New grads needing work can choose between three strategies. Jack and Suzy Welch like the boldest one best

By Jack and Suzy Welch

In about a month, I'll have an MBA—but no job. I'm at a respected school, my GPA is 3.5, I've got two years of retail consulting experience and great references, and I've been doing all the right things to get hired. Please help.—Anonymous, Chicago

What a terrible bind you're in—you and thousands upon thousands of others. Word is that at some business schools upwards of 30% of this year's grads, even in top-tier programs, have yet to land positions. Recruiters just aren't coming to campuses like they used to, and if they are, it's for "informational" purposes only. Word also is that many companies, hit by worsening results and alarmed by dire forecasts, have delayed start dates for their MBA hires or rescinded their offers altogether. It's not a jungle out there, it's a wake.

But you didn't ask for sympathy. You asked for advice.

And so allow us to pass along the exact three recommendations we offered a twentysomething MBA friend we met up with this week, who is, like you, still empty-handed and beginning to feel desperate.
Three-Forked Road

You can settle and learn to love it. You can go a little crazy. Or you can do your own thing.

Settling first, because it's the fastest and easiest.

Look, you already know you're probably not going to get the kind of job—in terms of industry, title, and salary—you were dreaming of the day you started your MBA, back when trees grew to the sky. But there is, very probably, a job out there, here or abroad, that offers you a reasonable amount of relevant experience and a livable salary.

You could accept that job. And more important, even with its disappointment factor, you could embrace it, working ardently to innovate processes, improve your team, and make yourself indispensible by constantly overdelivering. In your case, you might work at a retail store of some sort, with the goal of having your stellar performance eventually land you in management and get you noticed at headquarters. Sure, the day-to-day work of ringing up sales might seem like a pitiable return on your MBA investment at first. But think career strategy. Being a star performer at virtually any solid organization is a ticket up or onto a better opportunity elsewhere. In time, your humility—and results—will likely be rewarded.
The Long-Shot Strategy

Now for going a little crazy, which is the approach we prefer in the current circumstances but still recommend with trepidation. Because not everyone can pull off a highly targeted beg-and-plead campaign while remaining likable, and that's basically the program we're suggesting. With this option, you pick the one or two places you've always wanted to work (or the two executives you'd give a kidney to work for) and repeatedly make your case to them in the most creative, appealing, and persuasive way you can—with letters, e-mails, phone calls—just to get a five-minute interview. Which you then have to nail with your brilliant insights and positive energy.

Yes, this is a long-shot strategy. But when it works—and here's why we like it—you'll be starting your career in the right place. And you'll have experienc­ed the kind of hunger it takes to get ahead.

Finally, if settling and a little craziness don't work for you, there's starting your own business. Figure out what you know and what you're good at, find a friend who brings something to the table—like brains, contacts, seed capital, or very little need for sleep—and then, like entrepreneurs the world over, get out there and hustle. If consulting becomes your gig, for instance, take jobs for $5,000 or $10,000, or negotiate with clients for a percentage of the increased revenues you bring in or the savings you create. You know the drill, and you probably know the risks, too. The current climate makes becoming an entrepreneur an extraordinary act of courage, and only you know if you have the mettle.
Self-Awareness Is Crucial Now

Not to sound harsh; we're just trying to be realistic. These are unprecedented times for MBAs, as they are for any job seeker, requiring unusual levels of self-awareness. The global economic crisis will likely last another year or two, and there's no point in waiting and hoping for a miracle.

You really just have three options. Make a choice and press on.

The founder of Silicon Alley Reporter and Mahalo.com offers advice to employers trying to make the right hire and candidates struggling to land a job

By Jason Calacanis

Unemployment in the U.S. is going to race past 10% in the coming months and probably peak at 11% or 12%, according to the smart folks with whom I'm privileged enough to spend some time. There's an outside chance (call it 20%) that we might have a "disastrous event" that causes it to hit 15% to 20%. Sounds impossible, I know, but there are many regions in the U.S. already in the mid-teens.

The smarter folks whom I speak with think the recent market rally is "dead cat bounce" in nature and that we're "testing the top" before a return to the bottom. Who the heck knows what's going to happen with the stock market? What I want to talk about today is your employment—or employee—market. The stock market is the 10,000-foot view, but butts in chairs working? That's the 10-foot view. Let's stay micro in this essay, shall we?

Witness: We just put out a job for an entry-level researcher and had 200 résumés from highly qualified candidates in under 24 hours. We posted the gig at $10 an hour. Recent searches for a director of product and various sales positions at my company, Mahalo, resulted in 400-plus applications per position in a week. My In-box is flooded with really great folks desperate for a lead on a gig ("Hey, Jason, we've met a couple of times. I've been working in the Internet since 1997 and I was laid off in October…") My heart goes out to everyone who is stuck, or up against it, right now. I've been there; it sucks.

Anyway, let's cut the small talk get to the big pink (slip) elephant in the room: who gets laid off—and who gets hired—in a down market.

Some Background

Over the past 15 years, as a CEO and entrepreneur, I've hired well over 500 people, laid off over 50, fired a couple dozen bad apples (many of whom are on my e-mail subscriber list!), and actually helped make a handful of people millionaires. Before I ran my own company, and even while running my companies, I've received countless job offers.

Bottom line: I've been around the block, and I know exactly why people get hired and fired.

Before the recession hit, I was actually convinced that my techniques for hiring could land almost any willing candidate a job. In this current mess, I can't make any guarantees, but I can definitely tell candidates that if they follow my advice, they'll have a much stronger chance at landing their dream job. For employers, I promise you that these tests and techniques will land you more killers then duds.

In each of my points below, I'm going to start with an overview and then move on to a "For Candidates" section and a "For Employers" section. I'm really blending two essays into one here so that each party can understand the other's perspective. I hope this isn't too confusing, but you guys understand that sometimes I ramble before getting to something worthwhile.

For Candidates: People Who Work Harder Win

Wait, don't give up on me yet! I'm well aware that this first point is absurdly obvious, but for some reason, many folks overlook or discount this basic fact. The truth is, hard work pays off in almost all things: sports, education, relationships, and work.

The more you put into something, the better it tends to work out. (Brilliant observation, I know.)

If you're looking for a job, you want to send out as many signals as possible that show that not only are you not afraid of hard work, but you're actually turned on by it. You must understand that, right now, there are too many candidates fighting for each position. The leverage that led to bidding wars between employers two to three years ago is gone—just like the bidding wars over houses are over.

There is no sense in fighting the balance of power. In fact, you need to embrace it, because it will flip again in a couple of years.

The best way to signal that you're hardworking is to explain your routine and method for working explicitly to your employer. As someone who does a couple of hundred interviews a year, I can tell you I almost never get a proactive candidate who does this!

If I were coming into a meeting with me looking for a job, here is the script I would follow:

Candidate: "Thanks so much for having me in to discuss filling the role of VP of BlahBlah. May I tell you how I've been able to make an impact at the companies I've worked at before?" (Translation: "I'm confident I can fill this position. That's why I didn't put the word 'possibly' in front of 'filling the role.'")

