Charles Koch and "Good Profit" Book Review/Summary

Well October 8, 2015 I looked out on my doorstep and saw a package from Penquin Publishing and was surprised that I received Charles Koch new book "Good Profit". The book had on it uncorrected proof/not for sale on the front cover and the book. Also the copy I received ended up being 250 pages as opposed to the 288 pages for the final version. I have covered Koch Industries for years as I have written about the estate planning/succession planning here and even talked about the daughter (Elizabeth Koch) here. Of course any blog post I have written can be found here. I ordered the book from Amazon back in March 2015 but I guess I got the book earlier then the release date of October 13, 2015.

As soon as I got the book I couldn't put it down. What is nice about the book is that it is written with more of a personal side of Charles Koch and his family. Throughout the book stories, anecdotes, and analogies are used to get across the points Koch tries to make. For instance Koch in his free time likes to read praxeology, golf, work out, and eat heart healthy meals. The book mainly is about how Koch Industries operates and its history (both the good and the bad) is a great look into how Koch Industries truly operates and what Market Based Management (MBM) is truly about which has led Koch Industries to tremendous growth sine 1961. The company in 1961 was valued at $21 million and now in 2015 is valued closer towards $110 million (27 times better than an investment in the S&P 500-assuming dividends were reinvested). The company plans to grow 12% per year for the continual future. During the 2008 recession Koch increased doubled its shareholder equity and increased its workforce by 40%. The book emphasis the five dimensions of MBM which are Vision, Virtue and Talents, Knowledge, Decision Rights, and Incentives.

What I think readers willl find interesting is that Charles Koch didn't begin out as a Libertarian he read the "entire political spectrum from "left" to "right" and everything in between. This means he even read John Maynard Keynes, Karl Marx, and Vladmir Lenin. Two books for Koch that ended up being life changing were Mises Human Action and F.A. Harper's Why Wages Rise.

Charles points out that growing up Frederick Koch (the oldest son) wasn't one for physical labor. Since Fredrick Koch didn't develop a work ethic Fred Koch was harder on Charles Koch making him work at age 6 and made sure work occupied most of his time. Koch writes that even at age 79 he still works 9 hours a day.  His work history started out digging dandelions and then went on to bail hay and milking cows. In high school Charles was working on the ranch fixing fences, digging ditches, shoveling wheat in a grain elevator. Growing up Charles wasn't easy to deal with and attended 8 schools by the time he graduated high school. During his junior year he got thrown out of Culver Military Academy for drinking beer on a train). One summer Koch has so much homework he would wake up in the middle of the night and sight on the shower bench in the communal bathroom to finish it. Charles improved and was accepted into MIT. While at MIT Charles was maintaining a B- average (he was majoring in engineering too/enjoying himself having a social life) when he came home for summer break is dad told Charles that he would only pay for his education if Charles fully applied himself. After this talk Charles improved his grades a full point. After Charles graduated he went to work for Arthur Little were he designed a plant that produced a potent marijuana derivative. It was after father Fred Koch passed away that Charles Koch took the reins at Koch and growing it by leaps and bounds.

The personal side of Charles Koch is somewhat interesting he from an early age was a trouble maker and sometimes got into fights. You can't be an entrepreneur playing follow the leader. Charles once had a heated debate with a girlfriend of David Koch during the 1960's when she was taking views that the government should run people's lives. This girl mentioned that the government should act however the majority wanted. Charles most likely got frustrated and asked her if she was a redhead (knowing David he was probably dating a brunette or blonde) and the majority of the population voted to kill redheads would she be in favor of that. The girl started crying and even cried the next day which Charles still remembers after 50 years when it happened.

When it comes to subsidies Charles Koch is against all forms of corporate subsides. Koch for years has been against ethanol mandates (this actually increases the cost of food for the least advantaged people). Koch dispels the myth that Koch would profit from the Keystone Pipeline. He write that Keystone would increase the cost that Koch pays for crude by $3 per barrel which would lower Koch profits by $260 million per year. However, Koch takes the position that the pipeline in the long run would be better for the economy as a whole even if the company loses money from it.

Charles Koch is open and honest about the successes and failures of Koch Industries. In 1974 Charles Koch and his wife Liz Koch were breaking ground on their first home. During this time Koch Industries had to deal with price controls, the Arab oil crisis worried Charles that Koch Industries would go bankrupt. Charles Koch also discusses the 1996 pipeline leak that killed 2 teenagers Texas. Koch reflects openly and honestly how that incident along with a few others changed the company view about safety. It was after this incident that Koch switched to a 10,000 percent compliance (100% of employees acting in compliance 100% of the time). Koch discusses how the company when it had dramatic growth it had internal fraud issues were employees were setting themselves up as vendors, taking inventory, and receiving kickbacks which Koch quickly shut down.

