Happy New Year!

We wish all of our readers and clients a very happy and prosperous New Year!

2012 is sure to be a very interesting year for investors with much to look forward to and many opportunities for those who stay patient and disciplined and look to take advantage of owning great businesses at values not seen in decades!!
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Seasons Greetings and Warm Wishes

Seasons Greetings and warm holiday wishes from all of us here at Taylor Frigon Capital Management!

Above, a wreath at the General Grant tree in Sequoia and Kings Canyon National Park rests in the snow. The General Grant tree was designated "The Nation's Christmas Tree" by President Calvin Coolidge in 1926, after a little girl visiting the tree was overheard to remark, "What a lovely Christmas tree that would be!" at the sight of the massive sequoia. The story of how that came about is related on the home page of the Sanger, California Chamber of Commerce here.

The tree is also the only living, federally-designated monument to U.S. military men and women who have lost their lives in service to their country.

We wish all our readers a very safe and happy holiday season this year.
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The fantasy world of modern portfolio theory

The calendar year of 2011 will soon come to a close, and active managers will be watching to see how the performance for the year will turn out.

Many who hire active managers will also be watching closely, and will be judging whether or not they should continue to keep their investments with this or that manager based upon the outcome when the market closes on Friday, December 30.

Others, who disavow active management, will be watching in order to see how many managers failed to "beat the market" (or beat their benchmark) so that they can declare that "active management doesn't work" and that everyone should "just index."

While we believe that keeping score is important in investment management, we don't agree that the emphasis placed on a calendar year is the best way to determine whether any particular manager is doing a good job, nor is it the best way to determine the broader question of whether active management is better than (so-called) passive management or vice versa.

For starters, we have argued that investors often have far too short-term of an attention span when it comes to committing capital to businesses, much the way that the Ents in J.R.R. Tolkien's Lord of the Rings criticize hobbits for being too hasty. Would anyone select a money manager based upon whether or not his overall portfolio of investments went up or down on a single day? That would be ridiculous. How about based upon whether or not his portfolio outperformed "the market" or some other benchmark during a single day?

If you had a friend who told you that he moved his life's savings from one manager to another based upon which one did the best the day before, you might (like Treebeard) advise him, "Don't be so hasty."

The same could be said for jumping to conclusions about whether active management is better than passive management. It would be ridiculous for financial commentators to publish reports declaring "Several prominent active managers underperformed the market yesterday, leading to the conclusion that active management may not be the best way to invest."

We would argue that, while better than a single day, a single calendar year is not the most useful time period to select, but that investors should instead focus on longer periods, and should consider start and end points that are less arbitrary than the annual calendar but which correspond instead to major economic events (such as from one recession to another).

More importantly, the broader question of active versus passive management should not be decided based upon arbitrary and short periods of time. If active managers beat the market or their benchmark in one year or even in two or three consecutive years, some critics will always be waiting to pounce on them in a year that they do not, in order to declare that the mathematics are irrefutable and that nobody can beat the market in the long run. More precisely, these critics will often argue that anyone who does beat the market for a few years does so by taking "excessive risk" which could have been avoided by owning more securities. Since no one can really beat the market without undue risk, the passive advocates argue, then it is best to just buy the market -- that way, you will get the best possible return for the amount of risk that you take.

The mistaken idea that passive management is the best way to invest is one outgrowth of a much larger academic theory called "modern portfolio theory" which has slowly expanded its influence in the investment world, beginning in 1974. We have written about its problems numerous times in the past, such as in this previous post. The distinctive concept at the core of this theory is the idea that risk can be captured in mathematical formulas, and that because it asserts that risk is mathematically linked to potential returns, its advocates believe that mathematical analysis and diversification can point investors to the optimal level of risk and return for their investment profile (the so-called "efficient frontier" is an example of this concept).

This seemingly harmless idea manifests itself in many different ways in the investment industry, one of them being the idea that owning indexes with hundreds or even thousands of individual securities provides better "risk-adjusted return" than owning a smaller number of carefully-selected securities. If you think about it carefully, you will be able to see that this idea (which is at the heart of the "just index" or "passive investing" argument) was also behind the construction of the various structured investments and synthetic vehicles full of sub-prime mortgages which banks and other financial institutions bought under the illusion that enough diversification and the right mathematical models would make the analysis of the individual loans unnecessary. This fantasy led directly to the disastrous financial meltdown of 2008 and 2009.

In this regard, modern portfolio theory resembles the kung fu seen in certain martial arts movies like the one above -- it's a nice fantasy, but it is completely divorced from the real world. Thinking that its mystical precepts will keep you from ever getting cut in a real knife-fight could have disastrous consequences.

It is our conviction that in the real world of investing, there will be times when good investments are out of favor and therefore perform "worse than the market," whether for a day, a month, or even a year. The idea that owning a small number of good investments (even if they sometimes go in and out of favor) is "risky" but that owning a huge number of unexamined investments mitigates risk is actually a dangerous fantasy, and one that unfortunately is pumped out to viewers and readers daily by the financial media in video, magazines, and books. Investors who are tempted to buy into this fantasy should be cautioned that modern portfolio theory's vision of investing is as divorced from reality as mystical movie kung fu is from real fighting.

For investors who want to practice real investing, we would advise that finding quality businesses is not as difficult as they might think -- we have discussed criteria for doing this and provided several examples in previous posts (a list of some of them can be found here). They should then plan on owning those companies through the inevitable ups and downs of the market for long periods of years (this does not mean holding them forever -- we discuss sell discipline in other posts such as this one -- but rather owning them until the business signals that it is no longer the kind of business you want to own, instead of relying on the market signals that so many investors and pundits focus on).

Take a look at the kind of returns an investor could have experienced if he had purchased shares in Wal-Mart in 1982 and owned them through 1992*. Look closely at the chart and you will see that there were plenty of ups-and-downs along the way, including some sudden and rather severe drops: what would that investor have missed if he had been listening to what all the pundits were saying or if he had the mistaken idea that owning a tiny piece of a truly great company could be done without ever taking some hits and receiving some bruises?

Understanding this perspective is the first step towards building a strategy that is based on principles that investors should be focused on, instead of building one that is based on the fantasy of modern portfolio theory and its quest for "risk-adjusted return." It will also enable investors to see most of what appears in the financial media for what it really is -- entertainment that might offer an enjoyable escape into a fantasy world, but which should not be confused with reality, and actually isn't even as fun to watch as a good old-fashioned kung fu flick.

* At the time of publication, the principals of Taylor Frigon Capital Management did not own securities issued by Wal-Mart Stores, Inc. (WMT).
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Have you heard of this company? PNRA

While most of the financial world focuses on Europe and waits with bated breath for every new development in Greek parliamentary voting, S&P sovereign-debt rating, or ECB bank-lending stimulus, we would like to point out that economic indicators in the US have been showing modest but real progress.

