Become aware of IPTV



















Remember what television was like in the 1970s? There were no DVD players, not even VHS players yet -- you watched what was on when it was broadcast. If a movie came to television, it was over a broadcast network (no Netflix). For much of the 1970s, there wasn't even cable television, so you were stuck with a handful of VHF broadcast stations and (if you could dial them in) a few UHF stations where you might find reruns on tiny local stations for some "niche" content.

Television has changed dramatically since those days, but in a few years, the way television is today will seem as archaic as those memories of television back in the 1970s.

The reason is that the capabilities of your computer will be coming to your television, and the two will merge together. This may not seem too revolutionary, but it will be.

The capabilities of computers have been rushing ahead over the past dozen years, while the capabilities of your television have stayed roughly the same over the same time period (with some incremental increases, such as the replacement of VHS with DVDs, or the increase in visual quality ushered in by HD and the increase in size and display quality ushered in by LCD and plasma screens).

Think about some of the things that computers currently allow you to do that televisions do not, such as send content along to your friends and family through an email, or access the same content on any device you want to, from your desktop to your laptop to your handheld device (a Blackberry or an iPhone is really a small computer more than a telephone).

Those features are becoming available through IPTV, or the delivery of video content over networks that use internet protocols rather than the currently dominant methods (primarily cable). This change will be revolutionary not because of greater bandwidth (cable enables the delivery of tremendous bandwidth), but rather because of greater "interact-ability": with internet protocols (as we all know by now because of our use of IP with computers), you can have two-way communication, and you can have communities.

You can see an amazing documentary and email it to your friend. If it is something that would interest all the people from your college sorority, you can share it with all of them (or with any other groups that you join or maintain over computers).

Like other content that lives in the IP network (such as this blog, or your website), you will be able to access all of the video content that you watch on your television on any other device you choose to use, wherever you happen to be. You will be able to control that video with any other device that is on the network (you can use your iPhone as your living room remote, for example, or access your favorite sports team from your laptop while on a business trip).

Like other content that lives on the IP network, you will be able to create your own content. Your parents will be able to watch your HD broadcast of your child's soccer game live (or later on) in their living room in Des Moines (even if you live in Mountain View).

Like other content that lives on the IP network, you will be able to search for it using keywords. But, rather than just being an individualistic effort, your different social networks will also assist you in finding content, much as today (over the IP network) you may receive links to magazine articles or YouTube clips from your friends and family and colleagues.

Some of these capabilities are already available in the first-generation IPTV systems, and the rest and others will probably arrive faster than most people anticipate.

IPTV is going to be a major revolution, and it is just beginning. It is probably something that you should become aware of. It is also one of the heralds of the approach of the next paradigm shift that will be just as important and revolutionary as the paradigm shift created by the arrival of inexpensive computing power and its application to various aspects of life during the period from 1980 to 2000.

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Don't fear the current recession drumbeat















Recently, the "recession drumbeat" of those warning of the growing risk of a recession has been growing louder and louder.

Yesterday, for example, the stock market rallied strongly on negative comments from Fed Vice Chairman Donald Kohn, which market participants took as signaling a probable rate cut in the upcoming Fed meeting on December 11.

Today's front-page Wall Street Journal article discussing the rally featured a quotation from David Resler (Chief Economist of brokerage firm Nomura Securities International) declaring, "The risks that the weakness in this sector [housing] will pull the overall economy into a recession are rising by the hour." What exactly takes place in the housing sector on an hourly basis to threaten the economy with recession was not specified.

Bearish commentators, noting that the market recently (Monday) passed the official measure of a "correction" (a 10% from a previous high), made pronouncements that the upward moves of the last few days are just "dead cat bounces." Permabear Doug Kass published this article today on The Street.com entitled "This Dead Cat Won't Keep Bouncing."

While the market may indeed retrace upward moves that are predicated on a Fed cut (especially if the Fed deems that a rate cut is not needed), the increasing fear of a recession is overblown.

