Polygraphs: Reliable or Just Imperfect?

The April 3, 2008 Wall Street Journal published a letter by an economist re: the unreliability of polygraph testing that I thought worth of sharing:

Your article makes it crystal clear why a person should never consent to polygraph tests, which suffer from two types of errors: showing an innocent person to be guilty and showing a guilty person to be innocent. The article illustrates that a person is likely to fail the test because of perceived or actual guilt on subjects that aren't even being tested. The test i much more likely to show an innocent person to be guilty than a guilty person innocent. This is especially true if the person being tested is reasonably honest and worries about minor peccadillos, such as taking home a paper clip or coming to work a few minutes late. Because of this, polygraph tests encourage law enforcers who "know you are guilty" to keep digging until some question of innocence can be found on some (perhaps unrelated) activity.

Duane Eberhardt
Professor of Economics, Retired
Missouri Southern State University
Joplin, MO

See related article at Mother Jones:

http://www.motherjones.com/news/feature/2002/11/ma_148_01.html

Chip Johnson of SF Chronicle, Holding Government Accountable

Chip Johnson in his April 1, 2008 column in the SF Chronicle's B1 page, reports that almost 1/3 of Oakland's city workers are making over 100,000 dollars in salary per year. That figure, of course, does not include benefits and pensions. Overall, non-federal government (meaning, county, city and state) salaries probably make up between 10 to 15% of gross domestic expenditures, which doesn't sound like a lot until you realize that it's harder to reduce salaries once they achieve such a high level. More troubling is the fact that it's harder to reduce government benefits because such benefits are vested; in addition, such costs are difficult to estimate due to the guesswork in determining a former employee's health and life expectancy for pensions and medical benefit purposes.  In short, the public is indebted to the government for amounts unknown, even if the economy enters a period of recession or constrained growth.

Strangely, government employees making over 100,000 dollars a year are still eligible for overtime pay. In the private sector, most employees making 100K+ annually in base pay would be exempt and still expected to put in the hours that come with making such a salary.

The recent California Supreme Court decision allowing the public to see such salaries is INTERNATIONAL FEDERATION OF PROFESSIONAL AND TECHNICAL ENGINEERS, LOCAL 21, AFL-CIO et al., v. SUPERIOR COURT OF ALAMEDA COUNTY, REAL PARTIES IN INTEREST: CONTRA COSTA NEWSPAPERS (2007), which can be found at this link:

http://cprareq.blogspot.com/2007/08/contra-costa-newspapers-inc-v-city-of.html

The origin of "K Yew"

Some readers might notice the "K_Yew" nickname I have on my blog, but in no way is this a cute phonetic bit. The International Heald Tribune did a wonderful interview with Lee Kuan Yew that I just discovered. Here is one of my favorite bits from the interview:

The system works regardless of your race, language or religion because otherwise we'd have divisions. We are pragmatists. We don't stick to any ideology. Does it work? Let's try it and if it does work, fine, let's continue it. If it doesn't work, toss it out, try another one. We are not enamored with any ideology.

Let the historians and the Ph.D. students work out their doctrines. I'm not interested in theories per se.

It should not surprise anyone that this man is one of my heroes. The full interview is below, but if the link expires, you can go to the International Heald Tribune, Asia-Pacific, and do a search for the full interview, which spans eight pages and is dated August 29, 2007.

http://www.iht.com/articles/2007/08/29/asia/lee-excerpts.php?page=1

Starbucks Shareholder Meeting (Howard Schultz: "This will not stand." )

Puget Sound
U of Washington Law School
Seattle's Museum of Flight
First Starbucks at Pike's Place Market
Pike's Place
I went to the lovely city of Seattle to attend my first Starbucks (SBUX) shareholder meeting. This particular meeting was highly anticipated because of Howard Schultz. After leaving the CEO helm, only to see a downward spiral in SBUX's share price, Mr. Schultz returned and was greeted as an anointed savior. My friend said he looked like a cross between Pat Riley from his L.A. days and a Sopranos character, and he meant it as a compliment. Mr. Schultz does come across as a street-smart, wiry Mafia guy who was born to lead. (His slicked-back hair and nice suits draw comparisons to Pat Riley, another man from humble origins.)

