I’m not sure where this rant came from and I may disavow it tomorrow…

Isn’t it weird to think that theology has often gotten in the way of people having a real and personal relationship with Jesus? I think back to my own religious education… The muck and confusion about being asked to understand and accept Church doctrine: “begotten not made”, “consubstantiation”, “the Immaculate Conception”, “the Assumption”, the Holy Trinity and all the rest? These are very intricate, somewhat academic, and detailed things to grok. Teaching these concepts to kids and asking that they accept them at face value is like asking them to do Partial Differential Equations before they’ve learned arithmetic.

Instead, the focus for kids (up through young adulthood) should be on what Jesus taught and who he became on this earth. We should teach kids that they are truly divine beings and precious unto themselves. They need to know that they have un-erodable value and that Spirit’s guidance is available to them at all times. We should instruct and nurture their spirits, rather than starting with the mind and heaping on lists of “don’t dos” and the various classifications of sin. And maybe even we should give them the experience of Jesus (serving the poor, siding with outcasts, experiencing rejection for his truth) to make him and his life more intimate and real, hence enabling deeper connection to him.
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Notes from Shakti Gawain, “Developing Intuition, Practical Guidance for Daily Life”

Author: Shakti Gawain, Book: Developing Intuition, Practical Guidance for Daily Life

  • The more I follow my intuition, the better I am able to care for myself. And the more things just fall into place.”
  • Following our intuition puts us in the flow – a very live, productive, and desirable state
  • All these things began to open me to the non-linear, non-rational aspect of my nature
  • The practice of listening to and following my inner guidance… became a very important part of my life. I’ve discovered that listening to and using your intuition on a daily basis is one of the most important keys to self development.

Chapter 1: What is intuition?

There is a universal intelligent life force that exists within every one and every thing. It resides within each one of us as a deep wisdom or an inner knowing. We can access this wonderful system of knowledge and wisdom through our intuition – an inner sense which tells us what feels right and true for us at any given moment.”

In fact, our intuition is a very practical, down-to-earth tool that is always available to help us deal with the decisions, problems, and challenges of our daily lives.

Although the message may come through a bit at a time, if we learn to follow this information, step-by-step, the necessary course of action will be revealed. As we learn to rely on this guidance, life takes on a flowing, effortless quality. Our life, feelings, and actions interweave harmoniously with those of others around us.

Our intuition needs to be the guiding force in our lives… Many of us have programmed our intellect to doubt our intuition. When an intuitive feeling arises, our rational minds immediately say, “I don’t think that will work” or “What a foolish idea.” And the intuition is disregarded. We must train our intellect to respect, listen to, and express the intuitive voice.

Instinct vs. Intuition:

  • Animals live by their instinct — genetically programmed part of them, naturally directs them toward survival. Instinctual behavior is usually similar in all members of a given species. Includes aggression and sexuality. As humans, we have suppressed a lot of these (i.e. disowned them).
  • Humans also have intuition, which gives us access to a broader array of information which helps us not only in survival but in personal growth, development, and higher purpose. Intuition is fine-tuned to our individual needs in any given moment.
  • Need to develop healthy balance of intellect, instinct, and intuition.

An exercise to help you recall an intuitive feeling

  • Get in a comfortable position, close your eyes
  • Take a few slow, deep breaths
  • See if you can remember a time you had a strong hunch, gut feeling, or feeling of knowingness about something
  • How did it come to you?
  • How did it feel?
  • Did you follow the feeling?
  • What happened as a result of following it or not following it?
  • Write a little bit about this experience in your journal or notebook.

Chapter 2: Becoming Aware

All of us have intuitive feelings all the time. Many of us automatically ignore, discount, or reject those feelings. This often happens unconsciously. We don’t even realize that some deeper part of us may be trying to get our attention. You might get an instant, deep feeling in response to something — “this feels right to me!” Immediately after that, you might think, “Whoa, that doesn’t make sense.” Or “That would never work.” Or “I can’t do that.” Or “What would my family think?” Or “I don’t know anything about that, I might make a fool out of myself.”

Pay attention to what’s going on inside of you. So that you can become aware of these inner dialogues and catch them as they are happening or shortly thereafter. As you  become more aware of your inner process, you will become aware of the intuitive feelings as they pop up and begin to deal with them more consciously. Next up: how to interpret intuitive feelings, how to act on them.

Here are (some) different ways that people experience intuitive feelings

  • When phone rings, knowing who is calling
  • Thinking about someone, phone rings, and it’s the person you were thinking of
  • Sensing something coming in the mail
  • Sensing that something important is coming
  • Participating in sports, while at work, at school
  • Knew you were going to hit home run or sink putt and did
  • Scientists use hunches to figure out which line of inquiry to pursue
  • Strong and immediate desire to leave party or do X …

Very successful people follow intuition; intuitive guidance can come through dreams. When we follow intuition, we don’t know what doing or why … but there are usually some surprising results.

Awareness exercise: try every night for a week or so

  • Sit in quiet place where won’t be disturbed
  • Take a few slow deep breaths
  • Allow body and mind to relax
  • Think back to when first woke up this morning: how were you feeling? what were you thinking about? what did you do after you woke up
  • Slowly review day, anything significant happen? how felt? Just review it in a detached way… as if watching a movie of your day
  • Try to notice any time during day when might have had an intuitive feeling about something… impulse, hunch, rightness, wrongness, knowing something, a lot of energy / enthusiasm / juice for a possible action or conversely a sense of deadness about a possible action.
  • How did you handle that feeling? Pay attention or ignore? How did you feel afterward?
  • Let it all go; relax. This is an experiment in awareness — in increasing consciousness of intuition. Don’t judge or criticize self if not as advanced as you’d like to be. Instead, appreciate yourself for your desire to develop and use this gift more.

In general, when we follow an intuitive feeling, things tend to work out well. We feel energized and enlivened and there is a sense of being in the flow of life. When we don’t follow our intuition, we often feel somewhat depleted, depressed, or numb. And there may be a sense of being blocked, having to *push* to make things happen, or being out of the flow. (Later: will work to distinguish intuition from other feelings.)

Chapter 3: Trusting Yourself

We are taught from a young age…

  • Try to accommodate those around us
  • Try to follow certain rules of behavior
  • Suppress spontaneous impulses
  • Do what is expected of us
  • Look to outside authorities (family, religion, school, community values and mores, spouses, employers, doctors, lawyers, other experts, …) for guidance or direction, rather than looking inside ourselves INSTEAD of paying attention to own feelings and intuitions

We can follow our gut feelings about who to go to for advice or support. If we were drawn to them, there is likely to be value for us. Then we can ponder what they say, paying attention to what’s right for us. Open to learning and receiving guidance from others … without giving our power or authority away.

Many of us have the pattern of being overly concerned about pleasing or caretaking of our families. Or being overly concerned with trying to live up to their expectations of us. We may be reluctant to even tune into our intuitive feelings if we sense that following them might cause us to do things which might upset our friends or families. Things work out better when everyone can express their needs and feelings, including their intuitive feelings.

Can you remember a time when you had an intuitive feeling about something but disregarded it and followed another person’s advice. How did you feel about it afterwards? How did things work out? Write a bit about this experience.

Chapter 4: Accessing Intuition

Many of us are aware of spontaneously having intuitive flashes from time to time. Our intuitive wisdom is always there inside of us. And it is always trying to come through to guide us. Most of us just don’t know how to access it at will on a regular basis.