As we explained in this post, a large percentage of economists and journalists subscribe to the inaccurate "demand side" view of the economy, and this skews their vision and leads to questionable conclusions. Starting with "the consumer" as the fickle engine of the economy (fickle because they view the consumer as forever prone to becoming scared and not spending) the demand-side analyst is always afraid that the consumer will suddenly freeze up and usher in a recession. Current recession predictions generally blame "falling home prices" as the reason the consumer will go into hiding, as if most people buy their Christmas presents using home equity rather than money from their paychecks. The importance the demand side attaches to the "consumer confidence index" is another indicator of why they are always afraid that the moody consumer is always a bad mood away from going into hibernation and bringing on a recession.

However, this worry is misplaced. Healthy economies do not just slip into a recession. Recessions are more often created by misplaced government intrusion than anything else. The current conditions include continuing positive business earnings, lower unemployment percentages than at any time during the entire decade of the 1990s, and generally benign taxation and interest-rate environments. Business growth will always accelerate and decelerate from quarter to quarter, rather than growing at a smooth pace, but the economists we have found reason to trust continue to predict positive economic growth at rates much higher than the general (demand-side biased) consensus.

In fact, there have only been two official recessions, defined as two consecutive quarters of negative GDP growth, in the past twenty years, one beginning in July of 1990 and one beginning in March of 2001.

Similarly, although there have been many market "corrections" in the same twenty-year period (drops of 10% from a previous high), there have been only two actual bear markets (generally defined as a 20% or greater correction), both of which corresponded to the two recessions (there was also a "near-20%" correction in 1998, corresponding to the "Asian Contagion" credit crisis).

These two 20% corrections are depicted in the chart above, which shows the Dow Jones Industrial Average over the past twenty years, with the two bear markets indicated by yellow brackets:

July 1990 - October 1990 (Dow went from 2999.75 to 2365.10 which is a drop of 21.2% and which lasted 87 days).

January 2000 - December 2002 (Dow went from 11,722.98 to 7286.27 which is a drop of 37.8% and which lasted 999 days, the longest since the Great Depression).

While it is important to have cash reserves for market corrections (to prevent your being forced to sell securities at low prices in the event you have a cash need) and it is important to be alert for indicators that threaten an actual recession (such as increased government interference with free trade, increased intrusion into and regulation of law-abiding businesses, increased taxation, or unnecessary over-constriction of the money supply), the current recession fears are largely unfounded demand-side anxiety.

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Would you prefer options linked to your company or to the S&P 500?


In December 2006, this article appeared in the San Francisco Chronicle Magazine typifying the kind of journalism that surrounds the "active versus passive" debate.

The article recounts the education of "hundreds of impetuous young multimillionaires" at Google who were given lectures on the superiority of index investing from Bill Sharpe, Burton Malkiel, and John Bogle prior to the IPO of GOOG in 2004. Entitled "The Best Investment Advice You'll Never Get," the author suggested that any form of active management amounts to "get-even-richer investment schemes" and that the main reason everyone in the country is not investing solely in index funds is that "putting investors into index funds is simply not in the interest of the industry that sells securities."

In fact, as we outline in The Emperor's New Index Fund, there is a steadily-growing portion of "the industry that sells securities" that is doing very well indeed "putting investors into index funds."

The real question that should be asked in that article is how those "hundreds of impetuous young multimillionaires" became multimillionaires in the first place. The answer is the exact same answer that we outline in this post entitled The Classic Growth Stock Investing Philosophy, and the same method that has made most of the big fortunes in this country not only in the 1980s, 1990s, and this decade, but for the past two hundred years: through ownership of shares in a growing company.

Do you think new employees at Google would prefer to receive employee stock options that are tied to actual Google stock, or to the S&P 500? If Google's management truly believes that buying indexes is actually better than owning shares of exceptional companies, then maybe they should incent employees using S&P options rather than Google options.

Trying to own good companies makes sense -- in spite of the fact that most of the press now takes it as an established fact that trying to buy companies that are better than the average is foolhardy or somehow unsavory. Don't be taken in so easily.

