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March 11, 2002—Looking in All the Wrong Places

Boutique Beers. With wines over-rated and over-priced, we have been digging into the beer barrel lately to good effect. Some offbeat brews have proved very tasty, each eatery providing different treats. One of our local greasy cafes stocked Buzzard's Breath (a Canadian import we think) for a while, though it is now off the blackboard. With our Vietnamese pho, we knock down 33, Danang's best, an antidote to the spices with which we lace our soup. Our Chinese restaurateur, a cosmopolitan sort of fellow from Calcutta, offers us Sing Ha, straight from Bangkok. Since we cannot fit an MG in our garage, we have done the next best thing which is to quaff "Old Speckled Hen," out of Morland brewery, which dates back to 17ll, and is named after a vintage MG car that must have delighted the brewmaster.

Winners Are Losers. Wines, beers, and a host of other things now have to come from boutiques, because the well-known companies seem to have taken all the guts out of their products. Anheuser (NYSE:BUD) just reported boisterous results for the last quarter, once again picking up market share by packaging soapsuds in a bottle, leaning on its distributors, and flogging us with advertising that never relates to the quality of its product.

It is not alone in achieving viagra performance despite the lackluster physique of its products. We have had occasion to look at all the companies at the top of the Fortune lists (Fortune 500, Global 500, Diversity 500, Most Admired 500, Ad Nauseam 500) and so on. The top rated don't have the ring of quality, ethicality, innovation, wisdom, environmental concern, or dedication to excellence. In some instances, they are actually drags on the economy. They are yesterday instead of tomorrow, substituting marketing fizz for product substance and integrity.

The Gap. The politicos tell us that Andersen did not make Enron adhere to GAAP, generally accepted accounting principles. That's true enough. But GAAP would not get to the heart of the problem. It's long been known that GAAP and the accountants don't know how to measure the worth of an enterprise. So even if a company makes a Fortune list and passes an accounting examination, it may not merit your attention. There still may be no there, there.

Sorry About That. In all sorts of ways, the beleaguered accounting systems of bean counters do not capture economic value. It's no secret that serious investors don't use accounting statements to decide whether to put their money where their eyes are looking. Beady-eyed investors tear apart the statements, and look for the shakedown, break-up value of an enterprise in order to see whether they want a piece of the action.

Accountants aren't the only ones who have trouble looking at performance, value, and excellence. McKinsey, the General Electric of consulting firms, has commonly got it wrong. Read, for instance, an article in Across the Board, March/April 2002, "Excellence Won't Save You," where McKinsey's Richard Foster says, "This beguiling simple business of picking excellent companies was unfathomably difficult because every time you picked them they stopped being excellent."

Accountants, consultants, magazine editors, and all the rear-view mirror boys pick companies that used to be excellent, but are now coasting on their reputations. And, to boot, they usually measure the wrong things anyway. If you will look at Agile Companies on our site, you will find companies with a patch of excellence that make none of the lists and, often, have spotty financial performances. But they are up to something good.

Looking for Excellence. Excellence, in fact, is elusive. Only a few make the grade, unless you indulge in grade inflation. Ordinary tabulations don't find the right beers, cigars, brandies, companies, or chief executives.

And, horror upon horrors. Great companies that will shine for a century often seem plodding in the present. General Electric, today's star on every list, looks to us to be in decline, both because it is too dependent on the earnings of its financial services subsidiary which should be severed from the parent and because its leaders lack some of the ingredients that make for long-term value. L.L. Bean in Maine, honest to a fair-thee-well, will be around for a long time, although it is far from turning in the financial performance it could. It does not look like it will implode.

Passing Fancy. What a fragile creature excellence is. In the late 1950s, Yale University under A. Whitney Griswold was probably the best university in the United States. It was wedded to a liberal education, and its professors actually had to teach to earn their merit badges. At other institutions the profs made their reputations, and their graduate assistants made their classes. But that Yale is gone now.

We're reminded of Capote's Breakfast at Tiffanies. At the end, Holly Go Lightly loses her cat, and only then realizes how dear the cat was to her. We only know how valuable something is when it is lost.

That is excellence. We don't know how important it is till we don't have it. Like Paradise Lost, we cannot reclaim it. We don't know what ingredients make it up or how to account for it. Somehow it just gets away from us.

P.S. Notice that the PMI index has gone over 50, at least a temporary sign of economic recovery.

P.S.S. On Agile Companies, note Burberry, Analog Devices (NYSE:ADI), Tesco (NASDAQ:TESOF), Inditex (MADRID:ITX), and Bose, to name just a few companies with a touch of excellence. We will start laying out some of the characteristics of excellence in a future letter, though , in the end, it is indefinable. At work is the Heisenberg Principle where the process of measurement actually destroys the phenomenon being measured.


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