Without downplaying the importance of the issues that are at stake in Europe (which we believe are extremely important issues, and which we have discussed in this and this recent post), we would suggest that investors might want to pay attention to some of the companies in the US that we think are well-run and positioned in front of what we call "fertile fields for future growth."

One such company is Panera Bread*, which operates a chain of "fast casual" restaurants which they call "bakery-cafes" distinguished by fresh-baked artisan breads, hormone-free chicken, all natural ingredients, and a dining atmosphere that very different from a typical "fast food" establishment.

Panera Bread calls their concept "fast fresh," which points to one of the reasons that we believe the company is operating within a larger paradigm shift that may constitute a "fertile field of growth." The explosion of the fast-food restaurant concept during the 1950s through 1980s corresponded with a paradigm-shift in pace of life in the United States after World War II. The tradeoff consumers made, however, was in the healthiness of the meal -- you don't always feel very good (or very good about yourself) after consuming a fast-food meal.

Fast-fresh seeks to counteract the negative aspect of traditional fast food without sacrificing the main positive aspect of the fast-food concept (the "fast" part). Instead of plastic decor, bright and unnatural colors, and mass-produced bread, Panera features fresh-baked breads (fresh dough is delivered daily from strategically-located fresh-dough facilities that have an optimal distribution radius of 300 miles), a healthy menu, and a natural ambiance emphasizing earthy colors and free wi-fi.

The history of the company provides a clue to another paradigm we believe is important to the investment thesis. In 1976, a French oven manufacturing company created a showcase restaurant in Boston's newly-renovated Faneuil Hall Marketplace, dubbed Au Bon Pain (French for "with good bread"). In 1978, investor Louis Kane bought the restaurant and began expanding in the Boston area. In 1981, he was joined by political consultant and cookie chain regional manager Ronald Shaich, and together the two began pioineering a new concept in fast-food, the bakery-cafe.

At about the same time, in Kirwood, Missouri, a man named Ken Rosenthal was appropached by his brother about starting a business based on the sourdough bakeries popular in San Francisco. Ken and his wife traveled to SF, learned sourdough baking methods, and founded St. Louis Bread. The concept was successful, and they began expanding slowly over the next few years. By 1993, they had grown to twenty cafes. At that time, their business was acquired by Au Bon Pain, which had gone public in 1991. The concepts of the two companies were very similar, serving breakfast and lunch and featuring baked goods, made-to-order sandwiches, soups, salads, and locally-roasted coffee.

Eventually, the Au Bon Pain line was sold to a private equity firm and the remaining St. Louis Bread bakery-cafes were branded as Panera Bread bakery-cafes (except in St. Louis itself). The company has now grown to over 1,400 locations.

The interesting thing to note about this story is that Panera's success appears to be built in part upon the expansion of an urban phenomenon into suburban, "ex-urban," and even "sub-rural" markets. The concept of a "corner bakery" is an urban concept, and the convenience of having fresh-baked bread available in the neighborhood, and the cultural phenomenon of having neighborhood delicatessens and bagel-shops, are primarily an urban phenomenon in the United States. Panera has built a business model based on capturing the benefits of this primarily urban experience and exporting it to non-urban settings (suburban, collegiate, upscale rural, etc).

The company, of course, continues to have a significant presence in cities, but that is not surprising -- by making a successful urban concept repeatable, they can compete in cities as well, gaining economies of scale and using their superior resource base to their advantage.

Finally, the company faces an attractive potential field of growth in the large portions of the country where there are still few or no Panera Bread bakery-cafes. Our internal analysis suggests that, if the saturation level of Missouri can be projected to the rest of the US, the country is still under 50% penetrated in terms of the addressable market for the Panera Bread concept.

This is an example of the type of company that we look for as a potential destination for investment capital, and the kind of growth story which we seek to connect our investors with so that they can participate in the company's future earnings.

To read about other companies which we believe exemplify some of the same criteria, please visit this previous post, which contains a description of a different investment thesis and links to others we have published in the past.

* At the time of publication, the principals of Taylor Frigon Capital Management own securities issued by Panera Bread (PNRA).
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The biggest lesson from Europe

Six central banks -- the ECB, the US Fed, the Bank of England, the Bank of Japan, the Bank of Canada, and the Swiss National Bank -- rushed in to the European crisis today by taking steps to ensure liquidity for banks (essentially, lowering the cost of lending backstops that European banks can use as a source for short-term liquidity).

This was obviously a coordinated plan that had been prepared beforehand, probably for use in the event of real emergency (the collapse of a major European bank, for example, as Jim Cramer speculated this morning on CNBC). It is thus another example of "too big to fail" in all likelihood.

Before anyone explodes in anger at yet another example of those now-hated words (which have become so well-known that they are sometimes simply abbreviated TBTF without needing explanation), let's ask a few questions about why too big to fail has become the order of the day.

There is a line of argument which says that no bank should be "too big to fail," and that if banks make stupid loans, they should pay the price and go bankrupt if those loans don't pan out. After all, if those loans do work out, the banks get the profit, so why should they get the profit when their risky loans turn out well, but spread the cost of their failure to everyone who pays taxes, or to everyone who is forced to use a currency that is devalued over time?

However, there is a problem with this line of argument. For one thing, there is the moral problem that arises from the fact that the banks were often forced into making some of those risky loans in the first place (by governments, who have plenty of leverage over banks and can make life unbearable for them if they don't make loans to people or countries that the government wants the banks to loan to).

You can decide for yourself if it seems right for governments to coerce banks into making risky loans, and then to stand back when the loans go sour and shake their heads and say, "Well, I guess you never should have made those risky loans -- now you have to pay the price, by the laws of the free market!" We can look back in recent history and see plenty of examples that follow the same exact pattern.

Everyone in the US is angry that the government "bailed out" banks who held lots of subprime mortgage securities, but the citizens shouldn't be too angry, since they elected the government officials who passed laws forcing banks to loan to less-than-creditworthy borrowers (Congressman Barney Frank, who recently announced his retirement, was one of the primary culprits in pressuring the banks to loan to borrowers they would not otherwise loan to, and he will be replaced as the ranking member of the House Financial Services Committee by Representative Maxine Waters, who was just as aggressive).

Similarly, during the Latin American debt crisis of the 1980s, US banks had been told by the US government to lend at below-market rates to Latin American nations such as Mexico, Brazil and Argentina. When those countries found that their income (in the form of taxes, which come from the earning power of their businesses and the earning power of their citizens) was not enough to pay for the interest on the debt they had racked up, it would not have been right for the US government to simply let those banks swing as a penalty for lending to risky borrowers. They were forced to lend to those risky borrowers.