Employer: "Certainly." (Translation: "Thank the Lord! Finally, a candidate with whom I don't have to pull teeth!")

Candidate: "My belief is that hard work—not busy work, but hard work—is what differentiates the teams that win from those that lose. My method for working is that I like to prepare for the week on Sunday. I read up in the trades on where the industry is on the weekend, and I prepare a game plan for myself for the week ahead. This only takes an hour or two. Just a simple list of some goals I want to achieve and what I think will help the company reach its goals: I make it a point to get into the office on Monday an hour or two early. This gives me a chance to get an even bigger jump on the week—something I believe is very important. I tend to do working lunches with clients or hit the gym to get myself thinking. Finally, I've made a philosophy of not leaving the office until my boss does…. I think that's the honorable thing to do."

Employer: "When can you start?"

Seriously, I've been waiting for someone to say that to me for a decade, and it still hasn't happened. Now, I'm not saying folks can't have a life and family—let's not start that whole controversy up—but in a market like this, people seriously are going to need to sacrifice.

Bottom line: Employers are going to hire the hardest-working people and lay off the clock punchers first in an economy like this (as they should). If you want to get employed, your best strategy is to put yourself into the hardest-working bucket.

For Employers: How to Spot the Hardworking People

Wouldn't you just love to fill your open sales, marketing, or operations position with a candidate who gave you that speech above?

Yeah, me too. Too bad it never happens! You're going to have to figure out exactly who the hardest-working and most resilient people are when you're hiring. You have only a certain number of slots on your team, and you'd better start looking at it just like that.

You cannot—and you will not—give one of your few remaining slots to anyone who is not going to bust their ass. If you do that, your company is fracked. Period. You have to be cutthroat in an environment like this, because you're not doing anyone any good if you bring on—or keep on—a weak team member. Those folks can, and will, sink the entire ship in a market like this.

Let the weak people collect unemployment while the strong folks create strong companies that create more positions. (Positions that will, ironically, go to the weaker members of the herd.)

So, how do you find out if someone is a killer? Here are some of my favorite things to ask in an interview:

1. Do you live to work or work to live?

2. Do you consider yourself a workaholic? Do you think there is anything wrong with being a workaholic?

3. Are you able to turn it off at 6 p.m. and on Friday for the weekend? You don't get obsessed by work, do you? (Trick question!)

4. Do you consider yourself a balanced person?

5. How would you feel if we all needed to come in on the weekend to make a deadline?

6. How would you feel if this happened two weekends in a row?

7. It's a tough time right now, and we're super short-staffed—how would you feel if I asked you to cover for [insert job lower than candidate's experience] when they're on vacation?

8. Speaking of vacation, do you bring your BlackBerry and laptop with you to check in? Or do you like to unplug completely?

These types of questions will quickly get you to the point of understanding the kind of person you're dealing with. There are folks who work to live, and that's just fine. However, it might not be fine for your company at this time. In a hot market, you might deal with a clock puncher, because the people who really kill it are in short supply. However, in a market like this, you should start with the killers and work your way down to the clock punchers.

Hey, wait a second…are you anti-family and life/work balance?

Absolutely not!

If folks hate their day job and want to get out at 5:01 p.m., sure, go for it. I just think it's better to find a job you're super-passionate about, so you don't feel like running out at 5 on the dot. Also, you have to keep in mind the backdrop in which I'm writing this piece: an economic tsunami that we haven't seen in our lifetimes, or our parents' lifetimes, for that matter.

In this market, it's going to be a lot worse for families if Mommy or Daddy doesn't have a job than if Mommy or Daddy has to work late. This is not playtime, everyone—this is real time.

Bottom line: Employers should focus on the hard workers first so their companies survive long enough to hire the 9-to-5ers!

For Candidates: Establish That You Can Move the Needle

In my mind, there are three basic types of people in the world: people who make it, people who sell it, and people who support those first two groups. If you're a developer or designer, you're obviously making the product. If you're in sales, you're obviously selling the product. CEOs, COOs, accountants, and administrators obviously support those groups.

Folks who are most dispensable in this market are the folks who are not directly selling (i.e. bringing in money) or making the product:

1. Marketers/Public Relations

2. Strategy

3. Business Development

4. Product Managers

5. Managers in General

Like you, I've watched layoff after layoff at companies, and the first groups that get cut are the ones that the business can survive without. If you cut a couple of project managers, PR people, and your strategy folks, the business keeps running.

Does it run as well? Perhaps not. But it survives—and that's what matters in a market like this.

In fact, Google GOOG could cut half of its staff tomorrow and its revenue and earnings would be exactly the same, in my estimation. Would it be building cool new stuff? No. Would it be as effective? Probably not. However, its revenue machine (text-based ads) doesn't require this huge staff.

This is all really depressing stuff, I know, but I'm not telling you this to get you depressed. No, I'm telling you this to help you get your next job! If you want to get one of the small number of positions that will open up in 2009/2010, you need to place yourself in the "high-impact" bucket of employees, not the "low-impact" positions.

If you do strategy, marketing, and business development, I suggest positioning yourself in sales.

If you do product management or are a midlevel manger, I suggest positioning yourself as "player/coach"—someone who does a bunch of work and manages people in their "spare" time.

For Employers: Hire Impact Players

As I've mentioned above, you have a small number of positions opening, and you need to be very selective. Once you've narrowed your pool down to the folks you think are the hardest-working, you need to do another round of figuring out the folks who are the smartest and most versatile.

It's great that someone wants to work hard, but do they have direct experience closing a client? Do they have direct experience leading the building of an actual product that makes it to market and is embraced by customers?

Here are some very basic questions I like to ask folks in an interview. (Have I interviewed you? How was it for you?):

1. Who are the top three clients you've worked for? (This could be internal or external.)

2. What problem did you solve for these three clients?

3. How long did you work for these clients?

4. Can I have the names of these clients as references?

5. What was the best product/service you ever created/sold and why?

6. What was the most disappointing product/service you ever created/sold and why? What did you take away from that?

If folks can't answer these types of questions quickly and sharply, it might mean they had one of those "soft jobs" where they didn't have to produce a product that absolutely delighted customers. Every position serves a customer in some way: The mailroom guy serves the people getting the mail, the IT person serves the people who bring her frozen laptops, and the CEO has to deal with a range of "customers" in the form of investors, partners, employees, and board members.

This is a long and obvious way of saying that you need folks who can get stuff done.

If you're one of the 17 folks who made it to the bottom, I'm wondering the following:

1. What's your best technique for getting hired?

2. What are your favorite interview questions for figuring out if you're hiring a winner or a clock puncher?

3. What's going on in your backyard? What are you seeing in terms of hiring and laying people off? Who's getting let go and who's getting hired?

Note: Three ways to answer these questions:

1. You can jason@calacanis.com

2. You can answer this question over at Mahalo Answers in an open fashion by following this URL: http://digg.com/u17Rc (You can log into Mahalo Answers with your Facebook ID, so it's super easy. Yes, this is a backhanded way to get you to try my product. Hey, I'm a hustler, baby! Hate the game, not the player!)