Here is a basic meditation for getting in touch with your intuitive guidance

  • Find a quiet peaceful place where you will be undisturbed for a few mins
  • Sit or lie down in comfortable position
  • Close your eyes
  • Take a deep breath. As you exhale slowly, relax your body
  • Take another deep breath. As you exhale, relax your body a little bit more.
  • Take another deep breath. As you exhale, try to relax your body as much as possible.
  • If any place in your body feels tight or tense, gently breath into that area and allow it to release and relax.
  • Now take another deep breath. As you exhale, relax your mind. Let your thoughts just drift away.
  • As each new thought comes into your mind, let it go.
  • Take another deep breath. As you exhale, imagine that you can move your awareness out of your mind, out of your head, and drop it into your body.
  • Let it rest in the solar plexus of your body
  • Take another deep breath. As you exhale, let your awareness move into a very quiet, deep place within.
  • Keep repeating this until you come to rest in the deepest, quietest place you can find.
  • Let yourself rest in this quiet place inside.
  • In this quiet place inside, you naturally have access to your intuitive inner guidance.
  • A wise part of you that lives within this deep place within you. It knows exactly what you need at every moment.
  • Ask yourself, What do I most need to remember or be aware of right now?
  • Or you could ask: What direction do I need to go right now? Show me my next step. How do I need to take care of myself? Should I take a job I’ve been offered.
  • After you ask this question, just rest quietly and be open to what might come.
  • If a thought, feeling, or image comes to you in response, notice it.
  • Just take whatever comes and be with it for a little while. It’s not necessary to understand it. Just be with it in a receptive way.
  • Don’t try to make anything happen. Trying gets in the way of the process. Trust your own experience.
  • When you feel complete with the process for now, begin to notice your breath again. Become aware of how your body feels. Notice your surroundings.
  • If you wish you can write down whatever you experienced or what message you received. Otherwise, contemplate your experience a bit.

Practice following any intuitive impulses you have and notice how they work out.

Don’t try to make anything amazing happen. Just listen a little more deeply than usual for your own sense of truth. Try not to get caught up in needing to have an immediate answer. You may be in-process. Inner guidance usually just lets us know what we need to do in the moment. Sometimes it’s telling us just to wait, be patient, hang in there. When clarity is meant to come, it will.

  • If you feel really blocked for a long period of time, you probably need to do some emotional healing work. Find a good therapist or support group and begin learning to experience and express your emotions.

You can learn to “check in” with your intuition at regular points in the day. Develop the habit to pause several times during the day to tune into what your intuition may be telling you. Go into the bathroom or Take a moment to sit or Walk outdoors.


  • Take a deep breath, exhaling slowly.
  • Notice what’s on your mind, what you have been thinking about
  • Notice how your body is feeling right now
  • How are you feeling emotionally?
  • Do you feel like you are more or less following the flow of your energy? Or do you feel stressed, conflicted, or out of sorts?
  • Take another deep breath, exhale slowly.
  • Let your awareness move into a deep place inside.
  • Is there anything you need to pay attention to that would help you feel more connected to yourself?
  • Any gut feeling you need to be aware of?
  • Enjoy a moment of rest before you carry on.

Just the fact that you are taking a moment to tune into yourself will be deeply healing. Will make you more present and hence more likely to be tuned into our feelings. You will begin to develop and deepen a relationship to your intuitive self. And intuition will come to you more frequently, more clearly, more visibly, more easily.

Put little reminders where you are likely to see them … to remind yourself to do this exercise at regular times during the day. Something which conveys to you the feeling of connecting to your intuition. Maybe move the reminders around periodically so that they stay fresh and visible. You can apply the “intuitive check in” at many different instances. Develop habit of checking intuitive messages frequently.

Chapter 5: Acting on Intuition

What makes it difficult to follow intuition:

  • We are only instructed on what to do in the moment. We can’t see how/why/what this path leads to and why we are meant to take it.
  • Fear of acting on our gut;
  • Conflicting feelings or voices on the matter;
  • Feeling of moving into the unknown
  • Challenge: to infer that our intuition is telling us NOT to do something. We may try to make ourselves do it but it may not work. We often think there’s something wrong for us.
  • Also disconcerting: the energy doesn’t seem to be moving in any direction at all. Maybe you aren’t meant to be DOING anything right this minute…

As we keep following our inner guidance, a path evolves. How to build trust in intuition?

  • Start by taking small steps – what movie to see, what restaurant to go to, whom to call, what to do that night
  • When faced with simple choice or decision, briefly quiet your mind and go inside.
  • Instead of making your decision based on logical choice or reason, what you think is correct, or what others might feel, try to go by what your intuitive feeling tells you.
  • Get in the habit of checking your intuition and developing trust in yourself.
  • Make a practice too of noticing how you feel after following your intuition.
  • Do this in the spirit of adventure!
  • Notice also how things work out…

If you think you are following your intuition and yet things don’t work out well (or you don’t find much value),

  • You may be misinterpreting your inner guidance
  • You may be following a different feeling or voice that is actually not intuition
  • You may be following your intuition but it’s a more complex process — and you just haven’t gotten the full big picture yet

Exercise: List every reason you can think of about why you are afraid or doubtful about acting on your intuition. (Keep updating as you think of others.)

Exercise: For some pre-defined period of time, allow yourself to pretend that you are absolutely trustworthy in every intuitive inclination you feel and ACT that way. Let go of your doubts.

Chapter 6: Interpreting Intuitive Messages

It’s not always easy to understand what your intuition is saying … or what direction it’s trying to move you. Your true intuition is always correct but you may not always know how to interpret it correctly. Ways in which you may experience your intuition:

  • A feeling of rightness or wrongness
  • A deep gut feeling
  • An inner knowing
  • Energy — we sense that our life energy is trying to move us in a certain direction or BLOCK us from a certain direction
  • Generally it’s a very normal and natural feeling, as in: “I want to do this” or “I don’t want to do that”

Almost always a feeling of uncertainty or risk involved in following intuition. Rarely feels like “a sure thing.” Relax, take experimental approach, pay attention to what works or doesn’t work. Take in the feedback that life gives you and learn from it.

When following intuition, you feel like you’re in the flow of life. Things open up smoothly and easily. You feel like you’re in the right place at the right time doing the right thing. You may experience synchronicity with people and events. Things might happen miraculously. May get profound sense of Higher Power acting in the situation. When life is following smoothly like this, we are getting great feedback that we are following our intuition properly. Sometimes we find ourselves on a much bumpier road. Our intuition often leads us down a very different path than we expected. Our intuition may advise us to take a different path than rational logic would suggest. Or we might end up at a different place than we thought we were headed.

Our intuition might lead us right into the challenge that we hope to avoid. Something difficult or seemingly disastrous brings a wonderful result. Sometimes may need to let go of something we are very attached to. Or we may feel that our lives are falling apart. If you’re not sure, you can ask your intuition for clarity… Request to be blocked if moving in wrong direction or for a sign.

The surest and most reliable way to know whether you are following your intuition is that when you do so, you feel more alive. When you are listening to your intuition and acting on them, you keep your channel open so that the life force can keep flowing. You literally have more energy moving through you. Living in the present moment. When you don’t follow your intuition, you may find that you feel a certain heaviness, lack of interest, deadness. This is b/c the life force is trying to come through and move you in a certain way but it is being blocked. When we aren’t following our life energy, life feels like a struggle.

So in order to suss out your intuitive feelings on something, test whether you feel a certain aliveness more with one of the options. I.e. what is your natural energy for the thing? If you don’t act on an intuitive feeling, you might be left with a feeling of depression or numbness, loss of energy or power.

  • What blocks intuition? Fear or self doubt

If we pay attention to what enlivens us, it sometimes comes from expressing a different part of ourselves than we are used to expressing.

Quite often when people begin paying attention to inner guidance — may not get any message at all. Surrender into a time of being. Let go of all of the need-to-be-doing. After relaxing, our energy will be replenished and moved into new direction. Our energy moves and rests. We must rest.

Energy Awareness Exercise: Make a practice of noticing how you feel when you follow your inner guidance and when you don’t.

Chapter 7: Distinguishing Intuition from Other Voices

How do I distinguish my intuition from all the other thoughts and feelings going on inside me? She learned from Drs. Hal and Sidra Stone.

  • We each have many different selves.
  • Each one has its own distinct energy and voice.
  • Through the voice dialogue process, we can learn to dialogue with these inner voices and learn why they are there, how they feel, and what they have to offer us.
  • This can bring us awareness about what is really going on inside of us.
  • (This also reminds me of Caroline Myss’s Sacred Contracts book which is all about the multiple archetypes we each contain/embody.)

We are called to DEVELOP and EXPRESS as many of these different ARCHETYPAL personalities as possible. If you are overly identified with action and achievement, you need to develop the opposite polarity (relaxation and play). In so doing, you will actually be enhancing your action and achievement strengths.

