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Commerce · V.06 · MMXXVI · daylight

La Bourse  /  Volume V  /  Nº V.06  /  Workbook — the student

WORKBOOK — THE PERSONAL STUDENT

Chapter V.06 · The Cooperative Firm, Audited

For the person learning to read a firm the way an analyst reads one, starting with a firm they already belong to. A term of practice, a term project, and a way of checking your own work. Applied to a life, because the arithmetic in this chapter turns out to describe one.

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WHAT YOU ARE ACTUALLY LEARNING

Not are cooperatives good. That question has no answer and everybody who asks it already knows which one they want.

You are learning three transferable skills, and every one of them works on any organisation, cooperative or not:

1. To read a trade rather than a claim. Every organisation routes its volatility somewhere. Finding out where is a skill.
2. To price a claim you cannot sell. Yours included. This is the single most under-taught idea in personal finance.
3. To test an accusation with arithmetic instead of temperament. Degeneration is the worked example; the method generalises.

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PART ONE — DISCOVERY

Weeks 1–3: find the trade in a real organisation

Exercise 1.1 — Pick your firm (one hour)

Choose one organisation you can get published numbers for and that you have some real relationship to: your employer, your university, your union, the shop you buy bread from if it is a cooperative, a football club that publishes accounts. Not a case study handed to you. One you will keep thinking about.

Write one paragraph on why you chose it. Keep it. You will read it again in week twelve and it will tell you something.

Exercise 1.2 — Plot the two series (one afternoon)

Find, for as many consecutive years as you can:

• Headcount, year by year.
• Average pay, or any variable-pay element, year by year.

Plot them on one chart with two axes. That chart is the chapter.

The worked model is the John Lewis Partnership Bonus: 18, 14, 17, 15, 11, 10, 6, 5, 3, 2, 0, 3, 0, 0 percent of pay across fourteen years. Mean 7.43 percent, standard deviation 6.595 points, coefficient of variation 0.888.

Compute the same three statistics for your firm's pay series. Then compute them for headcount. Whichever has the higher coefficient of variation is the variable your organisation moves first, and that single comparison tells you more about how it behaves under stress than any statement of values on its website.

Exercise 1.3 — Find the year nobody quotes (two hours)

Every organisation has one. Find the worst year in your series and read what was said about it at the time — the annual report, the press, the internal note if you can get it.

Ask: did the organisation name the trade it was making, or did it describe the outcome as weather? An organisation that says we chose to hold employment and the pay line carried it is one you can audit. One that says market conditions were challenging is one you cannot.

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PART TWO — THE ARITHMETIC

Weeks 4–7: do the sums yourself

Exercise 2.1 — The insurance question, on yourself (90 minutes)

The chapter's bad-year model: the conventional firm lays off 10.0 percent and holds the rest flat, a laid-off worker retaining 60.0 percent of normal income; the cooperative lays off 1.0 percent and cuts everyone by 8.0 percent.

  expected income, conventional     96.00 % of normal pay
  expected income, cooperative      91.68 % of normal pay

The cooperative member expects 4.32 points less. Now the certainty equivalents:

Break-even: 3.446.

Your exercise. Redo it with your own numbers. Change the layoff probability to what you think it actually is in your sector. Change the retention rate to what your country's benefit system would actually give you. Change the pay cut to one you would accept. Then find your own break-even.

Then answer honestly: do you think your own relative risk aversion is above or below it? Most people's stated answer and revealed answer differ, and noticing the gap is the point of the exercise.

Exercise 2.2 — Price something you cannot sell (2 hours)

The chapter prices the cooperative member's claim:

  conventional cost of equity     8.50 %
  illiquidity premium             3.66 points
  cooperative cost of equity     12.16 %

Now price one of your own illiquid claims. A pension you cannot access for thirty years. A professional qualification. Equity in a private company. A tenancy. Pick one and write down: what could you sell it for today, what will it be worth when you can access it, and what discount is that difference?

Then ask the question the chapter asks. What have you already decided differently because you cannot sell it? That is the illiquidity premium showing up as behaviour rather than as a number, and it is always there.

Exercise 2.3 — The horizon problem, on your own choices (one hour)

An investment costs €100 and returns €12 a year forever at a 10.0 percent discount rate. Worth €20.00 to someone who can sell the claim. To a member:

Break-even 18.80 years; credit half the retained value to the member's account and it falls to 14.55, buying 4.25 years.

Your version. Write down the longest-horizon thing you are currently considering — a degree, a language, a move, a business. Estimate its annual return and its cost. Compute the years you need for it to clear. Then compute what would change if some portion of the value were realisable early.

This is the most useful piece of arithmetic in the chapter and it has nothing to do with cooperatives.

Exercise 2.4 — The degeneration model (45 minutes)

Start at 80.0 percent members, hire at 5.0 percent a year, admit at 2.0 percent:

  after  5 years    69.2 %
  after 10 years    59.9 %
  after 20 years    44.8 %

Recovery requires admission to exceed hiring by 2.94 points — 7.94 percent against 5.0 percent.

Build this in a spreadsheet yourself. Three cells and a fill-down. Then apply it to something that is not membership: the proportion of a team who were there at the founding, the proportion of a syllabus written by the people who teach it, the share of a city's housing owned by the people living in it. The model is about any ratio between two differently-growing populations, and once you have built it once you will see it everywhere.

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PART THREE — DESIGN

Weeks 8–10: the term project

The project: audit one cooperative, in twelve pages.

Choose a real cooperative with published accounts. Mondragón, a French SCOP, an Italian buyout cooperative, a British retail society, a credit union, a housing co-op. Produce twelve pages in this order.

