce. We can debate all day about the reasons, but--LISTEN UP CLASS--a company that continually produces products at a loss is not a viable business.

General Motors Chairman Rick Wagoner acknowledges that his company loses money on every car they sell. His public statements suggest a belief that they can make it up in volume.

Do you get the message folks?

If Americans will simply open up their grandchildren's piggy banks to them they're confident they can come up with a plan to sell more cars at a loss. Is it possible that he learned of this curious business strategy while pursuing his MBA at Harvard? If so, I'll take my degree from UCLA (The University on the Corner of Lexington Avenue) any day of the week.

As an independent contractor I have to file a Schedule C every year detailing business income or loss from my modest enterprise. According to IRS rules any business that shows a loss in three of the previous five years is not really a business at all, it's a hobby.

Now, if GM gets its way, independent contractors from coast-to-coast will have a wide variety of opportunities to report losses from fishing, golf, TV watching, snowboarding, jetskiing and every other diversion they can conjure.

In its own way GM can almost singlehandedly transform the American economy. Rather than producing goods and services, Americans will be able to focus all their energies on avoiding the production of goods and services. That is, of course, unless your business happens to be fishing tackle and golf clubs.

Perhaps the best part of this whimsical adventure is that next year President Obama will get to change the name of the Commerce Department to the Federal Bureau of Diversion and the Secretary of Commerce will forevermore be known as the Hobby Czar.