6 Ways CEBI Members are Taking Advantage of Market Turbulence

In more than one recent meeting of Chief Executive Boards International, members asked what others were doing to "make lemonade" out of a turbulent investing climate. As always, I'll remind you that anything you see on Chief Executive Blog or the Chief Executive Boards International site is an idea, not a recommendation. Consult your own financial advisor to be sure any strategy is right for you. Here's what our members said:

1. Capture Unrealized Capital Losses -- This is a surprisingly little-understood strategy that's not all that hard. There are two important things to remember:



A. Capital Losses can offset up to $3,000 of ordinary income in the year the loss is taken. Losses in excess of $3,000 can offset either short-term or long-term capital gains. And they can be carried forward indefinitely to offset future capital gains.

B. The "wash sale" rule -- If you sell a security, you must wait 31 days to buy back into that same security, or it's ruled a "wash sale" -- as if it didn't happen at all.

So, if you have stocks or mutual funds that are now worth less than you paid for them, you can sell them and capture those losses for 2009. But then what? Of course, you could sit on the cash for 31 days and then buy them back, which would be a good thing if the price goes down and a bad thing if the price goes up during the 31 days. Or you could just buy a different, and probably similarly depressed, stock in the same industry or mutual fund of the same style the same day. A simple plan if you don't mind changing horses.

A more sophistocated plan for mutual fund investors who like the funds they're in could be to sell your "underwater" mutual fund shares (being careful to specify those original lots that are actually worth less than your basis), and then buy an Exchange Traded Fund (ETF) of the same class, on the same day. For example, sell a large-cap mutual fund and buy a large-cap ETF. Presumably, your favorite fund and the ETF would track each other relatively closely for a period as short as 31 days. On the 31st day, sell your ETFs and repurchase the same mutual fund. Any market variations in the meantime will either generate additional captured losses or gains that will be offset by the captured losses. And you won't suffer the potential risks of market timing -- being out of the market in case it soars upward while you're out.

Perhaps the TV precaution "Don't try this at home" is appropriate. You may need an investment pro to execute this for you -- getting out of your mutual funds and into an ETF and back requires some technical savvy.

2. Reallocate -- Some members feel the market, if not at its bottom, may be close enough. Those members are reallocating cash and fixed income assets back into equities (now that they're underweighted in equities due to their decline in value). The preferred way to do this would be dollar-cost averaging. Take the amount you want to reallocate and invest it over, say 5 or 10 installments. You could do that over 5 or 10 weeks, 5 or 10 months or 5 or 10 quarters, depending on your own assessment of the market. This way, you buy more shares if the price is lower and fewer shares if the price is hign. Discipline is important -- pick the same day of the week, month or quarter, hold your nose, and execute your plan.
   
   Right now, you may be at greater risk being out of the market than you are being in the market. History suggests that there will be single weeks of huge gains at the turn. If you're on the sidelines, you'll never catch up.
   


3. Buy troubled assets -- If you have cash or credit lines (at record-low interest rates), you may be able to pick up equipment, inventory or real estate at prices you won't see again. One CEBI member said "I'm looking for vendors who need orders worse than they need margins." Some members are looking at second homes or income-producing real estate at "distress sale" values. As always, due diligence is everything. Consider hiring a your own pro's to assess, evaluate and appraise anything you're considering buying. And use your credit when doing so. An asset where you invest 20% cash that appreciates 20% is a 100% return on your invested cash, vs only a 20% return, had you paid cash for it. At today's interest rates on long-term financing, that would take a long time to break even in interest savings. Use other people's money where it makes sense for you.
   


4. Free up cash from your least-productive asset -- your personal residence. Ron Wiley, the founder of CEBI once said "A house is not an asset -- it's a liability." And having owned six of them, I'm inclined to agree. This is perhaps the most emotionally charged strategy that surfaced, as some people take great solace in knowing "my house is paid for." Nothing wrong with that viewpoint. Others, however, see their house as simply part of their capital structure, just like any other asset or liability on their balance sheets.
   
   Considering that anyone with good credit can get cash out of this non-productive asset by refinancing for 30 years at 5% or less -- rates we may not see again in our lifetimes -- it's too compelling to not mention. If you just found another investment with a 5% return, it's a breakeven. And if you're generally invested in liquid assets, you'd have the comfort of knowing that if you had to, you could sell one of those assets and pay off the house again -- probably in less than 48 hours.
   
   There are potemtial AMT consequences to this strategy -- do proceed carefully. If you refinance and spend the money, of course, you lose the game.
   
   
5. Free up cash from your business -- Many CEBI member companies are LLCs or S-Corporations. You've already paid taxes on a lot of money that's tied up inside your business -- it's on the balance sheet, usually as fixed assets, working capital or real estate. For the moment, long-term interest rates are at the lowest we'll see in a long time. The economy will pick up, and when it does, so will inflation, prices and investment interest rates. Some members are lining up long-term debt at today's bargain rates, pulling that cash out of their businesses (off the table -- you're protected from creditors and judgements by your corporate veil) and investing it in other things on their personal balance sheets.
   
