This is the season to watch the Dickens classic, “A Christmas Carol.” We all know the story of Ebenezer Scrooge, a businessman who has been consumed by greed. He is visited by three ghosts who collectively show him the error of his ways. 

Attacking businesses and their leaders as greedy is a common refrain, but how do we know this is the case? I would suggest that corporate greed could be measured by the extent an industry raises their prices relative to overall inflation. The higher the price increase above and beyond inflation, the greedier the industry. Does that seem fair? 

If so, then which industry is the greediest of them all? Would it be oil companies? No. While there are short periods of time where oil prices rise faster than inflation, there are more times when inflation goes up while oil prices stay steady. In fact, in 1980 a gallon of gas cost $1.19; adjusted for inflation, that would be $4.25 in 2022 dollars. Today the national average price is $3.01. So adjusted for inflation, gas costs less today than it did in 1980. 

How about the tech giants? The basic iPhone cost $499 in 2007, which would be $739 in today’s dollars, and it came with 4GB, which won’t store a lot of family pictures. The iPhone 15 costs $799 and comes with 128GB. That is a lot of added power for very little additional cost. 

The greediest industry in America, by a large margin, would be the industry of higher education. After adjusting for inflation, college tuition has increased 747.8 percent since 1963, according to the Education Data Initiative. Had college costs risen only by the rate inflation since 1963, the average cost today would be $2,122.75. 

I know what you are thinking: but colleges are nonprofit, and only people who make profits are greedy. So they say. Nonprofit is a tax status, not a business plan. In my experience, greed is measured by how obsessed one is over money. When I go to buy an iPhone, the subject of price will of course come up, but usually not until the end. We mainly talk about features: memory, phone quality, battery life, and coverage. Will I lose signal? How much data can I download? Then we discuss the price. Once decided upon, that is it. 

College admission starts with a full financial disclosure. It is all about cost, who will give the most aid, etc. Once in college, they start right away with the pressure to give. Once you are out, saddled with life-altering debt, the only thing one will hear from their school is, “Please give more.” The more they charge, and the more people give, the less time they seem to spend actually educating. 

Over the last few weeks, the most elite colleges in our country have been exposed as frauds. As Fareed Zakaria of CNN recently said, our universities “have gone from being centers of excellence to institutions pushing political agendas.” This CNN anchor went on to say, “New subjects crop up that are really political agendas, not academic fields.” 

Has there ever been an institution that has become this greedy and corrupt? I can think of only one: the Roman Catholic Church of the Middle Ages. Not today’s church, but the one of indulgences and inquisitions. The parallels are striking. 

Indulgences: First, a refresher – indulgences were payments to corrupt church officials who would then claim that the donors were forgiven of their sins…and that money ended up mostly in the pockets of those church officials. Today, we have the example of author and academic Ibram X. Kendi, who was lured to Boston University, where a reported $43 million funded his Center for Antiracist Research. The money came from corporations wishing to be forgiven for their lack of diversity. Three years later with little to show for the money, the majority of the staff was laid off. According to Saida Grundy, an associate professor of sociology at BU, this center showed “the pattern of amassing grants without any commitment to producing the research obligated” by them. Sounds a little like an indulgence to me, but this is not just in the academic wings of universities these days. 

On the other end of the spectrum, Texas A&M is now paying Jimbo Fisher approximately $76 million not to coach football. No, the athletic departments cannot be left out if this. This money comes from alumni who are told that they must donate if they even want the right to then pay for season tickets. It may be completely shameful that the presidents of three of the most elite universities in our country don’t know that genocide is a bad thing, but it is just as dense for Stanford and SMU to believe that they belong in the Atlantic Coast Conference. Note to our readers – if you are ever asked, genocide should always be condemned and Stanford is in California, which borders the Pacific Ocean, not the Atlantic. Indulgence indeed. 

One would have to have their head buried in the sand to ignore the inquisitions that have plagued our universities over the last several years. Cancel culture is real, and just like the days of the Spanish court, if one dares speak heresy, then he must be punished. Our universities have stopped teaching history and now they are repeating it. 

In 1517 a brave priest, Martin Luther, nailed 95 theses on the door of Castle Church is Wittenberg, Germany. His document revealed to the world the corruption that had grown within; what followed was the Protestant Reformation. Institutions can be reformed and redeemed. While it was not their intent, the three university presidents may have started another reformation. One can hope.