With fewer jobs available through on-campus recruiting and job boards, alumni networks are becoming more critical

By Anne VanderMey

For Alex Cavallini, the financial crisis hit home as he was preparing to begin a job with Cummins Inc. (CMI) Less than 24 hours before he was set to fly out to his new office, the diesel engine manufacturer rescinded his offer, leaving the recent graduate jobless—even though just a few months before he had his pick of offers from two companies. "I felt like I was losing two jobs at once," he says.

So Cavallini turned to his school, which turned to Brian Hancock, a vice-president at Whirlpool whom Cavallini had worked for and impressed during his internship the summer before. As important as that good impression, Cavallini says, was that Hancock was a fellow alumnus of Brigham Young University. The alum sympathized with Cavallini's plight, and placed a call that afternoon to the CEO of a Whirlpool supplier. Company executives interviewed Cavallini within days and then offered him a job. He accepted, and in less than a week the 28-year-old went from being unemployed to being upwardly mobile.

The MBA alumni network is an integral part of the package at most business schools. Stories like Cavallini's, involving an alumnus making a crucial introduction or putting in a good word, were never uncommon, but they're becoming increasingly critical as companies tighten their belts and more traditional recruitment forums such as career fairs run dry.

An old saying, "It's not what you know, it's who you know," rings particularly true as recruiters are deluged with qualified applicants and seemingly flawless résumés get lost in the shuffle. But even absent a professional connection, schools are turning toward alumni as a source for fresh job offers, relying on the foundation of trust many school networks automatically confer. InCircle, an alumni networking site used at several U.S. schools, reflects a common sentiment with its revision of the old axiom: "It's not who you know," InCircle's slogan says, "it's how you know them."

Kevin Knox, director of the alumni association at Southern Methodist University's Cox School of Business, puts it even more directly: "The network has never been more important."
THE OLD COLLEGE TRY

The exact number of job offers that come through alumni contacts is hard to measure and varies from school to school. In a recent survey by the Graduate Management Admission Council, 28% of MBA graduates reported receiving their first job offer as a result of networking. Kristin Irish, deputy director of career development at the Yale School of Management, cautions that that number may be artificially low, as networks play such a fundamental role in the job search that their role is sometimes overlooked. At Notre Dame University's Mendoza College of Business, Patrick Perella, director of MBA career development, estimates that about 50% of students get a job through an alumni connection. Given the recent slump in recruiting, he says, "That number can only go up."

Perella isn't alone in his prediction. As the nation faces the highest unemployment levels in a quarter century, many schools are looking to offset decreases in recruiting with job leads from alumni. At the University of Pennsylvania's Wharton School, Director of Career Management Michelle Antonio says about 40% of offers come through formal, school-organized events like job fairs. This year, she said, that ratio could flip, with 60% of offers coming from other sources—primarily networking.

Across the country, schools are attempting to help that process along with appeals to alumni to come together in the wake of the financial crisis.

At Wharton, Dean Thomas Robertson sent a letter to all alumni seeking input, and career services will reach out to all alumni clubs—not a new tactic, Antonio said, "but it will clearly be more critical than ever this year."

At Notre Dame, career services recently finished a "phone-a-thon," contacting 150 MBA alumni working in sectors likely to receive stimulus funds, as well as the government itself. And at the University of California, Berkeley's Haas School of Business, Dean Richard Lyons penned an open letter asking alums to look "deep into your organizations" for jobs, signing off with the entreaty: "Hire Haas!" The letter, says Haas' Executive Director of Career Services Abby Scott, yielded 14 new job postings in just 24 hours.

"People like to be asked," says Dipak Jain, dean of Northwestern University's Kellogg School of Management. Kellogg has conducted a targeted outreach to alumni in certain fields, but hasn't yet sent out a mass mailing. The school, like many others, has also redoubled support for struggling alumni, and plans to offer more services to bring them back to campus, where they can both regroup and connect with current students. Says Jain: "We need them as much as they need us."
A TWO-WAY STREET

Alumni networking has its perks for employers as well. Given the dismal market for MBA hires, many recruiters find themselves with hundreds of résumés for just a few slots. For online applications, it can be even worse.

The logical next step is to limit the applicant search through networks "rather than getting a thousand applications from every average Joe out there," says Wharton's Antonio. It's easier for many employers to single out a few people who are qualified and come recommended, instead of opening the search more widely. "Of the opportunities that do exist, which are obviously fewer and farther between, a lot of those will never hit a job board," she says.

G.R. Christon, a senior director at crisis-management firm Alvarez & Marsal and a graduate of the Cox School of Business at Southern Methodist University, says he contacted his alma mater when his firm was set to take on new recruits simply because he knew they would have a list of qualified résumés ready for him. "Putting ads in the paper or on Monster.com is kind of inefficient for us," says Christon.

An added benefit to recruiters is a network's reliability, especially in an economic climate where making a hire is taking a gamble. "It does help lower the risk when you can use [your contacts] to check into what you're getting," says Greg Bolino, a partner at Accenture (ACN) and chairman of the University of Michigan's Ross School of Business's alumni board of governors. At the consulting firm Business Talent Group, Vice-President Michelle Cline, a graduate of the Stanford Graduate School of Business, says the firm regularly seeks out talent through alumni networks, and hires largely along those lines. Once she has the recommendation from a person whose judgment she trusts, "There's not much more that I need," she says.

Of course, almost without exception, employers caution that a diploma doesn't automatically confer connections. It's far more effective to build genuine relationships, and only later ask for a job.

Those who don't heed that rule are eyed suspiciously, employers say. It's better to start earlier, or just ask for career advice or an informational interview. In those cases, says Bolino: "It's easy for me to say yes because somebody said yes to me."

"A LITTLE BIT OF PANIC"

As for students, the writing is on the wall. Formerly casual networking events have become a little more tense—with more industry-related introductions and swapping of business cards. At the University of Chicago's Booth School of Business, Senior Alumni Affairs Director Tracey Pavlishin says she's seen more professional connections made at the school's alumni-student gatherings—which include such things as happy hours, wine tastings, and golf outings—even though that's rarely the core purpose of the events.

At the Thunderbird School of Global Management, Associate Vice-President of Career Services Kip Harrell says there's been about a 50% increase in the number of students asking for alumni contact information since last year—meaning more requests than ever. Harrell, who is also the director of the MBA Career Services Council, says he advises students to dress professionally every day on the off chance they run into someone on campus who might serve as a professional connection. He's made a point to call students when alumni visit him, saying: "Whatever you're doing, drop it and get over here to talk to Jim, or Tony, or whomever it may be."

"You see a little bit of panic on everybody's faces," said Mary Lousteau, a first-year MBA at the Robert H. Smith School of Business at the University of Maryland, who has been organizing events for students and alumni in the marketing sector. She has two potential leads on internships—both through her work setting up alumni events. "It's becoming more important as students realize the reality that some of those opportunities are filled up," she says.

Most students realize their networks will be more crucial this year than ever before and are preparing accordingly—whether it be joining the business networking site LinkedIn, perfecting their golf technique, or methodically mapping out extended networks on Excel spreadsheets. Lousteau said the internship search sometimes takes precedent even over her wedding planning.