The same scenario is now playing out in Europe.

Further, while it does impress some people to talk tough and say, "I wouldn't lift a finger to help these banks -- they need to learn their lesson," the problem is that "teaching the banks a lesson" could entail collateral damage that goes far beyond the banks and causes severe harm to many innocent bystanders. Is "teaching the banks a lesson" worth the risk that ordinary citizens might be unable to access money that they have in money market funds for an unknown period of time, for example? If ordinary citizens can't access their money, it would cause all kinds of disastrous problems for families and small businesses. Is that a worthwhile price to pay in order to "teach those banks a lesson" about loaning to risky borrowers (especially when the government made those banks make a lot of those loans in the first place)?

To take this position is almost equivalent to saying, "If kids are playing with matches, you have to let them burn down the house sometimes -- it teaches them a lesson -- and that's just tough if they get burned to death in the process, along with a few of the neighbors."

The bottom line of all this is the fact that "you can't have just a little bit of socialism."

When governments interfere with banking, even if it's just a little bit, it eventually results in situations just like the one that is unfolding right now in Europe. First, the government meddling tends to result in expanded lending activity to borrowers who would not otherwise get loans (and at terms that those borrowers would never be able to get under a purely "free market" situation). This happens both because governments feel they can tell banks to whom they should loan and also because banks become more willing to lend to people or governments they would not otherwise lend to, as long as the government promises to pick up the tab if those loans don't work out (have a look at our previous post on the Solyndra debacle, for a recent example).

After the first result (expanded lending to people and/or governments who would otherwise not get loans, or who would otherwise have to pay a lot more for those loans), the second result is rather obvious. When all that artificially-expanded credit begins to go sour, the government sails in with other people's money in order to prevent the whole house from burning down. Once even a "little bit of socialism" gets added to banking, TBTF becomes an inevitable acronym of banking.

The sad fact of the matter is this: there is a market rate for borrowing that is based on creditworthiness, and if you want to subvert that rate, you will end up with inevitable losses. Loaning lots of money to people or nations with terrible credit histories will always mean that some of it is lost, and if you don't charge them high enough rates to cover those losses, you will have to get the money from someone else to cover those losses. The place that governments get that money is obviously from everybody else, either in the form of higher taxes or in the form of inflation and the slow loss of their purchasing power over time, or both. As Milton Friedman famously said numerous times, in economics there is no free lunch.

Yesterday we published a post about some other lessons from the current European crisis, but we believe the topic of this post is the biggest lesson out of the entire European situation. We have been talking about today's action which was probably taken to prevent a bank failure, but the question of government involvement in banking, lending, and bailing out is related to what we have called "the question of our time," because bloated spending by governments is directly connected to easy credit and borrowing, interference in banking, and ultimately the devaluation of currency. The pensions and other government entitlements that some Europeans have been enjoying on borrowed money are now going to be paid for by everyone else, but this should not come as a surprise.

Once people, through their elected leaders, decide to abandon the principles of free market capitalism, the socialization of losses and "too big to fail" become inevitable consequences. Everyone pays.

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Another lesson from Europe

Over the Thanksgiving weekend, data for shopping activity in the US blew away the forecasts of most economic prognosticators. Sales for the full weekend (from Thursday to Sunday) were up 16.4% over the previous year -- an astonishing increase and an all-time record in terms of dollar value spent during the period.

This data should indicate that the US is not in the middle of a Great Depression, in spite of the constant pessimism on display throughout the financial media and the confident predictions by numerous pundits over the past six months that a double-dip recession was on the way. We have been on record opposing the pessimistic conventional wisdom about the economy for some time now see here and here for example), so we were not at all surprised by the strength of the numbers.

We'd like to go out on a limb a bit and suggest that the conventional wisdom over the European debt crisis may be overlooking some positive angles there as well.

One of the most consistent themes among commentators on the European debt crisis is the refrain that Europe is a preview of America's future -- that the US is resembling Europe more and more, and that if we're not careful, we will end up like Greece or Italy (in some cases, the argument is made that the US will end up like Europe no matter what -- it's too late to avoid the fate of Greece, and the only question is how long it will take).

For example, here is an article published earlier this month by Dan Mitchell of the Cato Institute and the Center for Freedom and Prosperity, entitled "US should learn from Europe's Welfare State Mistakes."

We agree with Dan Mitchell on just about everything he says or writes (you can see previous posts stretching back for many years in which we have cited his work or embedded his videos, for example here or here). We even agree with the arguments he makes in this article, to the degree that entitlement programs in the US (particularly Medicare but including a host of others as well) are unsustainable, and that planned entitlement program expansions will bankrupt the country if they are not fixed.

However, we do not agree that the only important lesson of the European debt crisis is that the US needs to learn from Europe's woes. In fact, we would be so bold as to suggest that this crisis has been beneficial in revealing that Europe needs to learn from the US, and that some of the early indications appear to show that Europe is learning from the US model and may be moving in the right direction! How's that for an opinion you aren't hearing in any other financial commentaries or analyses?

For starters, Europe created a common currency (the euro) in order to try to have the same kind of commonality enjoyed within the US (a worthy goal -- can you imagine how difficult and expensive business would be if California, Virginia and Alabama were each able to print their own money and pursued different monetary strategy regarding the strength or weakness of their currencies?).

However, they created that common currency without any sort of fiscal unity, so that member states were left to their own devices on questions of how much they could spend on welfare programs and other budget items, as well as on questions of how to raise taxes to pay for that spending. Predictably, some member states were more responsible than others, and they have started to get upset about the fact that they are now having to bail out the irresponsible parties without any mechanism for changing the profligate behavior of their more irresponsible neighbors.

In the US, there is a governing body that is capable of imposing a unified tax-raising policy on all the member states -- it's called the federal government. The unified tax-raising policy may be inefficient and byzantine (as we have argued in other previous posts, such as this one and this one), but that is a very different problem than the one that the more financially responsible European states are currently facing as they prepare to bail out their less responsible neighbors.

Even more importantly, one of the most important lessons of the European crisis is the need to enable innovation and economic growth within an economy. The countries in Europe that are having the biggest problems paying their debts are those which make very little money, because they have built economic systems that stifle innovation and make business difficult. Those that are in better shape -- and Germany is in the best shape of all of them -- are the countries that have boosted production and economic growth by getting out of the way of businesses.

In other words, it is true that if you have too much credit card debt, one thing you should do is start spending less (and America certainly falls into this category). But the other solution is to start making more money, and the way to do that is to create an environment that allows for innovation and business growth.