First, let's talk about Seattle: the city is clean, fun, and mid-sized. I wanted to spend some time seeing the city, so I planned a three-day trip. The first two days, I felt like I was in a ghost town, because after being in San Jose, which has twice the population, Seattle felt tiny at just 500,000 people. On the other hand, the upside of fewer people is a better ability to control the local environment. As a result of conservation education and being so close to several lakes and near Puget Sound, Seattle's air feels noticeably clean and healthy. Indeed, one look at the view around Puget Sound, and you can't help but relax. Larger cities often forget that they are virtually concrete and asphalt fortresses, and spending a few days in Seattle proves that modern urban living and the environment can harmoniously co-exist.

Besides the cleanliness and beautiful lakes, Seattle distinguishes itself by having no state income tax. While that does seem to reduce government spending, it also results in making some cities, like Bellevue, into designated shopping mall areas and not much else ("Old Bellevue" is one unexciting, short block). Thus far, the retail businesses have left plenty of land for other uses, and with a sales tax of around 9% generating significant revenue, it seems reasonable to assume Seattle will continue to welcome retail establishments.

I would suggest skipping Bellevue, as well as the Space Needle (Seattle's version of Toronto's CN Tower, allowing visitors a bird's-eye of the city). After Chicago's Sears Tower, the Space Needle seemed unexciting and smallish to me. Instead, spend your time walking up and down "The Ave" near the University of Washington (don't miss the majestic George Washington statue near Red Square) and Broadway Street, Washington's version of Berkeley's Telegraph Street. I had a fantastic time walking up and down the Ave and Broadway.

The other "touristy" areas are Pike's Place, Pioneer Square, and the International District, all within walking distance from each other. The "original" Starbucks is at the Pike's Place, and was fun to see, old logo and all. Pioneer Square has an interesting memorial dedicated to firefighters who died in the line of duty and a few bars and shops, but not much else. A few blocks away are a small Chinatown and Little Saigon (after the trouble San Jose has had with this name, I chuckled at how common the "Saigon" name seems elsewhere). Neither district impressed me much, as they consisted of only a few blocks. Other than good restaurants--including one that sold a delicious durian milkshake--the "Asian" districts didn't seem to offer anything unique.

Seattle owes quite a bit to its Asian population--one of the first Boeing designers was Chinese, and Asian immigrants have revitalized the city. Seattle calls itself diverse, and nearby the university, it certainly is; yet, when compared with such an integrated Asian population in the main downtown and university areas, the International District seemed to include a less upwardly mobile immigrant population.

The Flight Museum, nearby the airport, was also fascinating, if you enjoy seeing actual, life-size planes used in World War I and II. There was even a miniature model plane section, which displayed about 100+ mini-planes. The price of admission included seeing the inside of an older Air Force One and Concorde. The Concorde wasn't much different from a regular plane on the inside, but the aerodynamic design was obviously novel at the time. Air Force One was plush, as expected, with some couches and large seating spaces.

Some downsides to Seattle: a) the water coming out of my hotel faucet was opaque; as a result, I would recommend not drinking Seattle's tap water; and b) Seattle is very eco-conscious, and seems to discourage driving by making parking somewhat expensive and limited. Parking is not an issue for tourists like me, who can use Seattle's decent bus system, and the parking situation is nowhere near the level of difficulty in San Francisco; at the same time, it was unusual to see a city discouraging personal transportation.

Now, to the main event: the Starbucks meeting took place at the Seattle Center in the Queen Anne neighborhood (near the Space Needle). Schultz came out to cheers from the audience, and immediately launched into a motivational speech about how although these were tough economic times, Starbucks needed to focus on making better coffee to attract customers back. His speech was geared to both shareholders and employees ("partners"), and many SBUX partners came to the meeting. After telling everyone that the poor performance "will not stand," Schultz had several ideas on how to improve sales, including using a new espresso machine that allowed the fresh aroma of beans to permeate the stores ("Mastrena"). This machine also had a lower height, allowing more interaction with customers. The SBUX baristas cheered the lower height of the machine, but it was unclear whether the cheers were because their shoulder muscles would be less weary, or whether they were looking forward to the prospect of easier eye contact with customers.