Scrooge awoke from the visit of the third ghost to learn that it was Christmas day. He hadn’t missed it. He had been transformed by the revelation of ghosts and it was said that he kept Christmas well. The same can happen to our universities, and we can hope that process has begun. I personally believe a positive next step would be for them to lose their tax-advantaged status; maybe paying taxes would bring a little reality to the ivory tower. At least that is my perspective. 

Chuck Osborne, CFA

Managing Director 

~Greedier than Scrooge

How do we know we are doing the right thing? Several years ago, I interviewed an industry veteran for a potential role at Iron Capital. I informed him that we had a zero tolerance for ethical violations, and he assured me this was music to his ears. Integrity was the most important thing in the world to him. In fact, he actually referred to himself as Mr. Integrity.

Mr. Integrity was working at Fidelity at the time, and while we were still considering him for a position, we needed his help. I don’t recall the details, but to get what we needed for a particular client, we had to assure Fidelity that we would bring a certain amount of business to their platform. This is not what Iron Capital does; we are not salespeople, so we were not willing to comply with Fidelity’s demands. We asked Mr. Integrity if there was another way, and he suggested that we simply lie: Tell Fidelity that we would do what they wanted, then once we got what we needed, just forget about it. He assured me that Fidelity didn’t even have a way of verifying after the fact.

Everyone thinks of themselves as ethical, but when push comes to shove, most will act out of pure self-interest. Dan Ariely is a professor at Duke University and a pioneer in behavioral economics. In his book, “The (Honest) Truth About Dishonesty,” he presents several studies which prove that most people will cheat if given the opportunity, and that conflicts of interest are stronger than most think.

Our industry is full of conflicts of interest, and regulation has centered around dealing with conflicts through disclosure. Ariely showed that when conflicts were disclosed, the individuals who disclosed the conflicts actually acted worse. His theory is that disclosing the conflict eases their guilt.

There are obvious conflicts in our business, but some are less so. For example, exchange traded funds (ETFs) versus mutual funds. ETFs have grown in popularity, and the reason often stated is that they are less expensive than mutual funds. That is because mutual fund fees include both the cost of managing the fund and the cost of servicing an account: A mutual fund has shareholders who buy into the fund at the net asset value, and the fund creates new shares every time a new investor joins. The fund has to manage an account for each shareholder.

ETFs, on the other hand, are traded on an exchange like stocks. The only disclosed fee is for the investment management as there is no account at the fund level; the account would be at the brokerage firm level. Salespeople tell you that ETFs are less expensive, but that might not be the case. I had a boss who loved to say that costs are like water balloons – squeezing one end simply makes the other end bigger. The ETF does not charge for account servicing; that expense is instead paid for by the cost of trading, which is the dealer spread. The ETF is not necessarily cheaper when all costs are considered, but the administrative costs are transferred away from the fund family and to the broker-dealer.

ETFs are more popular on Wall Street because Wall Street makes more money on ETFs. The idea that they are always cheaper is at best a half-truth, but it is a half-truth that also benefits the business model, so they are widely accepted and pushed by those who benefit. This is how conflicts work.

In our institutional business, there is a trend for consultants to take on more responsibility in managing retirement plans. The wonky term is that they become a 3(38) investment manager, which is a term that comes from ERISA regulation. In plain English, it means the adviser takes discretion to select the fund lineup for a retirement plan. Most argue that the adviser should then be paid more because she has more control and theoretically more liability. The reaction from most advisers is that if they have complete control, then the lineup should reflect all of their favorite options. Historically plans would be customized to fit the needs of a particular plan sponsor, but now the adviser makes the choices, and all of their plans look the same. The rationale is that they should put best-in-class options in every plan, but in reality there is no one best option. The truth is that making every plan look the same drastically reduces the amount of work for the adviser.

Higher fees for less work – that is a pretty big conflict. This doesn’t mean that ETFs are not appropriate in some circumstances, or that picking only the favorites may not work out. It does mean that these types of decisions, and many others, are often more conflicted than we all wish to admit. Being ethical is hard, and it takes a considerable amount of self-awareness. The world would be a better place if we all made that effort. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director

~Ethics

We just celebrated Labor Day, the unofficial end of summer and the official beginning of the college football season. I have always loved college sports – there is something special about them that the professional games just cannot touch. They are in trouble, however, from a disease we know all too well in my business: Greed. The irony of greed is that it ends up killing the goose who lays the golden eggs.

My freshman year at Wake Forest, we played the University of North Carolina (UNC) at home for the 100^th matchup of the two teams in football. Wake won, and the first person I called when I got back to my room (there were no cell phones) was my brother, who had gone to UNC. A little trash talk was in order.

