I Thought Medicare Was Free

By Rob McCreary

One of the most anticipated dates in your golden years is the time just before you turn 65 when you are thinking about the government starting to take care of you.  You probably have already applied for your AARP card and also are getting senior discounts at the movies. Like me, you were probably disappointed to find that the AARP group is a combination of a slick marketing organization and a political party. They want to program what you buy and how you think.  The senior discount at the movies really is not that great because you start attending matinées like you did when your parents dropped you off on Saturdays. Our last movie savings, for example, was 25 cents below the matinée price.

Finally A Free Lunch

But your expectation for Medicare was different because you have been paying premiums for 40 years.  I was simply quivering with anticipation because it was advertised as being free. Well not really – Only Part A is free and Part A only covers hospitalization. The day-to-day interaction with the rest of the health industry and prescription drugs are covered by Part B and Part D and they are not free. Part A also doesn’t cover the medigap which is about as wide as the Grand Canyon.

I’ll Stay On My Old Plan

                 When I found out that Medicare was not free and I was not retiring any time soon I asked the logical question. Am I better off waiting to enroll in Medicare and staying on my group plan as supplemented by a company sponsored HSA account? At first I was hopeful because I found advice that suggested you can defer enrollment if you are still employed and participating in the group plan. However, that advice was like the free Medicare. You are not permitted to remain on a group plan if you are a small group employer, which means less than 20 employees. This made no sense to me because there are thousands of small businesses with the financial ability to support healthcare plans as supplemented by Heath Savings Accounts. Aside from the premiums being reasonable, the high deductible plans we have always used made all kinds of sense to me as incenting careful first dollar expenditures and, ultimately, catastrophe insurance. I guess this is exactly the reason the insurance industry convinced the government to design Medicare to force small groups to jettison sick and sicker oldsters from their “Cadillac” plans. I had no choice but to enroll in Medicare within 90 days before or after my 65th birthday or else I would be forever barred.

 Your First IRMAA

                By now you can understand why I was starting to suspect retirement healthcare was rigged, but I was still in the early hours of my education. The next thing I got from Social Security was my IRMAA adjustment. Medicare did not advertise this adjustment when I was signing up, so I had no idea that in 2007, as a stop-gap funding plan, Congress elected to slam high earners even if they are in perfectly good health by having them pay up to 3 times what a lower wage earner pays for Part B. Maybe this is why the government accepted the sick and sicker oldsters? So now Medicare is morphing from free to not so free, and I am being asked to pay my fair IRMAA share after having contributed at the payroll max for more than 40 years. At this point I was surprised but resigned. What else could I do? Surely, the surprises had ended.

Unbeknownst to me, there was more to come because in my first few transitional months on Medicare I was still covered for the gap in Medicare insurance by my employer group plan. In essence Anthem served as the medigap insurer for the 20% that Parts A and B won’t cover. In fact, they did so happily at full premium!!!! What a deal for them- 20% exposure for 100% of the old premium.

A Hole in the Donut

               Fast forward seven months and now my wife and I are both 65 and we both are enrolled in Medicare and we are off the group plan, but we have a serious gap in our coverage. Welcome to the world of medigap- those insurers who charge premiums to insure virtually everything that Parts A and B won’t cover. This is Plan F coverage, and you can get Plan F insurance without any medical underwriting during the open enrollment period. This is a big deal. If you have a preexisting condition and you miss the enrollment period, you may have to get a medical exam. Also, if you elect Plan F coverage from so-called “Medicare Advantage “ providers and later on you change insurers, you will have to pass medical underwriting. These network plans are cheaper in the beginning, but if you don’t like their group restrictions, you may never get medigap insurance if you try to switch.