In this regard, our assertion that Europe can learn from the US is perhaps most telling. Even Germany's economic growth is somewhat anemic by US standards. Even with the increased regulations and government intrusions that have blighted the US economic landscape over the past eleven years (starting with Sarbanes-Oxley and accelerating through Dodd-Frank), the US remains an easier place to start a business or pursue a new innovation than almost any one of the European nations. We may have compared California's self-inflicted economic woes to those of Greece in previous blog posts such as this one (and they are similar), but the difference is that Greece does not have a Silicon Valley that produces much of the world's most innovative technologies, nor does it have a Hollywood that produces much of the world's entertainment content, nor does it have a Great Central Valley that produces much of the world's food.

So, we would argue that the lessons of the current European crisis do include the warning that many have sounded, about the dangers of the US heading further in the European direction. But, we would also argue that an important lesson, and one that many appear to have overlooked, is that Europe really needs to move more in the direction of the US.

If Europe really wants to foster the kind of economic growth and innovation that it needs to get out from under the credit problems some of its member states have created, it should look at steps that will create a uniform business-friendly environment throughout the continent, with relatively lower levels of government spending, lower levels of regulation, lower barriers to the ability to start a company, and more fiscal unity providing methods to impose discipline on countries that don't play by the rules.

We realize that Europe is an incredibly complex region and that getting to such a state of affairs may be impossible, and would certainly be extremely difficult even if all the member states decided that it would be a good idea.

The good news is that some in Europe appear to have gotten this message, and are making some real steps in that direction.

This is a very big topic and cannot be completely addressed in a short blog post, so stay tuned for more discussion on the subject in future posts.

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Happy Thanksgiving 2011

We would like to take this time to wish all of our readers a very warm and happy Thanksgiving. This of course includes our readers around the world, who can also share in the special message of this most American of annual holidays, wherever they may be.

As always, Thanksgiving is an opportunity to reflect upon and be thankful for the blessings in our lives.

In the United States, we certainly have an abundance of things to be thankful for, chief among them being a system which preserves human freedom and thus allows individuals to try to improve their situation by starting businesses, changing jobs, gaining new skills, and otherwise working to make things better. The byproduct of the free choices of individual Americans over the centuries has been a host of innovative products and services, new companies and new industries, medical cures and bounteous farm produce, all of which have enormously improved the world and created more wealth and prosperity than has ever been seen in human history.

Thanksgiving reminds us of this fact, and the humble origins of the holiday itself remind us that none of this was automatic: the first Thanksgiving on these shores, in 1621, was celebrated by a band of Plymouth Bay pilgrims who were not guaranteed of anything, including continued survival, and who would probably not have survived had it not been for the techniques taught to them by the Wampanoag Indians who were also present, and who brought the main course.

All of this is doubly pertinent this year, coming on the heels of nationwide protests by many who appear to be either misinformed about the freedoms that create such economic progress (and we would argue that the ability to start companies with limited liability, and the right to pay employees including CEOs as much as you want with privately-owned money fall into the category of "freedom"), or who are openly hostile to systems that give individuals and businesses such freedoms and who would rather have a system in which government bureaucrats or other dictocrats tell people what they can and cannot do instead.

We recently saw a video from a commentator named Bill Whittle, who with cutting insight suggests that the very prosperity that our system of freedom has created may in large part have led to the entitlement mentality so visible among many of the recent protestors. He proposes that some real exposure to the elements for just a few days each year might lead to a real change of views, and his arguments make some pretty good points about the benefits we often take for granted.

It occurs to us that the message of Thanksgiving is nearly the exact opposite of the mentality of "entitlement." We hope that perhaps the annual observation of Thanksgiving will renew the wonder we should feel at the incredible bounty that the attempt (however imperfect) to institute a system based upon human freedom has unleashed since America was founded.

For readers who would like to revisit our previous four years of Thanksgiving messages on this blog, you can do so by following these links: 2010, 2009, 2008, 2007.

We wish you all a very wonderful Thanksgiving.

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I'm glad I actually opened my account statement!

Anecdotally, we have now had more than one private client call us to say something along these lines:

"I was afraid to open my statement, knowing that things must certainly be going off a cliff, and when I finally did look at it, I was surprised to discover that things were far better than I imagined!"

Why would clients be so afraid to look and so sure that everything is "going off a cliff"? No doubt this feeling is due to the constant barrage of negative news coverage served up by the financial media for the past three months. Of course, the vicious market sell-off that accompanied the initial crescendo of fear during the month of September and into the first few days of October didn't help either. However, clients are surprised to learn that major market indices such as the S&P 500 are actually positive for the year right now (see this page for S&P data, for instance).

The financial media has a tremendous bias towards accentuating a perceived crisis -- any crisis -- because they know that such reporting drives viewers to stop what they are doing and hang on every word out of the media talking heads. This trend has been going on for some time -- since the dot-com crash, in fact. Before that (back in the 1990s), the financial media took almost the opposite tack and attracted viewers by reporting with wild optimism. We believe this trend is extremely dangerous for investors, because it gives them a false view of reality. The anecdotal comments we are hearing from clients, described above, appears to support this conclusion.

The economic data, as well as corporate earnings at many businesses, tell a very different story. All sorts of measures indicate that the economy is not going off a cliff but is in fact growing modestly (some businesses, of course, are not growing, while others are growing quite rapidly, particularly if they are involved in certain industries that are undergoing major paradigm shifts).

We have been cautioning investors on the pages of this blog for some time now that the dire predictions of many media pundits and market commentators are overblown and overly pessimistic (see here and here for some examples). Pessimism is in vogue right now, and optimism is out of fashion. However, we believe it is very important for investors to tune out the financial media and focus on actual business measurements. In fact, we have always said that trying to time economic ups and downs is folly anyway and that investors should focus on business fundamentals rather than economic predictions.

Certainly economic growth could be much better than it has been in the almost three years since the 2008-2009 recession began to turn around, and growth has been hampered by a host of government intrusions and mis-steps that have hurt everyone. However, the constant flood of financial negativity that has been hitting citizens from virtually every angle lately has created a perception in most people's minds that is entirely different from reality.

This is a very important topic and deserves careful consideration.
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Why you can't pay off your home loan with Monopoly money

First Trust Chief Economist Brian Wesbury recently published an outstanding one-page explanation of some of the underlying issues surrounding the ongoing eurozone debt crisis.

Entitled "The Drachma is Dead, and so is the Welfare State," it is an excellent primer on the topic of strong currencies versus weak currencies.