The state of North Carolina was a great place to go to college because there are four major universities, all rivals, within 70 miles of each other. In days gone by, the men’s basketball season would start with what was called the Big Four Tournament in which UNC, Duke, Wake, and North Carolina State (or just State in NC) would play each other. This meant that these teams often played three times in the regular season, and in these rivalries, anything could happen. Today everyone talks about UNC and Duke, as they have had the most basketball success over the last several years, but it wasn’t always that way. State was the first basketball powerhouse in North Carolina, and when I was a kid, State vs UNC was considered the biggest of the rivalries.

Wake has had its moments as well. Although not as successful as the other three (Wake is the only North Carolina school without multiple basketball championships), these are still rivalry games. Duke came to Wake as the number-one team in the country twice when I was at Wake, and left both times with the agony of defeat. (They lost the other two years as well, but they weren’t number one at the time.) 

The thing that made it so fun was the proximity. When one attends one of these four schools there is a significant chance that siblings and friends are at one of the other three. For example, I was the fourth of my cousins to attend Wake for either undergrad or law school, and there’s my aforementioned UNC brother. I have a cousin who graduated from State and married a UNC grad, and I had an uncle who went to Duke…I dropped by his house for a visit after we beat that number-one team.

This is the magic of college sports. All the best rivalries are built mostly by proximity. Alabama and Auburn, Ohio State and Michigan, Georgia and Florida. It’s a big deal because it is full of tradition, and we know that the outcome of these games will either allow us to gloat to family, friends, and co-workers for an entire year or doom us to listening to them.

This popularity leads to an unsavory side effect: money. According to CBS Sports, schools in the SEC each get $49.9 million a year from sports. The goose is laying golden eggs, and just like the fable suggests, there is a stampede to see who can kill that goose the fastest. The PAC 12 conference has imploded and now Stanford, University of California, Berkeley (Cal), and Southern Methodist University (SMU) are joining the Atlantic Coast Conference (ACC). After all, who doesn’t immediately think of Stanford when someone mentions the Atlantic coast…

I didn’t get to watch much football this past weekend. My wife’s cousin hosted his daughter’s wedding reception, and we traveled to Raleigh for the festivities. He graduated from Virginia Tech, also in the ACC. I asked him jokingly if he was excited about the new rivalry with Stanford? His answer was a short, “No.”

In their greed the remaining college conferences and the member university presidents are destroying everything that makes college sports unique. This is just the latest realignment, as it has been going on for some time, and I would argue that it proves my point. Boston College joined the ACC some time ago. I grew up in the south and am no expert of Boston College history, but I remember their football team upsetting Miami, and their basketball program making deep runs in the NCAA tournament.

Now they struggle, and why wouldn’t they? What kid growing up in New England dreams of one day playing against Georgia Tech? They want to play other schools in the Northeast that their friends, family, and neighbors attend. They thrived in the old Big East and now they dwell in the bottom of the ACC. Arkansas was a strong member of the old Southwest Conference. Maryland won national championships when they were in the ACC. Miami was a football powerhouse pre-ACC membership. Each one of those schools killed their goose.

This year Wake won’t even play UNC in football, but Wake will go to Notre Dame? How much attention do you pay to the classic fables: A farmer had a goose that laid one golden egg every day. At first he was thrilled, but over time he wanted more. He decided to cut the goose open and get all the eggs at once; when he did so, there were no eggs inside, and now his goose was dead. Greed is a deadly thing. That is certainly true in investing, and nowhere is it as evident today than at our universities. At least that is my perspective.

Warm regards,

Chuck Osborne, CFA
Managing Director

~Killing the Golden Goose

Earlier this week I received the following email:

“Hello Chuck, we have a team of founders from Harvard and are backed by professors from MIT and Harvard. Would you be interested to invest in our Series A round?”

This came from someone named Archie at a firm named GenesisAI. That is the entire email. They went to Harvard, know a professor at MIT, and have AI in their name. What else could an investor possibly need to know? You can’t make this stuff up.

One of our core rules for investing is to know what you own and know why you own it. It is a concept we stole from Peter Lynch. In my opinion that rule, and the concept of spending at least as much time in research when one buys a stock as she would when buying a refrigerator, are Lynch’s two greatest gifts to the investing public.