A Hole in the Donut Hole

                After A, B and F there is still a hole in the coverage. You have to think about prescriptions. Parts A and B and Plan F don’t cover meds. It is an altogether separate plan design also with open enrollment but with four phases of coverage that start with the patient deductible ($400), then the patient pays 25% up to $3750, then the patient pays 75% up to $5000, then the government pays 95% above $5000. Also, because our prescriptions are different I get my meds from Walmart/Humana and my wife gets hers from Aetna/CVS.

You’ll Need A Sherpa For This Journey

                I got the final bills from the wonderful consultant, Kelly Walter, who led me through this mine field of inscrutable legislation. I ended up paying almost 2.5x what my share of the group plan would have been with my employer. I also learned that the wonderful Health Savings Account that I so carefully built, cannot be tapped to pay most of the Part B, Part F or Medigap premiums.

I thought Medicare was free and now learn that all I can buy with my HSA is band aids and hearing aids.



Rob McCrearyI Thought Medicare Was Free

Bitcoin Futures – The Grizzly and the Salmon

By Rob McCreary

Anyone who owned Bitcoin for long enough to have experienced its wild appreciation was excited to learn in December that the Chicago Board of Options Exchange (CBOE) was authorized to permit trading in Bitcoin futures (CBOE,XBT). Somehow I knew this would not be what I expected and the game would be rigged in favor of insiders. I guessed this for four big reasons:

  1. Most of Bitcoin owners are retail investors.
  2. Retail investors were basically prohibited from shorting the XBT.
  3. The CBOE was designing a “cash settled” product.
  4. Institutional owners like Winklevoss twins saw a one time chance to lock in gains without selling much Bitcoin

I was not disappointed in the final rules and I was not surprised by the result. Up to and including the first 3 days after the CBOE began futures trading the price of Bitcoin futures, XBT, spiked. The price of Bitcoin actually bounced off $20,000 in intraday trading. Any speculator who was long Bitcoin knew enough to try to hedge his gains by shorting Bitcoin on the futures exchange.

Retail Investors Can’t Sell Short

It would be just like shorting General Electric (GE,NYSE) when you owned the underlying stock! If the stock went down, you made money on your short position but if the stock went up, you lost on your short bet but made money on the appreciation in GE. Unfortunately, in early trading there was only one securities firm in America who would allow its customers to short XBT on the CBOE. That firm required a cash margin of 45-50% which meant the retail investor had to deposit cash instead of Bitcoin. I called the CBOE and talked to a trader on the futures desk. He said that only institutional customers were permitted to short Bitcoin but retail investors were welcome to buy a futures contract betting that the price of Bitcoin would rise. In a recent article in the January 8, 2018 edition The WSJ implies that the smart money (institutional) is short and the dumb money (retail) is long. What they don’t says is how nearly impossible it is for a retail investor to short XBT. The chart below suggests the little guy is choosing the long position when, in fact, it is the only side he can buy.


When I saw this chart I immediately thought of spawning salmon all stacked up trying to get back to their spawning ground and a grizzly bear catching them in mid leap.

The Winklevoss Twins Controlled The Market

The salmon were retail investors in a frenzied state of wanting to get rich quick and jumping out of their shoes as their Bitcoin bet made higher and higher levels. I then thought of the Winklevoss twins as the grizzly bear who was allowed to go short but who also owned half a billion dollars of Bitcoin and had enough clout to actually condition the market frenzy. The little guy was only allowed to go one direction but the institutional investor could be on both sides of the trade.

When the little guy saw his Bitcoin at $20,000 per Bitcoin he wanted to lock in his good fortune. However, he was quickly disappointed to discover he could not hedge. Alternatively, many tried to sell. Meanwhile the Winklevoss twins probably shorted the XBT futures contract , but as experienced traders they also timed  actual sales of Bitcoin for maximum market pressure on the downside. Then the stories about Bitcoin energy consumption and government regulation began to emerge.The price of Bitcoin cratered.

The salmon also discovered that settling in cash is different than settling in the underlying security that you already own. As the price of Bitcoin declined holders of the long position on XBT forfeited their option premium to the Grizzly and then desperately sold Bitcoin to try to compensate for their cash option premium loss on the derivative product. This assured a tax bill and their complete destruction on their futures bet.