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Happy Thanksgiving to all














As we head into Thanksgiving, many of the economic commentaries you hear on the radio or on the financial news media will be focusing on "Black Friday" (so named because retailers supposedly spend the entire year up to Thanksgiving "in the red," and then go "in the black" in a rush of post-Thanksgiving shopping).

Accompanying all this talk of Black Friday every year, and this year in particular, will be plenty of concern over the question of whether "the consumer" will be able to step up to the plate this year and at least get on base, or if he will strike out.

While the shopping appetite of "the consumer" is certainly important -- especially to retailers -- it is a mistake to believe that the consumer drives the economy. Yes, you've been conditioned to believe that the consumer drives the economy, and you've heard it endlessly repeated that 80% of the economy is driven by consumer spending, but it is actually not true that the consumer drives the economy. The consumer is able to spend (consume) because he has a job, and he has that job because of his part in the production side of the economy.

The reason most people believe that the consumer drives the economy is because most of the economists in the world are demand-side economists -- focused on consumption rather than production as the more important side of the supply-and-demand equation. The reason so many economists are demand-siders is not because demand-side economics leads to better conclusions (quite the opposite) but rather because the majority of economists are employed by the government and by academia, where demand-side thinking is entrenched, rather than in the sectors of the economy involved in actual production.

Economist and Professor Emeritus of Economics of Pepperdine University George Reisman outlines the vast philosophical divide between the demand-side approach to economics (which he calls "Consumptionism") and the opposite approach (which he calls "Productionism" but which is often called "supply-side" in the media and popular press) in an invaluable essay entitled "Production versus Consumption."

That essay, originally published in 1964, explains that the productionist sees "the fundamental problem of economic life as how to expand production" and takes for granted the desire to consume, focusing instead on "the ways and means by which production might be increased."

The positive aspects of the productionist approach are too numerous to detail in a blog post, but one very practical benefit is that the productionist approach is right much more often than the consumptionist approach. The last GDP figure was severely underestimated by the demand-side majority, while at least one "supply-side" economist, Brian Wesbury, nailed it within a tenth of a percentage point.

Another positive aspect of productionism (besides the fact that it is right and consumptionism is wrong) is that it sees that the integration of more people and more technology into the overall economy is beneficial and not harmful. Demand-side theory leads to the belief that if more people world-wide are working, they are taking jobs away from others. Thus it leads to a belief that foreigners, or people of other races, or women in the workforce, or people in other regions, or even robots, take away jobs and benefit one group at the expense of another. It is a "zero-sum" mentality -- a "fixed-pie" view of the world.

Production-side theory leads to the conclusion that the more people -- locally and worldwide -- who are able to join the economy, the better. It is not a zero-sum view of the world. As new value is added into the economy that wasn't there before (see this previous post discussing this subject), they will earn money (a place-holder for the value that they produce) and they will spend it, but the way they are enabled to spend is because they were first empowered to produce. In fact, their improved situation actually helps the entire system.

If robots working in Detroit enable more cars to be produced per worker, then there are now more cars per consumer than there were before. If workers in China are able to produce more goods more cheaply than were produced before, then there are now more goods per person available worldwide. More goods per person means that those goods become more affordable than before. If it used to take ten people to make one Corvette, and now it only takes one person to make one Corvette, then it stands to reason that you can now produce more Corvettes per person than you could before, and that more people can potentially acquire a Corvette. The pie has gotten bigger.

Regardless of whether you actually like Corvette cars (it was just a convenient mental example), this process is the story of the past century in the United States, and the reason behind the availability of a vastly greater supply of goods to a vastly greater percentage of society than were available in, say, November of 1907.

Something to be thankful for this year at Thanksgiving.

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Malpass hits nail on head












In his most recent Forbes opinion, Bear Stearns Chief Economist David Malpass hits the nail on the head.

He points to "the uncertainty in U.S. tax rates and the scheduled tax rate increases" as underlying explanations of what ails U.S. markets here in the last months of 2007.

We agree, and point out that we sounded the same note last week in a blog post entitled "What's really troubling the market?"

