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I think there’s a lot of cognitive biases that cause this.
First of all is the “fair” notion. The idea that life is ever supposed to be equal or that people are supposed to get roughly equal amounts of reward and that there’s some ceiling cat to appeal to when someone has “too much” which is actually in practice “has more than ME.” And really, that’s never been reality. In fact, it’s the opposite. If you’re doing more, or providing necessary services, you deserve more. But, that’s not “fair”.
Second is that people always have the wrong idea about just how much work their betters actually do. I’ve seen this when people talk about the CEO. They assume that their work is easy, that they do slacker work and go play golf. Or they assume that it doesn’t take any more intellectual capacity than they themselves have. Again, this isn’t true. Anyone who has run a business— even a small one — can tell you that the business runs your life. Your “vacation” simply means working from a beach instead of an office. Slacking off means working 80 a week instead of 100 a week. You can kiss family time and friend time goodbye unless you can work while hanging around with them.
And it requires serious smarts as well. If you’re not smart enough to understand cultural trends properly, new technologies, regulations, emerging markets, competition, and the entire operation of the business from top to bottom, then chances are you won’t actually have a business in five years. One bad marketing decision cost InBev billions. Misunderstanding digital photography killed Kodak. One reputation killing bad product can tank you. And it’s a constant thing. Technology alone moves so fast that a person who cannot understand emerging technology from day one is at a huge disadvantage. Being too slow to adapt is deadly, but so is backing the wrong technology.
Given that the first half of the OP is defending landlords, this isn't really relevant. There is an active component to landlording (finding tenants, arranging repairs, etc.) but in the UK market most landlords hire agents to do this for them (and in fact most lenders insist on some degree of professional management of rental property). Collecting land rents is the closest thing to zero-effort moneymaking there is. When most capital was agricultural land, there really was a leisure class that worked less and spent more than the rest of us - see Jane Austen. In the future when most capital is residential land, the same will probably be true - see Thomas Piketty.
Actual capitalists who invest in productive assets have to do a lot of work creating those assets and ensuring they retain their value (and hiring someone to do it for you will cost you 2-and-20 if they know what you are doing, which doesn't leave much for you). But landlording is basically having a piece of paper saying "I, Charles III, by Grace of God and by virtue of my ancestor William the Conqueror having stolen this land in 1066, will cut the head off anyone who deigns to use the land without paying you off first". You need to collect the toll, but the work that makes the land valuable (including the violence incidental to making the promise meaningful, which can get very expensive indeed) is done by Charles's government and the community that support it.
Not really, because landlords assume all of the cleanup and maintenance and repair for every unit and the common areas as well. He’s the one finding a guy to fix the leaky roof, fixing the wiring, maintaining the building, providing security, working out the landscaping, fixing the parking lot, and making sure the garbage is collected and the utilities are paid. All of the things that go into ownership is on him for however many units he owns.
This isn't actually true, at least not in the country where I live.
Incorrect, when I was renting I was liable for damage to the property. I had to threaten taking the affair to the rental tribunal when they tried to charge me for a problem I reported when I moved in.
They did not find a guy to do any of those things, the utilities were still paid by me the renter and the garbage collection is done by the local council (technically the landlord paid rates - however this cost is passed onto the renter so it doesn't actually matter).
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I do think simultaneously that being a CEO is hugely demanding in terms of mental ability and time consumption, but also there's a ton of Fisher Kingness attributed to whoever happens to have the top job and they're largely fairly interchangeable.
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I think these is some truth to this though. I agree with 'the left' that many CEOs and managers are way overpaid relative to the value they create and compared to effort or skill. Look at the horrible performance of Cathie Wood's funds or Chamath SPACs. These people are worth billions or hundreds of millions of dollars, yet for piss-poor performance and bested by buy and hold of index funds or 60/40-bond mix to show for it. These people are not often "better's" --they just had maybe better networking, better school, better luck etc. Except for maybe the CEO of tech companies, they are not necessarily that much smarter. They just took more risks, which paid off, ignoring survivorship bias.
OTOH, extremely high CEO pay is not so much about doing more work, but as an incentive to encourage others to work hard in the hope of becoming promoted.
Plain old supply and demand drives CEO pay, for the most part, not value-over-replacement.
Even sub-replacement-level CEOs require an extremely unusual skill set. Large companies are like Game of Fucking Thrones. Running one is like herding cats where one of every three animals is actually a serial killer, a thief, or a company-destroying liability risk and three out of four would sell you for a sandwich, must less a shot at your job. On top of that, you're steering (at best) half-blind in a hurricane, an earthquake, and a tornado at the same time (macro-economically speaking).