CBOE wins big. Winklevoss twins win big and lock in gains on their holdings without selling much in the primary market. Grizzlies get the salmon. Round Two may be starting soon because there are still a lot of salmon backed up at the dam.


Rob McCrearyBitcoin Futures – The Grizzly and the Salmon

Wall Street Journal Innovation

By Rob McCreary

Wall Street Journal Innovation


For those of us who are challenged by the pace of news and information or the great majority of us who simply do not have the time to dig into anything, The Wall Street Journal has an answer. Over the last six months subscribers to The WSJ have been encouraged to sign up for “The Daily Shot”. This is a graphical summary of the current news in the form of charts and graphs with a link to the longer article. After “speed reading” the Wall Street Journal this way for several weeks I am amazed at how well it paints a picture of macro concepts like the flattening of the yield curve, the growth of debt in China as a percentage of GDP, tightening of employment markets, currency swings, trends in the M&A markets and growth of Bitcoin.

I highly recommend subscribing to The Wall Street Journal just to get The Daily Shot. Here are a few examples:



I will continue to use this convenient source of information for my blogs as well as a general understanding of trends in finance and commerce throughout the world. This is the new “Heard on the Street” column in graphs and pictures for people with attention deficit disorder.


Rob McCrearyWall Street Journal Innovation

Going Home

By Rob McCreary

Connected To Home

As Thanksgiving approaches I notice excitement and enthusiasm everywhere for returning home.

In Robert Frost’s poem, “Death of the Hired Man”, Silas, an itinerant handyman, comes home to die at Warren and Mary’s farm. Even though they are not family and he has a rich brother, home for Silas is where he is connected by the dignity of work in Warren’s hay fields and a memory of teaching a college boy how to find water with a hazel prong. Warren’s harsh and judgmental vision of home “is the place where, when you have to go there, they have to take you in”. But Mary with her mercy calls it a place “you haven’t to deserve”.

Connections To Home

However, Thanksgiving is more than going home. It has to be about understanding the important things for which we should all be thankful. For me, that means connections like family, friends, church, work, grade school, high school, neighbors, day camp, and the corner bar. As a nation, the further we get from home the less connected we become and more uncertain of the things for which we will take a knee.

As you carve your turkey and watch NFL football look at who and what connects you to home. Cherish it, nurture it and remain eternally thankful for a place you don’t deserve where they have to take you in.


Rob McCrearyGoing Home

Death By Compounding

By Rob McCreary

The Congressional Budget Office usually does a good job of predicting the financial future for our country. Its 2017 Report looks out over the next 10 years and predicts many trends that we all know:

  • Budget deficits will grow and accelerate
  • Interest rates on 10 year government debt will rise from 2.4% to almost 4% in 2027
  • Government debt will grow from $14 Trillion in 2017 to $25 Trillion in 2027- that does not include entitlements
  • Inflation will be a tame 2%

Based on $25 Trillion of debt in 2027 each 1% increase in the rate creditors demand for government debt after 2027 is $ 250 Billion increase in the budget deficit. If the world suddenly decides it will not finance our deficits at 4% and instead charges 10%, the incremental interest bill will be $1.5 Trillion. The total interest bill in 2027 under that scenario would be $2.5 Trillion. The CBO acknowledges that after 2027 interest rates are likely to accelerate.  Here is a 700 year chart showing the average “real” interest rate ((interest in excess of inflation) is 4.8%.  Today “real” interest rates on government debt are close to 0% and they would have to rise to 7.2% just to revert to the 700 year norm and 6% to reach the last 200 year norm.