While the media is full of pundits proclaiming that the "deepening credit problems" are the major issue of the moment, it is naive to think that the market has not been pricing in the current credit problems for many months.

Certainly the problem has been front-page news since the summer, and professional market participants have been making models incorporating the extent of these credit problems and write-downs for some time. It is very possible that there will be some "write-ups" later, when the damage turns out to be less severe than the more pessimistic models anticipated.

Rather, it is more likely that the forward-looking market is now looking ahead to 2008.
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A word about insurance














Late last evening I received terrible news about the medical prognosis of a friend.

I don't talk about life insurance with my friends, but I know a lot about life insurance. Life insurance is not something you really discuss with your friends, even if you are in the habit of discussing the markets or specific investments with them from time to time. You won't read about it on most stock-oriented websites or hear about it on CNBC. But it is an absolutely critical part of your overall family financial perimeter and one we spend plenty of time examining when performing capital management. Just like other parts of the financial picture, there are many different approaches and plenty of strong opinions about which way is best, although people typically pay less attention to the insurance debate and are generally much less well-informed about it than about other areas of capital management.

Most people don't even know the difference between the various forms of permanent insurance (universal life, variable universal life, whole life, and so on) and typically rely entirely on term insurance, which carries much lower premiums and which is also the type of insurance usually provided through their employer.

Insurance needs vary widely from individual to individual and family to family, of course. Term insurance is an important component in your insurance picture and many people should carry some of it during their working years because it provides the largest benefit to the size of the premium. "Buy term and invest the difference" is a common mantra among those who provide investment advice, because they see the accounts where "the difference" is invested as the "main engine." In the statistically improbable event of untimely death during the term of the temporary insurance, the death benefit springs up to replace the main engine that did not get built.

But that is where most people's analysis of insurance ends, and they fail to go any further and see that these strong points of term insurance lead to its weak points and to the reason it should not be the only form of insurance for most families. First, most people will never collect their death benefit, because they are going to live through the term (this makes it by far the most profitable product that insurance companies sell, even though its premiums are much lower than the others). By definition, it does not create a long-term accumulation vehicle the way permanent insurance policies do. The "buy term and invest the difference" argument says it is better to create that accumulation vehicle somewhere else, where it can potentially earn a better rate of return.

The problem with that argument is in the fact that it provides no protection in the event of incapacitation that does not result in death. In the "buy term and invest the difference" scenario, serious incapacitation will likely lead to the loss of any ability to continue "investing the difference" somewhere else. Only one form of insurance, what used to be called "ordinary insurance" or whole life insurance, comes with the ability to buy a disability rider by which the insurance company pays the "invest the difference" premiums in the event that the owner becomes incapable of working. Whole life insurance with a disability waiver of premium rider insures the continuance of the building of cash value as well as the continuance of the insurance.

You can buy a disability waiver of premium rider on a term policy, but that only insures the continuance of insurance, not the continuance of building cash value (term policies do not build cash value), and the relative price of the disability rider on a term policy is much higher. You can also buy a disability waiver of premium rider on some variable life, universal life, and variable universal life policies, but these differ in an important way from those on a whole life policy in that the insurance company only pays the portion of the premium that applies to the insurance. In other words, these enable the continuation of the insurance portion (as does the disability rider on a term policy) but not the continued accumulation of greater cash value.

For this reason alone, regardless of its other beneficial features, whole life insurance deserves serious consideration among those who have children and who are still working towards significant wealth, even if they are the company's fastest rising star on the sales team, or even if they are working at a promising start-up that will probably have an IPO in a few years. Again, it is not a solution that works to the exclusion of term life but rather in conjunction with it, in most cases.

Further, whole life insurance has other features that enable it to work as an important part of the complete financial picture of families with significant wealth. You might be surprised to learn that families with balance sheets of ten million dollars and more often own more insurance than those with less than a million.

At Taylor Frigon Capital Management we don't sell insurance.

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Gambling, Speculation, and Investment















We draw a very important distinction between gambling, speculation, and investment.