We have primary selves. There are certain other selves that we are afraid of, ashamed of, or try to keep hidden. These are our disowned or shadow selves. According to Dr. Gawain, these are often the opposites of our primary selves. Our primary selves make most of our decisions and run our lives. Their objective is to keep us safe and to make us as successful as possible.

How do we become conscious of the many selves within us and keep them balanced in our lives?

  • Begin to recognize and become aware of our primary selves.Don’t want to be totally identified with these selves. Want to see them as ENERGIES WITHIN US rather than WHO WE ARE.
    • What qualities are you most identified with?
    • Can you identify the personalities that make most of your decisions and run your life?
    • You may have primary self: CARETAKER. You may find yourself automatically doing this without making a conscious decision. Once you become CONSCIOUS of this, you can have more CHOICE in the matter.
  • This is called developing “Aware Ego”… disowned selves come forth. Our lives work better as we integrate the energy of previously disowned selves.
  • As you begin to become aware of the different energies operating within you, you can learn to distinguish them from intuition.
    • If you are feeling that you SHOULD take some particular action, that is probably your inner rule maker or perfectionist, not your intuition
    • If you are feeing SELF CRITICAL or JUDGMENTAL of OTHERS, that is your inner critic or judge — definitely not your intuition.
    • Intuition NEVER guides us with an authoritarian or critical edge. It doesn’t impose rules. It never feels heavy handed or burdensome. It never makes us feel guilty. It’s not self indulgent or rebellious.
    • Intuitive guidance brings a feeling of enlightenment, even release. It feels good in our heart and soul. It feels like exactly the right step to take in the moment.

It’s very important to distinguish between our FALSE CRAVINGS and ADDICTIONS vs. our true intuitive impulses. We are lured by false cravings when we are not conscious of our true needs and desires OR when we do not know how to fulfill them. We must heal our addictive patterns — because they keep us from being aware of what we truly want and need. Workaholism, obsession with relationship, … Even meditation. Anything we do habitually to avoid the pain.

  • Addiction: anything we unconsciously do to attempt to fill the emptiness inside
  • This emptiness can only be filled by the things we really need. In order to FILL those needs, we must FEEL them.

Our intuitive feelings often come to us from our bodies.

Chapter 8: Intuition and Emotions

  • “Feeling” == our intuitive promptings
  • “Feeling” == our emotions
  • Vulnerable sensitive child within us. Carries our emotional needs.
  • Playful child within us.
  • Angry self that feels afraid.

Primary self: one we identify with and show to the world.

The more we allow ourselves to be in touch with our emotional feelings, the easier it is to be in touch with our intuitive feelings. When we are in the flow emotionally, our intuition comes through more easily. Once we are aware of our emotional feelings, it’s not too difficult to distinguish them from our intuitive feelings. Each emotion has a particular energy; and our intuition has a unique energetic vibration as well. We may feel these differently in our bodies. Our emotions and intuition often go hand in hand.

If we have disowned our emotions, how do we do our emotional healing work? Need someone supportive that we can talk to about our feelings. If you sense that you have some blocked emotion, try working with a good therapist.

Exercise: To get in touch with your emotions. When you wake up in the morning, put your attention in the middle of your body. Ask yourself, “How are you feeling emotionally right now?” Try to distinguish your FEELINGS from the THOUGHTS you are having in your head. Are you feeling peaceful, excited, anxious, sad, angry, joyful, frustrated, guilty, loving, lonely, fulfilled, serious, playful, …? If there seems to be an anxious or upset feeling inside of you, go into that feeling and give it a voice. Ask it to talk to you and tell you what it’s feeling. Make an effort to hear it and listen to its point of view. Be sympathetic, loving, and supportive. Ask what you can do to take care of yourself at this time. Repeat this exercise before you go to bed at night and any other time it feels appropriate.

Chapter 9:  Intuition and the Body

One way to get more in touch with your intuition is to get more in touch with your body. The more you feel your body and listen to the signals it is giving you, the more it helps you get in touch with your intuition. Meditation helps, especially if you can drop your awareness from your head to your heart. Out of the intellect and into your intuitive self. Intuition can be experienced in the body: in your gut, heart, hands, goosebumps, some may feel being physically pulled in some direction, like a magnet.

  • When meditate on various areas of your life (work, spouse, children, home, community, friends, parents, …), do you experience anxiety at any point? If so, dive deeper into that area in order to pinpoint the exact cause of the stress. It might be Work –> Project X –> I’m haunted by sense that X is doomed to failure…

You might sense that you are “on the right track” when you feel excitement in your body (this is not the same thing as ego-driven gratification, which feels different). Also, feel peaceful, content, and calm.

Exercise: Over a period of at least a week, make a note in your journal of every time you feel an intuitive impulse or hunch through your body. Also keep a record of the times when your intuitive feelings were validated. The more you practice recognizing this sort of experience in your body, the easier it will be to recognize your intuition. Your ability to use your intuition on a daily basis will increase.

Body-talk exercise: Sit or lie down in a comfortable position, take a deep breath, let yourself sink into the floor or chair; feel supported by the earth below you. Gradually allow your mind to grow quiet. Take another deep and allow your body to feel held and protected — like it is surrounded by light and warmth. Take another deep breath and ask your body, “What would you like to tell me at this time?” If you are troubled by illness or aches or pains, ask your body what the illness or aches are trying to tell you. Be patient and breath deeply. As you inhale, allow your body to feel the nurturing healing properties of the oxygen you take in. When you exhale, release any anxiety. Bring yourself to a deeper place within your body. Notice any feelings, images, or sensations you receive. Now, ask your body, “How can I relieve these concerns?” Notice any feelings, sensations, and images. Now take a deep breath and thank your body for the information it has given you. When you feel comfortable and ready, open your eyes and make some notes in your journal about any info you received. Make sure to note how your body communicated to you.

Chapter 10:  Intuition and Work

Intuition can be a great aid in your work. Can help you process info, make better decisions, take care of yourself, and interact with people more successfully. Following your intuitive guidance supports your creativity. Great source for discovering and creating work that will satisfy you. Can use intuition to guide yourself to your right purpose. May take time, though. Good to explore the things that really turn you on…

Here are some exercises for discovering your passion:

  • Follow any impulses you have in the direction of your true work, play, creative desires… even if it seems totally unrealistic. Follow the impulse anyway in the spirit of opennese and adventure.
  • List any fantasies you’ve had around work, career, or creativity. Beside that list, make another list of the ACTION STEPS you plan to take to explore these fantasies.
  • Write an ideal scene — picture of your ideal career. Write it in the present tense as if it were already true. Put in description and details. Put it away someplace.
  • Cut out pictures you come across or articles that pertain to your desires. Collect in large envelope — to develop a clearer picture of what you’re looking for. Possibly create a collage out of these. Look at it often, let it inspire you.

Chapter 11:   The Art of Following Intuition

It’s an art… requires a certain commitment. Challenged to move to a deeper level of self trust. Allowing intuition to guide us — a new way of life. At times, may feel uncomfortable or frightening — especially if we have been conditioned to follow life in a completely rational manner. Learning to tune into and trust our inner truth is a major shift, which may take some time. And it may be a little difficult or confusing in certain moments. It’s important to be very compassionate to ourselves. We may be very aware of the conflicting voices inside of us. We ought to acknowledge and honor all of our inner voices. The more we practice our intuition, the more faith that we get. Because we see that it actually does work. Our lives are actually getting better and better…

  • Intuition likely to push you to take some appropriate risks. Intuition may tell you that there is something within you that is trying to come through. Allow yourselves to fantasize about something you’ve always wanted to do (e.g. start your own business). Follow any impulse you have to move in this direction.
  • You may find that your process of making decisions changes. Rather than just trying to figure things out in your head, follow your intuitive process a little and let things unfold.
  • If you have a problem to solve or a desire to fulfill, try turning it over to your intuition. Consciously ask your intuition to guide you in this process. Your intuition may draw you to certain activities, which may give you what you were seeking.

Our intuition is always guiding us to our own highest good and to the greatest good of all involved. In the process of learning to trust intuition, some people may go through a period where their life feels like it’s falling apart. These are signs that letting go of old identity. It’s a matter of TRUSTING that there is a deeper perfection in the process. New forms of relationship, creativity, and work will come into being. Obtain emotional support while going through these changes! You may need to seek out people who are interested in personal growth. Learning to follow your intuition can feel a bit like “living on the edge.” Gradually, we become less afraid and more comfortable with uncertainty. We can learn to enjoy “not knowing.” Relieved of false sense of control.