Default, currency debasement, massive inflation and financial Armageddon are possible. According to Gene Epstein in a Barron’s article dated Oct 23, 2017 entitled “There’s No Easy Fix For Our Mushrooming Debt” The US Balance sheet can’t be liquidated for more than $8 Trillion. He thinks the Parks System could fetch $2.1 Trillion, Federal Lands could get $5.0 Trillion, the Strategic Oil Reserve could get $136 Billion. Student loans are $1.5 Trillion but Mr. Epstein does not put any liquidation value on that asset class. Maybe you could collateralize our defense systems with the Chinese and Japanese creditors? In any event the holders of US Debt are woefully under collateralized.

 An Article V Convention

I never realized that prior to the Trump election 30 state legislatures had approved a call for constitutional convention to enact a balanced budget amendment. At the beginning of 2017 you only needed 7 more states to make the convention a reality. Since the Trump victory, however, the legislatures in Arizona, Maryland and New Mexico rescinded their prior calls for the convention. Many fear the Convention would be a “free for all” with agenda items reflecting the huge divisions in the country. What starts as a balanced budget inquiry might become a national referendum on transgender bathrooms.

Death By Compounding

I don’t know which we should fear more: (a) An Article V Convention in 2018 to decide the future of the United States including a balanced budget; (b) Chinese and Japanese faces on Mount Rushmore in 2020; (c) $20 Starbucks coffee and $500/BBL price of oil in 2024 or (d) a one time “Your Fair Share” assessment equal to 50% of your net worth in 2027. Death by compounding, however, is certain. Even with a balanced budget in 2027 and all years thereafter compounding interest at 10% on $25 Trillion would lead to $50 Trillion of debt by 2034. After $50 Trillion I can no longer do the math.


Rob McCrearyDeath By Compounding

Margin of Safety

By Rob McCreary

Margin of Safety


I admire Seth Klarman for his investment discipline and his realistic view of business models and securities analysis. As I have written before, his book “Margin of Safety-Risk Adverse Strategies for the Thoughtful Investor” is out of print but can be purchased online for slightly more than $2000. I have read it and gleaned some useful observations, most important of which is Mr. Klarman’s distinction between speculators and investors: “Just as financial market participants can be divided into two groups, investors and speculators, assets and securities can often be characterized as either investments or speculations…But there is one critical difference: investments throw off cash flow for the benefit of the owners; speculations do not.” His small cohort of value investors includes Howard Marx, Mitch Julius, Glenn Greenberg, Liu Lu, Jeremy Grantham and Warren Buffet. With the exception of Warren Buffet who has rock star status and can convince people like Jimmy Haslam to sell Pilot Flying J to him, their ability to put money to work in this investment environment is dwindling as almost all markets make new highs.

Value Investing Is Intellectual Humility

Their investment premise, however, is so right and fundamental that we all should pause and reflect on what is really happening in the Wall Street casino. At its core value investing is intellectual humility. It recognizes the need for a margin of safety in all investments because the future cannot be known. Once the intrinsic value of a business is determined, there has to be a further discount to account for uncertainty. Given the proliferation of collective products like ETFs and mutual funds, the retail investor wrongly believes that he mitigating risk because he is buying a low fee, low volatility product. Risk and volatility are easy to confuse but true value investors will tell you they are unrelated. Because the ETF product is meant to mimic an index or a sector, the important investment strategy is to compile a portfolio that accurately tracks collective performance. In market capitalization ETFs, winners are over weighted and losers are underweighted even to the point where 4 or 5 stocks like Amazon. Facebook, Google and Apple are providing all the juice. For example, just 59 stocks account for 50% of the market weighted value of SPX which is the S&P500 ETF.