Even though many MBAs obsess over their networks, it may not do them much good. In the wake of sweeping cross-sector layoffs, MBA alumni aren't always in a better position than students. "More people are going to look for alumni for those connections," Harrell said. "But whether they prove more fruitful than they have in the past remains to be seen."

Here, view a slide show of the schools with the most active alumni networks and a video describing the importance of alumni networks.

Anne VanderMey is a B-schools writer at BusinessWeek

Posted by: Louis Lavelle on March 26

With the economy in turmoil, many MBA graduates are finding the job search tough going. To give readers some insight into the strategies they’re pursuing and the difficulties they face, BusinessWeek has recruited four out-of-work MBAs to write about their experiences for a new feature called “The Hunt” that will appear periodically on the Getting In blog. Comments, as always, are welcome.

By Bryan Glover
I know many people are experiencing the same frustration I am, and I sincerely hope this blog can help relieve the feeling of “aloneness” that can permeate a job hunt. My bio has more information about who I am and my background, but I thought it appropriate to share with my audience a synopsis. I finished my MBA program in December and had been working part-time during my final semester at a company that had said my job would become full-time after I graduated. Unfortunately, I was notified on my graduation day that I was going to be laid-off.

I would describe myself as a driven, intelligent, hard-working generalist with a diverse background and experience at a number of world-class companies. My career goals may sound a bit vague and fuzzy for a 35 year-old MBA graduate, but they work for me. My overarching goal is to find a career that I enjoy and that is challenging. I can better tell you what kind of organization I want to work for than what position I want to have in the future.

My job hunt can best be described as a series of peaks and valleys up to this point. Almost weekly I will hear from a potential employer whether it be a phone interview or in-person. I have been offered jobs only to have the company run out of money the week I was supposed to start. I have had one company contact me to set-up and interview, delay the interview one week, then ultimately fill the opening with an internal candidate. I had another company e-mail me to set up a lunch meeting, which went well, and then follow it up with a phone call that I couldn’t answer because I was in a meeting, and that manager not bother to return my voicemails.

My job-hunting approach has been multi-faceted. I have been networking, attending job fairs, sending resumes through contacts, and using various online job sites. I am treating my job search like a full-time job. In general, I will pick a site or sector a day and dive in. For example, one day I spent researching and applying to jobs with the federal government, the next was with my state, and so on. I have had a few offers so far that were at salary levels so low that I could not pay my bills if I took them. So, for now I am turning those jobs down with the hope that I can find a job in my salary range before my bank account reaches a critical level.

Emotionally, this job hunt has been trying. I think much of this stems from seeing so many of my classmates unable to find jobs upon graduation. Of the 27 people I graduated with, only three have been able to find full-time employment. Of those three, only one has found a job in a field and at a level that would be considered MBA caliber. One has gone to work for a non-profit and teaching GMAT prep classes on the side; the other recently took a job as a waitress. I think much of this is due to the macro economy, but there does seem to be a stigma against MBAs that plays out in not getting interviews/offers or in the form of low salary offers.

Things change day-to-day. I go through mini depression cycles weekly. I don’t mind rejection and I have been through lay-offs and bubble bursts before (I worked at a dot com when the bubble burst in 2001), but to see so many widespread reports of economic problems, the struggles of my classmates, the overnight evaporation of jobs, and the “we can be as picky as we want and you will take what we give you” attitude on behalf of so many employers is really souring me on this whole process and my future prospects when the economy does turn for the better. I am trying to stay positive because I expect to have 30 years of career in front of me and starting out bitter and resentful isn’t going to help me be successful. I will admit that some days are harder than others. I know a number of people who have been laid off in the past six months (over 30 in my network alone) and this weighs on me. While I know I am highly qualified, I also know that companies can be (and are being) very picky in their hiring right now.

Thanks for reading and please feel free to share any thoughts, questions, or feedback as appropriate.

Business Week

President Obama recently unveiled plans to spur lending to small businesses. Experts detail the benefits and drawbacks of taking on debt

By Karen E. Klein

Over the past few weeks, President Obama has unveiled multiple plans for aid to small businesses, including lowering loan fees, increasing guarantees on government-backed loans, and buying up to $15 billion in Small Business Administration-backed loans. But will the new programs unfreeze credit as they are intended to do? And how can entrepreneurs take advantage of the warmer climate if they do?


Sanford Ehrlich, executive director of San Diego State University's Entrepreneurial Management Center, says the lending initiatives are likely to provide some relief, but he worries it won't be enough to help companies that are really struggling.

"Anything that will increase lending will be good for small business, but you have to be a fairly liquid small business to take advantage of this program. If you have too much inventory, too little cash flow, you're currently carrying debt that's been called, or balloon payments are staring you in the face, adding more debt to your current situation isn't going to help," Ehrlich says. "So many small businesses are in serious trouble that the number this will help will be limited."
Take Advantage of the Downturn

Ehrlich says he would have preferred to see government increase its spending in the SBA's Small Business Innovation Research or Small Business Technology Transfer programs. With the overall decline in wealth, he says, there's no longer much private investment money for the innovative, high-technology startups that often have an outsize impact on high-wage job growth.

If, however, small business owners can position themselves to take on new debt to fund future growth, Ehrlich says, they should begin looking for credit as the Obama plan goes into effect. "Companies currently in decent cash positions should consider plowing money back into their marketing and branding efforts, buying competitors, and accumulating more market share in this economy," he says.

But Ehrlich cautions entrepreneurs struggling to keep their heads above water not to think of loans as life preservers. "If your company is going under, do a realistic evaluation about whether you need to liquidate. Don't take on more debt just to keep treading water."
Time to Expand

Maria Minniti, a professor of entrepreneurship at Southern Methodist University's Cox School of Business, agrees. Companies in good financial situations are likely to benefit from increased access to credit under Obama's plans, particularly when combined with a market in which costs are down for human capital as well as commercial space. "This may be the time to upgrade your location or hire some fantastic talent," she says.

And would-be entrepreneurs with good credit scores might find this a good time to borrow some funds, she adds. "Small businesses, especially young ones, tend to operate on a tight budget, stretching earnings from year to year. If you've operated on a budget and you're holding some reserve, this may be the time to borrow and make improvements or expand."

Daniel Meyerov, a small business consultant and founder of OnlyBusiness.com, says companies looking for new credit should approach lenders by emphasizing the part they'll play in economic stimulus. "Banks won't want to lend to small businesses that are going to hold the money and try to survive through the wilderness," Meyerov says. "They will want to see it invested in the economy in a way that will support surrounding businesses in the supply chain."

Filling out Forms

A compelling loan application will include detailed plans for how you'll use the money—along with forecasts of results, he says. Also make sure your paperwork is completed properly before you deliver it to a lender.

"This is often an issue with small businesses, and it affects their credibility and accountability," says Meyerov. "If you're unsure and you fill out the paperwork wrong, it'll go into a very large pile marked 'more detail needed' that can sit on a desk for a very long time. Position yourself properly, have your documents ready, and if you're a viable business, you'll get access to capital sooner rather than later."