We can learn to move into the unknown with the confidence that we have a guiding force within us that is showing us the way!

Final meditation: repeat as often as you like!

  • Relax your body. Take another deep breath and relax your mind.
  • Continue to breath slowly and deeply. Let go of all tension and anxiety.
  • As you relax, find yourself in a deep quiet place inside. Allow yourself to just rest in that place.
  • Imagine that you are following your own energy — feeling it, trusting it, moving with it in every moment of your life.
  • You are being completely true to yourself. Speaking and living your truth.
  • You feel alive and empowered.
  • Imagine that you are expressing your creativity fully and freely. And let yourself… enjoy the experience.
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Book notes: Good to Great by Jim Collins

Some quick notes on some of my main takeaways (not necessarily the full set of key points, rather the ones that spoke to me) from Jim Collins’ great book – Good to Great. But seriously? You should just get the book and read it yourself. The writing style is totally accessible and the content is exhaustively researched and positively inspiring. Don’t settle for my secondhand renderings!

He (a professor at Stanford University’s Graduate School of Business) and his research team embarked on a multi-year project in order to understand whether a good company could become great or if, instead, that characteristic needed to be in the organization’s DNA from inception.

Table of contents

Selecting the companies to study

They looked for companies with the following pattern (as gleaned from the companies’ financial reports), which defined the transition from good to sustaining great:

  • [So-so company] Cumulative stock returns <= the general market for 15 years
  • [Becoming great] Followed by a transition period
  • [Staying great] Followed by cumulative stock returns >= 3 times the general market for 15 years

They also imposed some additional criteria in order to ensure that the resulting companies were not merely beneficiaries of good fortune (e.g. a rapidly growing industry) but rather possessed intrinsic characteristics which would result in greatness independent of industry. Namely: If the entire industry in which a G2G company operated demonstrated the above pattern then the company was dropped from consideration.

Then they chose a comparison company for each G2G company. The comparison company had to be in the same industry and have the same opportunities and resources as the G2G company had at the time of its transition. So there were 11 comparison companies. Additionally the team chose 6 companies that had made the transition (a short-term shift from ok-ness to greatness) but were unable to sustain that success. This group is referred to as the “unsustained comparisons.”

Research approach

The team collected all articles published on these companies and coded each such into categories such as: technology, strategy, leadership. They also interviewed executives during the time of transition. And they performed targeted analyses for the companies on their acquisitions, executive compensation, business strategy, corporate culture, layoffs, leadership style, financial ratios, management turnover, etc. Finally they took special care to identify “dogs that didn’t bark” — namely, certain phenomena that they expected to see demonstrated but which were not in fact born out by the research.

Some dogs that didn’t bark

  1. The idea of larger-than-life celebrity leaders. Often (91% of the time), G2G CEOs came from inside the company and did not fit the big-personality-CEO model.
  2. There were no systematic differences in executive compensation – between G2G and comparison companies.
  3. There were no major differences in strategy between G2G and comparison companies — all had some strategy which was reasonable.
  4. The G2G companies focused on what TO do as well as what NOT TO do. Comparison companies only focused on the former.
  5. The use or application of technology by a G2G company never caused a transition but instead was merely an accelerator. Moreover, no comparison company got blown away by a competitor’s use of technology. In all cases, the judicious or non-judicious use of technology either accelerated or decelerated (respectively) progress but wasn’t of itself the reason for the transformation.
  6. Similarly, no company became great as a consequence of M&A activity.
  7. G2G companies paid noticeably little attention to things like: managing change, motivating people, creating alignment. Under the right conditions, these problems go away (resolve themselves).
  8. The transition times for G2G companies were NOT marked by a specific campaign or initiative or effort on the part of the G2G company.
  9. G2G companies were not in great industries. Greatness, it turns out, is “largely a matter of conscious choice.”

So what leads to sustained greatness?

Below we will walk through the “primary concepts” that differentiated G2G companies from their less successful comparison companies. Each of the 6 primary concepts showed up in 100% of G2G companies and only 30% of comparison companies. For this reason, the authors argue that the identified concepts are key differentiators between OK-ness and sustained greatness. Moreover, the authors claim that these concepts are causative – that is, these concepts do not merely occur in great companies but actually lead to greatness. The concepts are:

  • Disciplined people
    • Level 5 leadership: leaders are self-effacing, quiet, shy, reserved. They demonstrate personal humility and professional will.
    • First Who Then What: first get the following thenfigure out what you’re going
      • The right people ON the bus
      • The wrong people OFF of the bus
      • The right people in the right seats
  • Disciplined thought
    • Confront the brutal facts (yet never lose faith)
    • The Hedgehog Concept – defining what is our one big thing; who are we; what are we about
      • Transcend the curse of competence
      • Just because X is your core business and you’ve been doing X for years… does NOT mean that you can be the best in the world at X. And if you cannot be the best in the world at your core business then your core business absolutely CANNOT form the basis of a great company…
  • Disciplined action
    • A Culture of Discipline
    • Technology accelerators: pioneer the application of selected technology

Chapter 2: Level 5 Leadership

Traits of a Level 5 leader:

  • Extreme personal humility combined with professional will
  • Self-effacing, quiet, shy, reserved, understated, humble, modest
  • Fierce resolve to do whatever is necessary to make the company great
  • Fanatically driven, incurable need to produce results
  • Ambitious for the enterprise, not for themselves
  • Set successors up for success
  • L5 leaders look out the window when apportioning credit and in the mirror when doling out blame

Examples of L5 leaders:

  • Kimberly Clark – Darwin Smith. Made decision in 1971 to sell the company’s paper mills and get out of its til-then core business of coated paper.
    • From 1951 to 1971, Kimberly Clark’s stock is 1/3 lower than its competitors’
    • From 1971 to 1991, Darwin Smith takes over and KC becomes leading paper-based consumer products company. Its stock returns are 4.1 times the market’s. It beats rivals Scott and Procter & Gamble.
  • Fannie Mae – David Maxwell led 9-year transformation. FM was losing $1MM/day when he started in 1981. Nine years later the company was earning $1MM/day.
  • Abbott Labs – George Cain. At time he became CEO, Abbott was in bottom 1/4 of pharmaceutical industry. He could not stand mediocrity in any form and was utterly intolerant of anyone who would accept the idea that “good is good enough.” Cain destroyed a key source of mediocrity – nepotism – even though he himself was an 18-year veteran (and hence had many long-time colleagues who were let go) and the son of a previous president of Abbott. From 1974 to 2000, shareholder returns beat the market 4.5 to 1.
  • Walgreens – Cork Walgreen. Took Walgreens out of the food service biz, which had been its core business, and focused Walgreens’ resources where it could be the best in the world. He was known for having stoic resolve, being quiet, dogged, simple, and for his sheer workmanlike diligence.

Note that bringing in a high profile “change agent” from the outside is negatively correlated with sustained transformation. 10 of 11 G2G CEOs came from INSIDE the company.

Chapter 3: First Who Then What

Expected to find that taking a company from good to great entailed first set a new direction then get people committed and aligned behind that new direction. Instead, it was the other way around. The G2G companies first got the right people on the bus then figured out where to go. Why would the latter recipe be the right one?

  1. If you begin with WHO, rather than WHAT, you can more easily adapt to a changing world. OTOH, if people jump on the bus because of where it’s going, what happens when you get down the road and need to change direction? Will you lose those people?
  2. If you have the right people on the bus the question of how to motivate and manage them goes away. They are self-motivated by an inner drive to produce the best results and be part of something great.
  3. If you have the wrong people, it won’t matter if you have the best strategy ever, you still won’t have a great company.
  4. At best, the model of “genius with a thousand helpers” lasts only as long as the genius is around (and sometimes not even that long) and hence is not a recipe for sustained greatness.

