I knew a boy when I was younger. He was a candidate for braces when we got to high school and he tried hair styles that weren’t quite right. He was skinny and loafed a bit when he walked. But one summer day it was 90 degrees. Where we grew up that was a pretty hot day. Since we were young boys, it was completely normal for us to jump on our bikes and ride over to the ice cream parlor – the Eagle’s Nest. We scrounged around for our $1.25 and each ordered a medium soft serve twist. I like the twist the best because it’s chocolate and vanilla. We killed about 30 minutes hanging out there and enjoying our tasty treat on such a scorcher.
My reminiscing story is tied to this blog because its about value, and particularly thick value. Umair Haque wrote about thick value and thin value in a blog called The Value Every Business Needs to Create Now. Thick value is providing something that makes each transactor better for for doing the deal. Each party is in a better position because of it. Thin value is where one party benefits and the other deals with it because no viable alternative exists. My story about ice cream is an example of thick value. It was hot, I was 13 with time to kill, and a twist was within my price range. I got a treat and the Eagle’s Nest made a sale. Sadly, examples of thin value abound now-a-days. As Haque points out, the cell phone industry loves thin value. It might be the 15 seconds it takes to leave a voicemail (I know how voicemail works and they know I know how voicemail works, but 15 seconds used listening is 15 seconds closer to the overage charges) or the fees associated with every nuance. Competition is supposed to address these unneeded expenses, but for some reason, there seems to be more of them everyday.
Today Paul Krugman discussed something similar to thin value in his Op-Ed piece titled Rewarding Bad Actors. The main point of this entry is that two factions on Wall St are making money by gaming the system. In one case you have Goldman Sachs issuing trades based on data that’s milliseconds faster than what other investors is getting. This technological advantage provides a window into the trading market that both protects as well as directs the future of different securities. It segregates this world even more into haves and have nots. But as Krugman points out, the point of these trades isn’t to better allocate funds to those that can generate the greatest return (thick value), its to profit from these slight timing discrepancies in knowledge and then to scale it up to maximize the profit. The actual company, the one that the securities represent, is irrelevant. They could make a revolutionary diaper, a non-polluting pesticide, or semiconductor chip designs, it doesn’t matter. The point of these trades is to make money on the bid and the ask.
The optimist in me thinks that there is always a place for thick value. If you can create something of value at a reasonable price, there will be a market for it. Go forth entrepreneurs.
The pessimist in me is very scared. There are just so many special interests and a real breakdown of what’s right.
These are things I didn’t think about with my friend at the ice cream parlor.