Overall the book is well written and easy to read and includes a personal side of Charles Koch not seen before-like the 153 death threats he got in 2014. The book discusses how Koch has grown tremendously since the 1960's (Charles didn't simply inherit the company as some might say). The company has grown so much by reinvesting 90% of their earnings back into the company. What is interesting is how Koch Industries despite having 100,000 employees doesn't appear to be bureaucratic and individuals are always asked to challenge and consider continuous improvement which sometimes never occurs at even Fortune 500 companies. Overall the book is a mix of economics, business, behavioral finance, philosophy, and good story telling of business failures. What I enjoyed was Charles Koch is honest about his failures. Koch is apply to apply Market Based Management to every day examples (including the NFL and even how much time he should spend working editing grammar of the book he wrote). The book is really a great book for anyone who wants to try to live there life to their maximum potential.

In Defense of Martin Shkreli (Blame the FDA)

So this past week Martin Shkreli who is only 32 years old but is CEO of Turing Pharmaceuticals. announced an increased in a drug called Daraprim which is used to treat toxoplasmosis (parasitic disease), malaria, and AIDS from $13.50 per pill to $750 per pill which represents a 5,455% increase. After public outrage a few days later Martin then announced that they would lower the price of Daraprim. This Slate article describes how if only the FDA had more funding and the government had more control we would see lower prices (in other news pigs fly).

In 2014, only 8,821 prescriptions for the Daraprim were written. According to the CDC there are between 400-4000 new cases in the United States every year and roughly 750 people a year die from it. Also toxoplasmosis can largely be prevented by cooking meat at the right temperature.  I have heard the common argument that the costs to make one pill is less than $1, however people who make this argument are not including distribution costs, FDA regulatory costs, and manufacturing costs that are not included in the marginal cost of less than $1.

According to SEC filings Turing Pharmaceuticals purchase the drug for $55 million in August 2015. The total revenue of Daraprim was about $5 million last year which is hard if not impossible to make any profit. At the previous price of $13.50 there was no one making a profit for it. The CEO claims the company will use their revenues to reinvest in developing a better with side effects. Parasitic diseases can rapidly change and a company needs to perform the research and development now in order to combat future mutations. According to this report death was reported in about 4% of patients who took Daraprim. Some patients have reported vomiting, renal failure, and Stevens-Johnson syndrome. All drugs have risks but the question is can the reward-risk profile can be improved.

It is important to distinguish the market price versus what people actually ended up paying. Even the CEO said that 50% of the customers pay less than $1 for the drug (which in this interview the CEO says in a major impediment to making money).  In the original New York Times article a director of toxicplasmosis at the University of Chicago praised the company for delivering the drug to patients quickly and most of the time without charge. In essence the price that people pay is somewhere between $0-$750/pill even though the stated price is $750 per pill. The company also participates in the 340B Drug Pricing Program which guarantees that Medicaid patients and hospitals get the drug at a reduced price. Alex Tabarrok points out that the prices in India are only going for 5 cents a pill compared to $750 in the United States. Perhaps some capitalists in India could sell their supply to people in the United States for less than $750 in order to increase the supply of Daraprim which would also bring down the price.

The FDA has a burdensome process for not getting a regular drug approved by also even a generic approved. Remember drugs have to first get approved by the FDA which can cost roughly $2.5 billion and take 10-20 years to develop from the research stage to actually being available to the patient. Approval times have only been showing too. In 1960 the average time for drug approval was 3 years and then 6 years by 1965. Companies have between 5,000 and 10,000 substances that they try to turn into the next blockbuster drug but 80% will lose money.

After a drug has been approved it then usually has a patent life between 7-12 years. After this period it then becomes what is known as a generic. Once the drug becomes generic other companies can begin making the drug and as a result the price drops about 30-80%. Even though the drug company spends roughly $2.5 billion bringing a drug onto the market (liberals dispute this figure however they don't understand their is an opportunity costs in dealing with the FDA when they are slow to approve drugs and raising capital) and 10-20 years bringing the drug to market if it wants to make a generic it still has to file an application with the FDA for approval. This whole process of getting the initial drug approve is known as NDA (New Drug Application). When a company is going through getting a drug as a generic it files a ANDA (Abbreviated Drug Application). The bureaucratic organizational chart of how NDA vs. ANDA are approved can be found here.