Maybe you think my email example is a one-in-a-million crazy name-dropping direct marketing ploy, but it happens regularly. Earlier the same day I received an email from someone who claimed to be familiar with us because he used to work at Morgan Stanley. He then listed a handful of large private equity firms that are clients of his firm and asked for some of my time. I have no idea what his firm does; I’m supposed to want to talk to him because he works with some well-known people in the financial world.

This is emblematic of a bigger issue in our society today: Being part of the “right” crowd has become more important than doing the right thing, or even attempting to think through what the right thing is. Of course, the “right” crowd is in the eye of the beholder, hence our perceived notion of society being polarized.

There is a sign on our den wall at home that reads, “Great minds discuss ideas, average minds discuss events, small minds discuss people.” We are becoming increasingly small-minded in our society today. Maybe I am just a romantic, but I truly believe that if we could move our conversations away from people and toward ideas, then we could begin to mend a lot of fences.

We are coming up on our nation’s birthday. It always frustrates me when people push back on the idea of American exceptionalism. This isn’t a boast, it is simply a fact: the United States of America is the exception. We are a nation founded on an idea; there really isn’t another nation that can claim that. As Lincoln so famously said in his address at Gettysburg, “…our fathers brought forth, on this continent, a new nation, conceived in liberty…”

Our founding fathers were not interested in name-dropping. We are a nation conceived in liberty largely because one man, George Washington, cared more about an idea than he did about being listed among the great rebellion leaders of history, nearly every one of which went on to be just as much of a tyrant as the tyrant he overthrew. Washington was offered a crown, and he turned it down. That is exceptional.

I have always loved the 4^th of July, but over the last 20 years it has had special meaning to me. Iron Capital, as we know it today, began when I came to an agreement with my co-founder, Larry, on July 1, 2003. I had left Invesco at the beginning of the year with an idea in my mind, and it took me several months to turn that idea into a business plan. I quickly figured out that I was not going to be able to do this alone, so I contacted an old friend and former colleague who I thought might know someone who would be interested in investing in my idea. I got less than halfway through my presentation when he stopped me and asked someone in his office to grab a certain file. They came back with the file of a client located in New Orleans that had just sent a letter essentially asking for the services I had just described.

Specifically, they wanted someone to conduct a thorough independent analysis of every investment in their retirement plan and potential alternatives. This was on Wednesday, and Larry had a meeting with the client on Monday. The request was outside the scope of his firm’s capabilities, and he didn’t know how he was going to handle it until I came in with my presentation.

That afternoon I contacted a friend still at Invesco; I needed access to a particular software and a database, and he gave it to me (I have never told that part of the story, but it was 20 years ago…the statute of limitation has to be up by now). With access to the right software and database I worked for 50+ hours in three-and-a-half days and met Larry at the airport to fly to New Orleans. Together we saved the client for Larry, and he and I discussed our partnership on the plane on the way back home. It was late June, and we made our agreement effective July 1, 2003.

Larry had purchased a broker-dealer named Iron Capital Markets, and the previous owners had set up an investment adviser named Iron Capital Advisors. It was an empty shell with no actual clients; he was going to just shut it down, but instead we used it to implement my idea. He asked me if I wanted to change the name, but it was the idea that mattered to me, not what we called it. The name stayed.

Don’t worry, the first thing we did was purchase that software and the database. We still use it to this day. What was my idea? People seeking investment advice should have direct access to expert investment counsel. It is hard to state how revolutionary that idea really is. Our industry has evolved to add layers, and with those layers came conflicts.

Maybe we would be more successful if we just dropped names everywhere we went. Wouldn’t you like to invest with the same people who handle her portfolio? How cool would you be? I didn’t go to Harvard, but I did go to Wake Forest, and will put that education up against any in the nation. We could probably impress a few folks if we dropped client names, but that isn’t our style. We would rather focus on the founding idea that makes us who we are than on how impressive our background and our client list is. That is what we have been doing for 20 years, and it has carried us this far. I am thankful for the team of professionals who have joined me on this journey, and we are all deeply grateful to the clients who have trusted Iron Capital along the way.

Great minds discuss ideas, average minds discuss events, and small minds discuss people. For 20 years Iron Capital has strived to keep our focus on ideas. I don’t claim that this has made us great, but it has made us better than we otherwise would be. At least that is my perspective.

Here’s to 20 years of providing clients with direct access to expert investment counsel.

Warm regards,

Chuck Osborne, CFA
Managing Director

~Ideas, Events, People

The world will come to an end on June 1, 2023, unless the United States raises its debt limit. Okay, maybe that is hyperbole, but it pretty much sums up the press coverage. 