There are certainly problems, like back-scratching boards determining compensation, but I don't see obviously superior alternatives.
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Tangential nitpick because this always really grinds my gears when I see it...
The index funds versus hedge funds comparison is insanely dishonest. Warren Buffett started it decades ago and it's an argumentative sleight-of-hand.
Broad market index funds (anywhere from 100% equity allocation to the 60/40-bond mix) pretty much track "the economy" as a whole. You're betting on all of the horses. Across cap size, across sectors. If you're including bonds, then you're covering the two largest asset classes on earth. If you can stay in the market long enough and tolerate bouts of down years, you're going to do just fine because the "oh shit" scenario is literally a 20-40 year sustained depression for the United States and very probably the rest of the world. Which, if it happens, fucks everyone including hedge funds and techBros. For generations.
Hedge funds are always much more narrowly constrained in what they invest in, and they often target very specific return profiles. "We long/short large cap non-financial equities and forecast capturing 80% of broad market upside in outperformance years while avoiding draw downs of over 20% in down years, with high annual liquidity but low turnover." That's contraint-on-constraint-on-constraint that index funds don't have to deal with at all. And hedge funds call their shots in that they predict a return profile within a given timeframe and aren't allowed to take excessive risk or leverage to get there. They actually can't "bet it all on black" again and again. Simply allocating to a portfolio with too elevated risk metrics constitutes something close to a breach of contract.
Why do hedge funds do this? Because most of them are trying to appeal to institutional investors (retirement funds, university endowments, etc.) that have really specific needs for performance, risk management, and cash disbursements for every single year. If you're CALPERS and you need to - every single year - push out $10 billion of retirement cash to your members to avoid a massive class action lawsuit, you need to find a hedge fund that has a reasonable chance of delivering part of that return profile. And they have to (try to) guarantee (part) of that return no matter what the rest of the market does. If there's a bad year, neither the hedge fund nor CALPERS can say, "Hey, sorry, we'll just wait a couple years to get back even." Nope, those retirees want their cash on the first of the month no matter what - and they probably have the legal language to back it up.
Why only part of the total return? Because no large institutional investor is allowed to give all of its money to a single fund / general partner. Diversification is always (nowadays) written into their charters. So, maybe the first chunk of money goes to the hypothetical fund above. That means that anybody else who's doing long/short in large cap non-fin equities is automatically off the list to receive another chunk of the institution's money - there's too much correlated risk. Pretty soon, you're investing in ARK Innovation because it's the only fund left who can take $100m - $1bn [:1] of capital that doesn't look like it's correlated to the rest of your portfolio.
Hedge funds are providing a very precise service at scale to a clientele that needs that precision within a time bound box. Index funds are providing general returns that track an economy over large cycles. It's pretty close to the difference between looking for a general practitioner doctor for health advice ("diet, exercise") and looking for a brain surgeon with tumor removal expertise that can also guarantee your blood pressure won't spike and your body temp won't fall too low during the surgery. Yep, that second guy probably has more dead patients on him, but that first guy has mustard on his shirt and likes to watch Mad Money in the afternoons.
[:1] Another thing people like to point to is that smaller funds often outperform their larger peers. That's because you have way more flexibility as a smaller fund and it's easier to deploy smaller amounts of capital. Big funds are a special monster because there are only so many things you can plow $1bn into and NOT move the market on your own.
The idea of the bond allocation is that bonds tend to do well relative to stocks when the economy is not doing so well, like in 2008 or 2001-2002. The problem is this failed massively in 2022.
Hmm but there have been many notable hedge fund failures of supposedly safe strategies, notably the collapse of LTCM.
"The market can remain irrational longer than you can remain solvent." That's LTCM in a nutshell.
There's no such thing as an omni-safe investment. What you have in the strategies employed by firms like LTCM are situations that, when identified, have a very high if not perfect chance of doing exactly one thing eventually.
LTCM modeled spread convergences. You can look up the mechanics on your own. The problem is that in order to take advantage of this strategy, LTCM had to pay what amounted to insurance payments until the spread did, in fact, converge. The longer that doesn't happen, the more you pay. And if you're liquid capital dries up, sucks to be you - even if you turn out to be right! Additionally, LTCM eventually succumbed to the attraction of using leverage when the spreads themselves started too narrow. Leverage amplifes both returns and losses so if the spreads stopped narrowing and widened, even just a bit, LTCM would potentially be blown up - which is what happened during the 90s Russian debt crisis.
