JustinIdea - Justin Ricaurte's Personal Blog

The Next Four Years

2008-11-05T14:26:06-08:00

It's great to see a barrier fall in America by Barack Obama being elected the first black President in our nation's history. Although, many people have what will turn-out to be unrealistically high expectations of what will happen over the next four years, no matter how good their reasons are - the Law of Unintended Consequences still lives. While Obama is great in some areas he falters in others, and just because an issue wasn't across every news screen during the election season doesn't mean that it isn't important. I wish him the best as President of the United States and making the best decisions possible considering the circumstances our country is in. The issues:

Very Excited About

Obama's energy policy. I'm hoping he picks Al Gore as Energy Secretary and has T. Boone Pickens head a panel of industry advisors. Energy determines our foreign policy, so making a smart pick here will be his most important decision.
A cap-and-trade carbon market where all carbon credits must be bought by private industry. Allocating them among participants for free would create loads of corruption. Also, if Democrats want to make sure our company's aren't at a competitive disadvantage to those in nation's with more lax environmental standards, they can make any company that produces or sells products in the United States buy carbon credits.
The closing of Guantanamo Bay prison and hopefully all the other secret prisons the U.S. has. We should not deny any person on earth their right against cruel and unusual punishment and to a fair and speedy trial by jury of the peers, not to mention access to a lawyer.
The ending of the war in Iraq. We shouldn't have been there in the first place.
Hopefully the end of most rhetoric from the White House being about terrorism.
America's world image being repaired as we stop Bush's use of "Cowboy Diplomacy"
Stem Cell research using federal funds being legalized. It's about time we started taking the lead further in this very important field of research.
Federal investment in basic research increasing, so that the pace of innovation in our country picks up again.
Intelligent Design not being given the same standing as Evolution in schools, because it is not a sound scientific theory.

Excited About

The ability for Obama to make the R&D tax credit permanent.
Greater potential investment in education.

Lukewarm About

Obama's ability to hold government programs accountable. With rock-solid majorities in the House and Senate, he won't be under as much pressure to find what should be given more money and what should be cut. This was the one good thing Bush started, while he was in office: The President's Management Agenda.
Ability of the Supreme Court to contain the Democrats with their majorities to overextending the government's role in the economy as long as Obama doesn't turn into a tyrant like FDR, when he tried to pack the Supreme Court. Currently the Supreme Court is leaning slightly conservative with a 4-1-4 break-down, so any attempt at overstepping their bounds should hopefully be struck down.
The Democrats being able to re-privatize the banking system in short order. The government has no place running the banking system and further destroying the balance between risk-and-reward in the financial marketplace.

Concerned About

Corporate taxes. If Obama closes the tax loop holes and does not lower the corporate income tax rate, businesses will be forced to lay-off workers or raise prices in order to stay profitable, especially given the current circumstances.
Health care. Moving towards a single payer system will not make our health care better. If you think government-run health care will work well, how well does government-run infrastructure work? Oh yeah, that's why our government has underfunded our infrastructure by $2 trillion, which is why our infrastructure is degrading to the point of being a developing nation. The only way to cut costs dramatically is to cut access. If you want to check out the future of health care, check out Qliance
Personal income taxes. Raising taxes never helps the country as government is less-efficient than the private sector at using the money it has, which is also why government workers are paid less. Not only that, but Obama wants to raise taxes on those citizens that make more than $250,000. At a time when the United States desperately needs investment in the country in order to create jobs and get out of the financial crisis, Obama wants to tax the group of people that invest most of their money back into the economy. If you want to pay more taxes, you should voluntarily mail the extra amount of tax burden you would like to take to the Department of Treasury as a gift. Here's the mailing address, so it is easier for you to increase your own tax burden.

