Saturday, March 24, 2007

SAVED BY THE PROFIT MARGIN

Before any of us invests our own money in a stock, one of the first things we ask is what is the company's bottom line, how much profit does the company make or stands to make. Most people navigate their dollars to companies making the most money now or potentially in the future. It's not hard to understand that the idea of making more than what you put in (revenues over expenses equal profit) drives many of us to find that new idea and to take a risk on it.

Not too long ago, HAL and other airlines went through bankruptcy. At that point, it would not have been wise for anybody to invest his or her money into a money-losing venture like a bankrupt airline company. During these companies' restructuring, they promised potential investors that if they steer capital their way, they would be well rewarded. It was a risky venture, and as such, the interest rates, or rates of return, were high.

But is there ever an appropriate amount of profit for someone's investment? Should it be 5%, 55% or 95%? If the person doing the investing doesn't like 5%, would he not take his money to an investment with a higher percentage or choose to not invest at all? Does Togiola know which profit margin will attract just the right amount of investment an airline needs to operate the Pago-Honolulu route?

Every business needs capital to operate and if you look at the stock exchanges, thousands of companies are competing for your investment dollars. If a company can't get your money willingly by giving you the best offer for your money, the only other way to obtain capital is to get the government to tax it out of you and receive it in the form of a bailout.

That always seems to be the Togiola Administration, Faleomavaega and the Fono's answer to everything. "Bailout". "Handout". "America must do more for American Samoa". "American Samoa cannot do more for itself in a vacuum".

Togiola says if we have cheaper fares, our economy would grow. But even if three airlines were operating the Pago-Honolulu route, I don't think our economy would grow at all. Cheaper fares won't address our terrible pot holes, flooding due to inadequate drainage systems, high taxation, ridiculous licensing requirements and competition from a government airplane to a government bank.

The obligation is on the ASG to fix the lousy state of our economy to attract more airlines not on HAL to lower airfares in an attempt to resuscitate an economy our government beats to death on a daily basis.

Our airline market has been saved by HAL's high profit margin because without it, investment in our airline market would dry up and we would be depending on the ASG for air travel to our parent nation. If the quality of service at your nearest ASG department is anything to go by, the last thing we would want to do is hand over our airline market to their lack of care.

4 Comments:

At 11:23 PM , Blogger Stuart K. Hayashi said...

Hey Good Golly Tali,

In keeping with your very specific request, I will now offer a rebuttal to your letter.

First, one question to ask oneself is: How many points should a letter-to-the-editor make?

The correct answer is that, in the long run, a letter to the editor should only make one ultimate point.

A letter to the editor is short. So if you have more than one basic point, the reader will get confused.

What is the ultimate point of your letter? I have a hard time telling. I am guessing that it is either (a) that the Governor should allow Hawaiian Airlines to profit by whatever margin the company's customers willingly pay the company, or (b), which is:

"The govenor claims that forcibly reducing Hawaiian Airlines's ticket prices will save money for American Samoan passengers, and the money that American Samoans save on plane tickets will then be spent back into American Samoa's domestic industry, thus making this consumer spending an 'investment' into American Samoa that will financially enrich our territory. Not only is the governor's convoluted pseudo-theory horribly wrong, but the governor will only lead us to further economic denigration as long as he continues to use such an ignorant assumption as his guide when crafting policy."

A reader should not even have to guess what the point is; the point should be stated blatantly at either the beginning or in both the opening and the closing.

The point should have been spelled out from the start; the thesis should not have waited for Paragraph 6 in an eight-paragraph letter to finally show itself; very few American newspaper readers have patience for that.

A short opinion piece is the opposite of some Twilight Zone-styled horror thriller. When people read short opinion pieces, they almost always hate surprise endings. More than 99.999999 percent of the time, the opinion piece should give away its conclusion at the beginning.

Most readers think most articles and letters are boring. Thus, they will only commit to reading a letter-to-the-editor all the way through after (1) discovering what the letter's point is early on, and (2) quickly deciding that the letter's thesis is worthwhile enough to justify spending precious time on reading the letter all the way through.