Examples of the above principles at work:

  • Wells Fargo CEO in 1970s – bank deregulation coming and massive change to the industry likely to follow. He didn’t know the right way to respond to all of this and so focused on hiring the best people he could find whenever and wherever they found them. B of A by contrast applied a “weak generals, strong lieutenants” model (ironically enough as an approach to retain top talent) which had the effect of indecisiveness and authoritarian rule. Single autocratic dictator who made all of the decisions (and hence the bank did not derive the benefit of the other minds in management).
    • The G2G companies cultivated talented executive teams and effective processes for deriving the full benefit of that amassed intelligence (namely, habits of group dialogue, debate, shared insights, …).
  • Fannie Mae’s David Maxwell refused to develop a strategy at FM until he got the right people on the bus – in spite of the fact that FM was losing a million dollars a day at that point.
  • Nucor – steel maker – put mills in farming towns in order to take advantage of local populations who had the farmers’ work ethic. Moreover, at Nucor, 50% of a worker’s compensation was tied to his team’s performance. They created an environment in which hard workers thrive. In hiring, Nucor placed greater emphasis on character attributes than on specific relevant experience – by asking questions such as: Who are you? Why did you make certain decisions in life?
  • Circuit City – Alan Wurtzel spent bulk of time getting the right people on the bus whereas his competitor (Cooper at Silo) focused on finding the right stores to buy.
  • Counter-examples: Jack Eckerd (genius for picking the right stores to buy, not focused on picking the right people to hire, like Cork Walgreen was), Singleton at Teledyne (achieved dream of becoming a great businessman, failed at building a great company), …

Other learnings:

  • No systematic pattern (relative to comparison companies) linking executive compensation to process of going from Good to Great. Observation: the right execs will do everything in their power to build a great company because they cannot imagine settling for less. Their moral code requires them to build excellence for its own sake.
  • These were rigorous cultures rather than ruthless ones. In G2G companies, they constantly applied exacting standards all up and down the hierarchy. The best people were made secure in the knowledge that they didn’t have to worry about their positions but instead could focus fully on their work.
  • The only way to deliver TO people who are achieving is NOT TO burden them with people who ARE NOT achieving.

How to be rigorous in hiring decisions?

  1. When in doubt, don’t hire. Keep looking.
    • The biggest throttle on growth for any great company is the ability to get and keep enough of the right people.
  2. When you know that you need to make a people change, ACT.
    • The best people don’t need to be managed. When you spend time/energy/attention thinking about how to improve a situation with the wrong person, you are taking away from focusing on making progress.
    • Hanging onto the wrong people demotivates the right ones. “Strong performers are intrinsically motivated by performance and when they see their efforts being impeded by carrying extra weight, they become frustrated.”
    • G2G companies churned people more quickly: people get off the bus in a hurry or stay a long time.
    • Questions when on the borderline with a hiring decision
      • Would you hire this person again?
      • If this person came to you and said he was leaving, would you feel terribly burdened or secretly relieved?
  3. Put your best people on your biggest opportunities (not on your biggest problems).
    • Managing problems: path to goodness
    • Building on opportunities: path to greatness

In closing: “But if we spend the vast majority of our time with people we love and respect – people we really enjoy being on the bus with and who will never disappoint us – then we will almost certainly have a great life…

Chapter 4: Confront the Brutal Facts

Kroger and A&P history

  • 1950s: A&P is largest retailer in the world; Kroger is an unspectacular grocery chain, about 1/2 the size of A&P
  • 1960s A&P falters; Kroger laying the foundations for transition
  • 1959 – 1973: Both chains lagging the market
  • 1974 – 2000: Kroger stock market returns were 10 times the market and 80 times Kroger’s

Both Kroger and A&P had all of their assets in traditional grocery stores in the 1950s. The difference was that, in response to lagging returns, Kroger attempted to find a path to improved returns and then heeded what it found, despite the fact that this required enormous capital investment and a “letting go” of its prior business model/approach. In particular, the findings (that both A&P and Kroger obtained) were that the American consumer was changing and the existing base of Kroger (and A&P) stores would not be able to satisfy that customer. While Kroger was confronting the brutal facts and their implications as well as making a plan for responding to those facts, A&P focused on preserving cash dividends and honoring the glorious memories of its past leaders (i.e. fiddling while Rome burned). Rather than take a disciplined approach, A&P lurched from one faddish strategy to the next, while Kroger deliberately made bold, sweeping changes in line with what customer research had found, which was that the old grocery store was going to become extinct; supercombo stores (where customers could get groceries plus) were the future; also, must be #1 or #2 in any given market or exit.

Learnings on disciplined thought:

  • Infuse the process with the brutal facts of reality. “When you start with an honest and diligent effort to determine the truth of the situation, the right decisions often become self evident.” Continually refine the path to greatness with the brutal facts of reality.
  • Must create a climate where the truth is heard and brutal facts are confronted.
    • Note also that if a leader is too charismatic, other employees focus on him rather than on the marketplace etc. The liabilities of a strong personality. Churchill took extra steps to make sure that he was always provided with the brutal facts of reality in spite of the fact that people might be intimidated by him. “Facts are better than dreams…” he said.
  • Holding out false hopes rather than confronting and embracing reality is demotivational.

How to create a climate where the truth is heard?

  1. Lead with questions, not answers. Ask questions of top team… debates, pushing, probing questions. They used to call Wurtzel (of Circuit City) “the prosecutor” because he would home in on a question and wouldn’t let go til he understood it.
  2. Engage in dialogue and debate, not coercion
  3. Conduct autopsies without blame. Bring up debacles, discuss openly, try to understand mistakes. Should be like a heated scientific debate where people are engaged to search for the best answers.
  4. Build red-flag mechanisms – things which enable disagreement with power. Used to ensure that information which should not be ignored bubbles up.
    • A good example of this is what Woolpert instituted at Granite Park – basically a system wherein the customers paid (for whatever service/product) what they felt was right. In this way, poor service/product/experience would directly and immediately hit the bottom line, which would ensure it got noticed. “Short pay acts as an early warning system…”

The Stockdale Paradox: Unwavering faith amid the brutal facts

  • “In confronting the brutal facts, G2G companies left selves stronger and more resilient. There is a sense of exhilaration that comes in facing head on the hard times…”
  • Hardiness research: of the people who suffered serious adversity…
    • Some became permanently dispirited
    • Some got their lives back to normal
    • Some used the experience as a defining event that made them stronger
  • Fannie Mae: the brutal fact is that the interest rate spread (between the rates that FM issues for its loans AND the rates that FM itself has to pay on the capital it has borrowed) was such that FM was earning a 9% return but having to pay a 15% return. FM looked hard at this truth and concluded that it needed to become the best in the world at managing mortgage interest risk. Thus, FM created a new business or revenue model such that it was less dependent on the vagaries of the Fed (i.e. fluctuations in interest rates).
  • Stockdale: highest ranking military officer at Hanoi Hilton. “I never doubted that not only would I get out bu also that I would prevail in the end…” Do not entertain false optimism (e.g. “We are getting out by Christmas!”), it only demoralizes when it is shown to be BS. Rather be relentlessly disciplined at confronting the most brutal facts of their current reality.

Chapter 5: The Hedgehog Concept

Name comes from old fable whose moral is that the fox knows many little things, the hedgehog knows one big thing, the latter is better. The fox pursues many ends at the same time, sees the world in all of its complexity but fails to integrate its thinking into one overall concept or unifying vision. The hedgehog by contrast simplifies a complex world into a single organizing idea, a basic principle or concept that unifies everything. Anything that does not relate to the hedgehog’s vision is not relevant.