Gifts to the United States

U.S. Department of the Treasury

Credit Accounting Branch

3700 East-West Highway, Room 622D

Hyattsville, MD 20782

Fannie Mae and Freddie Mac. The Democrats will want to keep these institutions alive, but no company in America should be given an unfair, government-endowed advantage in the marketplace. They helped to create the problem we're in today by creating excess liquidity in the financial markets due to their implicit government-guarantee, and now we're paying for it.
Excessive Regulation. Regulation in its current form is unnecessary. We have already bestowed police powers on the Federal government, so it can prosecute companies and their officers for fraud and other crimes. The Democrats will be tempted to over- regulate the markets, especially the financial ones, but hopefully they can't add too much regulation, or innovation will slow.
The Government bailing out the auto industry. The Democrats will be tempted to help the voters in Detroit that helped put them in power, but government intervention in industry only delays the inevitable. If the companies are not able to quickly adapt to the market, they should be allowed to die, so that they stop draining resources from the economy. If they want to invest in job re-training for these voters, then they should invest in job re-training instead of bailouts.

Very Concerned About

America's future trade policy. It doesn't matter if the economists voted Democrat or Republic, 95% support free trade. Why? Because, free trade brings prosperity to all parties involved and has created more jobs than it has destroyed. Yes, we should hold other countries to our environmental standards, but the best way to bring about this would be to make companies that produce or sell products in the United States to join our future cap-and-trade system and by permits.
The deficit. Government spending needs to be kept in check, and it should stop mortgaging the future for the present. No amount of stimulus will help revive the economy, because consumers and the federal government are over-leveraged and need to cut back on spending. Democrats being able to control spending? I don't think this has ever happened, and the Republicans haven't done much better. They need to get Keynes's influence out of there.
Monetary policy. The government has put $5 trillion into the monetary system in the last two months, which is completely unsustainable and will most likely over time as it has time to sit create massive amounts of inflation. Again, they need to get Keynes's influence out of there.
Entitlement Programs. The Democrats will want to raise taxes to cover these, but no matter what they try, they are sitting on a demographic time-bomb. Entitlements will eat-up our economy if the system isn't reformed.

The Real United States Federal Deficit

2008-11-02T12:42:54-08:00

During the Bush administration's reign, we've constantly heard the drumbeat about the ballooning federal budget deficit. While deficits of $400+ billion dollars may sound like a lot, do they tell the entire story? They don't. The Federal Government has been manipulating the deficit numbers for the past 40 years in order to make itself appear healthier than it really is. Is a Federal default likely? It's a strong possibility with the impending retirement of the baby boomers. While I hate to be pessimistic, realism is necessary and the stars are not aligned well for the Federal Government, and governments are not immune to default - remember Russia in 1998?

The Federal Government's deficit calculations are based-on the cash method of accounting, in conjunction with the unified method. In the cash method, revenue is only recognized when cash is received and expenses recognized when cash is paid. While it is very important to understand the cash flow of any entity, the cash method represents a dramatically distorted picture when it comes to the Federal Government's finances.

In 1968, Democratic President Lyndon B. Johnson had the Federal Government adopt a method of accounting known as "unified" budget accounting in order to allow his administration to use the Social Security surplus revenues to go against the then ballooning budget deficit caused by the Vietnam War. Would a for-profit company be able to use surplus gains from its pension system and other obligations in order to show excess profits but not take a hit when those liabilities ballooned? No, they wouldn't be able to. These gimmicks would bring about an accounting scandal reminiscent of what happened with accounting manipulation at Enron and Worldcom. So why does the government get to get away with it? Good question. Are the politicians in DC afraid the truth would be too great for the public to bear?

So what do the numbers really look like? If you think a $400 billion deficit is big, you'll pass out from these.

Note - 2004's huge increase is mostly due to the creation of the Medicare part D (Prescription Drug Benefit) plan

As you can see the Federal Government has been running an actual budget deficit of approximately $3 trillion a year for the last 10 years, with only one year of an actual surplus, which is about 20-30% of US GDP. Sustainable? No, it's not. Runaway spending has completely destroyed the Federal Government's financial position. Currently the Federal Government is carrying $51 trillion in debt - $41 trillion from entitlements and $10 trillion in other liabilities. If the Federal Government were a public corporation it would have a negative net worth and would be deemed insolvent.

