Month: October 2012

A lot has been made about Mitt Romney’s career in private equity, which started in 1984 at Bain Capital and ended in 1999 when he left to run the Salt Lake City Olympics. This calculator shows that the annualized return of the S&P 500 during this period was 18 percent (i.e., this was an exceptionally fortunate time for an investor in U.S. companies; the same calculation for the period 2000-2011 results in a 0.5 percent return).

Did Mitt Romney do even better than a passive investor in the S&P 500? Yes, as did most private equity shops during this period. Was that due to the fact that the folks who collected massive fees for managing private equity funds knew something about how to operate a business that had escaped the managers who’d spent their entire lives within a given industry? Not necessarily. Jeremy Grantham, one of the world’s most successful investors, is fond of pointing out that KKR has demonstrated very similar returns to what an investor would have achieved by buying the S&P 500 using the same amount of leverage that KKR used to buy companies. In other words, instead of paying a 20 percent fee to KKR, an investor could have simply bought the S&P 500 on margin and walked away, keeping 100 percent of the fruits of the investment rather than 80 percent. And KKR, instead of working hard to identify exactly the best companies to purchase and the best managers to hire, could simply have bought stocks at random to achieve the same result. (Indeed KKR might have done better with a more hands-off approach; the company offered a full partnership to Ken Lay, the Chairman of Enron, shortly before Enron’s accounting frauds were exposed (see this book excerpt).)

So while there may be other reasons to like Mitt Romney, his ability to outperform the S&P 500 is not necessarily one of them. Anyone who was able to borrow money at an interest rate lower than 18 percent could have beaten the S&P 500 during the period of time that Mitt Romney was involved in private equity.

[Has anyone seen this kind of analysis in a mainstream newspaper article or TV show? It seems odd to report that Mitt Romney was a big success as an investor without noting that so was almost everyone else during the same period of time.]

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People seem sort of shocked when countries such as Greece and Spain come crashing down to earth or when an unlikely success story such as Israel or Singapore emerges. I’m wondering if a simple study could predict a country’s economic future: Is a young person better off going to work for the government, or in a quasi-government job, or for private industry?

China stagnated for centuries and many historians have put forth as a explanation that the best and brightest young people wished to enter the civil service rather than become merchants or engineers. Israel has one of the world’s most successful economies, despite a huge range of challenges. A schoolteacher in Israel starts at about $18,000 per year (source; compare to about $51,000 in Chicago (source)), despite the fact that the cost of living in Israel is higher than in most of the U.S. (see this ranking by city; Tel Aviv is at 24 while Chicago is down at 108).

Air traffic controllers in Spain could earn more than $1 million per year (see this entry from 2010). A young person would have been foolish indeed to choose a private sector career over a government or government-affiliated job in Spain back in 2010 and in 2012 we see where the country ended up.

How about the U.S.? We certainly have some great opportunities in government. A California state prison guard, who may have no education beyond high school, earns more than an average Harvard graduate (WSJ). It is not uncommon for police and fire department workers to earn $150,000 to $250,000 per year (more if the value of defined benefit pensions are included). Health care jobs in the U.S. must be regarded as quasi-governmental due to the fact that the government pays for roughly half of health care bills. Doctors in the U.S. earn more, on average, than private-sector workers with similar amounts of education (e.g., PhD engineers). Given the regulated nature of banking, the subsidies handed out to Wall Street in 2009 and 2010, it might be argued that some financial industry jobs are really government jobs.

I wonder if we could quantify this by looking at projected 10-year earnings, including the actuarial value of pension commitments, for young workers starting out in different standard careers across a variety of countries. The ones where the government jobs are the plum jobs are the countries whose relative decline we can expect.

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Economists are unable to explain a lot of things (e.g., the Collapse of 2008, whether European governments should spend more or spend less, etc.). One of the persistent mysteries to economists is why Americans vote. There are almost no races that are decided by just one vote. One does not get paid for voting. Here in Massachusetts, the typical citizen is handed a November ballot in which 75 percent of the candidates are running unopposed.

I’m wondering if one reason that people go to the polls is that they feel superior to other Americans after they vote. One often hears people talking about folks who vote for the other party as “stupid”. How could those millions of people, nearly 50 percent of American voters in fact, be taken in by statements that are so obviously false? They must be stupid. If people who vote the opposite of me are stupid… that makes me smart! So after I come back from the polls I can feel smarter than approximately 50 percent of Americans.

Thoughts on this theory?

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