Today, many prospective investors do not understand this distinction, largely because the term "investment" is often misapplied to activities which should more properly be identified as speculation, or even as gambling, as we explained in a Taylor Frigon commentary entitled "Gambling, Speculation, and Investment" published earlier this year and available in the commentaries section of our web site.

Another important aspect of this distinction -- beyond the differences outlined in that commentary -- is the fact that both speculation and gambling are forms of a "zero-sum game." New wealth is not actually created in either gambling or speculation: wealth is often redistributed, but new wealth is not created. If four people walk up to a high-stakes poker table, each with one million dollars, only four million dollars will leave that same poker table. At the end of the night, one player may have four million and the other players may have zero, but nobody will walk away with five million. No new wealth is created in a zero-sum game (hence the origin of the term "zero-sum" -- nothing is added; there is zero "summed" or added in the process).

In forms of speculation in the financial markets, this same principle is evident. If you want to place a bet (in the form of futures contracts, for instance) that the dollar is going to go down against the euro, then someone else must be willing to bet that the dollar is going to go up against the euro. If you and I walk up to the exchange with a million dollars each, and you think the dollar is going down against the euro, and I think it is going up, then at the end of the contract (at expiration) you may have two million dollars and I may have zero, but no new wealth is going to leave the exchange: it is a zero-sum game. This is true for speculation on the price of oil and other commodities, as well as for foreign exchange speculation (forex), as well as for bets on volatility (I might bet that an index will stay within a certain range of volatility, and you might bet against me and win if the index moves outside of that range).

Investment, under the proper definition of the term, is the allocation of capital to an enterprise that will actually create new value. In investment, therefore, new wealth can actually arise where it did not previously exist. You can easily see this process from familiar examples of recent years. At one point in the recent past, there was no such thing as an iPod (or iTunes); today, there is an iPod and iTunes. Something of value has been produced that did not exist before. The pie actually gets bigger: it is not a zero-sum game. The same holds true for the creation of cures that did not exist before, or services that made something easier that previously was difficult or impossible to accomplish.

A zero-sum game is a much more unstable foundation for the creation of long-term wealth. It is difficult to win a zero-sum game consistently for decades. Just as in the gambling world of Las Vegas or Monte Carlo, there is a cost to participate in each zero-sum game, so the odds are already stacked against the player and in favor of the house (in the world of financial speculation, there are transaction costs and commissions involved in placing bets using futures contracts or financial derivatives) . Additionally, when involved in gambling and speculation, the game is often constructed such that the effect of a mistake is magnified (think of the phrase "double or nothing," for example).

It our hope that the distinction between gambling, speculation, and investment would become more widely understood, so that individuals are less likely to engage in speculation and gambling when they think that they are actually "investing."

[Of course, there is a place for both speculation and gambling, but it is important to know when that is what you are doing, so that you can make a conscious decision about doing so. Also, it is quite likely that poker is not really gambling under the definition outlined in "Gambling, Speculation, and Investment," but is really a form of speculation. The picture of the 1956 book on poker depicted here is really a picture of monetary inflation over the last fifty-one years, showing the diminishing purchasing power of thirty-five cents].

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Don't hire a journalist to coach your team












Wealth management has become a buzzword among retail financial services firms.

The previous post outlined how wealth management -- which we call wealth allocation planning and capital management -- is a critical concept that encompasses investment management as a subset. If capital management is the science of examining your overall wealth allocation and then ensuring that your wealth is working as capital (wealth employed to create more wealth), then investment management is the day-to-day blocking and tackling required to run the capital that is committed to the financial markets.

For some time now, Wall Street has been preaching the need to divorce wealth management from investment management. If you are an investor who has substantial wealth, you will likely be familiar with the "wealth manager" who de-emphasizes his role in investment management so that he can "focus entirely on wealth management." For almost a generation now, those going to work in the retail financial services firms have been taught not to make the day-to-day buy and sell decisions on securities but to farm that process out to professional investment managers. In other words, the official story is that the wealth manager cannot and should not be an investment manager.