For those who might be wondering why Europe doesn't just kick certain countries out of the eurozone and let them go back to their old currencies (such as the drachma for Greece), Mr. Wesbury abundantly illustrates why that is not an option. Those who suggest such a remedy are implying that if Greece had their own currency, they could inflate it to help pay off their debts -- the reason Greece is in such a jam is that they cannot use this common method sovereign governments (including the USA) use to escape debt. The problem is that lenders to whom Greece owes money would not accept drachmas as payment for loans that were made in euros.

It's the same reason your bank won't let you pay back your home loan with some unreliable currency, such as Monopoly money: they don't have any way to be sure you won't go print out a bunch more of it, leaving them stuck with worthless dollars in return for the real dollars that they loaned to you. (Lenders wouldn't mind accepting Monopoly money -- or Greek drachma -- for debts, as long as they were tied to something that you can't print out at will, such as gold).

Mr. Wesbury's piece also gets to the deeper issue behind this whole drama: the question of whether the unsustainable costs of excessive welfare and government giveaways should be borne by everyone, or by those who depended on the government for guarantees and promises that proved to be too optimistic. For it is when governments inflate their currencies that their money-creating ways drive the cost of everything higher, slowly taxing everyone using those currencies. This approach especially hits hard those who save money only to find it worth less when they want to use it.

He points out that the choice most governments take is pretty obvious -- in the second choice, governments would have to admit that they were wrong, and take the anger of those who trusted them, while in the choice of debasing the currency, governments can blame markets, bankers, and the financial institutions that seem to be raking in money while everyone else suffers.

This deeper question does not face those in Greece, Italy, or even Europe alone: the United States and just about every other western country is facing the same question in one form or another, as the costs of guaranteeing more and more payouts to more and more citizens are shown to be a weight that no government can bear.

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Financial innovation is largely bunk

Here's a conceptual diagram of all the companies listed on the NYSE from September 2006, grouped by sector and sized according to market capitalization (value of the companies).

It is roughly based upon the excellent "map of the market" tool that is available to look at on a daily basis in the "Market Data Center" section of the Wall Street Journal. You can go over right now and see what it is doing today by following this link.

The point of showing the sector weightings from September 2006 is to illustrate the size to which the financial sector had swelled at that point in history -- in fact, to the point that it was the largest sector in the entire economy, by a large margin. In other words, at that particular point in time, the financial sector was 22% of the entire economy by market capitalization, meaning that an awful lot of capital was flowing into that sector -- not only monetary capital which can be measured on a chart of the market capitalization of different companies but also "human capital" in the form of individuals choosing to pursue careers related to finance, and students choosing to pursue degrees related to finance, etc.

As you might imagine based on the world events which have taken place since September 2006, the size of the financial sector has deflated somewhat since the days when its size dominated the rest of the economy by a wide margin. A simple visual inspection of the map of the market using the above link will verify that.

A visit to the data available at Standard & Poor's about the capitalization of the S&P 500 by sector (a slightly different group of companies) reveals that companies categorized as financial now make up only 14% of the economy (as of November 08, 2011). Financials are no longer the largest sector (that honor now belongs to companies categorized as "information technology"), although they are still the second biggest sector, and their relative footprint is now much closer to the third-place sector -- energy -- which used to make up only 9% to financial's 22% and which is now roughly the same size as the financial sector at close to 13%.

We would argue that this is a very revealing exercise, because we believe that the amount of capital (both monetary capital and human capital) that was pouring into the financial sector prior to the collapse of 2008-2009 illustrated a disastrous "over-valuing" of what we might call "innovative" financial products and services (more on that term in a moment). Even with the reduction that has taken place, this sector is probably still too much of the economy, although at least the trend seems to be moving in the right direction.

Now, as professional money managers and therefore members of the financial industry, the above commentary might seem confusing, especially as we just finished explaining how important the ability to buy and sell shares in a public market is to the economy in general, and defending the financial sector's valuable role of enabling pools of capital to become available to entrepreneurs and businesses who need it. We wrote that defense in light of some of the misguided attacks of the Occupy Wall Street movement, which appears to have banks, the exchanges, and the concept of legal personhood for corporations as its prime targets -- all institutions which play a valuable role in the critical allocation of accumulated capital to business.

The argument we are making when we say the financial sector's footprint became way too large and absorbed way too much human capital is the argument that financial companies moved far beyond the connection of capital with business and into all kinds of "financial innovation" and "financial engineering" of dubious value.

Much of this "innovative finance" was not only of dubious value but was harmful and played a role in creating the conditions that led to the financial implosion that followed. We have made this argument in numerous previous posts, including "The ideology of modern finance" and "Professor Amar Bhide and his praise of more primitive finance."

In fact, we think investors might be well served by considering the possibility that finance itself is pretty simple and straightforward, and that its job is to connect capital with innovation rather than try to be innovative itself.

In many ways, the confusion between the two is evident in the turmoil dominating the news of late, including the European crisis, where investors are mainly focused on the woes of the financial sector and are largely missing the root problem, which is the lack of innovation and business growth in the other nine sectors of the economy.

This confusion manifests itself in the breathless worrying over whether Europe's banking woes will cause an economic collapse in the US. The storyline goes something like this: Europe's banks go into a state of shock because loans they made to countries such as Greece and Italy were unwise loans and the borrowers default; US banks which have dealings with European banks are unable to lend because of the crisis in Europe; therefore, US businesses and consumers cannot borrow, and US business and economic growth suffers or goes into another 2008-2009 panic and recession (or worse).

Our response is that, while it is true that finance touches every aspect of the economy because every business needs to use money and every business needs capital, the financial sector is not (or should not be) the dominant sector, and innovations in finance are not (or should not be) the innovations that drive an economy (see the discussion above). US businesses are generally flush with cash and many don't need to borrow a penny in order to grow and continue creating valuable goods and services for their customers. The 2008-2009 recession was not caused by businesses being unable to access capital, but rather by businesses picking up the phone and canceling all their purchasing orders for more inventory in the face of the implosion of Wall Street's financially-engineered innovations and in the face of a Rose-Garden speech from the President of the United States warning of a scenario that sounded like the end of the world (see this previous post for more on our view of the causes of 2008-2009).

There is actually quite a lot of real innovation going on in the US economy right now, innovation of the sort that adds real value and real economic growth, much as the computer innovation of the 80s and 90s added real value and real economic growth. We believe investors should understand the distinctions we are making in this post about the importance of connecting capital to real business innovation, and the dangers of pouring too much capital (monetary and human) into financial innovation.

We believe that over time, the problematic nature of much of what is called "financial innovation" will become more and more widely perceived, and capital will naturally flow towards real innovation and business growth. Investors who want to be there ahead of the crowd should be thinking about these things right now.
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"Stop me before I ease again!"