Concentrate On The Losers

The value investor would be more interested in the losers. General Electric (NYSE,GE), for example, should be a target for value investing inquiry. It has lost 35% of its market value in the last 12 months and has become less important and least represented of all the Dow stocks making it an afterthought to ETFs. It has a 4.5% dividend yield but no free cash flow. An activist investor has been elected to the Board and a new CEO, John Flannery, who ran GE’s healthcare operations is ready to unveil a plan of reorganization on November 13. Speculation about a big dividend cut and a sale of assets is pervasive. Since GE has no free cash flow and has limited debt capacity, the dividend probably should go to zero. Instead it is more likely that the new management will liquidate assets to pay a reduced dividend. This is just a slow liquidation plan reminiscent of Sears. Reducing overhead expenses for shared services as you shed operations is always a lagging problem and GE has plenty of shared services.

If the new CEO has any guts he will eliminate the dividend at which point the stock will likely fall by another 30% and a value investor like Seth Klarman may be interested. The break-up value of GE net of debt and unfunded pension should exceed $15 per share. The likelihood of a break up is enhanced because the institutional sellers who are following analyst recommendations will sell and will be replaced by more activists who can wage a proxy contest to force a full break up.

Pit Boss Advice Is Suspect

The intellectual conceit about GE is evident, however, in the number of reputable analysts who have rated it a sell. Of the 17 analysts covering GE Yahoo Finance reports 5 are strong buy, 4 are buy, 6 are hold and 2 are underperform. Only Deutche Bank issued a sell recommendation earlier this year. Apparently none of the analysts, having ridden it down ,think it is risky enough to sell. This is like a casino suggesting a gambler on a losing streak substitute keno for craps; they stay in the game but with worse odds. Seth Klarman would not find any margin of safety in rigorous and well intentioned securities analysis. He would look for the free cash flow and, finding none, would move on to the next opportunity.



Rob McCrearyMargin of Safety

Take Control of Your Credit Proflie

By Rob McCreary



I am amazed at the number of highly profitable business models focused on monetizing individual identity, location and movement, credit, socialization, and dating. The internet has allowed many companies to leverage you for their gain and profit. But one of them stands out as extraordinary. The three Credit Reporting Agencies. (Experian, Equifax and TransUnion), have built a data trove of information about you without any input from you. Your financial identity is crafted by participating third parties who share their opinion about your credit worthiness. This industry has been around since the 1800’s and it is so important that, until recently, you even had to pay to get a copy of your own credit report. These three businesses are oligopolies that make huge amounts of cash by monetizing your credit interactions.

Getting Bad Advice

I got a sense of how important these three credit bureaus are when I started to read articles and hear advertisements advising the 143 million people whose credit profiles were stolen in the Equifax hack not to freeze their credit information. Freezing your credit information is so obviously the right thing to do for you and me, that I had to ask myself why would so called experts advise against it? More to come about that question later in the blog, but it has something to do with the $1 Trillion credit economy and maybe a Wall Street firm that owns a big stake in one of the three colossus of the credit economy.

Control Your Own Profile

When Equifax was hacked your personal profile compiled from telephone companies, banks, auto leasing companies, mortgage lenders, cable companies, credit card companies and hospitals was stolen. You didn’t have any input in its creation, never got paid one cent for third party use of your personal information, never consented to sharing your credit information, and had no recourse against Equifax for allowing that information to be stolen. Even if you never accessed the credit world, you still have a profile that is being monetized over and over again.

At least Facebook allows you to shape your own profile and gives you the satisfaction of making your timeline available to your friends. Even though it is shamelessly monetizing you and destroying your privacy, it is at least giving you a tool for socialization. Similarly, Google Maps may be compiling a data trove on your movements and matching you to retailers as you move around, but it is helping you find your way. In the case of most men it is also restoring marital harmony often dashed by a guy’s chemical inability to ask for, or listen to directions. That’s enough for me even though I know I am being used.

Follow The Money Trail

The money trail behind the three credit bureaus is interesting. All three of the “bureaus” are publicly traded even though the man on the street probably thinks these credit reporting agencies are either government controlled or not for profits. The whole credit economy also relies almost exclusively on them and their credit scoring system. For a few years before the big Recession, your credit profile and score was probably more important than your W-2 or personal balance sheet in obtaining a mortgage.

