I know a lot of people are scared – or worse – with the economy in such bad shape. It’s the topic of conversation everywhere you go, on every show, in every news story.
With so much depressing and scary information being thrown at us all day, every day, it’s important to step back and really try to remain balanced and understand what information we should be paying attention to and which information we should ignore.
First, turn off CNBC. These guys are NOT the people who will be able to tell you anything sensible about the economy. Most of the people on CNBC are NOT reporters, have NEVER owned any kind of real business, and over the past ten years have been wrong on almost every count about the economy. The reality is, the Dow Jones Industrial average is not the best indicator of the economy, and hedge fund managers aren’t the best people to tell you how the economy is going to do. Over the past year alone, CNBC has told viewers at least four times that the economy was about to rebound, only to see the market go far lower. CNBC told viewers that Lehman Brothers was sound, that CitiBank was sound, they said AIG was solid and Merrill Lynch was top notch. If that’s not enough to convince any viewer that CNBC has no ability to advise people on their money, I’m not sure what more you need. In fact, over the past ten years, if you did exactly the OPPOSITE of everything CNBC advised you’d be fabulously wealthy.
Second, let’s talk about the Dow Jones average. I’ve said before that the DJIA isn’t much of an indicator. It only tracks 30 companies (with multipliers) out of thousands and while many people like to parrot the idea that the DJIA is forward looking, it’s become more and more obvious that it isn’t forward looking at all. It’s reactive, panicked, and wildly unstable. For years I made money in the stock market by following the idea that I would only buy companies with steady dividend growth, actual revenue and viable products. I don’t care what anyone says about any company that doesn’t pay a dividend or shows negative long term growth. I stay away from financial stocks and complex insurance stocks. And I keep my exposure in stocks to a minimum, but the stocks I’ve purchased over the years, I’ve held onto with the idea that in five years, or ten years, I will continue to see consistent growth. The Dow is wildly overly volatile on a daily basis, mostly because of multipliers. There are stocks in the DJIA that have such high multipliers that if the stock price rises a dollar, the DJIA goes up 30 POINTS. So let me sum up: if two stocks, just two, out of thousands and thousands of stocks, rise a dollar each, the DJIA could rise 60 points and people would act like it mattered. Forget the DJIA for the most part. It’s just one, mostly irrelevant, indicator of the overall economic picture. And that little DJIA ticker you see in the corner of news and financial channels? Useless.
Next, the reality: businesses have seen revenues plummet, and some businesses are looking at negative growth for 2009. I can say that my businesses are still on track for growth this year, but I personally know several business owners who can’t say the same. The worst hit are those related to real estate and construction. But amid this, I want to segregate the difference between negative growth and real losses, because it’s almost always reported as one and the same. It isn’t.
I think most of us understand the difference between profit and loss. I think we all understand the difference between revenue and profit. This is why I generally ignore the GDP as an indicator of economic soundness, but that’s a deep discussion for another day. So when you run a business, your first priority is to NOT run at a loss. It you aren’t running at a loss, then you try to grow your profits. I can have a profit drop in my business but that’s not the same thing as showing a loss. I can see more revenue but that’s not the same thing as showing a profit. Pretty clear to me, but CNBC doesn’t seem to understand any of this.
So, when a company like Microsoft makes an announcement of layoffs as they did recently, it often comes paired up with a statement about where they see their bottom line. Believe me when I tell you that companies come up with a lot of ways to explain their bottom line, but in this case, Microsoft was citing that their profit for the quarter had missed estimates and that’s why they were laying people off.
Now, let’s stop there for a second. Microsoft made 2% growth for the quarter. Hmm. So let me get this straight. You have 2% more sales and you announce massive layoffs? I would think that in an economy where your business is still growing while others are shrinking would be the best time to hire, because you can get good people that other companies are losing. I would think that other companies distress is your opportunity, and I would think that the billions of dollars in profit that your company is still bringing in – profit, not loss – would be enough to do that. Even if Microsoft thinks that revenue will shrink and wants to be proactive, I think that the war chest they have should be enough to let them hunker down and bring in the talented people that will help them pound the competitors as the economy rebounds. I’m not wanting to single out Microsoft for this, it’s just a really obvious example of a company reporting lower profits and layoffs in one breath and trying to make it sound like they are losing money like crazy.
I’ve got a lot more to say on this, but I think I’ve gone on long enough for now.
