Top 10 business/economic myths you should stop believing

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There’s nothing more infuriating than seeing the same mistakes repeated over and over. So here are the top 10 common falsehoods about business or the economy that we need to correct stat.

1. Black Friday is a predictor of holiday sales

As much as we like to see crowds of crazy shoppers break through the doors of Best Buy at an ungodly hour, the day after Thanksgiving tells us nothing about how retailers will perform the four weeks to Christmas.

Let me repeat. NOTHING.

Yes, Black Friday historically meant the day retailers returned to profitability (the black). But Black Friday is neither profitable nor is it on Friday. Thanks to the Internet, retailers launch their deals several weeks earlier. And physical retailers now open their doors on Thanksgiving, diluting the power of Black Friday.

At the same time, the strategy behind Black Friday distorts the picture. Retailers offer those insanely cheap televisions and laptops (which wreck profit margins) to lure consumers into the stores and then hope they buy other stuff at full or fuller price. But consumers have grown accustomed to just buying those ultra cheap items and then go home.

In fact, retailers have resigned themselves to losing money, just as long as they don’t lose market share. Though it’s tempting to think those hoards of shoppers mean strong holiday sales, retailers often report the opposite come January.

So unless retailers release their Black Friday sales data (and they won’t), you can’t predict anything.

2. Venture capitalists are daredevil risk takers

This might have been true during the onset of the Internet. But VCs are more risk averse than their reputation suggests. They tend to mostly fund derivatives of something else: “the Uber of…” or “the Apple of…”

In that sense, VCs remind me of Hollywood studios. Yes, everyone claims to prize originality and creativity but yet the final products are mostly sequels and remakes.

Moreover, venture capital is increasingly flowing toward later stage deals, including unicorns, where companies are much more developed and hence less risky.

In recent years, seed/early stage deals have been drying up. In the third quarter of 2015, such companies closed 970 deals, according to the MoneyTree report from PricewaterhouseCoopers and CB Insights. Three years later, the number of deals fell 43 percent to 554 deals during the third quarter of this year.

Meanwhile, we’ve seen the emergence of both “private IPOs,” single funding rounds of at least $100 million, and unicorn funds armed with at least $1 billion in capital.

Eight years ago, only 8 percent of total capital raised originated through unicorn funds. In 2015, the number jumped to over 27 percent. Over the last 12 months, unicorn funds accounted for 16 percent of total funds raised.

3. China is a wealthy country

China does boast the world’s second largest economy with a GDP of $12.24 trillion. And the country’s economy will eventually surpass top ranked United States.

But what people tend to forget is that China has way more people than America: 1.37 billion vs. 325 million. That means China’s annual GDP per capita amounts to $16,700, good for 108th out of 229 countries, according to the World Factbook. The United States ranks 19th with an annual GDP per capita of $59,500.

China’s per capita income totals just $7,329 a year, or 12 percent of the United States’ per capita income of $60,200.

In other words, despite its amazing economic growth, China is still very poor.

4. Higher pay signals bad things for the economy

Normally, the stock market goes berserk when there is the slightest evidence of (gasp!) workers earning more money. Inflation alert!

But even as companies generate record amounts of profits and cash, real wage growth (wages increases minus inflation) have been non existent.

Here’s how monthly real wages fared from October 2017 to October 2018, according to the federal Bureau of Labor Statistics:

  • Oct. 2017/-0.3%
  • Nov. 2017/no change
  • Dec. 2017/+0.2%
  • Jan. 2018/-0.3%
  • Feb. 2018/-0.1%
  • March 2018/+0.3%
  • April 2018/no change
  • May 2018/ +0.1%
  • June 2018/+0.1%
  • July 2018/+0.1%
  • August 2018/+0.2%
  • September 2018/+0.2%
  • October 2018/-0.1%

The lack of wage growth is especially puzzling, given the shortage of labor in several industries like trucking and construction.

Perhaps companies should heed the advice of Minneapolis Fed President Neel Kashkari .

“I often times hear businesses saying I just can’t find the workers that I need,” he said. “You should try paying more, and you may be able to attract more workers.”

Someone alert the Nobel Prize committee!

5. Physical retail is dead

In recent years, big chains like Toys ‘R Us, Circuit City, Borders, Radio Shack, and Sears have declared bankruptcy, giving birth to the clumsy term “retail apocalypse.”

But despite the rapid growth of e-commerce, brick and mortar stores still generates the vast majority of sales. In 2015, by the most recent government data, e-commerce accounted for only 7.2 percent of all retail sales in the United States.

And if physical retail is truly dead, why did Amazon pay nearly $14 billion for Whole Foods? Why do online retailers like Bonobos and Warby Parker open physical locations? And why do millions of Americans still flock to stores on Thanksgiving even though they can find similar or even superior deals online?

6. A booming stock market spreads wealth to everyone

As much as a bull market occupies a firm place in American culture, the wealth from rising stock prices is increasingly going to already wealthy people.

Stock ownership has grown increasingly concentrated among the richest Americans, according to study on household wealth published last November by the National Bureau of Economic Research (NBER). In 2016, people who made $250,000 or more a year (5.2 percent of U.S. households) owned 60.5 percent of all stocks; in 2001, the same income group (2.7 percent of U.S. households) owned 40.6 percent of all stocks.

Or put another way, the top 10 percent of U.S. households by wealth own 84 percent of all stocks in 2016.

7. Tax cuts generate long term economic growth


8. R&D dollars and patents equal innovation

One problem with measuring innovation is that innovation is hard to measure. So we turn to metrics like research and development spending and number of patents awarded.

In her book “How Innovation Really Works,” Anne Marie Knott, a professor of strategy at Washington University in St. Louis, says public companies’ R&D efforts have worsened over the years even as they spend more on it.

Knott developed a scoring system to measure the effectiveness of corporate R&D called “RQ,” or Research Quotient. In short, RQ is the percentage increase in revenue a company obtains from a 1 percent increase in R&D spending.

Knott concludes that returns from corporate R&D spending has dropped about 65 percent over the past three decades, a reason why U.S. GDP growth has also declined in this period.

“Despite the importance of innovation to companies as well as to the broader economy, despite the growth in real R&D by both the government and companies, and despite all of the experts dedicated to helping companies innovate, companies have become worse at it!” Knott writes.

“The money companies spend on research and development is producing fewer and fewer results,” she wrote.

9. Presidents deserve immediate credit or blame for the economy

In my household growing up, we had a rule: the last person to touch something that breaks is responsible for it breaking.

That’s how we tend to see the relationship between the President and the economy. Whoever sits in the Oval Office at any particular moment makes the economy go up or down.

Whether tax cuts or spending, it takes several years to determine the impact from a major economic initiative from the White House, sometimes long after the President leaves office. The economy is a long term game while politics is mindlessly short sighted.

10. Stock market declines wipe out the wealth of companies and founders

We constantly hear how a bad day or week or month on Wall Street sweep away billions of dollars from the value of tech firms like Amazon and Facebook and therefore the wealth of Jeff Bezos or Mark Zuckerberg.

While that’s technically true, we’re talking about some pretty big numbers. Bezos and Zuckerberg are doing just fine thank you because their companies are still worth $773.3 billion and $388 billion respectively.

Focusing on just the losses is misleading since these companies enjoy enormous valuations.



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