So how can we make the Federal Government more accountable with this knowledge?

Replace use of the Unified Method with GAAP-based accrual accounting for Federal Government reporting (including taking into account the entitlement programs).
Modify the annual financial statements to show a Consolidated Income Statement, Balance Sheet, and Statement of Cash Flows, and put them at the beginning of the report to make them easily accessible.
Distribute financial statements to all registered voters in the country. If shareholders of corporations are required to be sent this information, then the voters should receive it every year in the mail as well.
Require a balanced budget using GAAP-based accrual accounting.
Reform the Entitlement System.

Other Resources:

Defined Benefits, Loose Accounting - From CFO.com

What's the real federal deficit? - From USAToday.com

Financial Reports of the U.S. Government - From GAO.gov

Accounting Insolvency - From Bloomberg

Fudging the Budget - From the NY Times

Federal Deficit Reality - From Shadow Stats

Making Executive Compensation Reward Long-Term Performance

2008-04-06T16:57:10-07:00

Now, I'd just like to say I don't know the intricate details of most executive compensation packages, but I'd like to pose this as an idea on how to align pay and the long-term performance of the company. One thing I think people get too hung up on is what the change is in 12 months of pay and stock prices. Why should chief executives have their pay based-on just 12 months of information? If you want a firm to last for the long-term, wouldn't you want to compensate them based-on long-term performance, such as improvement over the last 2, 3, 5, or 10 years? Then there's also the question of how much impact did the chief executive actually have on a firm. If an oil companies profits go up 4x because the price of oil went up 4x, there is no reason a chief executive should receive higher pay. But if profits go up 6x while oil prices go up 4x, then it would make sense for the chief executive to receive higher pay, so long as their competitors and peers saw lower profit growth.

So if you're on a compensation committee and want to create a compensation package that is good for both the chief executive and the shareholders, you should make sure to do a couple things:

1) Benchmark the performance of the firm
2) Reward the executive for long-term performance by staggering their stock options.

Point 1: Benchmarking
With benchmarking, it would be good to benchmark the firm against its competitors. If the company competes against many businesses across multiple products, it might get a little difficult, but would still be a good idea to ensure the benchmarks are done well. Other benchmarks that could be used would be new product offerings and how much growth they have generated, the productivity of the firm, the inputs or outputs of the firm (such as oil prices), and other performance measures that align with the firm's mission.

Point 2: Rewarding for long-term performance
You could also stagger the reward of the chief executive's stock options. For example:
In year 1: The chief executive receives 2 million stock options for performance. 20% of those begin on a vesting schedule starting with the day of compensation, the other options begin vesting after years 2, 3, 4, and 5, if their future performance targets are hit. For the options that begin vesting in the future years, the compensation committee will review the performance target again in each of those years over the entire time period of 2-5 years and will decide then on whether the stock options should begin to vest. If the performance targets are not achieved, the stock options will be destroyed.

In each additional year, the chief executive would also receive additional options that would follow under the same schedule and adjusted for their date of issue. This way the firm's incentives for the chief executive are aligned to create long-term value, instead of just short-term gains.

Inspiration: A Brighter Spotlight, Yet the Pay Rises (NYTimes.com)

Constructive Complaining

2008-02-12T18:55:43-08:00

It can get pretty frustrating when people complain non-stop. Most of the time it's because they’re whiny and can seem to do anything but look at the negatives. It can also be pretty depressing talking to one of these people. Do they think you really want to hear about how they can’t stand the person down the hall talking all the time, or that they don’t think they’re smart enough to do anything productive? It might be good to ask them sometime.

While these people can be quite a drag on a day, there is a way to take what they do best and turn it into a great opportunity – constructive complaining. During the normal course of a day, I tend to complain a lot, but you’ll also find me doing a lot of writing. Why? Are these two correlated? Yes. Whenever I find something worthy of complaining about, the first thing I ask myself is how could I make it better. From just this simple question, ideas are incredibly easy to generate.