Equifax (NYSE,EFX) has a market cap of $13 Billion, Experian PLC trades on the London and Nasdaq exchanges (OTC, EXPGY) and has a market cap of $18.4 Billion and Trans Union ( NYSE,TRU) is the smallest with a market cap of $9.2 Billion. All three are extremely profitable. All three are still endorsed by Wall Street analysts and Jim Cramer even though, after the Equifax hack, if I were them, I would fear Elizabeth Warren, Bernie Sanders and wholesale regulation that might destroy my oligopoly. If these three firms were not the handmaiden of the credit industry, might you even see the kind of privacy protections that medical records are accorded? The analogy is heath care providers creating your health profile based on medical encounters and then sharing it with insurers and employers.

Goldman Has A $1.6 Billion Position

Finally, Trans Union’s biggest shareholder is Goldman Sachs (20.5%) and if we learned anything from The Big Short, the price of Trans Union won’t decline until the insiders get out. So even if a tsunami of problems are heading its way, the savvy shareholders in the big three credit bureaus will do fine. Keep your eye on how Goldman wriggles out of this one

Rob McCrearyTake Control of Your Credit Proflie

Cloning Private Equity With An Index Fund?

By Rob McCreary

Taking a page out of the Austin Powers movie “The Spy Who Shagged Me” the financial world has introduced its own Mini Me clones of the Private Equity Asset Class. The August 26 edition of The Economist unveils these two new offerings. One is offered by State Street Investments using their own database of private equity performance over the last 30 years, and the second is offered by DSC Quantitative Group using performance data on private equity from Thomson Reuters. The former does not add leverage, but the DSC product utilizes 25% leverage.

I was fascinated by these products. What we do in private equity is not formulaic so I was interested to learn how these two firms could replicate our outstanding performance as an asset class over the last 20 years. Often our returns rely on a strange brew of leverage,accretive acquisitions, expense management, debt pay down and superb management. It is hard to replicate with a synthetic product.

I looked at the website where  DSC/Thomson Reuters and State Street discussed their Mini Me process. The DSC index is shown below:



The blue line is their index performance compared to the S&P500 and Cambridge Associates PE index. The product has then been back tested to 2007 for high correlation. Both products then utilize a mix of individual stocks, derivatives, leverage and exchange traded funds from seven industry sectors.

According to the research on their own website, the secret sauce for the DSC product is the weightings for those seven sectors determined by econometric models that are way above my pay grade to explain:


So if I am understanding these products correctly, they will provide private equity returns for a fraction of the fees and expenses by using a mix of sector ETFs, derivatives, individual stocks and some leverage.  It is like asking Sherwin Williams what mixture of paint would have been necessary on a monthly basis to match blue walls as they fade in hue from 2007 to 2017 and then applying that formula to the future blue walls.

Wouldn’t it be a lot easier and a whole lot more representative just to buy a basket of publicly traded companies that act like leveraged buy outs? They already have managers. They utilize real leverage proportionate to PE capital structures and that debt has to be repaid. They have valuations expressed as a multiple of enterprise value to EBITDA that are comparable to PE valuations. They report and consolidate the tuck in acquisitions they have made. They incent managers with performance plans that are tied to stock performance. They compete in real industries and are benefitted and hurt by the same industry dynamics as their competitors. The product would have to be a mutual fund, but it would certainly come closer to mimicking private equity’s actual business model.