Some of the rules for generic manufacturers can be found here which are complex and expensive to implement. Last year the FDA announced it was considering adding even more regulation that produces the drug company must work with the FDA on the chemistry, labeling, factory inspections, and testing of the generic. The FDA currently has had a growing backlog for ANDA applications in 2005 the backlog was 780 applications and recently has been as a high as 3000 applications (gee I wonder if any of those applications could be for Daraprim). The fees just associated with the ANDA can reach in the hundreds of thousands of dollars (remember the drug at one point in time was approved by the FDA). The median time of approval for ANDA is roughly 35 months however can be as long as 89 months.

The high price of Daraprim signals to people that they have to try alternatives first. Also the high prices are incentives for other companies to take a look to see whether or not it makes sense to make Daraprim. Doctors and patients will experiment with other drugs before using Daraprim. Turing has about 2-3 years before they should expect competition from other companies. Turing paid $55 million for a $5 million drug (in revenue-remember you only get to take home profit not revenue) when less than 9,000 prescriptions for the drug was written every year. If you divide out $55 million by 9,000 that is roughly $6,000 per prescription. The cost of treatment for the full course of Daraprim is roughly $63,000 however can vary depending how severe it is. Assuming 9,000 people took the drug that turns out to be $567 million of revenue. When we factor in that 50% are getting the drug for $1 we can halve the revenue number to $287 million. Remember this is revenue not profit. The average profit margin for generic drug makers is actually negative -4.2%.

A wiser approach is for people to get outraged at the FDA for increasing the time and cost to get drugs to market. If it took 10 years and $1 billion out of pocket to make a drug (this is before including cost of capital) you would be forced to charge a relatively high price. The FDA needs to be reformed to allow faster innovation to create more competition which will only drive down drug prices. Reducing the number of phases that drugs have to go through from three phases to just one phase and only requiring that a drug be safe to get approved would drastically lower the cost of drugs. Everyone has different bodies and chemistry within their body and the FDA shouldn't get to decide how effective a drug is for me since it will be obviously different for everyone.

The other obvious no brainer is to allow more prescription drugs over the counter which would increase there availability (often times patients must get pre-approved by an insurance company before taking certain drugs-which ends up wasting both time of the doctor and patient). People would have the fear that consumers won't consult their healthcare professional when the data shows 60% do when purchasing over the counter drugs. Switching from prescription drugs to over the counter drugs could save roughly $5 billion for just upper respiratory infections alone. You can easily see how doing this for many different ailments would start adding up and not require people to stand in line at Walgreens/CVS waiting to refill their prescription.

If the FDA reduced its burdensome regulation it would allow more companies to bring their products to market which would create more competition and reduce prices for everyone.  Creative destruction needs to be brought to the drug development industry just like Uber has disrupted the taxi industry or Airbnb has disrupted the rental market industry. The FDA burdensome process will not only not allow patients access to drugs they want but also force consumers to pay higher prices than they otherwise would have paid under a free market system.

Did Charles Koch Really Inherit His Wealth?

One thing that bothers me is when people say that Charles Koch merely just inherited there wealth implying that he did not work for it. However, these same people ignore the facts of reality about how Koch Industries was really a very small company when Charles Koch took over a company that was worth $21 million in 1961 (the company had less than 700 employees) and growing it into a $100 billion company by 2014 (with roughly 100,000 employees). What is interesting to note is that Koch Industries has grown 27 times faster than the S&P 500. Koch essentially doubles every 6 years. Charles mentions this growth rate in the company newsletter Discovery here. This would mean that Koch has a growth rate of roughly 12%/year which is pretty good considering the company has 100,000 employees and over a $100 billion in sales. Koch has grown faster than the S&P 500 too. The long term return from 1926-2014 in the S&P 500 was 10% vs 12% for Koch. This 2% difference doesn't appear to be much but when you compound it over many decades it can make a substantial difference. Part of the reason Koch may have grown faster than the S&P 500 is that the company reinvests 90% of the earnings back into the company. Koch has grown at 12% per year but the Koch net worth has grown at roughly 17% per year as I mentioned in this post (difference may be due to Charles Koch not having all his assets in Koch Industries).