Here’s an example. I tend to focus in on the lyrics of the songs I listen to, so I work on weeding out songs with messages I don’t want to penetrate my subconscious. This process can be a pain when trying to keep track of all of the songs I listen and wanting to generate a playlist for a specific mood. So, I asked how could this be made better? One way I’ve thought of to fix it is to make tagging and labeling of songs much easier for someone. To allow a person to base it on their emotions if need be and then to be able to mix and remix songs that they associate with the emotions into playlists, because a song can be attached to multiple meanings for a person. This would make setting the mood much easier for an occasion or for helping you get pumped up or excited about something. Have a sad day and need to mope for a while? Just play some sad music until you get sick of it and want to be happy again.

Now implementation and execution is the only bottleneck to this method. You’ll generate so many ideas you just won’t have the time to work on them all at once. But in the end, is it better to have too many ideas with a few gems or too few and less of a chance of a gem emerging?

Holding true to constructive complaining, here’s something to keep in mind. When you hear one person complain, think business opportunity. When you hear many people complaining, think BIG business opportunity! Happy complaining! :D

A recession? How about some inflation with that

2008-02-01T14:06:35-08:00

Good old Ben Bernanke has been working on quieting Wall Street recently, because the bankers lost money from some risky bets they made, and he now claims a recession is currently the worst thing that could happen to the United States. Last time I checked, if you're trying to get above average returns, you'll need to take on above average risk. So the fact that the banks lost billions of dollars on sub-prime mortgages should be nothing to get riled up about.

So what if the United States does go into recession as the jobs data and other indicators may be pointing to? Shouldn't the Fed lower rates? If the United States was isolated from the world, yes, it should. But the U.S. isn't an island without any trade. We might not be completely globalized, but trade still makes up about 20% of our economy.

What ever happened to the talk about inflation? Inflation must have disappeared right? Well, no, not at all. A falling dollar makes foreign imports cost more in the United States. Look at toys, clothes, and other products rising in cost unless the companies want to absorb the currency exchange costs. While that might be manageable, a falling dollar coupled with inflation in China makes a bit of a perfect storm. With Chinese inflation now hitting 11-year highs, companies will be less likely to be able to absorb the pressure on their profits and will need to pass on the price increase. Some are already asking for 20-50% more. Hopefully the Fed will get its act together, raise rates, and keeps stagflation from hitting the United States.

Social Advertising

2007-11-25T22:07:07-08:00

From business's point of view social ads are the holy grail of marketing. Being able to give ads to people based-on their previous behavior, not only from shopping with your company but with others, is the Fort Knox of personal data. This information potentially allows marketers to give consumers marketing messages through the most influential marketing channel, social networks, and based-on the users profile, giving away their preferences.

But it's also the holy thorn of marketing. When someone posts information on a social networking site, they expect their information to not be shared outside of the privacy controls they've set. When this data becomes shared, people feel violated, lowering their trust in the service that is rendered. Privacy rights groups then storm the gates of the government demanding greater protections for consumers and for federal investigations of the service providers. The EU, with it's stronger privacy protections, will already be on its way to analyzing the security and privacy implications of the services, make recommendations, then get ready for its next set of legal battles.

They say there's no such thing as bad pr, but when the consumers trust in a set of dominant services is on the line, it is bad pr. Companies should be careful when treading in the territory of personal privacy concerns. Maximum transparency about one's policies and allowing for people to control the disclosure of their information will create maximum trust. Trust is the glue of relationships and commerce. It's not meant to be abused.

"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently." - Warren Buffett

A Sustainable Policy

2007-10-15T13:28:20-07:00

Last week it was great to see Al Gore acknowledged for his efforts in promoting the building of a more sustainable society. With a decrease in pollution and energy consumption, we will have fewer incidences of illnesses such as asthma and thereby decreasing the amount we spend on health care, more money to spend on things aside from energy, greater domestic and international economic growth, and a more peaceful world because money will not flow en mass to dictatorships built off of fossil fuels, especially ones that finance international terrorism.