For instance, in "Why Are CEOs Paid So Much?" the thesis statement is: "successful CEOs are indispensable to their companies. They earn their rewards."

Note that the thesis statement is in the first third of the essay; the author didn't wait to unleash it when the essay was already 75 percent complete.

Thus, the first paragraph of your letter should not have been about investing or anybody's motives for investing. The first paragraph should have instantly announced the final point you intended to make, which I imagine is something like this:

"The governor apparently believes that if he uses the force of law to artificially reduce Hawaiian Airlines's profit margins, the consequence will be a magical improvement in American Samoa's economy. Not only is such an asssumption wrong, but the governor will direly harm our economy if he continues to use such an ignorant assumption as his guide when crafting policy."

To be continued...

 
At 12:19 AM , Blogger Stuart K. Hayashi said...

A short letter-to-the-editor, like the sort you send, are most effective at getting their point across when they are structured like upside-down pyramids.

The basis or foundation -- that is, the summary of the letter's entire point -- should be directly on top. The further down you go, the less important the words are, until you get to the very end, where you basically restate the point of the entire letter: the very same point you made at the beginning.

If your point was (1) the governor was wrong to say that forcibly reducing Hawaiian Airlines's ticket prices would improve American Samoa's economy by giving American Samoans more money to spend in American Samoa, thus making such cost savings an "investment" into our economy, and (2) the governor crafting policy while utilizing such ridiculous assumptions will only cause greater economic harm, then the letter could have been structured something like this:

"Governor Togliola makes the delusional claim that passing laws to reduce the profit margin that Hawaiian Airlines makes off of ticket prices will somehow magically improve American Samoa's economy. He claims that when our airfares are reduced by a certain margin, the cost savings that Hawaiian Air's passengers reap can then be spent back into American Samoa's economy, thus making this 'cost savings' an 'investment' into American Samoa that will create new jobs and improve our living standards. Not only is such an assumption wrongheaded, but the governor will only further erode our economy if he continues to use such ignorant assumptions as his guide when he crafts his policies.

"In the air travel market, the price of air travel is negotiated between the airline and the aggregate of all the decisions made by the airline's passengers. Because nobody's life or private property is physically damaged in the process, the negotiation of price between an airline and the sum of its customers cultimates in the only price that can possibly be fair.

"Inasmuch as it is the consequence of market forces rather than government subsidy or fraud or violence or pollution, the price of an airplance ticket is a rational compromise between the even-higher price the airline would prefer to charge and the much-lower price the statistically averaged passenger would prefer to pay.

"When the governor uses the force of law to coercively alter the price mutually agreed upon by a service's provider and the service's consumer, he assumes he can run the lives of the buyer and seller better than the men themselves.

"What the governor evades is the fact that we American Samoans consent to the price we pay. To consent to making a purchase is not the same as being 100-percent happy with making the purchase. If a man goes to work at a job he hates, when nobody threatened to put a gun to his head if he didn't go to work, he consents to that job, even if he hates it. When one decides to take a horrible job to feed himself, Nature isn't coercing him to do anything; there is no freedom from the need to eat; one can only be wrongfully coerced when one man threatens to physically harm another based upon what the victim does or doesn't do.

"And if you refuse to pay the airline, the worse it can do is refuse you service. If you refuse to pay the government, the government sends armed men after you.

"When we buy airline tickets, without anybody putting guns to our heads, we tacitly consent to the airline ticket prices, whether we angrily complain about them or not.

"Speaking of complainers, the governor makes a wholly irrational assumption when he claims that his preventing Hawaiian Airlines from charging above a certain price will ultimately increase the amount of capital that will be invested into our economy.

"The entire purpose of making an investment in a business is to make money on it. If profit were not your aim when you wanted to provide an enterprise with some capital, then you would donate to a not-for-profit charity instead. When you invest in a for-profit business, you do so with profit in mind.