   
6. Do the math. Financially savvy people understand that a 5% debt and a 5% investment of the same amount are a wash. The return from the investment exactly covers the interest cost of the debt. If you can tilt that equation just 1 or 2 percent in your favor, you're making money in your sleep. When you're making investment decisions, if the opportunities and risks are similar, it's just about comparing the interest rate on a debt or the ROI on an investment.
   


7. Do nothing. Probably the strategy of choice for most Americans right now, who seem to be paralyzed by the current economic climate. However, CEBI members are not most Americans, and are generally used to making the best of the cards that are dealt. Try 1 through 5, or something else that makes sense to you.

Remember, anything you see on this blog in an idea, not a recommendation. Consult your own financial advisor to be sure any strategy is right for you.

If you have current-economy business or investing strategies that aren't mentioned above, would you click "Comments" below and share them with others?

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

Business Lessons from Flight 1549

The world was both impressed and relieved by the miraculous outcome of Flight 1549's ditching in the Hudson River this week.

To be sure, an amazing number of things went right for both the crew and the passengers. That aside, there are a number of business lessons we can extract from this accident, and several of them might make some useful "word pictures" to help your management team understand the fundamentals of business planning and strategy -- particularly when things take an unexpected turn.

First, the advantages of luck and good timing can never be discounted. Most business owners, if they're honest, can cite one or five or ten incidents of either good luck, good timing, or both that have propelled their businesses forward. Never discount luck or timing, and never fail to capitalize on either luck or timing, should they befall you.

But back to what Capt. Sullenberger and his First Officer could control. A great saying among pilots is "You never want to run out of airspeed, altitude and ideas all at the same time." The business analogies? Airspeed is a lot like cash flow, and altitude is a lot like size and scale (business volume). And ideas are ideas -- the "do-differents" that are essential when you're running out of airspeed and altitude.

So, what actually happened in this accident? First, a completely unforseeable event -- a bird strike taking out BOTH engines. The luck part was that it wasn't 30 seconds or a minute earlier -- they had been able to get just over 3,000 feet of altitude -- with few feet to spare for the landing they pulled off.

The crew figured out immediately that with no engines, more altitude was not an option, and then made an instinctively correct decision -- putting the nose down, hastening their descent, but maintaining (or perhaps even gaining) airspeed. Not bad luck, either, that Sullenberger's experience included certification in gliders -- he was no stranger to flying an unpowered aircraft. This was a critical and experience-based decision (remember he was also a fighter pilot). A less experienced hand could have easily stalled the airplane, and simply fallen out of the sky like a rock.

And then they quickly discarded unworkable ideas -- forget LaGuardia, forget Teterboro. Forget any expanse of unpopulated land -- there aren't any in NYC. And then they communicated their intentions -- they radioed the tower and said "We're gonna be in the Hudson." Another good call, giving the Coast Guard and others a couple of minutes advance notice to start their response. Finally, they communicated with the passengers and flight attendants: "Brace for impact." They didn't have to say that twice -- the flight attendants took over and repeated and amplified that message in the cabin.

And on final approach, that glider experience kicked in and they landed "tail first", bringing the plane to a near-stall (and minimum ground speed) just as it hit the water. They remembered also the pilot's axiom "keep your wings level" -- perhaps the single thing Sullenberger absolutely had to get right -- dropping those two engines into the water at precisely the same time, unlike most water landings where one wing dips, catches the water, and the plane cartwheels into pieces.

Let's also not forget luck -- that a calm, shallow-water channel was available and that it also happened to be surrounded by boats already underway that were able to take on survivors in minutes. Just 15 minutes of additional delay would have claimed several lives to hypothermia in the frigid water.

You can probably extract several business lessons out of this that specifically relate to your business and your management team. For myself, some of those include:

1. When things go wrong, don't run out of airspeed, altitude and ideas at the same time --
• Assuming you still have some altitude (cash) left, maintain airspeed (revenue) at all costs. Without that, the game's over quickly. Point the nose down -- to maintain critical airspeed (enough revenue to cover reduced expenses). And do it quickly, before you stall.
• Ideas -- The stock in trade of Chief Executive Boards International. If you're running out of ideas, reach out to others (such as CEBI members) who may have experience, training or instincts you don't have.
  
2. Keep your wings level -- Keep your objectives, strategies and values in focus. Despite adversity, your employees want to see you consistent and level in your thinking and decision-making. They may not like the decisions you make, but they'll respect them if they're consistent and steady, rather than erratic.
   