  • How this relates to business? G2G companies develop their hedgehog concept and implement it with fanatical consistency. They develop a simple concept (comprised of three parts, discussed below) and use that as a frame of reference for all decisions.
    • Note that defining your hedgehog concept is not so much a CREATIVE process as a DISCOVERING process. That is, you’re not creating some vision to aspire to or some self you want to be. Rather, you are uncovering what actually makes you tick, what you’re actually very talented at, etc.
    • Hedgehog concept: the UNDERSTANDING of what you can be best at
  • What we get from this is that it’s equally important to know what you are as it is to know what you’re not.
    • There is a humility in seeing yourself for who you are and what you can do and letting go of who you’re not and what’s beyond you… Maturity; honesty
    • Letting go of your history/experience/competencies in order to embrace your destiny
    • “Just because something is your core business – just because you have been doing it for years or perhaps even decades – does not necessarily mean that you can be the best in the world at it.” And it should not be your core business if you cannot be the best in the world at it.
    • The curse of competence
    • “Focusing solely on what you can potentially do better than any other organization is the only path to greatness.”
  • Risks when do not have a well developed hedgehog concept
    • Setting goals based on bravado vs rooted in deep self understanding
    • Mindless focus on growth for growth’s sake
  • Prehedgehog state: going through the fog

G2G examples

  • For Walgreens, this was “profit per customer visit”. They could use this unifying vision to guide decisions about how to allocate resources (which stores to buy) and how to make progress. If you don’t have a clear vision of which variables you are optimizing for, you can fall into the trap of optimizing for too many different things and failing to fully optimize for any of them (i.e. scattering your efforts/energies).
    • Stuck to cities where could implement this concept. (Contrast: Eckerd which acquired any and all stores that were being offered at good value, regardless of location, and without any particular unifying concept.)
  • For Wells Fargo, they determined that their simple unifying concept was all about “running a bank like a business” and focusing on the Western US. This enabled WF to make decisions such as pulling the plug on international operations (allowing CitiGroup to be the best at global banking).
  • By 1964, Abbott had lost the opportunity to be the best pharmaceutical company. Merck had a far superior research engine and too much of a head start. So Abbott acknowledged that it could not be the best at developing new pharmaceuticals. The company determined that they could be the best at creating products that contribute to cost-effective health care.

How do you discover your hedgehog concept? By answering these 3 questions…

  1. What can you be the best in the world at? “To figure out with egoless clarity what they can be the best at…”
  2. What drives your economic engine?
    • How can you effectively generate sustained and robust cash flow and profitability?
  3. What are you deeply passionate about? This must be *discovered*, rather than imposed or aspired to. It’s a heart and soul and guts question. What do you care about even if you’re not only not rewarded for it but also actually punished for it. What would still matter to you despite this cost?

Developing insight into your economic engine

If you could pick 1 ratio to increase over time… what X would have the greatest and most sustained impact? E.g. Walgreens switched focus from “profit per store” to “profit per customer visit”. This enabled Walgreens to focus on a strategy of convenience for the customer – which meant that they might have a high density of Walgreens stores within a small radius. The effect of which is that the profit of each of those individual stores might be lower (than if there were only 1 of them in that region) however they could still maximize profit per customer visit. For Fannie Mae, it was profit per mortgage risk level, not per mortgage.

How to develop your (organization’s) hedgehog concept?

Developing the hedgehog concept is inherently iterative. For G2G companies, it took 4 years on average. The majority of G2G companies pre-transition were not the best at anything and showed no prospects of becoming so.

Get the right people engaged in vigorous dialogue and debate. Have a Council (5-12 people, representing a range of perspectives, where each has deep experience in some aspect of your business or its climate) repeatedly ask and discuss and refine answers to the 3 basic questions.

Chapter 6: A Culture of Discipline

A culture of discipline with an ethic of entrepreneurship.

  • Set your objectives for the year – never change what you measure yourself against.
  • Use rigor and discipline to enable creativity and entrepreneurship. Financial discipline as a way to provide resources for the really creative work.
    • Abbott’s Responsibility Accounting – in which every item of cost/income is identified with a single individual who is responsible for that item.
  • Discipline in terms of focus on and adherence to the hedgehog concept. Say “no” to opportunities that fall outside of your 3 circles (from the hedgehog concept). Disciplined diversification (anything that falls outside of our hedgehog concept, we will not do). Freedom and responsibility within a framework for a consistent system.
    • “The fact that something is a ‘once-in-a-lifetime opportunity’ is irrelevant if it doesn’t fit within the three circles.”
  • Discipline todo what it takes to be the best then continually seek improvement.
    • Dave Scott (triathlete) rinsing his cottage cheese: one small step to make him better.
  • Difference between a culture of discipline and a single leader at the helm who personally enforced discipline throughout the organization.

Comparison companies lacked the discipline to understand their 3 circles OR lacked the discipline to stay within them. Bethlehem Steel failed because it was a culture wherein people focused their efforts on negotiating the nuances of an intricate social hierarchy, not on customers, competitors, or changes in the external world.

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How does The Pill work?

To answer this question, it’s helpful to recap the role of hormones in a woman’s menstrual cycle. That’s actually a pretty big topic so we’ll just look at what causes ovulation and that is a surge of Luteinizing Hormone (LH). “Ovulation” is the release of a single egg from the follicle (or sac) in which it had been residing. Occasionally, two eggs will be released – one from the left ovary and the other from the right which, if both fertilized, results in fraternal twins. Amazingly enough, the leftover sac in the ovary (called the “corpus luteum”) has an effect on thickening the uterine lining and preparing the woman for pregnancy – pretty amazing, eh? Even our biological rubbish has a purpose. Getting pregnant requires an egg; hence a class of contraceptives (including The Pill) focuses on preventing ovulation.

The general approach is to prevent the LH surge and hence the release of an egg. The LH surge is triggered by super elevated levels of estradiol (which is a type of estrogen). When a follicle becomes very mature, it releases these super elevated levels of estradiol. Therefore, by preventing follicular maturation, we can keep estradiol levels down, and hence the LH surge will not be triggered.  In order to inhibit follicular development, one decreases the levels of Follicle Stimulating Hormone (FSH) that are released by the pituitary gland. Increasing the levels of progestin in a woman’s system inhibits the release of both FSH and LH. It’s also the case that elevated levels of estrogen inhibit the release of FSH – and so “combined contraceptive pills” contain both Progestin (used to inhibit release of FSH and hence follicular development) and Estrogen (specifically ethinyl estradiol), which also inhibits release of FSH.

Hence, to recap, the way that The Pill works is as follows:

  • Add progestin to woman’s system. Increased levels of progestin result in decreased levels of FSH and LH (b/c progestin decreases the frequency of release of GnRH from the hypothalmus).
  • Add small amounts of estrogen to the woman’s system. Slightly elevated estrogen levels also inhibit the release of FSH.
  • Since FSH causes follicles to mature, a decreased level of FSH results in halting follicular development, which in turn results in lower levels of estradiol.
  • Without elevated levels of estradiol AND with immature follicles, the LH surge does not happen. If the LH surge doesn’t happen then neither does ovulation.

Maybe you will have this question – I did: We know that the Pill contains some estradiol (estrogen) and that’s “a good thing” because it causes less FSH to be released. But we also know that if there is a lot of estradiol (estrogen) in the woman’s system (as occurs at the end of the follicular development phase) then this causes an LH surge. So how to resolve this apparent contradiction – wherein a woman ingests some estradiol as part of taking the Pill but evidently this does not result in triggering the LH surge?

Here’s the answer:

  • [The Negative Estradiol Feedback Loop] The threshold of estrogen required to trigger the “negative feedback” mechanism (wherein levels of FSH and LH drop) is very low. That is, by adding a little bit of estrogen, we can cause this effect.
    • Note that this is part of what causes a single follicle to mature each cycle. Once that follicle starts developing, it starts releasing estradiol, which inhibits FSH, which inhibits the growth of other follicles.
      • “Serum estradiol levels begin to rise as a result of the emergence of the dominant follicle. The rising estradiol, through the negative feedback loop, suppresses FSH levels (see Fig. 1) to concentrations that are too low to sustain maturation of the other follicles in the cohort…” Source: http://www.glowm.com/index.html?p=glowm.cml/section_view&articleid=282
  • [The Positive Estradiol Feedback Loop] However, at a much higher threshold, the effect becomes the opposite. Namely, when estradiol levels get really elevated (as is the case at the end of the follicular phase where we have a single big follicle which is producing a bunch of estradiol), we see that this induces the LH surge.
    • This is the positive estradiol feedback loop.
  • Note that it may be the case that the positive estradiol feedback loop acts on “different neuronal cell populations [receptors] than those modulating the estradiol negative feedback loop.”
  • Therefore, the effect of elevated levels of estradiol depends on how elevated the level is.
    • This is because the level of estradiol produced by a mature follicle at the end of the follicular phase is MUCH HIGHER than the amount of estradiol required to trigger the initial negative feedback effect.
    • Therefore, the amount of estradiol in the Pill is enough to trigger the negative feedback loop but not enough to trigger the positive one.
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Going dark, Going private, An example of going private