"That is the same profit that Hawaiian Airlines and all other companies operating in American Samoa intend to make. Any company currently considering whether it should begin operation in American Samoa uses its potential profitability here as its main criterion.

"So what will happen when prospective investors -- companies thinking about opening up shop here in American Samoa -- see that businesses like Hawaiian Airlines are penalized for profiting?

"Such companies will not enter our market; they will flee it. These companies will open up their plants in other countries and provide jobs in those other countries. These are jobs that we would have gained if the governor's anti-profit policies had not scared off prospective employers.

"Think of American Samoa's economy as a globe, and think of productive enterprises as Atlas. Atlas holding the globe aloft is much like productive enterprises keeping our economy alive.

"But what happens when people like our governor choose to needlessly add to the weight on Atlas's shoulders, increasing his burden? That's what's happening when our anti-profit regulations destroy the incentives of businesses to expand their operations here. When too many shackles make it too hard for Atlas to balance the weight of the world, he will shrug, and the world -- our economy -- will meet a grisly fate.

"The governor claims that when he puts a 'cap' on the profits that Hawaiian Airlines can make off of us, we will save a certain amount of money that we will re-invest into American Samoa. But he ignores that if Hawaiian Airlines decides that such regulations inhibit its profit maximization to a point where it could maximize profit by pulling out of our market and moving somewhere else, then that is exactly what Hawaiian Airlines will do. And then we will be left with no airline to serve us.

"But hey, once we receive no air travel service at all, at least we won't have to complain anymore about airline tickets being so expensive; nobody will be selling expensive tickets in the first place.

When the governor claims that his reduction in the profit margin that Hawaiian Airlines makes from us will provide us 'cost savings' that will make us 're-invest' into American Samoa and improve the economy, he ignores how much his policy will discourage any would-be entrepreneurs from both American Samoa and abroad from starting new enterprises here.

"The governor's regulation makes as much sense as my saying that I will increase my net income by refusing to purchase any more soap or toilet paper or any other hygiene products. The money I no longer spend on hygiene is money that I 'save' and can 're-invest' in my business. But because I no longer bathe or practice personal hygiene, nobody will want to do business with me anymore anyway, and that will ultimately reduce my income, not increase it."

To be continued...

 
At 12:50 AM , Blogger Stuart K. Hayashi said...

Good Golly Mr. Tali,

In keeping with your request, I am continuing my critique.

I sadly admit to finding the first three paragraphs confusing.

You write: "Before any of us invests our own money in a stock, one of the first things we ask is what is the company's bottom line, how much profit does the company make or stands to make."

That's confusing.

The vast majority of people in the Corporate Social Responsibility movement, including the creepily self-righteous Whole Foods Inc. founder John Mackey, would deny your assertion.

The proponents of Socially Responsible Investing say that profit is not their primary motivator when deciding what businesses to invest in. They say that what they find far more important than the company's net income is the magnitude and quality of the service that the company produces for its customers and for society as a whole.

For instance, suppose I am a financial genius with $10,000 to invest. I could say to you, "If I invest all $10,000 into this tobacco company, I can expect to realize a capital gain on this worth $1 million after ten years, and that's after adjusting for inflation.

"Conversely, I could take that same $10,000 and instead plunk it all into a smarmy self-righteous organic foods business like Whole Foods. I estimate that after ten years, adjusting for inflation, I will realize a capital gain that will be worth $500,000."

And which investment do I choose? I choose to investment in the self-righteous organic vegetable business, even though that will reduce my expected capital gain by $500,000.

As a holier-than-thou Socially Responsible Investor, I would rather make $500,000 from an organic vegetable business and then feel morally superior to everyone else, than for me to make $1 million from a tobacco company and then feel guilty about it.

In such a case, one can invest one's money and try to make a profit without profit maximization being the most important criterion.

Here, you can issue the following rebuttal: If profit is completely irrelevant to you, then why invest in a for-profit company at all? If your main concern is the benefits conferred upon others, rather than having financial benefits conferred upon yourself, you could take that $10,000 -- or even just $1,000 from that sum -- and then give it to not-for-profit charity.