Demand for loans has dropped in 2009, according to the U.S. Treasury, perhaps because many companies are pulling back on spending or fear they wouldn't get a loan if they applied for one. But demand is likely to increase if banks feel more comfortable lending under the new government guarantees, says Minniti.
Drawbacks Nonetheless

While she commended the Obama Administration for putting a spotlight on small business, she says she is wary of the idea that government—not the free market—may play a greater role in determining which companies get loans. "Economists like myself tend to believe that the market incentive structure does the best job of selecting and channeling financial flow to the right places," she says.

Minniti worries that with higher loan guarantees and government providing a secondary market for small business loans, bankers will be tempted to abandon their strict monitoring role in lending. "In spite of their best intentions, the government's attempts to monitor and implement these programs correctly will add to a huge bureaucracy." she says. "Will a large government plan do a better job than the market would? It's tricky to work that out."

Dan Mica, chief executive of the Credit Union National Assn. and former U.S. Representative from Florida, agrees that creating a small business "lending bubble" would be a mistake. "You have to draw that line very carefully," he says, "but people who do lending for a living are very good at making the distinction between businesses that need extra help without being imprudent in their decisions."
Trying to Raise the Ceiling

Mica, whose organization represents the nation's 8,000 credit unions and their 90 million members, is working to get laws changed that cap credit unions' ability to lend to small companies. "Our credit unions are the best-capitalized financial institutions left in America, and we could put $10 billion into the economy almost immediately," he says.

Mica spoke to Obama adviser Valerie Jarrett, and his chief counsel spoke briefly to President Obama, at the small business press conference on Mar. 16, Mica says. Under current law, credit unions can use up to 12.25% of their total assets on small business loans. But most have reached that cap and would like to extend more loans to small businesses, where he says credit unions have default rates of less than 2%.

"We have a record of lending to small companies, and we know how to do it," Mica says, noting that Senator Charles Schumer (D-N.Y.) is planning legislation to raise the cap on credit union lending later this year.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

Business Week

Though the SBA doesn't give stimulus package loans directly to small businesses, savvy scammers would have you believe otherwise

By Karen E. Klein

Q: My sons own and operate an architectural/engineering firm and a steel fabrication firm. These are Main Street firms, needing operating capital. What department of the stimulus package do they apply to for a loan?

—J.R., posted online

A: The American Recovery & Reinvestment Act (also known as the "stimulus package") signed into law last month provides $730 million to beef up the loan guarantee programs of the U.S. Small Business Administration. Part of that sum is supposed to reduce the fees that borrowers pay for SBA-backed loans and to increase government guarantees on the loans, making them more attractive for bankers. These measures are designed to help thaw the current credit freeze.


Another program in the works, a joint Fed and Treasury program known as the Term Asset-Backed Securities Loan Facility, or TALF, also aims to get credit flowing again to Main Street borrowers.

However, it is important for your sons and other small business owners to realize the government does not give loans directly to small businesses. The government works through commercial lenders, such as banks, by guaranteeing the small business loans of banks that participate in their loan programs.

The confusion on this point has unfortunately opened the door to fraudulent operators who charge fees purporting to help small business owners and individuals get government money, says Alison Southwick, spokesperson for the Council of Better Business Bureaus in Arlington, Va. "Anytime there's a story dominating the headlines, scammers are going to take advantage of it," she says. "When people hear the word 'stimulus,' they know that's something they heard about in the news, so it must be legitimate."

Hundreds of complaints have poured in to the BBB in the weeks since the stimulus package was passed, she says, most of them from people who responded to Internet ads leading to Web sites featuring "testimonials" from individuals claiming they got government money to start businesses or pay off bills. For a fee, many of the Web site pitches say, they'll send you a CD or a mail-order kit explaining how to have access to government stimulus money.
Lucky Winners?

These Web sites are extremely misleading, Southwick says, including some that incorporate blogs that appear to be written by the lucky winners of all that stimulus cash. However, not only is the government not cutting checks to would-be entrepreneurs, you don't need to pay for information about SBA loans or government grants (most of which are available only to nonprofit organizations or very specialized research companies).

"They're charging you for free information, in the first place. And maybe they send you a CD or maybe they don't. But what happens is that people's credit cards start getting billed and there's no way to stop it," she says. "A woman I talked to today said she started getting billed not only for the stimulus information but also $25 per month for a newsletter she didn't want, either."

Victims often wind up paying $60 to $80 a month, and if they don't realize it, the scam can go on indefinitely. "They keep on billing and hope that a certain percentage of people aren't going over their credit-card statements closely," Southwick says. Even those who catch the unwanted charges often find there's no way to stop the billing unless they cancel their credit cards.

The bottom line: Provisions of the stimulus package and other government programs are aimed at increasing access to government small business loans and getting the banks back in the business of loaning money again. Good information about SBA loan guarantee programs is available here. Other government sites offer free information about grants, student aid, and government benefits.

There is no reason to pay for software or guides to apply for government loans or grants. Companies that offer such information for a fee—when it is already available for free online—are likely to be scams, so stay away from them.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.
Business Week

Advice for recently laid-off workers considering going into business for themselves

By John Tozzi

So you lost your job. Now what? As an employee, you had a daily routine, health insurance coverage, and a regular paycheck. You liked the security—while it lasted. And if you sometimes daydreamed about the freedom of working for yourself, leaving a full-time job never seemed worth the risk.

But now, laid off into a recession and the worst job market in decades—2.6 million Americans lost jobs in 2008, with 524,000 eliminated in December alone—you may be thinking self-employment sounds like the best path out of unemployment. Rather than try to land one of the few open jobs out there, maybe you could work as a freelancer or consultant, at least until the job market recovers. You're in good company: There were nearly 9 million self-employed workers in December, according to the Bureau of Labor Statistics. But if you're among the thousands of unemployed now trying to go it alone, where do you start?

First, step back. Decide what your goals are and how freelancing will help you achieve them, says Pamela Slim, author of the Escape From Cubicle Nation blog and a forthcoming book of the same name. "It's obviously very easy at the point of being laid off to really come from a position of fear and desperation," she says. Thinking about long-term goals from the start will keep you grounded and help you determine how to proceed. Once you're clear on your goals, Slim says, you should ask: "What are the specific skills, knowledge, money, resources, information, and contacts [you] need to bring that picture to life?"
Health Care

There are plenty of nuts-and-bolts concerns that can overwhelm first-time freelancers, especially those who suddenly lost steady jobs. Chief among them is health care. The health insurance system does not accommodate independent workers well. If you can't get coverage through a spouse's plan, you can continue your old employer's plan at your own expense under COBRA. You may also be eligible for group health insurance through a group like New York-based Freelancers Union, which launched a health insurance company last year offering plans in 31 states.

Freelancers Union's executive director, Sara Horowitz, suggests checking with local chambers of commerce to see if they offer plans for sole proprietors. She also points self-employed workers to local health insurance information on a site run by the Actors' Fund called Access to Health Insurance/Resources for Care. Whatever option freelancers choose, Horowitz says they should avoid going uninsured for even a month, even if they buy high-deductible plans. "So many states have preexisting-condition clauses. If you go and buy the most catastrophic plan, you will not have a break in coverage—and if you get another plan it will all be counted," she says.