Halloween is over, but that didn't stop markets worldwide from reacting in terror to the news that Greek leaders have decided to put their bailout up for a popular referendum, which is a little bit like asking a sick child to vote on whether he would like to take a bitter-tasting medicine or not.

The latest consternation arrives just in time for this week's meeting of the Federal Open Market Committee, which will announce its latest monetary policy decisions tomorrow. We hope that it will not encourage those at the Fed who want to introduce "QE3" or some other new form of monetary easing.

We believe the Fed's serial easing has already caused enough damage, and that more easing is uncalled-for.

Proponents of further easing argue that the stubbornly high unemployment rates, coupled with fears of another recession triggered by Europe's woes, necessitate pumping more money into the system in order to bolster consumer borrowing and spending, on things like homes and autos.

However, we have already explained in numerous previous posts that "the consumer" does not really drive the economy. If he did, the unprecedented amount of monetary stimulus that has been in place over the past two years might have been expected to have a lot more positive effect than it did.

On the contrary, we believe that production and producers drive economies. When producers increase their production, that prompts the hiring of more employees, which then stimulates the consumer much more effectively than artificial government stimulants can ever do. The Fed's excessive monetary easing has made life much harder for producers, by creating price instability and price uncertainty, which continues today (incidentally, this also ends up harming consumers because fewer of them get hired, and they also face higher prices for the goods and services they need to buy).

Noted Stanford economist John B. Taylor wrote an editorial in the Wall Street Journal today explaining the ways that the Fed's excessively easy policy has caused damage around the world. Some of them may surprise you because they are rarely explained by the consumer-centric media coverage that dominates the financial television shows. He explains:
Economic policies in America affect the world in ways that are often subtle. In the case of monetary policy, for example, decisions on interest rates by foreign central banks are influenced by interest-rate decisions at the Federal Reserve because of the large size of the U.S. economy. If the Fed holds its interest rate too low for too long, then central banks in other countries will have to hold rates low too, creating inflation risks. If they resist, capital flows into their countries seeking higher yields, thereby suddenly jacking up the value of their currencies and the prices of their exports.
While some might mistakenly believe that tilting the playing field in order to help one's own exports or harm another country's imports could be a good idea, we have explained in previous posts that such unstable business conditions make it very hard for producers to predict the future, lowering their willingness to hire employees and having a host of other negative side effects as well.

Further, with US GDP growth coming in at 2.5% for the third quarter, the argument that we are slipping into recession simply does not hold water, even though we believe that growth could and should have been a lot stronger at this point, if it were not for the misguided government policies that have been creating obstacles to business growth.

In sum, now that Halloween is over, we hope the serial "easer" that has been stalking the halls of American monetary policy for the past two years will not strike again.
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7 billion

In light of the headlines about the arrival of the seven billionth human being somewhere in the world today, and the inevitable hand-wringing over whether we have enough resources to sustain such a population, we thought it was appropriate to revisit some things we have written previously on the subject.

Back in 2009, we published a post entitled "The dark side of zero-sum thinking," noting that the angst over "overpopulation" has its roots in a zero-sum view of the world which sees resources as limited, like a "fixed pie," and every additional person as having the potential to leave a smaller slice for everyone else.

While declaring the 7 billion milestone as a "victory for mankind," the UN population fund abounds with this type of thinking, and their webpage entitled "Linking Population, Poverty and Development" makes declarations such as "slower population growth" reduces poverty, perhaps because "smaller families share income among fewer people" and "families with fewer children are better able to invest in the health and education of each child."

On a national level, the same page suggests that decreasing the population creates a "one-time only demographic window" in which countries can "spur economic growth" with government spending before the population ages and "dependency increases once more."

This kind of thinking is completely backwards, but it is consistent with the idea that growth is created by government spending (which often goes along with these same zero-sum assumptions) and that, since there is a limited amount of such spending to go around, the best way to maximize it is to create a one-time only "population window" for the fewer citizens who can enjoy the increased funding per person for a limited time.

Similar zero-sum beliefs are reinforced by the stark questions appearing on National Geographic's web site on the 7 billion milestone, such as
  • "Can we feed 7 billion of us?"
  • "Are there too many people on the planet?"
  • "Is there enough for everyone?"
  • "What influences women to have fewer children?"
Another article appears to be serious when it asks whether, in light of the population reaching the 7 billion mark, "the world should adopt a one-child policy" because the increased "demand on resources and the environment" might be "too large a demand for Earth to support."

In contrast to those who see the world as a fixed pie and every additional person as a potential drain on those resources, a few voices recognize that every additional person is actually a potential contributor who can make the pie bigger.

Not surprisingly, these voices tend to coincide with a view that governments and government spending do not grow economies, but rather innovation and entrepreneurial activity grow economies and make countries (and those who live in them) wealthier.

Last week, for instance, the Wall Street Journal's editorial page had an article by chief editorial writer William McGurn entitled "And baby makes seven billion" points out that prosperity is not linked so much to abundance of resources as to the correct view of the human being -- the right view being that "so long as people are free to trade and use their talents, the more the merrier."

For evidence that abundance of "resources" is not the central issue, he offers places such as Hong Kong that have prospered with almost no natural resources, while many countries with abundant resources have not.

This fact shows that the most important "natural resources" are human beings themselves!
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The corporation as a legal person, the stock market, and other things Occupy Wall Street protesters don't like

While it is impossible to state exactly what everyone associated with the "Occupy" movement is for or against, some general themes are emerging, some of which are captured in the above video. Some of the things that emerge in that video include:
  • against: the concentration of wealth among "the 1%" of rich persons and corporations.
  • against: the concept that a corporation can be a legal "person."
  • for: the idea that "corporations" and "the rich" need to "pay forward" by giving "a hunk" of their profits to "the next kid," since "nobody gets rich on their own" but brings their goods to market on streets that "the rest of us paid for" and employs employees who were educated in schools that "the rest of us paid for" as well.
Economist and Professor Emeritus of Economics at Pepperdine University George Reisman recently wrote an extensive discussion which deals with all three of these (especially the first one), entitled "In Praise of the Capitalist 1 Percent." In it, he points out that even if you accept the existence of a 1% / 99% split in the US for the sake of argument, the protesters are failing to realize that "the wealth of the 1 percent provides the standard of living of the 99 percent" (his italics).

By way of explanation, he points out that "in the modern world in which we actually live, the wealth of the capitalists is simply not in the form of consumers' goods to any great extent" but rather the wealth of the capitalists is "overwhelmingly in the form of means of production" and that "those means of production are employed in the production of goods and services" that are sold to voluntary buyers in the market.

