Marty Fridson's $100 Million Fix for GM
Martin Fridson is a Wall Street securities analyst, the youngest person ever inducted into the Fixed Income Analysts Society Hall of Fame (yes, there is such a thing), and author of several books, including Investment Illusions, named by Worth magazine one of the fifteen best investment books of the last 125 years. He is also my friend, going back to the (now distant) days when I was his editor.
For some unknown reason, Marty doesn't blog (although he does maintain his own website). Instead, he periodically circulates emails containing wisecracks, satiric phony movie ads, and miscellaneous observations about people and markets. Here, with Marty's permission, is his latest missive.
People are upset about all the money General Motors is losing, but lucky for them, I've figured out how to turn things around.
According to the latest quarterly earnings report, GM sold 2.2 million vehicles and lost $323 million. That means every time the company made a car or truck, it lost $147. The solution is obvious: Make fewer cars and trucks and you'll lose less money. In fact, if you reduce the output level to zero, you'll be up to a breakeven!
Now I know what you're thinking: All that GM has to do is wait for the price of cars to go up and then it will resume making a profit on each vehicle. But that logic is faulty. Take my car, for example, which I bought in 2001. According to a reliable source called the Blue Book, my car is worth less than it was last year. And in 2005, it was worth less than it was in 2004. So GM would be crazy to count on car prices going up. The trend is obviously down! This shows the importance of doing your homework before you start throwing in your two cents.
The real money, I find from reading the company's own report, is in the finance business. GM's subsidiary, General Motors Acceptance Corp, made $605 million last quarter. The company needs to keep that part of the operation going. The only problem is, what do you do when someone comes in to borrow money to buy a car and you're not making cars any more? Once again, the answer is obvious: Convince that customer to use the money to buy shares of General Motors stock instead. These shares are just pieces of paper that cost almost nothing to produce. It's basically pure profit and on top of that, you can charge the customers interest on the money you're lending them. Truly a sweet deal!
So by following my advice, the company can improve its bottom line by a net figure of about $1 billion. I think everybody will agree that a 10 percent cut represents fair compensation for my powerful recommendations. So Mr. Waggoner, mail me a check as soon as you can get the treasurer to bring the company checkbook to your office.
But please make it certified.