Another hurdle for any new freelancer is how to land your first gig. Slim suggests looking to former employers, even if you have been downsized. "Many times, strangely, the same companies that lay people off do hire them back on a contract basis," she says. You can use that first client to show others that you're capable of delivering value as an independent contractor.
Network Full-Time

In addition to maintaining ties to your old company, you should prepare to make networking a full-time job. But realize that the people who can help you succeed may be different from the contacts that helped in the corporate world. "Freelancers, it's kind of an underground culture, and once you tap into it, people know everything about where to go for what," Horowitz says.

One of the most important referrals you can get is for a good accountant. Knowing what to write off as business expenses can save enough on your tax bill to make hiring an accountant worth it, Horowitz says. Still, be prepared to write hefty checks to the IRS. Since your employer isn't withholding taxes anymore, you'll need to pay estimated taxes four times a year. You're also on the hook for the employer's contribution to Social Security now. Horowitz says freelancers should set money to pay taxes aside in a separate bank account. "Nobody ever puts away enough," she says. "That's the biggest way that people get themselves in a hole."

Besides paying taxes, finding health care, and landing clients, self-employed workers face another big challenge: motivation. It's easy to procrastinate when there's no boss looking over your shoulder. Slim suggests freelancers establish a schedule and put themselves in environments where they know they'll do their best work, whether that's having a clean home office, going to a co-working event, or plugging in at the local coffee shop. Regardless, she says, the newly self-employed have a powerful incentive to deliver, particularly in a tough economy: "There's nothing more motivating than knowing that if you do not complete your work you will not get paid."

Flip through this slide show for a 20-step checklist for recently laid-off workers considering going into business for themselves.
Business Week

As AIG's chief heads to Congress, some of the thorny problems facing the insurer include its troubled asset sales and the billions paid to counterparties

By Ben Levisohn

American International Group's executive team shouldn't expect a warm welcome when it goes before Congress on Mar. 18. Americans are up in arms about the $165 million in bonuses paid to AIG (AIG) executives, and Congress has noticed. Rather than an information-gathering session, the executives should be ready to face a grilling worthy of Torquemada. "It's going to be a witch hunt," says Dory Wiley, chief executive of boutique investment banking firm Commerce Street Capital.


American taxpayers own 80% of AIG at a cost of $173 billion in loans and guarantees. But the value of that investment is shrinking by the day. "They're holding a deteriorating asset," says Adam Lerrick, a scholar at the American Enterprise Institute and a former investment banker. "They're losing clients, businesses, and good people, and the assets [soon] won't be worth much." There are important questions that should be asked, but probably won't be, about how taxpayers are going to recoup even a small portion of their investment. The focus should be on resolving the issues at AIG, not on righteous anger and revenge. In the current rage, Lerrick says, elected officials would be wise to start thinking like investors.

To do that, they need to dig below the headlines. Start with the bonuses. It seems inconceivable that anyone working for a company that has cost taxpayers billions should get million-dollar payouts. But there are arguments for the pay. For starters, the skills these managers possess are still in demand. UBS (UBS) and Deutsche Bank (DB), among others, have been raiding U.S. financial firms for brokers and other financial professionals. Nor are there many incentives for employees to stay put. AIG Financial Products employees are being paid to clean up the unit and wind it down. When they complete their task, they will be out of a job. "You don't punish the cleanup crew," says Rob Sloan, head of U.S. financial services at Egon Zehnder International.
Asset Sales a Mess

Congress may wonder why it was important to retain everyone who was rewarded with a bonus for staying on the job. After all, some of these same workers undoubtedly helped get AIG into the financial mess. And according to New York Attorney General Andrew Cuomo, 11 of the 73 AIG employees who received retention bonuses of more than $1 million no longer even work at AIG. They also need to ensure that the incentives are designed correctly to balance performance and retention. Lean too far to the retention side, and employees will be rewarded for keeping the unit going as long as possible, rather than liquidating it for the best value. But if any payments are based on past agreements, rather than the new order, anger would be justified. "That would be troubling," says Sloan. AIG Chief Executive Officer Edward Liddy himself has been critical of the bonuses. "I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them," he wrote in a Mar. 14 letter to Treasury Secretary Timothy Geithner.

If investors really want to get angry, they should take a look at how management of AIG has been handling its asset sales. A big part of AIG's restructuring plan involves selling profitable units to pay back the government. But these asset sales have been a disaster, despite the presence of veteran insurance CEO and dealmaker Paula Reynolds, who was brought into AIG to handle the restructuring. For instance, the sale of AIG's Asian businesses (AIA) was announced in October and financial details were supposed to be available to bidders by the end of that month. Instead, the prospectus wasn't available until February, and it was a scant 65 pages long and contained information only through August 2008. Bidding, unsurprisingly, was light and the unit was taken off the market. "There is no coherent effort internally to sell the assets in an organized M&A process," says Steve Czech, head of hedge fund SJC Capital Partners. Congress needs to ask what went wrong. "The process to gauge market interest in AIA was very thoughtful and deliberate," says AIG spokesman David Monfried. "This is the most difficult market in years and years, and to date nobody has the ability to raise the capital that reflects the worth of this company."
Counterparty Hullabaloo

The asset sales are small change compared to the $100 billion plus paid to AIG's counterparties. This information, released by AIG on Mar. 15, confirmed what many suspected since October—that a large portion of the government's investment in AIG became a backdoor bailout to the world's banks. Goldman Sachs (GS) got $13 billion, Société Générale (SOGN.PA) received $12 billion, and $12 billion went to Deutsche Bank, nearly 100% of what they were owed. That strikes some financial professionals as egregious. If AIG had filed for Chapter 11 bankruptcy in September, those same firms would have gotten in line with other creditors and received pennies on the dollar. There's no reason AIG couldn't have negotiated better terms, says Lerrick. "Everyone should have [been] marked down 20%."

Most important, Congress needs to know how Liddy and his team plan to get taxpayers out of this mess. Some experts argue that AIG should have filed for Chapter 11 in September, and that bankruptcy remains the best option. "Dissolution would be painful," says Martin Weiss, chairman of the Weiss Group, a research group. "But it would not take a Herculean effort to rearrange things and shift responsibility to a receiver." AIG, however, continues to operate under its original plan to raise cash by selling off successful businesses, liquidate AIG Financial Products, and pay the government back. Legislators will likely demand specifics on how that's going to happen and when.

And if Liddy can't do that, some in Congress may begin to demand someone who can.

Businesswekk.com

Spending on health care and education will be the fastest way to create jobs while other sectors recover

By Michael Mandel

Here's a thought experiment. Suppose that you have $50,000. Using that cash, you can: a) remodel your outmoded bathroom; b) purchase an expensive new car; c) replace your arthritic and failing knee; or d) pay for two years of college for your child at your state university.

Which of these do you choose? My guess is that most people would pick either "c" or "d." These days, fixing up your house or getting a new set of wheels feels like a luxury. But even in tough times, health and education are still necessities to most people. What's more, the public seems to support increased government spending in these areas. In an early February Gallup poll, 56% of Americans considered aid for education "one of the most important" items to have in a stimulus bill, beating everything else, including tax cuts.