Create Your Own Mutual Fund

Here are a few suggestions for the basket by sector:

Consumer Non-Cyclical:

Constellation Brands (NYSE,STZ); wine and spirits;3.65x Debt/EBITDA; 20x EV/EBITDA

Consumer Cyclical:

Ply Gem (NASDAQ; PGEM); siding, windows and doors;3.8x Debt/EBITDA; 6.8xEV/EBITDA


First Data Corp (NYSE FDC); Information Technology; 6.56 Debt/EBITDA; 12.3x EV/EBITDA


Deere (NYSE,DE); diversified industrials; 6.6x Debt/Ebitda; 17.0xEV/EBITDA


Kindred Healthcare (NYSE KND) general hospitals; 7.07x Debt/EBITDA; 8.36x EV/EBITDA

Derivatives May Disappoint

In any event, the last time theoretical derivative products (collateralized mortgage backed securities) were intended to give AAA protection to people buying a pool of substandard mortgages we had a Great Recession. I would bet right now that these two new products will not replicate private equity returns. In fact, I will bet they will not even beat the S&P 500. Why buy a derivative when you can create your own portfolio of real companies that act just like private equity? You can buy them for the price of the stock plus $4.95 per trade.

Rob McCrearyCloning Private Equity With An Index Fund?

Why Is This So Hard?

By Rob McCreary



The most important ingredient of success in private equity is not capital.  It is people. After 40 years of working in mergers and acquisitions as a lawyer, investment banker and private equity owner I come back to people as the biggest variable in my success and failures. Why is it so hard to find good people beyond the small group you really know?

My brother had a career as a management recruiter and he had a good nose for a fraud. He would always ask me “if this candidate is so good why is he on the beach?” What he usually meant was the good candidates have a job and will always have a job. So if you want to recruit the person for your job try to recruit someone who is working.

There always will be exceptions like the CEO we recruited because there was a health problem in his family and he retired until it passed and we had the luck of landing him. Or the person who has experience and gas in the tank but he is forced to retire because of an age requirement. But my experience with finding good leaders has certainly been below .500.

We work with some of the best recruiters in the Midwest so I reached out to them to weigh in on this topic anonymously. Here is what they had to say about why getting the right people is so hard.

Retired VC Recruiter: “It’s an arduous task and necessity that consume the likes of Jeff Bezos and Tim Cook.  They demand they meet the right people quickly and don’t have time nor interest with process and details. Usually, they make their decisions within 15 minutes. Nothing has replaced “gut” decisions. Having great “gut instincts” is an ART, not science and the very best hiring managers are more right than wrong.”

Cleveland Middle Market Recruiter: “It is a common fact in PE; the “win” moves with the executives, and candidly does not stay with the business. Today a challenge is more and more executives are making “life changing” money, and are very reluctant to take a next assignment, unless the payday is outsized. This will continue to be a major problem in attracting experienced C-suite executives, and lead to a dwindling talent pool.”

Chicago Middle Market Recruiter: He wrote a thoughtful memo about the funnel for getting to a successful candidate as requiring the timing to be right. Then the prospect has to have the right location, fit and experience and specific industry experience. Finally, the compensation and equity package has to be compelling and the candidate has to survive an arduous interview process: “Through this process you can see how hard it is to find the perfect executive and why it can take time to do so, and then think about not only the top executive, but then all their direct reports.  You have to go through this process on every search.

Getting and keeping talent is one of the unrecognized attributes of successful private equity firms. Those with a record for fair dealing, good communication and management support get most of the good candidates and a track record of successful exits does not hurt.



Rob McCrearyWhy Is This So Hard?

First Do No Harm

By Rob McCreary

Freakonomics has really interesting podcasts, and the last one of a three part series on August 20, entitled “Bad Medicine” did not disappoint.   The long standing view of the big three causes of death was Heart, Cancer and Respiratory.  According to The Center For Disease Control, here is the list for 2014 sorted by the number of deaths:

  • Heart disease: 633,842
  • Cancer: 595,930
  • Chronic lower respiratory diseases: 155,041
  • Accidents (unintentional injuries): 146,571
  • Stroke (cerebrovascular diseases): 140,323
  • Alzheimer’s disease: 110,561
  • Diabetes: 79,535
  • Influenza and pneumonia: 57,062
  • Nephritis, nephrotic syndrome, and nephrosis: 49,959
  • Intentional self-harm (suicide): 44,193

This was before researchers at Johns Hopkins actually began to question the data. It turns out that the third leading cause of death in the US is not respiratory related at all, but rather medical error. Think of the millions of decisions including NIH funding, charitable giving, medical school curriculum, hospital protocols, career choices, doctor reputation and malpractice insurance premiums that were all predicated on faulty data.