One big problem with proposed policy measures is that they do not allow for both parties to get what they want from the table. The Democrats want to help the environment, public health, etc., and the Republicans want to promote growth by lowering taxes. To increases its chances of success, a policy should take into account these agendas. One such as this:

A cap-and-trade pollution system where the government sells credits that companies can buy for their needs. The cap would need to be lowered each year to promote further decreases in energy used.
Requiring all business that produce goods in the United States or that sell goods to American consumers to participate in the system and to take into account a life-cycle analysis of their products.
Requiring companies listed in the United States and those that want to have government pensions buy their stock to disclose their carbon footprint.
Eliminating the corporate income tax in exchange for participation.

A policy such as this will promote business to adopt more energy efficient measures and reward the most energy efficient companies by allowing them to sell their credits and then not have to pay a corporate income tax. The elimination of the corporate income tax would further spur innovation and accelerate the development of a more sustainable environment.

This acceleration of innovation will create millions of jobs in research, development, production, marketing, financing, and servicing these new products and make American-made products more competitive in the global economy. These new employment opportunities along with the money the government makes by selling the credits will also offset the revenue lost by the elimination of the corporate income tax, keeping our national debt from increasing due to the program.

Using Songs to Segment?

2007-09-26T21:25:56-07:00

If you think about it, the music you listen to can say a lot about your inner thoughts and desires, personality, and what you relate to. Its the emotional outlet that people tend to share a lot, especially when younger. Could this provide a worthwhile way to do customer segmentation?

Pandora and Last.fm have a huge store of songs that people have favorited/bookmarked/etc. and what music they listen to at different points in time. If you look me up, you'll probably find I like to listen to a lot of club music now. You could throw me in the segment of a person that likes to go out, dance, and socialize a lot. With a little more demographic information (maybe age, education, and location), the company could then tailor ads to product categories of interest to me. Ads that might target me could be networking events going on in the area, nice clothing, or sports cars.

These ads wouldn't be able to pick-up whether I like to trade stocks or if I read business news ever day, but it might provide a nice way to find out what people want to spend discretionary money on. Who knows, with a large enough user base it might say more.

A Philosophy of Gray

2007-08-29T00:06:21-07:00

I know in many instances it is more efficient and effective to place all of your bets on one strategy, especially when working on a start-up company with limited cash. Although when going about life, I find it interesting how people like to be one thing instead of adopting a bi-pole philosophy. If you approach life from only one angle, then you will surely be able to capitalize on all of the opportunities that present themselves along that angle, and you will become more specialized at that view. But at a point, the amount that you gain from that angle no longer matches the energy and effort you put into it. You will also miss other opportunities that present themselves and it will be harder to make yourself flexible to meet new situations.

I've adopted a philosophy of gray, where I work on using both poles at the same time to maintain my flexibility to react to new situations as they present themselves. I work on keeping these poles in constant competition and cooperation, so that I can mix and match them as necessary. For example when solving a problem, I work on deducing the core problem that everything else seems to hinge on, then finding through induction how changing this bit many different ways may alter the system. This is both an art and science as the questions you need to ask for a given situation are not set in stone and the path to exploring it zig-zags a lot. There are also many dependencies that you need to account for when solving these problems. Granted, sometimes this strategy does not work as there might not be a core problem, and in those situations I work on finding a tool set that does.

An analogy for a philosophy of gray is to view everything that you are and can do as a tool. For example, I'm an ENTJ, the field marshal. This doesn't mean that I always act like all of these traits. Sometimes I seclude myself into a cave, other times something I see sends a feeling of passion through me, or I might sit back and watch what is going on in the world. Instead of saying this is all I am, why not view each letter as a tool? Sometimes being surrounded by people is the best way to regain my energy, other times a good book will do. Sometimes I need to judge quickly, other times I need to take a step back and smell the flowers.