The public support for health and education carries a broader economic implication. The two sectors, long maligned as inefficient, may turn out to be the best hope for sustaining the economy. Hospitals, universities, and the like employ about 30 million workers, or 22% of the workforce. These employees are numerous enough and well-paid enough, on average, to prop up the economy while housing and finance recover.
stabilizing influence

If additional stimulus is needed, the health and education fiscal policy channel is still functioning, while other ways of getting money into the economy have broken down. Taxpayer money given to banks, businesses, or households will likely be saved with little stimulative effect. But funds directed to schools and hospitals—as called for in President Barack Obama's recent stimulus bill—will almost certainly be spent on buying equipment, putting up new buildings, and hiring workers. Health-care employers in particular seem willing to hire nurses, medical technicians, home aides, and the like. Over the past year the number of health and education workers has risen by 500,000.

Ordinarily, such spend-and-hire behavior would be objectionable. After all, most people on both sides of the political aisle agree that health and education are overpriced and hobbled by world-class bureaucracies. Indeed, on Mar. 10, Obama unveiled his education reform program. Health-care reform is high on his agenda as well.

But these are no ordinary circumstances. In many regions—especially the hard-hit manufacturing belt—people working in health and education are crucial to keeping local economies afloat. In Michigan, health and education now provide 23.7% of jobs while manufacturing has dropped to half that, only 12.5%.

Looking back over the past decade, health and education have been a stabilizing influence nationally, hiring at a steady pace and adding 5.3 million jobs since 1999. Meanwhile the rest of the economy has gone through booms and busts, creating fewer than 400,000 new jobs in 10 years as offshoring ate away at manufacturing.

Spending on health and education eventually will have to be reined in. But that crisis is 5 or 10 years down the road. For now, schools and hospitals may be the best choice we have for keeping the labor market afloat.

This article is from Business Week.

If your company faces a product safety crisis, don't panic. Here are some guidelines to help you respond with a cool head

By Eric Dezenhall

If "reality television" has exposed the personal lives of ordinary people, then speed-of-light electronic communications have stripped bare the most intimate vulnerabilities that companies face when managing product safety concerns.

Between 2006 and 2008, there were more than:

• 1,100 separate recalls of consumer products such as appliances, clothing, and children's goods, accounting for more than 1.5 billion individual items; and

• 130 recalls of meat, poultry, and egg products affecting roughly 56 million pounds of product.


These figures don't even include drugs or automobiles, which have been notable for recalls, or cosmetics. Product recalls are now everyday events—not necessarily crises—yet we are aware of only the few that are highly publicized.

Product safety advice is fraught with Mother Goose clichés, such as "Get the facts out immediately" and "Do a mea culpa." And simplistic business-school case studies have no relevance to what your company may face, typically dwelling on the over-cited Tylenol tampering crisis. What follows are some guidelines for a level-headed response:

1. Identify the true origin of the crisis.
Before you can find a cure, you need the right diagnosis. What is really driving the controversy: a legitimate hazard or an unwarranted attack by a motivated party?

As a general rule, when your company bears some responsibility, repent; if not, go on the offense.

When melamine-tainted pet food sickened and killed pets in 2007, Procter & Gamble Pet Care played a critical role in identifying the culprit substance in products manufactured by one of their vendors. P&G' s Consumer Relations Unit, trained to handle inquiries from passionate pet owners, quickly and effectively sifted through inquiries and relayed pertinent information to internal scientific sleuths, who investigated the claims. This fast-moving process led to a well-organized recall and the implementation of new safeguards.

When a human finger turned up in a cup of Wendy's chili in 2005, pundits said the company needed to conduct a nationwide recall. But why, when there was nothing wrong with the chili? Wendy's managers knew they weren't confronting a systemic problem with misplaced fingers. Rather, they were confronting a saboteur. The matter was resolved not with a recall, but with the arrest of the criminal who put the severed digit in the chili.

2. Isolate the risk.
In safety-driven crises, customers want answers to two questions: "Am I going to be okay?" and What are you doing about it?"

Bolstering consumer confidence is largely about control, and companies must communicate precisely what consumers should—and shouldn't —be looking out for. One reason the public can identify so few product recalls is because savvy companies defused potential outrage by quickly flagging offending products—serial or lot numbers, purchase and expiration dates, regions and stores where the product was sold.

Give consumers a straightforward action, such as returning the product to the store where they bought it. A consumer should be able to conclude, "Because I did not purchase or use Acme Brand Contact Lens Solution, Lot #1234, between Mar. 1 and Mar. 15, 2009, I am probably not at risk" or "I purchased Acme Brand Contact Lens Solution, Lot #1234, and I will take it back to my nearest Main Street Food Store for a refund coupon."

3. Don't offer definitive assurances until you've isolated the risk.
It is too often the instinct of many executives to offer assurances that all is well before the critical facts are known. The reason why companies don't always "get the facts out right away," as they are so often urged to do by the press, is because they don't know the facts right away. This can result in debacles such as when the Postmaster General held a news conference during the 2001 anthrax attacks to assure the public that the Washington, D.C. mail supply was safe—only to have two postal workers die of anthrax poisoning days later.

Better to demonstrate what actions are being taken to address the hazard than make hurried assurances that may backfire.

4. Lose the crisis plan; find a leader.
Crisis manuals may help companies assess vulnerabilities, but they are often worthless when bad news actually hits, because adverse events are largely unforeseeable. However, a strong leader with decision-making authority is indispensable. An effective crisis-management team must be a benevolent dictatorship governed by good judgment, not a democracy governed by protocols. Assorted players—legal, public relations, safety—can have input, but there is a positive correlation between strong leadership and a successful resolution. There is no such correlation between a thick manual and a positive outcome.

5. Manage the relationship with the relevant regulatory agency.
On most safety issues, there is a government agency that has oversight authority. The Food & Drug Administration, for example, has more influence over a crisis than the company that's under fire. In 1993, when there were widespread news reports of medical syringes being found in Pepsi cans, FDA chief David Kessler rightly differentiated between a food supply problem and a bad actor external to Pepsi. Soon afterward, a store camera caught a woman slipping a syringe into a soda can. This exculpatory video clip, combined with reassuring footage that Pepsi-Cola released of thousands of cans whirring safely through a pristine bottling plant, legitimized Kessler's stance. This "inside game" of working with appropriate authorities can be more important than external public relations.

6. The medical touchstone, "first do no harm," applies to product safety.
Don't over-communicate. Most product-safety concerns are dealt with discreetly through swift internal investigations and limited recalls. One major flaw in how product safety is studied is the false assumption by many academics that all resolutions are accompanied by big public relations campaigns. Sometimes, the best-managed crises are the ones that never become Harvard case studies because they were resolved quickly and quietly, but with the cooperation of the proper authorities.

7. Manage the "meta-crisis."
When JetBlue cancelled thousands of flights during a 2007 snowstorm, a television interviewer asked me, "Why is JetBlue in such a mess?" I answered, "Because you keep inviting guests on your show asking them why Jet Blue is in such a mess."