Terminology: going dark versus going private

  • Going dark: terminating a company’s public reporting obligations by deregistering shares that were issued by the company under the Exchange Act of 1934. Also referred to as “opting out” (of the SEC’s reporting obligations…).
    • The Securities and Exchange Commission (the “SEC” or the “Commission”) permits an issuer to voluntarily “opt-out” of the public company reporting system because its small shareholder base no longer justifies imposing public company obligations and SEC rules upon it.” Source: http://www.sec.gov/info/smallbus/pnealis.pdf
    • If a company has issued some class of securities (e.g. common stock) which is registered under the Exchange Act of 1934, that company is subject to reporting requirements (periodic audited financial statements, disclosures of various kinds). Fulfilling these requirements costs money.
    • If the benefits of a company’s securities being publicly listed do not outweigh the costs (of complying with the requirements for being registered) THEN a company is likely to consider going dark.
    • Going dark sounds great!
      What are the criteria for being able to deregister a security?
      • The security cannot be listed on a national exchange (which offers benefits such as liquidity for stock holders, increased visibility of the company, …).
      • The security cannot be registered under the Securities Act of 1933.
      • The security must have <300 shareholders of record
        • Note that “shareholder of record” does not equal “beneficial owner.”
        • Each issuer keeps a list of shareholders of record, which might include a small number of people who have large ownership stakes. It will also likely include the Depository Trust and Clearing (DTC). This institution is used to clear and settle stock trades. See: http://www.bis.org/publ/cpss20r3.pdf
        • When counting “shareholders of record”, if the issuer’s list of shareholders includes the DTC then all of the DTC’s participants who own shares in this company are listed. But a DTC participant is typically a bank or a brokerage house (e.g. Fidelity, TD Ameritrade). And so “behind” a single DTC participant (shareholder of record) might be thousands of beneficial owners.
        • Again, because of the way shareholders of record are counted, this single DTC participant (e.g. Fidelity) counts as 1 shareholder of record.
          • For purposes of determining whether the Company has less than 300 holders of record, Rule 12g5-1 has been interpreted to mean that an issuer does not have to further “look through” DTC participants to the ultimate beneficial owners.” See: Dorsey and Co – Going Dark
        • For this reason, it may not be as difficult to meet the “<300 shareholders of record” criteria as one might imagine at first blush.
  • Going private: cashing out a company’s shares (i.e. the publicly-held ones) via a tender offer (by entity “foo” to purchase shares for $X each), merger, reverse stock split, … This reduces the # of shareholders of record for a given security and hence goes some of the distance toward enabling the issuer (company!) to delist and/or deregister if it wishes. See also: http://www.sec.gov/answers/gopriv.htm
    • Going private typically alters “the control, capitalization, and ownership composition” of the company dramatically. The act of going private requires extensive board consideration, disclosure, a fairness opinion, SEC filings, a shareholder vote, …
    • Typically, a company will go private so that it can go dark. But some companies can go dark without going private – because those companies already do not meet the SEC requirements (for registering a security) and hence they not have to change *who owns what stock* in order to become eligible for deregistering.
    • Mechanisms for going private include: reverse stock split (mgmt exchanges 10,000 existing shares for 1), tender offer (some entity buys stock from public shareholders), merger.

Delisting and/or Deregistering

Delisting entails taking a stock off of a national securities exchange (NYSE, Nasdaq, AMEX). This can happen for a few different reasons: (1) the company is being taken private, e.g. by a Private Equity firm; (2) involuntary delistment – the company no longer meets the minimum requirements for having its securities traded on that exchange, typically these have to do with: share price, P/E and other ratios, revenue levels, etc.; (3) the company wants to deregister (“go dark”). (See also: involuntary delistment and here.)

Note that delisting from an exchange and deregistering a security (with the SEC) are separate things. If one delists from an exchange then it may be possible to deregister the security as well (though not necessarily – subject to the number of shareholders of record, etc.). Certainly one cannot deregister a listed security (since all listed securities must be registered per the Exchange Act of 1934).

  • Delistment is primarily something which takes place between the company (which has a listed security) and the exchange on which that security is listed. The company must file a form with the SEC (and give sufficient advance notice etc) but the SEC does not require that certain securities be listed. Typically, the exchange requires that the Board of the issuer approve the delistment (see here for additional details). Note that, perhaps counterintuitively, shareholder approval is not required to delist a security (why “counterintuitively”? because the shareholders would seem to be quite impacted by the decision). The effect of delisting a security from an exchange is that investors can no longer trade shares of the stock on that exchange. A delisted stock may still be traded on other exchanges, e.g. Over The Counter (OTC) and Pink Sheets.
  • Deregistration is primarily something which takes place between the company (which has a registered security) and the SEC. A security can be deregistered if there are less than 300 holders of record OR there are between 300 and 500 holders of record but the company’s total assets are <= $10MM. Upon filing Form 15 to make this happen, the company is immediately relieved of the duty to file reports (if the request to deregister is denied, the company will be required to supply reports for the interim dark period).

Why go dark? And how?

The question of why go dark is a question of why deregister. The most obvious answer is that the costs of complying with the Exchange Act reporting requirements are too high relative to the benefits. Notably, SOX intensified the reporting requirements, which increases the compliance costs, further tipping the balance in favor of opting out. See also: http://www.investopedia.com/articles/stocks/08/public-companies-privatize-go-private.asp#axzz1eDh3EHO5

Question: does this mean that we are losing SEC “coverage” (in the form of periodic public reporting) for certain issuers because companies are attempting to avoid being subject to SOX? That is, is SOX having the unintended negative consequence of causing companies to “opt out” more aggressively from all regulation (including that which comes along with SEC registration), even regulation that was tolerable before? Appears so…

See also:

Fallout from the Sarbanes-Oxley Act – are Private Companies and Nonprofits Next? (pdf) Guidelines For Companies Considering Delisting (pdf)

What does it mean for a privately-held company to “go private”?

By “privately held”, I mean it’s stock is not available to the general public. This is tricky in part because “public” and “private” are overloaded terms. I think that the neophyte thinks of a “public” company as one which has a security listed on a national exchange (by “neophyte”, I mean – me, 3 weeks ago). After reading various SEC documentation as well as other sources, I believe that the better definitions are as follows:

  • Public companies: companies that are subject to public reporting obligations (under the Exchange Act of 1934).
  • Private companies: companies that are not subject to public reporting requirements (i.e. do not have any securities registered under the Exchange Act of 1934).
  • Listed companies: companies whose stock can be purchased on a national securities exchange.

Going private: A case study

(Note that, though I have some relationship to Peter Kiewit the company, all of the info below is gleaned completely from public sources; I possess no privileged information.)

In looking at Peter Kiewit’s SEC filings, I notice that the company appears to have “gone private” at the end of 2007 (about 5 years after SOX was passed as law). That’s when the 10-Q filings end (note that these 10-Q filings have attached certifications from the executive officers, per SOX requirements): When we expand to look at all filings, what we see next is two things: a tender offer (from “the issuer” == Kiewit), which is form SC TO-I/A (circled in blue), and a Going Private transaction, which is form SC 13E3/A (circled in black).

So, what are the mechanics here? How do these two actions relate and how does this explain the cessation of 10-Q reporting? Effectively what we see is that Peter Kiewit the company takes the steps necessary to *deregister* its securities from the SEC. This relieves the company of the reporting obligations. Perhaps more significantly, the company is not required to comply with Sarbanes-Oxley (SOX).