Charles Koch never wanted to be a country club bum as his father Fred Koch use to put it. Growing up Charles Koch and his brothers never received an allowance. Fredrick Koch was actually the oldest out of all the Koch children and when Fred had Fredrick perform chores at one of the family ranches he had a nervous breakdown. After this disappointment Fred was very hard on his second son (Charles) and had him working at age six.  Growing up Charles was somewhat of a trouble maker: he got into fights, stayed out late drinking, and had quite a following of girls according to the book Sons of Wichita. Charles even got kicked out of school for drinking beer. Even brother David Koch admits in this 1986 New York Times article that Charles as a teenager did awful things but ended up being a "bad boy who turned good". Entrepreneurs in their own way are trouble makers because often they are willing to take risks that that few people are willing to take on.

Now most people who inherited a business could have just sat back and waited for their dividend checks to come in but Charles didn't. In fact the evidence shows that 70% of family fortunes are usually spent by the second generation and 90% by the third generation. Charles was never working 40 hour weeks. In this article from Fortune from 1982 Charles was putting in 10 hour days at Koch. This article from CNN money from 1997 shows that he worked around the clock putting in 12 hour days (then after that he would go home and work some more) and expected executives to show up on Saturday mornings. Not only would he put in extra hours after he went home but would work on weekends, and holidays even. Also Charles didn't think twice about calling meetings that ran into Saturday evenings. In August 1968 he called a meeting that began at 4 P.M. Sunday afternoon and it didn't last until midnight. Charles is still working harder than ever these days. In an article from the Wichita Eagle last December his wife Liz said Charles gets up around 6 A.M. gets to work around 7 A.M. and works until 6 P.M. and then in bed by 9 P.M. He plays golf about 2 times per week. In addition to playing golf he has a daily workout routine which consists of a 90 minute work out- 30 minutes of Pilates, 30 minutes of aerobics (usually on a elliptical), and 30 minutes of  weight lifting). According to  his wife Liz he is on a disciplined and strict diet.

Brother David Koch is no slouch either. David told Avenue magazine (Oct 2014 edition) last year that he usually gets to the office around 9 A.M. and leaves by 7 P.M. and 12 hour days are not unusual for him. It is important to note that Fred Koch (father) had his sons working from an early age. Charles was working on the family ranch at age 6 and David remembers spending his summers on the family farm work from 7:30 A.M. and working until 5:30 P.M. For another summer job David was working 10 hours a day 7 days a week doing manual labor jobs in sometimes in 115 degree heat too.

Remember Charles Koch is 79 years old. How many people who are 79 are still working? Charles Koch could have retired many year ago but he didn't. He continues to put in plenty of hours at Koch Industries. He isn't doing it for money (the man still lives in the same house he built in 1975). My guess is that he works for personal fulfillment and trying to make a difference. John D. Rockefeller retired at age 58 (he lived to be 97 years old), Andrew Carnegie was 66 when he first thought about retiring (he ended up living to be 83), and even Bill Gates last day at Microsoft was when he was in his early 50's. Despite these other titans retiring early Charles Koch continues to show up to the office plowing away and trying to grow Koch Industries. Charles claims in this Forbes article that if he got hit by a truck maybe things would run better. 

ERISA Law Responsible for High 401k Fees Cost Investors $7.6 Billion A Year

Often times people complain about the high fees of 401k plans. However, people don't stop to think about why the fees are high in the first place. Unless you are in the financial planning/finance world you most likely don't know about the mandated regulation/compliance that 401k plans have to go through (which can be time consuming/costly/counter productive).

In a study done by Deloitte in 2013 that studied the fees for 401k plans of various companies and found that the median "all-in fee" the cost for record keeping, administration, investment management was was .67%. which is actually a reduction in fees from 2009 when the "all in fee" was .72% which is actually a 7% decrease in 401k expenses! People complain about 401k fees but as a percentage basis realtors charge 6% yet I don't hear many people complain about that. What is interesting is that record keeping and administrative fees made up at least 18% of the total 401k "all-in fee". The rest of the fees are related to investment management fees which represent 82%. However, the report mentions that some of the investment fees include administrative/record keeping fees. Also it is important to remember that the mutual funds that many 401k plans use have their own regulations which are summarized here (as you can see this is government regulation on top of government regulation). If employees believe their 401k plans are invested in funds that are too expensive they can always tell management to switch to cheaper index funds (index funds are a fraction of the cost of mutual funds). Another compliant is that people won't know how to invest their 401k plan. I don't know everything about medicine but I know I can hire a doctor to help me with my medical affairs. In the financial world people can hire a fee only financial advisor who can provide advice on what to do. Usually financial advisors charge either a percentage of the assets they manage, an hourly rate, or a flat rate. However, they usually assist people with more than just investing (things like estate planning, insurance, retirement planning, etc.)