But this thesis is critically flawed, because it leaves the critical decisions of wealth allocation planning and management in the hands of someone who by his own admission does not have the time to stay on the pulse of the themes and trends of the business world and the interaction of corporate capital in the markets. Sure, he keeps up with it, and can even provide entertaining color commentary on what is taking place, but he is not on the field battling in the trenches every day.

In other words, would you want Vince Lombardi running your team or the guy who is up in the booth doing commentary? A reporter may know a lot about the game, but the experience of voicing opinions is vastly different than the experience of making the tough calls day-in and day-out.

Beware of the conventional wisdom that you hear in the world of financial management. The prevailing theory that wealth managers should not dirty their hands with the day-to-day discipline of real money management is a Wall Street truism that deserves closer critical examination.
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Manage your Capital















Investment management is a very important subject. It refers to the process by which you make your buy-and-sell decisions on financial securities over the years.

Important as it is, however, it is only part of the entire picture.

Your financial market investments are only part of your overall capital, and the financial markets are only one of the different places you can invest your capital in order to create greater wealth. Real estate is another form of capital investment. Investments in businesses that are not traded publicly on the exchanges are another. While not actual investments, insurance instruments that you choose to purchase are yet another place you may direct your capital.

Economists define capital as wealth used reduplicatively -- wealth that is employed in order to create more wealth. When you loan money to a bank and receive interest, you are using your wealth in a reduplicative manner.

When the bank gets your money, however, they are likely to be much more efficient in employing that capital to create more wealth. They may loan it out to someone who is buying a house, and receive 6% interest. The money doesn't stay in the house, however -- whoever sells the house puts that money back into the system somewhere, some or all of it may go right back into a bank. Whether it goes right back into the same bank or not is immaterial for this illustration -- if this home seller puts it into a different bank, then a different home seller may put the money he receives into this bank, but for the purposes of the illustration, imagine that the home seller puts all the money right back into the same bank that loaned it to the buyer at 6% interest.

Now the bank turns around and loans it out to someone who is buying a car, this time at 8% interest. Again, the car buyer gives the money to the car seller, and the car seller puts some or all of that money back into the bank. The bank will then lend that money out again, this time perhaps to a credit card user who makes a credit card purchase at an even higher rate of interest, perhaps 10% or 12% or even 18%. In other words, the bank has used the capital it received reduplicatively -- it has used it multiple times in order to make more capital. A corporation will do the same thing, always analyzing where it will get the best return on its capital when it decides where to direct the capital under its control.

Wealthy families and individuals should think this way also, although often they do not. Wealth is different than capital: wealth is defined by economists as goods with value, and it can take the form of money which is simply a place-holder for goods with value (when you produce goods of value in your business, for example, you can trade them for other goods with value but more often you trade them for money, which you can then exchange for other goods with value at a later date).

When wealth is used in order to create more wealth, then it is being used as capital and not simply as wealth. Like a corporation or a bank, a family or an individual should examine the entire balance sheet of all of their wealth.

In the late 1950s and throughout the 1960s, rock climbing techniques were developed in the Yosemite Valley of California for ascending the spectacular big walls and cliffs there. This "Yosemite System" later spread throughout the world and still forms the basis for the system of placing ropes and anchors to protect a climber against a fall (the ropes and anchors are not used
to help ascend the rock -- only to stop a falling climber).

At the basis of the entire system is the anchor -- the connection of the person to the rock (or to a tree), often using nuts wedged into cracks and occasionally using bolts drilled into the rock. The anchor is the foundation of safe climbing -- following the Yosemite System, the belayer at the bottom of the rope is usually held to the rock by a system of three anchors or more. Trusting to fewer than three anchors is risking death in the event of a fall by the lead climber.

Likewise, with your capital, it is important to build more than one anchor as you "climb." Capital directed to the capital markets, in the form of stocks and bonds, for instance, is a critical anchor. However, it is far better to have at least three anchors, for example in the form of real estate and in the form of insurance instruments in addition to financial market assets.

It is possible, with the proper capital management techniques, to use wealth in a reduplicative manner between and among these different anchors -- to use the rents thrown off by a piece of investment real estate in order to pay the premiums on an insurance policy, for example.