He points out that everyone in a capitalist economy benefits from the vast concentrations of wealth that are required to buy the enormous tanker ships that bring oil to those who need to put it into their cars (after it is refined in refineries that also require huge capital investments to build and maintain), or the vast concentrations of wealth that are required to build the massive plants that are required to build those cars, or the vast concentrations of wealth that are required to create the ever-smaller and ever-more-powerful microchips that power their ever-less-expensive mobile connected devices.

In fact, since everyone depends on food and clothing that is delivered by these same trucks powered by this same fuel, it is quite accurate to say, as Professor Reisman does, that "the protesters and all other haters of capitalism hate the foundations of their own existence." Even the corporations that make products that compete with the products that individuals actually buy are helping them, by driving down the prices of the goods that they do end up buying.

One of the biggest reasons for the legal status of corporations as they exist in the US today is to limit liability for entrepreneurs and innovators and others who would otherwise not risk the loss of all their personal property. It is essential to create a tool whereby the legal personal property of a person engaged in business can be separated from the legal property held by the corporation. Without the legal ability to separate that, few if any innovators would risk the losses that often occur when starting a new business.

Without the concept of the corporation, access to capital would be severely limited, and the ability to bring together the resources needed to turn inventions like iPhones or iPads into reality would be severely limited. Professor Reisman explains why the ability to sell shares of corporations in a stock market is critical to this ability in his book Capitalism (available in its entirety on-line). Anticipating by several years the anti-Wall Street tone of the current protesters, he writes:
A widespread misconception is that the stock market is divorced from genuine productive activity [. . .]. It should be realized that the ability to sell their shares provides a major inducement to the purchase of those shares in the first place. If it were not for the existence of the stock market and its continuous trading in already issued stock, any purchaser of newly issued stock would be faced with the prospect of not being able to sell his stock, or of being able to so only with great difficulty. Such a prospect would greatly discourage the initial purchase of stock from the issuing corporations and would greatly reduce the availability of capital to those corporations. 466.
The protesters are thus shown to be squarely against aspects of modern economic life that are extremely beneficial to their own lifestyle -- and in fact to their very survival. It can be argued that governments can also accumulate capital in sufficient quantities to build automotive plants or oil tankers, although after the dismal record of the twentieth century experiment with that alternative, few sane people would recommend it. However, the last bullet point listed above shows that the protesters are indeed "for" the idea of requiring those with wealth (wealthy individuals and wealthy corporations) to "give back" a chunk (after all, as Elizabeth Warren says starting at about 3:30 in the above video, they used the roads "the rest of us paid for" when they were making that money).

Setting aside the fact that if it is true that "the rest of us paid for" those roads and schools, it is also true that the corporations who used those roads also paid for them out of their fairly substantial corporate taxes, the whole idea that the government needs to get involved in forcing certain people or businesses to give up some additional "hunk" to "pay forward for the next kid who comes along" may sound nice in principle but actually leads to all kinds of tyranny in practice. Once widespread redistribution (beyond what is needed to take care of the neediest members of society who might otherwise die without food, clothing or shelter) becomes the accepted role of government, all kinds of evils ensue. Just look at those countries where such a situation prevails, and you will find that people and companies spend their energy figuring out how to get those government (or UN) handouts rather than in coming up with the innovations and production that create growth and new wealth.

While it is not possible to make a blanket statement about the largely amorphous "Occupy" protests as they have developed so far, it is safe to say that the general tenor of many of the positions they are against as well as some of the things that they are for, reveal that many of their ideas would be extremely harmful to everyone if implemented, including to themselves.

Although we are not members of "Wall Street," we feel it is important that investors understand the benefits of the legal concept of the corporation, and the stock market and bond market and other institutions that enable those corporations to assemble the capital they use to bring those goods and services to market on which everyone in society relies.

There are certainly areas where the system in the US could be improved -- most notably in those areas where the government's willingness to benefit one group over another, whether on Wall Street or on Main Street, has created obstacles to innovation, entrepreneurship, and the ability of individuals to improve their situation through the very structures of capitalism that the protesters are mistakenly attacking -- but the institutions that are being attacked in the video above are institutions that actually protect and benefit the 100%, not just the 1%.

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Quick comments from Gerry Frigon, October 24

Here's a little commentary from Gerry Frigon from this morning, discussing the current state of the European situation, earnings season, and this week's GDP report (the advance report for Q3 GDP is due to be released on Thursday).

* At the time of publication, the principals of Taylor Frigon Capital Management did not own securities issued by Caterpillar (CAT).
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Another inspired presentation by Mary Meeker

Mary Meeker's presentation at the Web 2.0 Summit on "Internet Trends" given yesterday, October 18, provided a wealth of data and some insightful analysis regarding the direction and speed with which the networked world is moving.

We have linked to previous presentations by Mary Meeker on the same subject before (2009 and 2010) and explained that the data she is discussing provides powerful and graphic confirmation of an extremely important paradigm shift taking place at a rapid pace, even in the midst of widespread economic angst and unmistakable government ineptitude.

We have also explained previously that paradigm shifts of this magnitude are so powerful that it is difficult for even government blundering to derail them completely (not completely impossible, but very difficult and in fact nearly impossible). In yesterday's presentation, Ms Meeker actually presents one slide which reinforces that theme, in which she shows the adoption by percentage of population of previous communications technologies going back to the AM radio, and includes bars on the graph showing recessions and the Great Depression, to illustrate that even the worst economic environments could not hold back change of this nature.

Finally, Ms Meeker closed her talk with a short but pointed quotation from the justly famous poem If, by Rudyard Kipling (1865 - 1936). She cites the first words of the poem's opening line:
If you can keep your head when all about you
Are losing theirs [. . .]
Her message is that the changes and innovations taking place in certain parts of the economy present a tremendous opportunity, but only if you keep your head about you (especially because there are plenty of talking heads who appear, in our opinion, to be "losing theirs").

Mr. Kipling's poem certainly applies to many other aspects of life, but we agree with Mary Meeker that it applies very well to investing, and particularly to investing at this particular junction of history. Bravo to her for another extremely worthwhile talk, and for sharing her insights so generously with anyone who cares to listen. We believe that every investor should do so.

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More data says "no recession." So why is everyone so uneasy?

The Census Bureau released their data for estimated monthly sales for retail and food services for the month of September this morning, and the numbers came in much stronger than most economists expected.

For the past month or so, many economists and pundits have been growing more and more pessimistic, with many of them declaring that a recession is all-but inevitable.

