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Why are there Few Entrepreneurs?

Ray Galkowski, CFA — Tue, 16 Aug 2011 18:21:26 +0000

Two recent Wall Street Journal pieces highlight our current poor economy. The first recognizes that entrepreneurship is on the decline.

Shrinking in a Bad Economy: America’s Entrepreneur Class

By JOHN BUSSEY

Imagine a small airstrip where single-seat planes head down the runway, get 100 feet into the air and crash back to Earth, joining a heap of wreckage that grows by the day.

You’d think this might discourage people deciding to become a pilot.

That’s a snapshot of what the recent recession did to many small businesses in America, where beneath the wreckage of failed companies lies a collection of would-be entrepreneurs. Economic funk, poor sales, tight credit, competition from new entrepreneurs abroad—all either choked existing businesses or caused aspiring entrepreneurs to hunker down and not take the leap.

Which leads to the question: Will the damage done by the weak economy have a long-lasting effect, discouraging the next generation of entrepreneurs?

Read the whole first piece here: http://online.wsj.com/article/SB10001424053111904823804576502482906192742.html?mod=djemSB_h#printMode

Unfortunately, the first piece fails to identify a large reason for the decline in entrepreneurship. For a hint at why few people are willing to take risks, see today’s lead editorial:

The abstraction known as “regulation” is often invoked as a reason businesses aren’t growing or hiring fast enough, and with good reason. Anyone wondering what that means in practice should consult the epic saga of the Ruby pipeline.

Read the whole thing for a clue of the nonsense that firms like El Paso must put up with.

http://online.wsj.com/article/SB10001424053111904140604576498503171054430.html?mod=WSJ_Opinion_LEADTop

When one multiplies the nonsense that one firm–El Paso–had to deal with across the entre economy–tens of thousands of businesses–one gets a better sense of why there are few people willing to start a business and hire anyone.

The Ruby saga isn’t remarkable except in how unremarkable it is, how routine, and this ordeal replicated countless times across the entire economy helps to explain why the recovery is so mediocre.

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Does Your Mutual Fund Manager (or Broker) Have Skin in the Game?

Ray Galkowski, CFA — Tue, 18 Jan 2011 19:16:43 +0000

Good article in today’s Wall Street Journal. I could not agree with it any more (subscription Required to read the whole thing):

FUND TRACK

JANUARY 18, 2011

Look for Money Managers With Skin in the Game

By CHUCK JAFFE

There is an old adage in investing: No one will ever take better care of your money than you do.

If you aren’t confident of your abilities to manage money on your own, however, there is a logical way to tweak that saying and come up with a plan to determine who you can trust. It goes like this: No one will take better care of your money than a fund manager who is taking care of his own money.

Intuitively, investors have known this is true—that a fund manager invested in his or her own fund is a better steward for shareholders—and research has touched on it, but a recent study from Morningstar Inc. proves the point more concretely. In 2010, the average core stock fund with no manager investment earned a rating of 2.93 stars, according to Morningstar. The average star rating rose with the amount of money managers invested; funds in which the manager had at least $1 million invested earned an average of 3.51 stars…

“Whatever drives it, when a manager is also a shareholder, they tend to be a better steward for your money,” said David Kathman, senior fund analyst at Morningstar and one of the authors of the study.

In 2010, 45% of core stock funds and 66% of core bond funds had no manager ownership, according to Morningstar…

…quality managers always have invested in their own fund and not worried about it…the more he or she is likely to invest in the fund, the better the performance…

“If nothing else, looking at how much the manager has invested could be a good thing to tell you if the manager has confidence in their own fund and if their interests are aligned with yours,” said Mr. Kathman.

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

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Don’t be Snookered by Investment Credential Alphabet Soup

Ray Galkowski, CFA — Wed, 20 Oct 2010 17:47:31 +0000

Please do not fall for the kind of manipulation examined in the attached Wall Street Journal article. There are only a handful of investment credentials that add value and even fewer that relate directly to the knowledge and experience required in portfolio management.

The CFA designation is one of the most difficult designations to earn and relates directly to portfolio management. And, there is a culture of ethics that permeates the CFA program and membership in the CFA Institute that some believe relates to the difficulty of earning the charter. Few charter holders would risk losing the designation–after working so hard and long to earn it–by resorting to unscrupulous behavior for short-term gains. If your mutual fund manager says he (or she) has no desire to earn the CFA designation, move your money to someone else because he or she is probably not telling you the truth.

However, as indicated by the lawsuit described in the article against Carl Wyllie, CWP, FICF, LUTC, a stock broker, I suspect that this manipulation may be more of an issue with respect to brokers–primarily salespeople who are recruited to join brokerages because of their silver tongues and presentable appearances (including ”credentials”)–than it is for portfolio managers who rarely appear in front of retail clients.

By JASON ZWEIG and MARY PILON

Just when Americans seem more desperate than ever for trustworthy investment advice, financial advisers are brandishing a baffling array of new credentials—some of which can be earned with minimal or no study and a few hundred dollars.

Increasingly, say regulators, financial advisers are using these dubious designations as marketing tools to win the trust of older, wealthier clients, in hopes of selling high-fee investments that aren’t appropriate for them…

…In recent years the number of financial credentials has soared. According to the Financial Industry Regulatory Authority, which oversees how investments are marketed to the public, there are at least 95 different professional designations for financial advisers—nearly double the 48 it listed in 2005.

The Wall Street Journal has found at least 115 others that aren’t tracked by Finra…

…The certified retirement financial adviser, or CRFA, for example, sounds similar to the CFA designation. But the CFA requires roughly 900 hours of study in accounting, economics, ethics, finance and mathematics, and only 42% of candidates pass its three required exams, a process that can take several years.

The CRFA, by contrast, requires that students pass one exam consisting of 100 multiple-choice questions, for which 40 to 75 hours of preparation is typically sufficient preparation, says Lynda McColl, a spokeswoman for the Society of Certified Retirement Financial Advisors, which grants the CRFA designation.

Read the whole thing at:

http://online.wsj.com/article/SB10001424052748703927504575540582361440848.html?KEYWORDS=zweig (Subscription required)

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