3. Communicate -- Let your key managers know exactly what's going on. They can be part of the solution if they understand the problem. And, of course, you should expect them to repeat and amplify the message to the troops.

I hope you can use some of these ideas or "word pictures" to explain what you're doing and why to either your management team or employees. Sometimes metaphors work best in communicating unfamiliar or abstract ideas.
Perhaps you see some more business lessons in this accident. Would you click "Comments" below and share them with others?

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Terry Weaver


CEO
Chief Executive Boards Internationalhttp://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com

How Much Employee Motivation Can You Buy for $10?

We've had a lot of conversations in Chief Executive Boards International meetings about the differences in world view of those employees known as "Generation X" and "Generation Y". I had an amazing experience that convinced me that companies are actually changing their management approaches to meet the differences in wants and needs of these vs. older employees.

It's quite possible you'll believe, upon reading this, that I've completely lost my mind. I'm still processing it myself, based on that specific concern.

I had an extended conversation about employee recognition with two Gen-X'ers and learned something that totally amazed me. Both of these people have MBA's from prestigious schools and work in large NYSE companies at great salaries. Both have traveled and lived internationally.

And both were talking about their respective companies' practice of handing out small-denomination gift cards to employees as part of their "spot" recognition programs. Now, here's the part where I started to think I was losing it. In these cases, "small" is REALLY small -- $5, $10 and $15 dollar gift cards -- amounts that could get lost in the roundoff error of their respective W-2's.

I apologized in advance, and asked "Would someone who came in on a Saturday to get an important project done by Monday actually be happy with a $10 bonus?" "You mean they're not offended by such a trivial amount?"

Well, I learned, there's something wildly different about a $10 gift card and a $10 bill. I still don't know exactly what. Perhaps it's the "indulgence" element. The hottest gift cards going are Starbucks and I-Tunes, plus, believe it or not, Target. Somehow spending $5 apiece for two coffees feels great if it's the shareholders who are buying. One of these people had received a $50 gift card for something a bit more meaningful, and used it at Target to buy Christmas decorations -- something she might have been too frugal to spend "real" money on. Car wash coupons are similarly prized -- you get your car washed more often than you'd be willing to pay "real" money for.

I also learned that these two companies have a well-developed protocol and process for this. Clearly they've been paying attention to what motivates and satisfies Gen-X and Gen-Y employees. A couple of important things are:

1. It's not just about the gift card -- The acknowledgement of and recognition for the accomplishment must be public, such as at the beginning of a shift or a staff meeting. One of these companies starts every meeting that way. Being recognized publicly is important to every human, and particularly important to Gen-X and Gen-Y. The card usually comes later, given privately.
   


2. It's not assumed that every accomplishment or recognition includes a gift card -- recognize and praise people regularly & publicly, just as you have been, and then the card is occasional "icing" afterwards.

Now, you ask, isn't the gift card ordinary income, subject to the same taxes as a $10 bonus? Yes, indeed it is. In the one case of the $50 gift card, it was clearly stated that this was "$50 after tax." I assume the employer tracks who receives a card, and then grosses up their W-2 at the end of the year. That gross-up is no small deal. Consider Federal taxes at perhaps 28%, State at 7% and FICA at 8%. That takes a $37 gross-up -- to $87 to leave $50 net on the W-2.

I don't know how these companies handle the taxability of $5 gift cards and car washes, and neither did these two employees. What I do know is that the tax code is unambiguous in stating that ANY cash-equivalent amount given to an employee is taxable. The specific ruling on this topic is found at: http://www.irs.gov/pub/irs-tege/p_4090_fed_0305_text.pdf While not dated, the document was apparently published in 2005. I didn't see any wiggle room in it at all. Perhaps you will.

One would need to control, under lock and key, such cards, just like you would Petty Cash. Good idea -- it's just like cash. And then to stay within the law, you'd need to keep meticulous track of those to whom cards were awarded -- have the supervisor sign a form or something, identifying the recipient. And then turn over those tiny amounts to Payroll to be grossed up and included in the W-2s at the end of the year.

Why would you go to all that trouble? Because it might work! The two people who told me about this were smart, well-educated, well-traveled and well-paid. And both were excited when someone gave them a car wash coupon. Go figure. Do keep in mind that this strategy plays best, I think, in the "instant" world of Gen-X and Gen-Y. In the case of these two companies the workgroups involved were mostly under 40.

Wow, if you can make 50 people happy with $10 Starbucks cards or 10 people happy with $50 Target cards, isn't that a better outcome than giving a $500 bonus to one person on a pay stub? Think about it -- I'm still processing the idea myself.

If you give this a try, be sure to come back in 6 months or so and let us know how it worked for you. I can't wait to hear. Just click "Comments" below.

As always, posts you see on this blog are ideas, not recommendations. Before acting, check with your own trusted advisors to be sure an idea is right for your own situation.

To forward this to a friend, Click Here

Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com