  • In particular, prior to the tender offer of November 2007, there were 19,800,866 outstanding shares of common stock owned by various past and present Kiewit employees. The tender offer enabled each single share of common stock to be exchanged for an equivalent “interest” in the Kiewit Employee Ownership Plan (EOP).
  • The offer expired on 12/28/2007. 19,611,623 of the shares were tendered and accepted. Some number of the shares were purchased for cash (263,632) – from shareholders that did not accept the tender offer (in some cases because they were not eligible to possess interest in the EOP).
  • The remaining # of shares after the tender offer was closed was: 19,800,866 – 263,632 = 19,537,324. And all of these common stock shares were owned by the Administrator (rather than individual employees).
  • Therefore, the number of shareholders of record was dramatically reduced. This enabled Kiewit to *deregister* its Common Stock security (since the # of shareholders of record was <300) which in turn temporarily suspended reporting obligations on the company (which is why the stream of 10-Qs ends).
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More details on registration with the SEC

There are actually two different types of registration (see: http://www.sec.gov/info/smallbus/qasbsec.htm):

  • Registration under the Securities Act (1933)
    • When required?
      • For a public offering of some new security
      • If the company is registering some outstanding security (that the company intends to sell publicly?)
    • What requires?
      • The registration itself requires a prospectus, additional info for investors, and audited financial statements from the issuer.
      • The company must fully disclose all material facts.
      • The company must do an Exchange Act registration as well.
  • Registration under the Exchange Act (1934)
    • When required?
      • Any security registered under the Securities Act
      • Any security listed on a national exchange
      • Any security issued by a company with >=$10MM in assets *and* which has >=500 shareholders.
    • What requires?
      • Continual disclosure of information about the business’s operations, financial conditions, management, and so on. Also, Sarbanes Oxley imposes additional requirements – in particular that these periodic reports are “certified” by all executive officers of the company (and those officers bear some liability in case the report contains factual inaccuracies), see: section 302, see: HR 3763-33.
        • These continual filing obligations can be suspended if the security ceases being interesting, i.e.
          • The security has <300 shareholders OR
          • The security has between 300 and 500 shareholders AND <$10MM in total assets.
      • The company must comply with Proxy Rules in soliciting a shareholder vote.
      • Anyone who acquires >5% of the shares of a given class of securities must file a “beneficial owner” report (provides info about this owner) for as long as they own >=5% of the shares.
      • SEC’s tender-offer rules apply whether an outsider or the company itself is issuing a tender offer for some number of shares of the given class of securities.
        • Must provide info about the issuer of the offer
        • Time limits for the duration of the offer apply
      • Must report: transactions (involving the company’s equity securities) by officers, directors, and those who own >10% of the given class of security.
    • Exemptions: private offerings given that the purchasers of the securities (a) are “sophisticated investors”, (b) do not sell or distribute the securities to the public, AND (c) have access to the same level of information as is typically provided in an Exchange-Act registration.
      • So does this mean that a security can be exempt EVEN IF the issuer has >$10MM in total assets AND >= 500 shareholders?
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Why does a company care about its stock price?

Paraphrased from: Why Do Companies Care About Their Stock Prices?

This is something I always wondered – in the sense that, once a company raises some money for itself through issuing some stock (security), then the company doesn’t directly benefit from increases to the price of that security – so why do they care? The premise of the question is that a company raises money through a stock offering but only through the initial sale of the issued shares. Once the initial buyer resells those stocks on “the secondary market” (which is what we think of as the stock market), the issuer (company) doesn’t participate in any gains/losses for that transaction.

The answer is multiple reasons:

  • Management of the company are often shareholders so they have a vested interest in the stock doing well.
  • When a stock performs below expectations for long enough, shareholders might get irate and take action.
  • The stock price is used as a proxy for assessing the financial health of the company. This is because stock price is typically tied to earnings per share (EPS), which itself identifies the money the company could have to pay off debt.
    • Therefore, a company with a high stock price is likely to have high EPS which means it is low risk for a loan and hence can get cheaper financing.
  • Any publicly traded company whose market value significantly lags its intrinsic value is a target for takeover.
  • If a company’s stock is viewed very favorably this may enable the company to acquire another company via issuing some more stock (rather than paying cash).
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Peter Lynch, Learn to Earn, Introduction

Limited Liability

A company is a legal entity and hence punishable by law… hence, one motivation for incorporating a company is so that the corporation can bear the brunt of mistakes made in its name. Absent that, if a company makes some misstep, all of its investors (owners) can be sued for the mishaps/misbehavior of the company itself and the extent of their liability or exposure is unlimited (they could lose their life savings). Once incorporated, however, the company itself is liable. Its owners/shareholders are not hold responsible. This is what the phrase “limited liability” refers to – it means that the owners/shareholders have limited liability for mistakes made (damage done) by the company itself. Note that the employees of the company (managers, directors) can be sued, even if it is incorporated.

  • So what does the “limited” part mean? It means that shareholders are liable upto the value of their investment. So if I have 5 grand plugged into CostCo then I can lose that $5,000 but no more. My liability is limited to the size of my investment.

PROs/CONs of being public vs. being private

Private companies are typically owned by a small number of people; the distinguishing characteristic is that the general public cannot invest in them. Think of your local barber shop, salon, shoe repair shop, … By contrast a company is public if its stock is publicly traded. There are about 13,000 public companies in the US. The beauty of the stock market is that it lets “ordinary people” participate in the wealth and prosperity of public companies. And it lets those companies, in turn, finance their growth. You don’t have to work for Goldman Sachs to share in its success (and failure); you can just buy the stock.

  • The vast majority of companies are private.
  • The majority of employees work at public companies, however.
  • PROs of being public (the opposite of each is a CON of being private)
    • For investors, their investment is liquid – they can increase/decrease their holdings in the company at pretty much any time.
    • For investors: Stock that is traded on a national securities exchange must be registered with the SEC, which requires periodic audits (by an independent auditor) of the company’s financial statements. Also, the company must disclose various events. In theory, this results in a good flow of information to the investor.
  • CONs of being public (the opposite of each is a PRO of being private)
    • Very high regulatory requirements (as imposed by the US gov’t): administrative, financial reporting, corporate governance
      • E.g. Sarbanes Oxley (SOX) requires publicly traded companies to implement, doccument, and test controls which (are meant to) ensure proper and complete financial reporting “at all levels of the organization”
      • Disclosure requirements (i.e. the company has to announce when it’s doing foo)
      • Reporting requirements (the periodic audits)
      • Corporate governance dictates
      • Compliance costs (the consultants one must hire to do the SOX audits plus whatever costs lead up to that)
    • Pressure and focus of consistently meeting quarterly earnings expectations (can foster short-term thinking/orientation)

Being registered with the SEC, etc.

The SEC exists to protect investors, effectively, by imposing requirements on companies that would offer securities for sale to those investors. For example, a company with  SEC-registered securities must undergo periodic audits by an independent accountant and publish the audited financial statements. A company must register a class of securities (e.g. bonds, stock) with the SEC if: (1) the securities are “widely held” OR (2) the securities are traded on a national exchange (e.g. NYSE, Nasdaq, AMEX).

  • The criteria for widely held is:
    • If the company has significant assets (> $10MM),
      • >= 300 shareholders for the given class of securities
    • Otherwise,
      • >=500 shareholders for the given class of securities
  • Assets are measured as: total company assets for each of the last 3 fiscal years.
  • ALL securities offered in the US must either be registered or quality for an exemption to the registration requirement.

What are the requirements for companies that have securities registered with the SEC? Their financial statements must be audited periodically and published. If any entity attempts to purchase >= 5% of a company’s shares, this must be disclosed. Also, if shareholder input is to be solicited on some matter (e.g. via a proxy vote), then this solicitation must be filed with the SEC first so that it can ensure that all required background/context is provided (“disclosure of all important facts concerning the issues on which holders are asked to vote”). Illegal insider trading == If someone possesses material non-public info about a company AND is required not to trade on it BUT does so anyway.

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My reading list for learning about investing



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Getting my head around investing

I’ve always wanted to learn about investing and money. So I’ve picked up a few books and will be working through them one-by-one. Typically the way I learn a new topic is to find a reliable, highly regarded source who has written an intro’ish tome for the topic. Then I just begin reading that book — stopping at any word or phrase or concept that I don’t completely understand and that isn’t completely explained in the book. Then I go on a side search to build up my understanding of not only that particular word or phrase but also any relevant context.

For example, I was on page 18 of Lynch’s book (Learn to Earn) when I encountered my first major need-to-detour. As I was reading about various public companies whose products we encounter every day, I began to think:

  • What does it mean to go from public to private? What is the mechanism for this? Why might you do it?

And so for 1.5 days, I’ve been following that thread, just so that I can resume Lynch’s book on page 18, where I left off.

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