We have been on record several times saying that all the pessimism is overdone, and that those calling for additional government stimulus (they are often the same as the ones declaring an imminent recession) are mistaken. See for example this post from the end of August, in which we said:
Finally, we would like to point out the fact that economic growth of 1%, while anemic, does not indicate an impending crisis. The commentators in the NPR clip above imply that 1% growth is "just above stall speed," as if an economy that does not grow fast enough will automatically stall, in the same way that an airplane that does not go fast enough will stall. But that is a false analogy. Airplane engines require a certain amount of speed in order to force air into the engine, but there is no law of physics or of economics that says that a country must grow at a certain speed or else it will simply "stall" and go into a recession.

This view comes from the idea that economies are fragile things that will naturally break down unless they are constantly tinkered with and stimulated by governments. In fact, economic activity is the natural state of human affairs. Left to themselves, people will grow crops, start businesses, invent solutions to problems, look for cures to diseases, and generally "do economic activity" that will enable them to make money for their families in greater and greater amounts. It is government tinkering and interference that disrupts this natural pattern. Thus, the cure for the sluggish 1% growth is not more stimulus but rather removal of some of the "persistent drags" that we talked about above.
Today's data, and other economic measurements that have come out since we wrote that, have confirmed our analysis. The economy does not seem to be heading into a double dip, and today's strong retail-sales data makes it virtually impossible to continue to maintain that it is. However, growth could be much stronger, being held back by a host of damaging government policies.

So why is there such a pervasive feeling of economic angst out there? Well, for one thing, because the media continues to serve up pundit after pundit predicting disaster. For another thing, unemployment remains dreadfully high, because businesses understandably are reluctant to hire when government regulations make it more expensive to do so, and when the Fed and the Congress make it hard to predict the future stability of the dollar and of tax rates.

Even more importantly, we believe that these misguided policies are creating an environment very similar to that in the 1970s, when some innovative businesses in innovative industries were able to grow as they paved the way for the major changes that would take place in the next two decades, but when most businesses had a very hard time achieving real growth. We have been discussing this theme for quite some time -- see for instance this previous post and this previous post.

Forbes publisher Rich Karlgaard recently made this point again in an interview on MoneyShow.com, and we agree with many of the points he raised in his analysis of the economic similarities with the 1970s and the implications for technology (click the video in that story to listen to Mr. Karlgaard's interview).

What this means for investors is that you cannot simply "own the market" or "just index" -- an approach that became popular in the more economically friendly environment of the 1990s, when there was not the same kind of performance gap between more innovative companies and everybody else, the way there was in the 1970s.

We have always argued that the kind of businesses you choose as destinations for your investment capital matters a great deal. We believe that message is even more important in times like this, and that the combination of widespread economic unease even when economic data show signs of growth, indicates that we are probably in a period that is more like the 1970s than the 1990s.
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Have you heard of this company? IDXX

In order to explain what kinds of businesses we look for as potential destinations for investment capital, we have published many previous posts describing some of the important criteria. Readers may wish to go back to the series on "Beautiful Growth Companies" (part one, part two, and part three) for some discussion of those criteria, and they may wish to look at individual companies that we have highlighted in previous discussions (many of those discussions of individual businesses are linked in this previous post).

One of the companies we own in the portfolios we manage is IDEXX Laboratories, an innovative provider of diagnostic solutions primarily for use in the animal health industry (serving both companion animals or pets and production animals or livestock).* Their solutions are also being applied in the water and food safety diagnosis field.

IDEXX Labs develops, manufactures, and distributes products that allow animal healthcare providers to test for an impressive array of diseases, from canine heartworm to feline leukemia, from avian leukosis to chicken anemia, from bovine spongiform encephalitis (mad cow) to swine influenza and swine pseudo-rabies. The company has created a wide variety of "assay kits" which can be used right in the field to test animals -- for instance, they market simple tests that dairy owners can use to test milk for antibiotic contamination before shipping it in bulk to a milk plant (where, if it is discovered that their load has contaminated other loads, they may be liable for the losses of the owners of dairies whose milk had to be dumped due to the contact).

Other IDEXX assay kits enable vets to test pets for Lyme disease or parvo or pancreatitis, or allow cattle ranchers to test potential new additions to the herd for bovine viral diarrhea virus (BVDV) through a simple ear-notch test so that they can catch sick animals before they contaminate the rest of their cattle. Many of these assay tests return results in a matter of minutes.

IDEXX also manufactures and sells diagnostic equipment to veterinary offices and diagnostic labs, and they run their own lab business so that vets can send samples to IDEXX for testing with rapid turnaround times.

Additionally, the company develops and markets a range of products used for testing water safety for human consumption and for recreational use (lakes and pools and rivers, for example), including tests that can detect the presence of all coliform bacteria (including E. coli), enterococci, cryptosporidium (which is potentially fatal if ingested), and giardia.

While there are formidable competitors in the vet diagnostic field, we believe that IDEXX has demonstrated that they are extremely innovative and have a reputation for quality, and we also judge that the market that they serve consists of a very fragmented field of veterinary healthcare service providers which may be in the process of undergoing some consolidation, and that some of the companies that are doing the consolidating are IDEXX customers.

We provide these highlights of IDEXX not only because we believe it is an interesting and well-run business and one with which many readers may not be familiar, but even more because we are trying to give our readers an idea of the kind of characteristics that we believe they should be looking for as destinations for their investment capital.

We believe that when it comes to investing money for success over many years and even over many decades, it is vitally important to have a clear idea of what traits in a company investors should look for, so that they can participate in the future success of those companies. While the names of the companies that we own will necessarily change over the years, the characteristics we are looking for generally do not.

* At the time of publication, the principals of Taylor Frigon Capital Management own securities issued by IDEXX Laboratories (IDXX).
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Rest in Peace, Steve Jobs

It is no exaggeration to say that Steve Jobs changed the world and that he was directly responsible for shaping the way we all interact with technology and the way that technology will interact with our lives for years to come -- probably for generations to come.

There are many heartfelt and well-written tributes to him on the web today, and they all deserve to be read thoughtfully. A few we believe deserve special attention include:
Not long ago, we were struck by a video interview of Steve Jobs by the late Louis Rukeyser, apparently from the period between his two turns at the helm of Apple, during a time when both Pixar and Apple were struggling*.

Around 6:01 in the clip, Steve says "I still think Apple has a future."

This in itself is a stunning statement, and reveals the entrepreneur's ability to see things with laser clarity before anyone else around him could. But even more memorable is what he said immediately after that:

"I think the way out is not to slash-and-burn. It's to innovate. That's how Apple got to its glory, and I think that's how Apple could return to it."

These words are so accurate and apply so far beyond one company that they should be memorized.

Vaya con Dios, Steve Jobs. You've made the world a better place.

* At the time of publication, the principals of Taylor Frigon Capital Management own shares of Apple (AAPL).

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