Today's product safety controversies come with a Greek chorus—analysts, journalists, pundits—who usually declare the matter to have been mismanaged. They are essentially investors in the crisis who need to perpetuate it for their own purposes. It is not enough, then, simply to manage the crisis itself; companies must manage the public relations associated with their handling of the crisis!

To handle this additional component, you need a leader who can communicate clearly about the crisis management process itself. In our scandal-fueled media age, the chief executive officer is expected to be the chief crisis communications officer.

Every crisis is its own animal. Companies must replace tired conventional wisdom with the improvisational realities of crisis management as the world is, not as we would like it to be.

Eric Dezenhall is the co-founder of Dezenhall Resources, a crisis management firm based in Washington, D.C. He is the co-author of Damage Control: Why Everything You Know About Crisis Management is Wrong (Portfolio, 2007).

Taken from BusinessWeek.

The meltdown has left many wondering about stocks. BW Contributing Editor Chris Farrell thinks reports of their demise are exaggerated

By Chris Farrell

These are truly scary times. The stock market has lost some $11 trillion in value since its October 2007 peak. Blue-chip companies like AIG (AIG) and Citigroup (C) are now penny stocks, while General Motors (GM) and Las Vegas Sands (LVS) trade at less than 2 a share.

It seems that everybody is scouring through the numbers, trying to figure out how far down is down—and how long this bear market will last.

And if the stock market train wreck isn't enough, investing icon Warren Buffett has come along with a new warning. "A few years ago, it would have seemed unthinkable that yields like today's could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms," he writes in his latest annual letter to Berkshire Hathaway (BRKA) shareholders. "When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary." Great.
No Longer a Cornerstone

What is the average saver in a 401(k)-type plan supposed to do? Abandon equities? Flee bonds? (Sales of home safes are up, but that's not recommended.) Two simple market stories reinforce a time-honored lesson for all investing seasons. You don't have a clue what investment will do well going forward, and neither do the experts.

The first story: The old attitude of buying solid stocks as a cornerstone for one's life savings and retirement has simply disappeared. Younger investors, in particular, are avoiding stocks. In fact, the only reason the mutual fund industry has been able to survive the death of equities is the dramatic success of such funds which invest in T-bills, bank CDs, and other short-term paper. Says Alan B. Coleman, dean of Southern Methodist University's business school: "We have entered a new financial era. The old rules no longer apply."

Those thoroughly modern-sounding lines were plucked from one of the most famous cover stories in business journalism, BusinessWeek's August 1979 piece "The Death of Equities." Needless to say, BW's bold pronouncement became the favorite example of contrarians. (Type "The Death of Equities" into your search engine and you'll see what I mean.) Case in point: "By the end of the 1970s, things were so bleak on Wall Street that a pessimistic BusinessWeek cover proclaimed "The Death of Equities," Money magazine wrote last year. "That, of course, turned out to be one of the great buy signals of all time."

Really? The contrarian story doesn't stand scrutiny. Rereading it today, it's a well-reported, well-written article that thoughtfully looked at why individual investors were abandoning stocks nearly seven years after the Dow's peak and suffering through years of raging inflation. Here's the rub: The stock market didn't bottom out until August 1982—three years later. That's one long lasting contrarian indicator. Hopefully anyone who invested on the theory that magazine covers are useful contrarian indicators had very deep pockets and a long time horizon.

Vroom

The real lesson is that despite the gloom, the U.S. economy eventually recovered, inflation rates trended lower, businesses became more competitive, and innovation flourished, setting the stage for the bull markets of the '80s and '90s.

A second story: Remember Dow 36,000, the book co-authored by James K. Glassman and Kevin A. Hassert? It was published in 1999. "The Dow Jones industrial average was at 9000 when we began writing this book," the authors write in their introduction. By their calculations "in order for stocks to be correctly priced, the Dow should rise by a factor of four—to 36,000… The Dow should rise to 36,000 immediately, but to be realistic, we believe the rise will take some time, perhaps three to five years."

Oops. The Dow Jones industrial average peaked at over 14,000 in October 2007, and it's down by more than 50% since then. Worse yet for Messrs. Glassman and Hassert, from 1999 to 2009 the S&P 500 is down 50% adjusted for inflation, calculates Michael Mandel, BusinessWeek's chief economist. Their notion that stocks were almost a riskless security over the long haul was nonsense. Stocks are riskier than bonds since equities represent the uncertain rewards for entrepreneurship, while bonds are long-term contracts that spell out when borrowers must make principal and interest payments.

"There is no predestined rate of return, only an expected one that may not be realized," says Laurence Siegal, director investment policy research at the Ford Foundation. "The risk of holding stocks, then, is the possibility that in the long run, returns will be terrible."
Higher Return on Bonds

A close look at market history also shows that stocks did not always do better than bonds even with a 30-year time horizon before 1871, and after that bonds often outperformed stocks for 10-year periods. You don't even have to reach into the history books, either. From 1983 to 2008, the annual total return on stocks was 9.8% a year vs. an 11% average annual return on Treasury bonds. That should put to rest the "stocks for the long haul" dogma.

What is the individual investor trying to save for retirement to make of all this? The patterns of market history are such that stocks are sometimes seen as diamonds and bonds as zircon, and vice versa. Benjamin Graham, the investing legend, wrote in his 1949 masterpiece, The Intelligent Investor: "In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, 'This too will pass.' Confronted with a like challenge to distill the secret of sound investment into three words, we venture the following motto, MARGIN OF SAFETY."

Diversification is one way to build a margin of safety. It's a hoary lesson oft forgott. The Talmud recommends it: "A man should always keep his wealth in three forms; one third in real estate, another in merchandise, and the rest in liquid assets." Shakespeare in The Merchant of Venice has Antonio explain to his friends why he wasn't spending sleepless nights worrying over his investments.

"Believe me, no. I thank my fortune for it,

My ventures are not in one bottom trusted,

Nor to one place; nor is my whole estate

Upon the fortune of this present year.

Therefore my merchandise makes me not sad."
Don't Hark Back to the Depression

The other way to build a margin of safety is to hedge, or employ strategies to mitigate risk. For instance, Professor Zvi Bodie of Boston University is a leading proponent of hedging with retirement savings. He argues that the basic money question for the future retirees of America is not "How much money will I make on my investments?" but "How much can I afford to lose?" Take the amount you can't afford to lose and eliminate the risk with default-free, inflation-and-deflation proof Treasury Inflation Protected Securities (TIPS).

So, should we send flowers for the equity market and comfort its bereaved survivors? Don't back up the hearse just yet. My own sense is that there is wonderful value in the stock market. When was the last time you heard a professional money manager go on television and say, don't buy my fund? That's what Steve Leuthold, the market historian, long-time money manager, and head of Leuthold Group did on Bloomberg TV late last week. His Grizzly Short Fund—a mutual fund that typically sells stocks short—sports a one- year return of 84% and a year-to-date return of 29%.

So why is Leuthold recommending not to follow the hot fund? "These comparisons with the Great Depression are totally out of touch with reality, and pretty stupid," he says.

I think he's right. But I'm well-diversified just in case.

Farrell is contributing economics editor for BusinessWeek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace. His Sound Money column appears on BusinessWeek.com.

This article is published on BusinessWeek.