Medical Error Was Not A Choice

This occurred because the death certificate process has an international code that does not include medical error as a cause of death and the medical profession, medical examiners, and funeral directors often controlled the answer. For decades the medical person filling out the death certificate usually listed the problem you were being treated for rather than the proximate cause of death. So if you were being treated for a heart problem, but the surgeon nicked an artery during a heart valve repair and you died on the table, the cause of death was heart disease.

Medical error includes a spectrum of mistakes both passive and active, ranging from misdiagnosis to acts of negligence like a surgical mistake, or injecting the wrong dosage of insulin. Johns Hopkins research also showed that the more experienced the doctors were, the more likely to cause your death than the least experienced. As the number of procedures increase so does the possibility of medical error.

Business World Has No Equivalents

The analogy to the business world would be faulty reporting on 10Ks and 10Qs because management selected the accounting treatment they were using, without disclosing how it impacted the result and without oversight from auditors or SEC. I am sure there are thousands of CEOs who would have supported a reporting category called gross revenue that was selected by the sales team! In that case an investor, lacking the true information might lose money on his investment, but at least he would not have lost his life.

The greater issue raised by this massive misclassification is why did it take so long for someone to figure it out? I wonder how many times a week some medical person was aware that the Center For Disease Control classification codes did not allow truth to be told? I am also shocked that the tort industry did not figure this out but it is probably because the misclassification helped their chances at trial. If a medical expert had a choice of medical error and did not mark it, that evidence from an expert would be hard to rebut. The trial lawyers were actually benefitted by the conspiracy of silence.

Unfortunately, the Freakonomics podcast missed an opportunity to explode the myth of expertise. There is too much fake news, bad science and intentional deception based on shaky experts who want to promote a social or political point of view whose opinion also serves a financial interest. We should all bring a healthy dose of skepticism to any point of view that cannot be tested, debated or validated, and an even a more suspicious eye when a lot of money is involved.

Experience Trumps Credentials In My World

For me, an expert must pass the Lisa Vito test. Lisa is Vinny’s fiancee in “My Cousin Vinny” and introduced by Vinny as an expert witness on general automotive matters. Given she is a woman in a southern courtroom and she speaks with a New Jersey accent, the prosecutor, Jim Trotter, objects to her expertise. Evidently working in her father’s garage was not enough. Prosecutor Trotter thinks he can disqualify her by asking a tricky question on ignition timing:

Jim Trotter: Now, uh, Ms. Vito, being an expert on general automotive knowledge, can you tell me… what would the correct ignition timing be on a 1955 Bel Air Chevrolet, with a 327 cubic-inch engine and a four-barrel carburetor?

Mona Lisa(scoffing) That’s a bullshit question.

Jim Trotter: Does that mean that you can’t answer it?

Mona Lisa: It’s a bullshit question, it’s impossible to answer.

Jim Trotter: Impossible because you don’t know the answer!

Mona Lisa: Nobody could answer that question!

Jim Trotter: Your Honor, I move to disqualify Ms. Vito as a “expert witness”!

Judge Haller: Can you answer the question?

Mona Lisa: No, it is a trick question!

Judge Haller: Why is it a trick question?

Vinny(to Bill) Watch this.

Mona Lisa: ‘Cause Chevy didn’t make a 327 in ’55, the 327 didn’t come out till ’62. And it wasn’t offered in the Bel Air with a four-barrel carb till ’64. However, in 1964, the correct ignition timing would be four degrees before top-dead-center.

Jim Trotter: Well… um… she’s acceptable, Your Honor.


Rob McCrearyFirst Do No Harm