All of this is to say that even the risk-free rate of return (most often 10yr or longer Treasury Bonds) isn't static and isn't actually risk free if you layer it with leverage, derivatives, etc.
In terms of hedge funds "calling their shots" - I didn't mean to imply hedge funds sell "safe" strategies or that they always hit their anticipated performance. This is actually one of the brutal realities of the industry - if you're a senior analyst or a portfolio manager and you miss your targets even for one year, there's a really, really good chance you will get fired and, at best, only be able to find a new job a step down from where you were. While hedge fund compensation is pretty insane, it's a lot like professional sports in that you might only make it for 3,5,10 years before being close to unemployable. A lot of blowout types tumble down to financial consulting or fair valuation opinions or just market analysis and equity research. Still (mid to high) six figure jobs, but a far cry from some of the 7/8/9 (it happens) figure payouts people see in single years.
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The quality of tech CEOs is pretty mixed too. I’ve known glorified conmen whose only skill is getting people to put money into obviously unworkable startups, sages with astounding achievements (from 30 years ago) who don’t have a clue about the area they’re trying to break into, and consultants who just sit there and brainstorm new slogans while the whole edifice degrades.
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Does the stereotypical CEO work hard? I don't doubt that small-business owners and startup CEOs work hard. But what about CEOs like the head of a big bank or an oil company, where there are profits semi-automatically coming in?
Mostly it seems to be the work of a king to me. The king doesn't work hard. But the king is the final authority, he makes decisions between war or peace, he deals with the Papacy, he arbitrates between feuding nobles, he directs that royal funds be spent on bridges or cathedrals, he creates institutions... All 'work smart' stuff rather than 'work hard' stuff. Nobody has the power to make him work hard because normally things are going well and he's the boss.
Fortune 500 CEOs aren't working bone crushing hours the way a small biz CEO might. (More on that second part later).
But, being an F500 CEO is incredibly hard.
I had the opportunity to meet and interact with one at the F500 I worked for in my mid 20s. This was a non-trivial interaction that occurred because a series of events led me to being on this big strategic thrust planning team that the CEO was half-personally overseeing. Another series of events led to a bunch of us being at the HQ on a Saturday. Right before lunch, the CEO walks into the main "war room" and literally rolls up his sleeves to help out. He was there all day. In that setting, everyone was talking with everyone at some point or another and the various "ranks" that usually created some deferential distance were not as palpable. It was easy to talk to the Big Guns, so I just sat down and started talking with the CEO.
The conversation can pretty much be summed up like this:
TollBooth: "So .... what do you actually do?"
F500 CEO: Chuckling, "I make about four decisions per year and, the rest of the time, am on call to answer questions that the board and wall street investors have. That's the easy part. I'm basically a financial psychotherapist. The first part is way harder."
TollBooth: "Why?"
F500 CEO: "Because those four decisions dictate the 16 - 20 decisions I can possibly make for the next 4 to 5 years. If I make the wrong ones this year, we, as a company, have fundamentally worse options in the out years."
TollBooth: "So, just make good decisions this year"
F500 CEO: "Well, yeah, that's the goal. But these 4 or so decisions I make rely on, without exception, massively incomplete information that I then have to use as part of a decision making model that incorporates what I think our competitors are going to do, what the market will support, and what won't cost us customers. All of those things are interdependent and you can't really say which one comes "first" in the decision making chain. It's like hitting a half dozen moving targets that are all moving in random directions - if you time it right, you can blast three of them at once, and that's a really great year. If you don't, you miss everything and it looks to outsiders like you were shooting randomly."
TollBooth: "Why are we doing this strategic thrust thingy right now?"
F500 CEO: "Because I screwed up one decision two years ago and I think I can salvage it with this. If I can't, I probably am gone 2 years from now."
I'd add one personal/emotional level consideration to this; you have to live with the uncertainty and lack of control leading up to and following making these four big decisions each year. One thing I learned in my first technical sales engineering team was that a sales process might be long, but you can sort of see it developing day to day and week to week. So, you can reduce your overall anxiety by just doing the next obvious thing in the process, even if that thing is banal (scheduling a follow up meeting, asking for a how-to guide review, whatever). A good analogy is training for a sports meet. You put in the work day in and day out, and then, all of a sudden, it's the big payoff day / week and you go out and get it (or don't). All your nervous energy along the way, however, you can divert into the training (or the development of a sales cycle in this case).