This process is properly called "capital management" and it is a larger category than investment management (it includes investment management inside it). Understanding the distinction is important.

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Video Games and the Future of Computing





















Video games have come a long way in the past twenty-five years!

The inimitable Peter Huber has this noteworthy post on Forbes online, dated yesterday.

It is worth a read on several levels, but one of the most important is the "entrepreneurial" level. Huber is describing the possibilities raised by "two woeful deficiencies" in digital life, and opening up vistas for the reader to see what is possible when the opportunities these deficiencies create begin to become reality.

To an entrepreneur, every frustration in life is a potential business model waiting to happen. Huber points out some areas of frustration in the computing world that most of us don't even notice -- we're ready to "settle" and accommodate ourselves to life's little frustrations. Even if we spend a larger percentage of our waking hours looking at a computer screen, we don't even notice that it is largely a two-dimensional display of information and we are beings that live in three dimensions most of the time.

But, as Huber points out, computer games have been three-dimensional for a long time now (in fact, Atari's Battle Zone was basically 3-D in many ways back in the early 80s, when many other games like Asteroids or Defender were still 2-D). And individuals with an entrepreneurial mindset are not standing still -- they will find ways to add value to the world where it doesn't exist now, by applying technologies in ways that Huber imagines in his article, for example, or in ways that he can't even imagine.

The value that it is possible to add in the world is literally unlimited. As Austrian-school economist George Reisman notes in Capitalism, "Considered abstractly, man's possession of reason gives him the potential for a limitless range of knowledge and awareness and thus for a limitless range of action and experience. [. . .] The potential of a limitless range of action and experience implies a limitless need for wealth as the means of achieving this potential" (43). In other words, no matter how much value he is able to add, his mind is able to race ahead and conceive the possibility of improvement. At all times, there is always a potential for the creation of more value.

When a company (whether owned by one person or by a group in the form of a corporation) is adding value, it creates wealth. The greater the value it adds, the greater the wealth it can create. It isn't just technology companies or new companies which add value -- if a company stops adding value, eventually people will no longer buy its goods or services. Finding companies with the potential to continue to add value faster than the average company is a critical aspect of growth stock investing.

It is by aligning with companies who are adding value that investors can become wealthy (in addition to creating value themselves in the company they work for). As Huber states at the end of his article, "never fall into the trap of believing that things are slowing down and the dominant companies are settling in."

There is limitless potential for value addition. This fact is a key concept for the entrepreneur and for the investor.

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What's really troubling the market?














As explained in the previous post, at Taylor Frigon Capital Management we do not advise families to build their investment foundations on an attempt to predict this cycle or that cycle. All the loudspeakers of the giant financial retail firms and the financial news media are constantly blaring a message that you have to time cycles -- cycles of the dollar, cycles of the Fed, cycles of quarterly economic acceleration or deceleration.

However, the shorter the cycle you are chasing, the less you build your foundation on the real source of wealth in this country for the past one hundred years. That foundation should be "ownership of successful business enterprises which continued to grow and prosper over a long period of years."

If you are focused on that goal, then you will want to examine a company's leadership and its business fundamentals very carefully -- because you may own that business (if all goes well) for "a long period of years." You are less apt to care about the management team if you are only going to hold the company for a few weeks because you chase short-term cycles.

It is better to focus on a longer period than the loudspeakers of the financial world tell you to focus on, and to watch different indicators that are more important to creating the kind of healthy long-term environment in which a company can thrive. Instead, pay attention to indicators of economic freedom: the level of taxes and regulation placed on the economy, for example.

Right now, the short-focus commentators are atwitter with diagnoses of the recent market turbulence that suggest the market is shaky because of the continuing mortgage and credit problem, and that the "weakened consumer" is going to bring the economy into a recession.

This diagnosis is short-sighted. The economy has accelerated strongly during 2007, with the third quarter GDP number blowing past analyst estimates, and the most recent productivity growth number the highest since 2003 (and also blowing past analyst estimates). The credit problems have been priced into the market since the end of the summer and are largely "past history" to the forward-looking market.