Mr. Schultz also announced Starbucks' acquisition of a local company that invented a machine that brewed an individual cup of coffee in seconds, creating a single, ultra-fresh cup of coffee ("Clover"). In addition to those two innovations--the "Mastrena" and the "Clover," Schultz introduced a loyalty card that allowed regular customers to receive their "customizations," such as syrup shots, for free, as well as a partnership with an eco-company (whose direct impact on the bottom line was ambiguous). There were a total of six new ideas, including a web-site for customer feedback and the introduction of a new blend of coffee, but the Mastrena was the main upgrade.

k.d. lang performed a few songs, and her voice was beautiful, even better than her "Constant Craving" days. Her rendition of Leonard Cohen's "Hallelujah" was inspiring. (Starbucks doesn't announce who their annual musician will be, which creates additional buzz around their meeting.)

The other entertainment highlight was Mr. Schultz playing a "Colbert Report" clip on the host's travails when SBUX shut down for a few hours to re-train employees (Schultz said, in all earnestness, that the limited shutdown was not a publicity stunt). Upon leaving, each shareholder was given a bag with some SBUX goodies, including a CD (I learned that Aretha Franklin copied her "Respect" song from Otis Redding), a mug, and some coffee beans. All in all, the meeting was a great experience.

CalPERS and CalSTRS

Teachers and government employees always ask for more money, claiming that they cannot attract good employees because entry salaries are too low. Putting aside the argument that government employees exchange, in some areas, somewhat lower salaries than their private industry counterparts for a pension and other benefits, the amount of money government employees have taken from private citizens is vast.

Benn Steil, Director of international economics at the Council on Foreign Relations, provided recent numbers on how much private citizens have given California's state government (Wall Street Journal, March 2008):

The Public Employees' Retirement System has 259 billion dollars in assets.

The State Teachers' Retirement System has 169 billion dollars in assets.

Even so, these entities are underfunded in future obligations/payments, meaning that they will most likely put initiatives on future ballots asking for more funds/taxes from private citizens.

Applied Materials (AMAT) Shareholder Meeting (March 11, 2008)

I attended AMAT's shareholder meeting yesterday. All in all, it was uneventful. Only two people asked questions, and I was one of them. (Quite a contrast from the Apple meeting.) The food was above average--Starbucks coffee, some fruit sticks, and pastries.

AMAT did have an excellent presentation showing that its nano-manufacturing technology was used in many applications worldwide. More specifically, the projected growth for products relating to LCD displays and solar technology was high, and AMAT indicated it was well-placed to achieve sales in those two areas.

Much of AMAT's revenue comes from Taiwan and South Korea. I asked what companies in Taiwan were AMAT's major buyers of products, and the CEO answered that it was mainly DRAM manufacturers. Such companies would most likely include Inotera and Nanya Technology; however, neither of those companies offer ADRs in the States. American investors can buy SMOD if they are interested in Taiwanese DRAM makers. (A search also uncovered this unrelated, interesting stock: TRCR.)

My original thinking was that if AMAT was projecting high growth in certain areas, its future stock price could be ascertained by checking its Taiwanese buyers' health. But the picture is more complicated, I found, because even if the Taiwanese companies buy more products from AMAT, overall prices need to stay stable to increase profits. Favorable margins are a key component of growth, and Inotera's President has said that a sharp decline in DRAM prices has caused Taiwanese DRAM makers to cut back on their capital spending plans this year. Thus, the question is whether AMAT's buyers will decrease overall spending and hurt AMAT's ability to sell more of its products. I don't know--the shareholder meeting, while well-done, left me with more questions than answers.

I did discover another (non-legal) definition of "deposition"--page 2 of AMAT's 10-K states that a deposition is also a "fundamental step in fabricating a chip. During deposition, layers of dielectric (an insulator), barrier, or electrically conductive (typically metal) films are deposited or grown on a wafer."

Overall, AMAT's shareholder meeting was professional and informative, but scarce on specifics.