The CEO can't do that. There's no training cycle that builds up to something. It's literally four decisions made on four different days across a year. I think he could, and did, think about the decisions a lot before he made them. And I also think he probably had a team of smart people digging through a mountain of data and projections. But, like he said / I wrote above, these decisions had really incomplete information - you can't brute force your way through them even with a million spreadsheet runs. And, there isn't really a way to test and the iterate - you're calling out a new direction for the Battleship and you have to live with it until you hit the iceberg or don't. (Sorry for throwing in another unrelated metaphor)
I think the personality type that ends up as an F500 CEO definitely isn't "work like a dog 16 hours a day" but is, instead, "Be comfortable with weeks and months of utterly not knowing. Then pull the trigger." Is that hard work? You tell me.
Returning to small/medium CEOs working crazy hours. In my experience, that's 90% of the time a failure mode of a founder type CEO who can't give up micro levels of control and build the durable systems you need to scale. I've been in tech startups where the founder was very much the engineering genius type but then there came a time where the best answer was to "hire the MBAs." Everyone's life got better. Everyone made more money. The founder saw their big dream flourishing, albeit without direct control.
Great write-up, thank you. I knew a CEO of a big bank, and I think the biggest barriers to making good decisions were:
For example, there's a shareholder meeting and one of the directors tells you "Bank X used to be #5 retail bank in the country 4 years ago and now it's #8, while Bank Y, your closest competitor, grew from #6 to #3". This basically means you are already on your way out, so let's rewind the time.
There's a board meeting and your trusty advisory office has prepared a memo for you that shows that you'll soon lose your #5 spot in the ranking of retail banks. Your chief retail officer of course has a slide deck that explains that this is a temporary setback mostly driven by a big drop in car sales this year. What do you do?
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Very interesting commentary. I personally think it's 'work smart' stuff but the meaning of what you say does extend beyond anything a two-word platitude can cover.
Reminds me a little of my experience in crypto, few decisions, lots of stress, lots of waiting on events. Easy things that are difficult to do. Of course, much less money at stake.
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agree. a small business CEO is busting his or her ass off, probably way more so than the McDonald's ceo who is assured a fat pay package regardless of what happens
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They; at least, appear to work hard. I'm not sure how much value they produce; but, they try to look like they are producing value. They spend the effort on the appearance of the thing. I won't debate the actual product, because how could anyone without info into the goings on of the business make any real verdict except the one given by the stock price.
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Maybe not just a cognitive bias at this point. It's reinforced/encouraged by rights discourse which is a neat frame for any situation where you're not getting something you want. It allows/encourages obscuring the logistics of any service and the fact that the laws of economics and physics don't get suspended for anyone. Which then makes it easy to claim an injustice.
You'd think people don't actually believe-believe that but I do find it weird how many people think declaring something a human right means anything. I suppose it does, it means: it's your job to provide it for me even if it costs you (or the government's job to force you to do so).
You buy into that and someone eventually has to be to blame for why you don't have something you "deserve". The rich are always a good bet.
We do see it where fairness in the most obvious sense isn't expected: a lot of the talk around immigration seems to lean on "rights" of asylum seekers as if it resolves a single logistical issue for anyone. The entire discussion then necessarily becomes who's denying these rights.
I agree. I’ve long been skeptical of “rights” discourse because it approaches human dignity in a very narcissistic and narrow way. What you’re implying when you say you have a right is that you have a claim to something regardless of your connection to the wider society. If I have a right to food, even if I’ve done nothing or even been a net drain on society, then I still get that, I have the right to demand it through channels as provided by society. I could have destroyed the entire ability of the rest of society to eat. I’m much more in line with the idea of reciprocity especially in Confucius. The ruler owes his ministers, but those ministers owe the ruler. The teacher owes the students, but the students owe the teacher. On it goes, of course through all of human relationships.
What I think this does better than modern notions of rights is that it undercuts the narcissistic tendency to see society as a thing that’s supposed to cater to me as an individual. Instead it puts me in a series of relationships that each come with benefits and duties. I get more respect as a senior leader, but as a senior leader, I’m expected to help juniors to achieve and teach them what I know. As a younger sibling I’m expected to obey my older siblings and in return they protect me. And thus I cannot simply wave my fist and demand something— goods, respect, or protection— without being in relationship and providing something to other people.
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