Page 1 — The four numbers.

If a number is not available, say so in the table rather than leaving it blank. An unavailable number is a finding; a blank is a gap in your work. This distinction is the single most important habit in the whole workbook.

Pages 2–3 — The trade. Your two plotted series, the three statistics for each, and one paragraph naming which variable the firm moves.

Pages 4–5 — The cost of capital. Build the firm's WACC twice: once as if its equity were tradable, once with an illiquidity premium you can defend. State your inputs and their sources. The chapter's worked version gives 5.65 percent against 7.11 percent, a gap of 1.46 points and a refused band between them.

Pages 6–7 — The growth gap. Compute sustainable growth with and without external equity. The chapter's model: 10.20 percent against 7.50 percent, a gap of 2.70 points, compounding to 28.2 percent of capital base after ten years and 64.2 percent after twenty.

Pages 8–9 — Degeneration. The member share now, the hiring rate, the admission rate, and the projection. Say plainly whether the firm is degenerating, holding or recovering, and give the admission rate that would hold it.

Page 10 — The honest negative. One page on the strongest case against your own conclusion. Not a caveat — a case. If you cannot write it, you have not finished the analysis.

Page 11 — The instrument. What you would propose, with a term, a coupon, a ranking and the accounting treatment. The chapter's worked example clears by 0.55 points, which is thin, and thin is a finding too.

Page 12 — What you could not verify. Every figure you could not source, every assumption you had to make, every number the firm does not publish.

That last page is the one that will be read. A survey that hides its gaps is an advertisement.

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PART FOUR — DESTINY AND DELIGHT

Weeks 11–12: make it hold

Exercise 4.1 — Send it to someone who will disagree (one week)

Find a person who holds the opposite prior — an advocate if you concluded against, a sceptic if you concluded for — and ask them to try to falsify one number. Not the argument. One number.

Record what they said and whether they were right. That record is worth more than the report, because it is the only part of this term's work that teaches you something you could not have got by reading.

Exercise 4.2 — Write the paragraph you would defend in ten years (one hour)

One paragraph, no hedging, on what you now believe about the cooperative firm and on what evidence. Date it. Put it somewhere you will find it.

Exercise 4.3 — Read your week-one paragraph (twenty minutes)

The one about why you chose your firm. Read it beside the paragraph you just wrote.

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SELF-ASSESSMENT

Score yourself honestly. The scale is the work, not a population.

The one that matters is the last. An analysis that cannot name its own falsifying evidence is an opinion with a spreadsheet attached.

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WHAT TO CARRY OUT OF THIS TERM

The cooperative firm is legible. That is the whole finding, and it is a hopeful one. It has a cost of capital you can compute, a growth path you can project, a degeneration rate you can govern, and an instrument that can close the gap at a margin you can check. Nobody has to believe anything for any of that to be true.

And the three skills come with you. Wherever you work, somebody is routing volatility, somebody is holding an illiquid claim, and some ratio between two populations is drifting because nobody plotted it. You can now find all three, and finding them is most of what analysis actually is.

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PART FIVE — A TERM OF PRACTICE

The weekly habits that make the project possible

The twelve-page audit is the visible output. What actually produces it is four habits, each of them small enough to keep and each of them a skill you will use long after the term ends.

Habit one — the Monday number (fifteen minutes a week).

Every Monday, look up one number about your chosen firm and write it in a notebook with its date and its source. Not a number you need. Any number. Headcount, revenue per head, the chair's pay, the year the last new site opened.

By week twelve you will have twelve numbers, and — far more valuable — you will have twelve sources, which means you will know where that firm keeps things. Most of the difficulty in this kind of work is not analysis. It is knowing which document holds which fact, and that knowledge is only ever built by accumulation.

Habit two — one falsification a week (twenty minutes).

Take one claim you believe about cooperatives and spend twenty minutes trying to find evidence against it. Write down what you found, including nothing.

This is the habit that separates an audit from an advocacy document, and the chapter models it openly: the French survival series is checked against Uruguay by a method sharing none of its assumptions, and the insurance arithmetic is carried all the way to the point where it works against the cooperative and reported anyway. A break-even relative risk aversion of 3.446 set against Chetty's estimate near one is a finding the chapter would have been more comfortable without.

Habit three — the unit and the source, every time (a rule, not a task).

Never write a number without its unit and where it came from. Not in your notes, not in a draft, not in a message to a classmate. 12.16 % is a number; 12.16 % — cooperative cost of equity, model inputs in lib/verify/V_06.py is evidence.

This habit feels pedantic for about three weeks and then becomes the reason your work can be checked by somebody who does not trust you, which is the only kind of checking that is worth anything.

Habit four — say what you could not find out (ten minutes a week).

Keep a running list. At the end of the term it becomes page twelve of the project, and page twelve is the page a serious reader turns to first.

The temptation is always to convert I could not find out into a plausible estimate, and the estimate then travels through the rest of the analysis wearing the same clothes as a measured figure. A missing answer and a zero are not the same fact.

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WHAT THE TERM COSTS AND WHAT IT RETURNS

Roughly three hours a week for twelve weeks, most of it reading documents that were written to be read. In return you will be able to open any set of accounts — a cooperative, a listed company, a charity, a university — and within an hour say which variable it moves under stress, roughly what its capital costs, and which of its own ratios is drifting without anybody having decided.

That is not a small competence and very few people have it. It is also, and this matters more, a generous competence: it is the ability to read an organisation fairly, including the parts of it that are working, which is the harder half and the half almost nobody practises.