More likely, the market is upset right now because it is looking forward into 2008 and seeing the possibility of an election that will bring higher taxes and greater regulation in years ahead. This possibility may well be weighing on the market in spite of generally strong economic growth numbers and earnings reports.

Markets like the one we are in now happen from time to time, and it is times like this that make it so important to be a long-term investor with a longer-term perspective than the one the financial world dictates that you should have.

We wrote more about the importance of having the right time perspective in a commentary entitled "What Hasty Investors Could Learn from an Ent."

You can read this and other Taylor Frigon investment commentaries in the commentary section of our web site.
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The Classic Growth Stock Investment Philosophy












Taylor Frigon Capital Management LLC has deep roots in investment management.

Our investment philosophy is directly descended from the growth stock theory developed in the late 1930s by Thomas Rowe Price, Jr.

Because Mr. Price was a money manager and not an academic, he did not publish books or dissertations about growth stock investing. He produced portfolios. Because of this fact, it seems that there is less literature surrounding the growth stock theory of investment than other investment management styles (such as value investing). As a consequence, growth stock theory is less understood and is often completely misunderstood.

During the 1990s in particular, the popular understanding of the term "growth" had been distorted into something very different from the original meaning. Mutual funds with the word "growth" in their label were often characterized by extremely high turnover of stocks (sometimes in excess of 200% turnover per year) and the purchase of companies with little or no earnings. What should be called "momentum investing" was often called growth investing and the two were seen as interchangeable, when nothing could be further from the truth. Investors came to think of "growth" stocks as speculative plays on companies with huge potential that made current fundamental measurements unimportant.

However, this popular misconception of the concept of growth investing is quite opposed to the sense Mr. Price wanted to convey when he coined the term in the 1930s. In a paper entitled "A Successful Investment Philosophy based on the Growth Stock Theory of Investing," which he wrote in April of 1973, Mr. Price explained that "In the early 1930s, after 10 years experience in the investment business, several things were learned which helped to formulate my investment philosophy." Specifically, he noted that neither he nor anyone else (including the big investment houses and stock market firms) had the ability to correctly forecast the trends in the markets to the extent that they could base a long-term strategy on calling the next move correctly, year-in and year-out. "The various systems usually failed at crucial turning points in the market," he noted.

Instead, Price developed what he called the growth stock theory of investing, which meant NOT trying to call the next cycle but instead "retaining ownership of successful business enterprises which continued to grow and prosper over a long period of years." Most of the big fortunes in the 1930s (he noted) were made by men who did not attempt to time the ups and downs of the business and stock market cycles. Fortunes were made by owning great companies back then -- and if you think about it, that is exactly the way most of the big fortunes have been made in this country in the 1980s, 1990s, and in this decade. When Price coined the term "growth," he meant a philosophy that tried to make money the very same way: by owning good businesses through the up and down cycles, rather than trying to time those cycles.

This is very different from the picture most investors have of "growth" investing as it is depicted in the "style box" simplification used by tens of thousands of retail "financial advisors" and those in the financial press.

The classic growth stock theory, in the words of Rowe Price, looked for "capable, dynamic management operating in a fertile field for future growth." He set out a variety of fundamental criteria, including parameters for return on invested capital, profit margins, and annual earnings growth.

Ultimately, the investment philosophy based on the growth stock theory of investment places the long-term financial health of a family on a foundation of sound businesses, as opposed to investment theories that place long-term success on a shaky foundation of trying to call one or more market trends (such as trends in this sector versus that sector, this currency versus that currency, trends in the direction of interest rates, or trends in the direction of the price of oil or some other commodity, among countless other trends).

Basing your financial future upon the ability to call the next move in the price of oil is extremely hazardous. Even if you are better than the next man at doing so, the possibility that someone would be able to call those moves correctly for thirty years, day-in and day-out, is dubious.

At Taylor Frigon Capital Management, we are proud of our heritage as practitioners of the classic growth stock theory of investment for over twenty years. Please stay tuned to the Taylor Frigon Review for more information about investment management, and about the larger questions of wealth planning.

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