Adobe and Stock Investing ("The Wide Moat")

All the talk about Adobe's technology not being compatible with the iPhone made me wonder if its stock was still a good hold or buy. One key to investing is making sure you don't buy outdated manufacturers or companies that have products out of favor with consumers. Warren Buffett famously refused to invest in tech companies during the 2000 stock market boom/bubble, avoiding companies he did not understand because he could not calculate whether a particular technology would survive long-term.

Taking a look at the top 40 companies in Santa Clara County in 1982 and 2002, I recognized only 20% of the top revenue-generating companies on the 1982 list--and most non-stock-investors would only recognize three or four names. After Steve Jobs' comments at the Apple shareholder meeting, I became more curious about Adobe's product, especially because I own shares in both Adobe and Apple. I wondered whether Adobe would be one of those companies missing from the 2022 list. Mr. Buffett has a metric called a "wide moat." Basically, a wide moat is how secure a company's product is from competition/attack. Imagine being in a castle and having no moat. You will be invaded and possibly vanquished. But with a wide moat, attackers need to spend more time, energy, and resources to attack you and might avoid your territory. I asked one my friends, whom I've known since high school and who has always impressed me with his tech knowledge, whether Adobe had a wide moat. Here is his response:

PDF is an open international standard created by Adobe.

Anyone can create software that uses or reads PDF files. PDF is actually native to Macs. The imaging model of Mac OS X is PDF. The Preview application can display PDF files, as can version 2.0 and later of the Safari web browser. System-level support for PDF allows Mac OS X applications to create PDF documents automatically. When taking a screen shots under Mac OS X versions 10.0 through 10.3, the image is captured as a PDF; in 10.4 and 10.5 the default behavior is set to capture as a PNG file, though this behavior can be set back to PDF.

In other words, on a Mac virtually all applications can read and create PDF documents without downloading any software from Adobe.

Microsoft hates PDF and is trying to replace it with XPS, but they have been unsuccessful so far. Windows Vista comes with the tools necessary to create and read XPS documents. Some third party companies have created XPS tools for Macs and Linux systems. Thus, Adobe provides all PDF software for Windows systems.

So you might wonder then why do people buy Adobe PDF creation software for Windows and Macs? Yes, that's right, Mac users buy PDF creation software from Adobe too. The answer is that the PDF format is much like Microsoft Word. Over the many years of its existence, it has become a big fat pig of specifications and rules. The *only* software capable of reading and creating every feature with 100% accuracy is Adobe's software. The main reason for this is because Adobe adds new stuff to the PDF specification almost every year. For example, Adobe PDFs support DRM. Their DRM scheme was broken and thus Adobe added a new DRM scheme to the following year's specification. If you want to make 100% product you would need to implement both DRM schemes. However since only enterprise customers use the DRM feature and average-joe- computer user could care less, they don't need a reader with DRM support. Thus, most non-Adobe PDF software does not implement PDF DRM support.

PDF has many features of this sort that are only used by niche customers (e.g. enterprise). Enterprise customers have money and thus are willing to pay for these products. Windows users usually have no choice but to buy Adobe's software if they want to *create* PDF files. Mac OS X users can create basic PDF files for free, but if they want to use features like forms support then they too will have to buy Adobe's PDF creater.

In the same token, Google Docs lets you import Microsoft Word documents, but it doesn't support every feature of a Microsoft Word document. Often Google Docs users will import a Microsoft Word document only to discover the formatting is messed up in some way. So then those users go back to Microsoft Words for their documents.

BTW, Adobe's bread-and-butter product is not PDF, but Photoshop. Photoshop is the de facto standard for Digital Art. Although there's free alternatives like GIMP, Photoshop has huge following with a large investment in education and training. When you go to college to study Digital Art, you are taught Photoshop. Photoshop is the standard. Transitioning to GIMP from Photoshop is too hard. So, most people just end up buying Photoshop when they graduate (or download a pirated copy from the net). If your business deals with Digital Art like Apple, then you buy lots of copies of Photoshop.

There you have it. I am holding onto my Adobe shares. And for the record, I didn't think Mr. Jobs was trying to disrespect Adobe with his response to my question. I think he was just trying to say that no such product existed, and if anyone could create such a product, it would be a boon for the tech industry.