This entire thought process came to me, because of how many self-help books there are proclaiming how you should lead your life a certain way - granted if I wrote a book about this I'd be in the same league, haha. A friend of mine has been reading a lot of these books and is convinced that

that the world is moving in a direction where it will require you to be right-brain dominant to lead.
and conversly, being left-brain dominant will not allow you to become a leader in the world of the future.

I argued that he'd be most valuable if he was both right and left-brain dominant and knew when to use each of them to his advantage. Without a combination of logic and creativity, it's more difficult to ask the tough questions and generate spontaneous ideas that you can back-up with documented research.

I personally enjoy the flexibility that being gray allows. :)

ALPFA National Convention

2007-08-09T12:34:07-07:00

I got back to Seattle from a trip to the ALPFA National Convention last night and must say the convention was awesome! Having 2400+ Latinos from the business world at Disney World in Orlando made for awesome networking, friends, dancing, and after parties! :)

The convention started off Friday night with a Salsa Competition that I took part in with my friend Nerelys. The first time we had danced together was last Wednesday, and it showed a bit on the dance floor by the judges comments, haha. Saturday was pretty slow until the reception that night with salsa dancing following immediately afterwards.

Sunday was a lot of fun. I was on the University of Washington KPMG Case Competition team, and we gave our presentation on a fictitious company called InfoMemo that needed to raise $15 million from investors to do the marketing and sales for a hybrid pda/laptop it had developed. I worked on applying what I've learned from reading Logic+Emotion and Presentation Zen. The part I presented was the Financial Analysis section, and I received a lot of compliments for the two, colorful tables I had (the case competition was mostly for accounting students, so lots of text and big quotations tended to be the norm). [link to slideshow]

One thing I learned during the presentation was that you can use your nervousness right before you present to your advantage. People will tell you that if you sense your heart rate increasing that you should take a couple of deep breaths to settle down, although I've noticed this tends to decrease your energy level during the presentation and make you less animated. I've given quite a few presentations, but right before it was handed-off to me, my heart rate doubled and I became pretty nervous. I took one deep breath, noticed it didn't do anything, said "screw it", and gave my presentation. By not trying to calm myself down, I believe my presentation was much more animated than it would have been, due to the combination of adrenaline and extra oxygen in my body.

Sadly, we didn't end up making the finals for competition, but this did allow us to go out and dance the night away, without worrying about waking-up at 6am (3am Seattle time, my usual bedtime). Monday night, we went to Epcot for the case reception, mingled with the other college students, and were able to watch the fireworks display outside on a private boardwalk. The one thing I wish they would've added was a dance after the reception, because it was a perfect time for all the students to get to know each other, and good quarter or half of them were under 21 and not able to take advantage of the club scene at Pleasure Island.

Tuesday was the grand finale with a career fair in the morning and a gala at Epcot at night. I was surprised at how quickly many of the recruiters asked you what kind of position you wanted with them, instead of getting to learn about you more. About half of them asked me within the first two sentences they spoke to me. Not being interested in getting a job, I instead told them about how I'm working on Mavenry. For a couple of the companies, I was genuinely interested in learning more about their products and services, and I was further surprised that none of them pitched me about their services after I told them I was working at a start-up. You would think they'd like the idea of someone paying them, instead of them paying someone else, *shrug*.

The gala that night was a blast! The program went a little longer but it was a lot of fun being able to meet a table of people from E+Y and Silicon Valley. Towards the end, we were able to go out and watch the fireworks display again on a private deck. This time it seemed we were much closer and the fireworks aimed more directly at us. I get excited when I see well orchestrated fireworks displays and felt a bit giddy inside at the sight of it. Once inside, we saw a couple more awards handed out, some prizes given away, and then it was time to dance the night away (for my fourth time, haha).

I can't wait until I'm able to travel more and attend conventions and conferences like this more frequently. It's awesome when you're able to meet so many smart, determined, fun loving people in one place.