Another wake-up call

The world is mostly consumed with worry over European sovereign debt as we head into the end of November. We've discussed this subject several times in the past, in posts such as "The question of our time," (06/06/2010), "Not fragile" (07/28/2010), and the recent "European debt issues and the primacy of growth" (11/08/2010).

We've said all along that this "crisis" is actually a good thing (or at least, that it has a silver lining), if it causes people to realize that the endless growth of public-sector (government) jobs and entitlements must be brought to heel, and that the real solution to the problem is to foster private-sector growth and innovation. As George Gilder -- one of the greatest thinkers in the United States for the past four decades -- explains in an article linked in this post, the simple formula for encouraging private-sector growth and innovation is simply lower taxes and sound monetary policy.

There are encouraging signs both in Europe and in the United States that people are starting to get this message.

While they work that out, we would recommend investors focus on the exciting opportunities for growth taking place right before our eyes. In the video above, former Morgan Stanley analyst Mary Meeker* gives a rapid-fire presentation from the recent Web 2.0 summit in the San Francisco Bay Area that highlights the phenomenon we have called "The Unstoppable Wave" and presents incontrovertible evidence that it is definitely taking place.

We would recommend that all investors watch this video and think very carefully about the implications of the trends she is discussing. While the speaker is framing the ten topics she discusses as "questions that internet company executives should be asking themselves" right now, we would argue that they are questions that every investor should also be asking themselves as they commit capital to one company or another (whether in the form of buying bonds issued by a company -- or a country -- or in the form of buying stock).

The speaker touches briefly on Clayton Christensen and his insights into what he calls "disruptive innovation." This is an extremely important concept for investors and one we discussed in some detail in "Clayton Christensen, disruptive technology, and your portfolio recovery plan" (02/04/2009), and we recommend revisiting that post and following some of its links before watching the video above.

This video discusses a huge ongoing phenomenon that illustrates what Dick Taylor and Thomas Rowe Price were talking about when they recommended that investors seek "fertile fields for future growth" (often characterized by what are called "paradigm shifts" today). We believe that many investors -- including many professional investors on Wall Street -- are still not completely tuned in to the size of this ongoing paradigm shift. Investors who heeded our posts on this subject from late 2008 and early 2009 could have taken advantage of some excellent investment opportunities related to this tectonic shift. If not, this can serve as another wake-up call.

While the rest of the investment world focuses on sovereign debt alarm bells (alarm bells that are generally providing a healthy wake-up call to the dangers of creeping public-sector expansion), we recommend investors pay attention to the trends highlighted in this recent video, and ensure they are preparing for them in their own businesses and in their investment portfolios.

* At the time of publication, the principals of Taylor Frigon Capital Management owned preferred stock issued by Morgan Stanley (MS).

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Happy Thanksgiving 2010

This is our fourth Thanksgiving for the Taylor Frigon Advisor, and in keeping with the tradition of our previous posts on this holiday, we find it fitting to reflect on the countless blessings of a free enterprise economy (follow these links to previous Thanksgiving posts from 2007, 2008, and 2009). Such reflection is invited by the very nature of the American holiday of Thanksgiving, which stretches back to the feast celebrated in 1621 to give thanks for their first successful harvest by the pilgrims of Plymouth Bay Colony, joined by the Wampanoag Indians led by Massasoit, who sent his braves into the woods to bring back deer for the occasion.

In 1789, President George Washington recommended Thursday the 26th of November of that year to be a day in which all the people of the United States would come together to give thanks to "the beneficent author of all the good that was, that is, or that will be" for the Constitution "now lately instituted, for the civil and religious liberty with which we are blessed, and the means we have of acquiring and diffusing useful knowledge, and in general for all the great and various favors which he has been pleased to confer upon us."

In 1863, President Abraham Lincoln established Thanksgiving as a national holiday, reminding the citizens that: "Needful diversions of wealth and of strength from the fields of peaceful industry to the national defense have not arrested the plough, the shuttle, or the ship; the axe has enlarged the borders of our settlements; and the mines, as well of iron and coal as of precious metals, have yielded even more abundantly than heretofore."

The incredible sweep of economic growth and prosperity which stretches from 1621 to 1789 to 1863 and on through the twentieth century and today staggers the imagination. The first Thanksgiving was a response from settlers who had every reason to be concerned of starvation from one harvest to the next, while today the United States is so bountiful that it regularly sends hundreds of thousands of metric tons of food into the oppressive and belligerent Communist country of North Korea, which is so bankrupt that it can neither feed its own citizens adequately nor purchase food for them with goods that it produces.

The contrast is an important one. Many today continue to subscribe to the zero-sum fallacy that in a free economy characterized by open competition between producers of goods and services, any gain by one party must come at the expense of someone else. However, as Friedrich Hayek explained in 1968, this free competition "is not a zero-sum game, but one through which, by playing it according to the rules, the pool to be shared is enlarged" (cited in G.R. Steele, Keynes and Hayek: the money economy, page 43). Truly, no one can deny that the pool of opportunity and prosperity in this country has been exponentially enlarged in the years between George Washington's Proclamation of General Thanksgiving in November, 1789 and today.

This result has not been the same in other countries over the same period of time, especially those where the zero-sum theories of Communism (which teaches that wealth always comes at the expense of others) have held sway for long periods of years, or those in which oppressive kleptocracies still prevail (which also operate under a zero-sum approach to economics).

As we noted last year at this time, we believe the cornucopia traditionally associated with Thanksgiving is the perfect opposite to the "fixed pie" of zero-sum thinking. Unlike the view that there is only so much wealth to go around, and that some get it at the expense of others, the cornucopia or "horn of plenty" is a symbol of constant increase, like the expanding pool of which Hayek wrote in 1968. As we gather for Thanksgiving this year, we can reflect again that this is not just a mythical concept!