Our regular readers will know by now that I am a big believer in facts. I hold onto the romantic idea that everyone is allowed to have a unique point of view, but that we are not allowed to have our own unique facts. Capital T Truth exists; we may view it from different perspectives, but we cannot deny it. Therefore, it should come as no surprise that the media coverage of the debt ceiling debate is like fingernails on a chalkboard to me. 

“Eighth-Graders’ History, Civics Test Scores Hit Record Low,” reads the headline of a May 3 Wall Street Journal article by Ben Chapman. What does that have to do with the debt ceiling debate? Everything! Everything people of my generation need to know about the debt ceiling debate, we learned Saturday morning between cartoons. “I’m just a bill…And I’m sitting here on Capitol Hill…” – “Schoolhouse Rock” taught us more about civics in that one episode than our current day eighth-graders know. 

This is how our system was designed to work: If legislation is required, which it is to pass an increase in the debt limit, then the House of Representatives must pass a bill. One wouldn’t know it from watching the news, but that has occurred. That bill then goes to the Senate. If the Senate approves of the bill, they can pass it as-is, but if there are disagreements, which there are this time, then the Senate passes its own bill. The two chambers then go into committee to negotiate compromises between the differences on the bills. Once out of committee, both houses vote to finalize the bill and if passed, it goes to the President for approval. The President can sign it into law or veto it and send it back. 

Obviously in real life, the president and his administration have a role in leadership. There is no reason to pass bills that would be vetoed, and the administration can persuade representatives and senators, especially from the same party. However, the power of the president ends there…or it is supposed to. Over the last 20-some years, Congress has ceased to function. There was a day when politicians campaigned at election time and then actually went to work. Today, Congress spends its time in performative art. They video committee meetings so each politician can have a turn delivering a zinger that will get lots of likes on social media from their most partisan supporters. 

Meanwhile, someone has to actually run the government, so in the absence of a functioning Congress, the administration has taken over. One’s opinion of whether this is good may differ based on their perspective, but regardless, it is a fact – it is a fact that this has occurred, and it is a fact that this is not how our system was designed to work. 

The news has reported that President Biden believes President Obama made a mistake by negotiating with Congress in 2011, and this is why he has refused to negotiate now. Let’s pray that this is not accurate and that he and his staff realize that they have no choice but to negotiate. That is the nature of our system. 

The thing about American democracy is that no one ever gets what they want, but everyone gets something they can live with. We are no longer teaching that to our children, and there will be grave consequences if that is not remedied. An educated public, and the ability to compromise and to accept incremental progress, is crucial to the survival of democracy. 

The problem with allowing the administration to run everything is that we now have a winner-take-all back-and-forth in our nation’s policies: We see it in our economy, we see it at the border, and we are seeing it with this debt ceiling craziness. The last administration wanted to reduce regulation while this one cannot regulate fast enough. The last administration wanted to build a wall, and this one wants to have no border. The one thing they have in common: neither wanted to negotiate with Congress. 

Our system of democracy has lasted longer than any other. The reason? Because our system requires stability. A new president means only incremental change, not a wholesale back-and-forth. Zealots of any kind do not like incremental. It is that stability which, while occasionally causing us to act more slowly than history would say we should have, keeps us from going over cliffs. 

We as citizens can make long term plans because we know there is stability. Our foreign allies know they can rely on us, and our adversaries know we will be there regardless of election outcomes. All of this goes away if we continue down this road of administrative rule and a complete flip-flop from one administration to the other. 

To maintain this stability, we need to end politics as a career option. Term limits might help, but in my mind, the solution lies in the Constitution. When our Constitution was ratified in 1788, our founders included a minimum age requirement of 25 for a representative in Congress. At that time in history, the few who went to college did so when they were as young as 13; by age 25, they likely would have been married with children and several years into a career. The Baby Boom generation is the first in American history to have the teenage-to-college experience that we now think of as normal. That age requirement should be amended to be an experience requirement. No one should be allowed to go into politics until after they have had a career doing something else. They should be adults who understand the art of persuasion and compromise. 

Meanwhile, the house has passed a bill. The senate needs to act. Show today’s eighth-graders how our system is supposed to work. That won’t happen; we will go right down to the wire while all parties pose for the cameras, then something will get done to kick the can down the road. However, our world would be just a little bit better if it worked the way it should. At least that is my perspective. 

Warm regards,

Chuck Osborne

~How Is This Supposed to Work?