What does the ancient Greek civilization’s tax system teach you about wise investing? [Wednesdays: The Independent Investor]
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The Independent Investor
Have you ever been to the Acropolis?
In case you’re not familiar with it, the Acropolis is an ancient Greek citadel located on a rocky outcrop above the city of Athens and contains the remains of some ancient buildings of great architectural and historical significance.
Part of these buildings is the Parthenon, a former temple dedicated to the goddess Athena during the 5th century B.C.
Photo from Britannica Encyclopedia
Until today, the Acropolis is one of the most striking ancient Greek monumental complexes. The citadel’s remaining monuments remind both locals and tourists of the intellectual and spiritual foundations for some contemporary world values like democracy, philosophy, theater, freedom of speech, and others.
The Ancient Greek Society and A Lesson on Management and Investing
In October 2022, Professor Joel Litman and his wife spent a few days in Athens. According to him, the high point of their trip was walking the Acropolis and seeing various ancient monuments that were built well enough to still be recognizable and impressive after almost 2,500 years.
Upon strolling around the place, Professor Litman also realized that somehow, ancient Athenians had to pay for these buildings to be built. So, like many government projects today, this ancient civilization paid taxes.
Ancient Greece had a “progressive” tax system, meaning the wealthiest Athenians paid the highest amount of taxes. It’s similar to the U.S. tax system nowadays when you look at the actual tax return dollars across income levels.
Imagining the early civilization, you could say most of the tax burden fell on the top 1% of the ancient Athenian population. However, taxes weren’t a big deal during their time.
Back then, it was an honor to pay taxes in ancient Greece, and folks didn’t generally try to hide from or find loopholes in their tax responsibilities.
In fact, many of them were willing to pay more than their fair share of taxes. For them, sharing their wealth for the betterment of society was one of the HIGHEST status symbols they could attain.
In other words, the wealthiest citizens viewed taxes as “doing their part” to make sure Athens remained powerful.
This wasn’t entirely a selfless act, though. By paying the highest amount of taxes, ancient Athenian elites gained tremendous social standing. On the other hand, those who tried to skirt their obligations were mocked and labeled greedy.
This leads us to our main point: Ancient wealthy Athenians had an intrinsic incentive to behave as they did.
In a past “The Independent Investor” article, we talked about the incentives dictate behavior (IDB) concept that states people’s actions are directly attributable to their promised rewards.
Think about this: In ancient Athens, citizens—especially the elites—had a strong motivation to pay taxes. After all, participating in the tax system meant acknowledgement and acceptance from the society, and knowledge that they were helping keep Athens in power.
IDB applies not only to ancient Greek government but also to today’s government and management systems. You can even use this framework to determine how management teams will likely behave in a certain situation.
Take pharmaceutical company Valeant Pharmaceuticals, now known as Bausch Health (BHC), as an example.
Photo from PR Newswire
In the early 2010s, part of the firm’s management team’s annual bonus was based on making at least 5 acquisitions outside the U.S. Valeant even had a “stretch goal” of making 10 acquisitions in a year.
It’s no wonder that the company took on HUGE amounts of debt to buy various businesses and maximize the annual bonus. So, in 2013, Valeant made 13 acquisitions; in 2014, 5 acquisitions; and in 2015, 10 acquisitions.
Valeant’s debt grew from USD 11 billion in 2012 to USD 31 billion in 2015!
Despite that, Valeant’s former CEO Michael Pearson kept earning more money. In 2013, he received USD 7 million; in 2014, USD 10 million; and in 2015, a whopping USD 142 million.
By the end of 2015, the company had taken a turn for the worse as it experienced pressure for the high prices of its products… and the more investigators and investors looked into Valeant, the more they uncovered facts.
This example shows why understanding compensation is crucial. In Valeant’s case, management wasn’t acting irrationally when it took on lots of acquisitions. It was simply doing what its pay structure encouraged.
So… what does this mean for you as an investor?
You should do the IDB analysis before investing in a certain company or stock.
For publicly traded companies in the U.S., management compensation is published through the DEF 14A. This file is a great tool to understand how a company is likely to perform. In fact, Professor Litman and his team do this for every stock recommendation in their monthly reports.
If you see in a particular company’s DEF 14A that its management team is rewarded for growing revenue, that means revenue growth will be a priority. Meanwhile, if management makes money based on stock performance, that’s what the team will focus on.
In short, a good framework will generally pay a management team to prioritize a mix of top-line growth, margins, and asset efficiency… and as an investor, you have to watch out for these things to know whether or not a certain stock or company is worth putting your money into.
We hope you learned a lot from today’s topic!
The truth is, there’s no universal playbook in business, management, and investing. What’s good for a company will depend on its specific goals.
However, to be confident in a company’s stock, you have to be confident in the team behind the company. Compensation is a great place to start to gain this confidence.
Apply the IDB analysis in your next stock market research! You’ll see, this will help you know a lot more about the stock you’re planning to invest in.
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
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