We wish all of our readers a safe and happy Thanksgiving in 2010.

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Have you heard of this company? NAT

In the past, we have highlighted examples of classic Taylor Frigon growth companies: well-run businesses positioned in front of fertile fields for future growth.

Today, we're posting a November 8 interview with the CEO of a company we own in our Income Strategy, which seeks income-producing securities, some of which may be debt-based (such as bonds) but some of which are ownership-based (preferred stock and common stock in dividend-paying companies).

As we've recently explained, it is very important for income-seeking investors to have a clear understanding of the issuer of their income securities, whether they are buying the company's bonds or the company's stock. They should seek to determine whether the company is well-managed, and whether it is taking steps to grow and ensure its survival against competitive threats.

Nordic American Tanker Shipping, featured in the above interview, has a somewhat atypical operating model compared to many companies investors may be familiar with, in that they pay out substantially all of their net operating cash flow in the form of dividends to their shareholders.*

The company runs a strong balance sheet with little to no debt, and can therefore take advantage of periods in which the prices on tanker ships soften by adding to their fleet more easily than many of their competitors. The company's operating cash flows, of course, are dependent upon the shipping rates they can charge for moving bulk oil across the ocean, rates which fluctuate based on a variety of global economic and political factors.

In the interview above, CEO (and founder of the company) Herbjørn Hansson explains some of the important aspects of his company's business model in exemplary fashion. The interview is also noteworthy for a quotation that all investors should write down and hold onto.

At two minutes and fifty seconds into the video clip, Mr. Hansson says: "As I've said in other contexts, America is a stronger nation than Americans think."

We absolutely agree with Mr. Hansson's statement. We have made the same point ourselves, for example in this recent post, which shows that the US economy has grown almost 30% over a period that many are calling a "lost decade," or this post in which we provided counter-arguments against the constant drumbeat of negative economic predictions and those calling for a new plunge as steep as the one that took place in 2008-2009.

In many respects, the negativity we wrote about in those earlier posts is still going on today, although business earnings in the most recent quarter largely exceeded most analysts' expectations. The bigger picture is that this failure to realize the strength of the American economy leads to all kinds of errors, including the fear of other countries (such as China) and the bashing of their attempts to grow.

Instead of bashing China and other emerging economies, the US should simply remove the self-imposed obstacles to our own economic growth (including excessive corporate tax rates, penalties on the repatriation of capital earned overseas, inflationary monetary policy that drives up commodity prices and weakens the US dollar, and regulations which make it more expensive to hire new employees).

We recommend paying attention to the video above, both to understand some aspects of the environment in which Nordic American Tanker operates, and to hear CEO Herbjørn Hansson argue that America is a stronger nation than Americans think. Underestimating the resilience of the American free-enterprise system is a major error, and one that many commentators of all political persuasions often commit. We hope that it is an error that readers of this blog will avoid.

* At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Nordic American Tanker (NAT).

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"Greened" Into Economic Oblivion

In this Wall Street Journal article, our good friend and venture capital partner George Gilder has eloquently framed the salient issues surrounding "green" investing. George highlights the unintended consequences that are already being felt due to the almost cult-like obsession that many in the political, business and now venture capital community have adopted with respect to investment in ventures tied to the environmental agenda. It is the latter group that concerns George the most and we share that concern.

At a time when growth is slow and job creation is at a standstill, the malinvestment taking place in this quest for "feel good" business ventures is, frankly, frightening. Pursuit of investment in businesses that generally wouldn't exist without the "helping hand" of government subsidy starve real innovators and entrepreneurs -- the would-be creators of new products in biotech, nanotechnology and many other scientific fields -- of the capital they require to bring their creations and innovations to market, thereby creating jobs that are truly "sustainable".

We believe George Gilder's article deserves the widest possible distribution. Please read it and pass it on to your friends and family.

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A growth-based perspective on income investing

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We've been accused of having a one-track mind when it comes to our message to investors (invest capital in well-run companies positioned in front of fertile fields for future growth). While we take that as a compliment, we decided that, just in case some readers might be a little tired of reading about the importance of growth (if it is possible to get tired of that subject), we decided today to change the subject and talk about income-producing securities instead.

At Taylor Frigon Capital Management, we recognize the need for some investors to own income-producing securities. Because of the danger posed by inflation, we believe that growth in most cases needs to be the foundation of an investor's portfolio, with income playing an auxiliary role "on top" of the foundation of innovative, growing companies (see here and here).

In the Income Strategy that we manage for investors, however, we don't exclusively own fixed-income instruments such as bonds: instead, we seek a variety of income sources, including floating-rate debt instruments, preferred stock, and common shares in companies that pay royalties or dividends.

The important thing for investors to remember is that, in order for the dividends or interest payments of a company to be secure, that company has to have the ability to stay in business. For common stock that pays a dividend, the best way for that company to be able to raise the dividend is for that company to have fields for growth! In other words, we may be sounding like a broken record again when we urge income investors to consider growth as an important criteria when evaluating a potential income investment.

Friday's announcement by Intel Corporation that they will be raising their dividend by 15% to 18 cents per share per quarter (or 72 cents per share per year) is a perfect case in point.*

While we own shares of Intel Corporation for our Income Strategy, one of the reasons we are comfortable owning it is the company's continued ability to add value and grow. In announcing the approval of the increased dividend, Intel CEO Paul Otellini said, "Intel remains on track to have our best year ever and we continue to generate strong cash flows. Our ongoing operational performance and confidence in our business going forward provide the ability to return more cash to shareholders."

We agree with Mr. Otellini in seeing the connection between future growth and dividend yield, and urge our readers to consider this important aspect of investing for income as well.

* At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Intel (INTC).

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