However, the Socially Responsible Investor can reply to you that, in some ways, he believes that a for-profit business is more competent than a not-for-profit charity, because, even though the Socially Responsible Investor isn't motivated solely by profit maximization, he knows that the business he's investing in is more competent as a consequence of its greedier profit-maximizing shareholders and managers being more strongly motivated to satisfy clients than is a not-for-profit charity.

So somebody can invest in a for-profit company without profit maximization being his sole criterion. However, it remains true that if a guy were 100% unconcerned about profit, he would just donate his money to charity instead of invest it in a for-profit enterprise.

If it is true that the guy expects a private company to provide more help to people than would a private charity, on the grounds that the private company's profit motive makes it more competent, then the anti-profit guy still has to rely on the selfish profit motives of others in order to maximize his own goal of helping others.

And, of course, profit maximization on the part of a private company does not preclude any charitable actions on the part of any stockholder. I can invest my money into a company that engages in absolutely zero philanthropy and charity, and I can then take my profits from that company and give a portion of it to charity.

Note that, in all of these cases, private charity is contigent upon -- and heavily reliant upon -- for-profit business. All not-for-profit charities are financed by for-profit businesses. The for-profit businesses could continue maintaining efficient operation if all charities went defunct, but private charities could not maintain efficient operation if all private for-profit enterprises went defunct (a society in which all goods and services are provided by non-governmental, not-for-profit trusts would be highly inefficient, as Oregon's hippie communes demonstrate).

But the SRI (Self-Righteous Investor) can say to you, "When I invest $10,000 into a business that does something constructive I approve of, I ultimately don't care if it makes for me $700,000 or $100,000 or even if it loses $5,000. The botom line isn't the biggest deal."

To be continued...

 
At 1:04 AM , Blogger Stuart K. Hayashi said...

Hey, have you heard of a famous brand of cookies? You're Famous Tali Amos.


It's confusing when you write "it would not have been wise for anybody to invest his or her money into a money-losing venture like a bankrupt airline company."

Actually, corporate raiders like Larry the Liquidator get rich from investing in bankrupt companies that are hemorrhaging money.

Suppose Kmart has really incompetent managers and declares bankruptcy. Nobody will invest in it now, right? Wrong! Just because a company is in Bankruptcy Protection today, that doesn't automatically mean the company wil have to fold or still have Bankruptcy Protection status 10 years from now.

Suppose that, in 1997, Kmart obtains Bankruptcy Protection. Because of this, demand for Kmart stock is low and the shares are for sale really cheap. Maybe it's selling at $1 per share.

Then comes along a corporate raider like Larry the Liquidator. He anticipates that much of the company is still salvageable. It has many good assets; it's just that the managers are so incompetent that they are underutilizing the assets they have.

So Larry the Liquidator raises a lot of capital when he employs the services of Michael Milken's investment bank, which sells a lot of high-risk, high-yield junk bonds. Larry the Liquidator uses the money raised from those bonds to buy lots of stock in Kmart. In other words, Larry the Liquidators believes it is the most opportune time to invest in Kmart right now precisely because it is Bankrupt. Larry's Kmart stock is collateral that he will have to relinquish to the bondholders if he cannot pay them back.

So Larry the Liquidator fires Kmart's most incompetent managers and hires better ones who utilize all of the company's assets to their fullest capacity.

By 2007, the company has been rejuvenated and has cast off its Bankruptcy Protection status.

As a consequence of all this, the company makes huge profits and pays out huge dividends to stockholders, driving up the demand for stock. The stock price is now at $60 per share.

Thus, Larry the Liquidator realizes an impressive capital gain of $59 per share -- and all because it was wise to invest in a company when it was Bankrupt.

The reason why he got such a great bargain is that the stock price was so low in 1997 as a consequence of the business being bankrupt and losing money.

That is the critique you asked for. What do you think?

Please keep up the fantastic work. :-)

 

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