So let's do some quick math here. If the average 401k plan has a "all-in fee" of .72% and to be conservative we will say 18% of the fees are due to administrative/record keeping fees (thanks to ERISA) and as of 2013 401k plans held $5.9 trillion in assets this would mean that ERISA and regulations cost 401k plans at least $7.6 billion per year! I didn't even include the ERISA compliance cost related to employee benefits.

One major body of legislation that governs 401k and other employee benefits is a law known as ERISA (Employment Retirement Income Security Act of 1974). ERISA was created because if an employer went bankrupt and had to terminate its pension plan the employees of the company would lose their pension benefits. A nice summary of ERISA can be found here. The law now requires companies to set aside monies for the specific purpose of paying pensions and other employee benefits. If you are a company and have a defined benefit pension plan the ERISA law requires you to be fully funded (of course the government isn't subject to this for their pension plans).

Companies have over time moved away from defined benefit plan (were the employer was in charge of managing the investments) to a defined contribution plan (401k where employees contribute and therefore determine their own retirement). Of course the government deprives us already of our retirement fund by taking about 15% off the top (6.2% for Social Security and 1.45% for Medicare for both the employer and employee and obligates people to invest in Social Security. Not only does the government force you to contribute into Social Security but if you want to invest in a 401k under ERISA you can only contribute a maximum of $18,000 for 2015 to your 401k plan. If you are over 50 the government let's you contribute an additional $6,000 to your 401k (the government likes to let people defer more for missing out in earlier years). Not only are there limits of how much you can put in as an employee there is a limit of how much can be contributed between the employee and the company ($53,000 for 2015).

Also you shouldn't worry because the government gets to tell you when you distribute the monies. Once you are 70 1/2 monies are required by law to be distributed (known as required minimum distributions) which are taxed at ordinary tax rates. Oh and don't worry if you don't take your required minimum distribution the IRS slaps a 50% penalty tax along with taxing your distribution as well. The IRS also has rules on when distributions can be taken from a 401k without penalty (there are 16 exceptions which can be found here). As you can see the government likes to make sure they have control in how much you can save, when you can save, and when you take distributions from what you saved in your 401k plan.

The regulation and compliance with 401k plans and benefit plans can be burdensome. Let's go through some of the ERISA code and just see some of the regulations companies have to face (remember the regulation are passed through to workers). 401k plans must provide a summary description which is a written description of the plan and what the plan offers.  Section 103 requires an annual report be filed that tells the government how the plan is operated, the assets of the plan, and the investments of the 401k plan. The plan also has to have detailed financial statements and these statements have to be made available to plan participants on a regular basis. All this information is then filed out on a form that is filed with the Department of Labor (known as the Form 5500). ERISA even tells companies who can be included or excluded for a 401k plan! Under ERISA 202(a)(1)(A) a 401k plan can exclude an individual who isn't 21 or hasn't worked a 1 year (1 year they define as working 1,000 hours in the course of a year). Companies on a 401k usually offer a matching contribution. Some people say this is "free money" of course this is utter nonsense because the company has to get the money from somewhere (the company gets a deduction for the match though-reducing their own taxes) and they could offer you more money instead of matching your contributions. Anyways, when an employer makes a matching contributing as an employees you don't have access to those monies to 401k monies under ERISA rule 203(b) until the 6th year of employment (companies can be more generous if they want and make the time period shorter).  

Not only do companies have to comply with these rules but the penalties can be extraordinary burdensome. No worries Section 501 of ERISA provides what the consequences are. Under ERISA if a person violates the reporting or disclosure of information the fine can be up to $100,000 and up to 10 years of prison times. Companies can be fined up to $500,000. Section 411 bars people from even working for a benefit plan if they have convicted crimes. Oh and if you hire someone who has a criminal record you could get a fine of $10,000 and spend 5 years in jail. 

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In general ERISA states that plan benefits have to be offered in a nondiscriminatory manner. This means that if you offer a benefit (health, 401k, life insurance) it has to be offered to everyone. The law evolved to this because executives were setting up company plan benefits for themselves and leaving out the rank and file employee which of course made regulators add more regulations requiring that company benefit must benefit at least 70% of non highly compensated employees (nondiscriminatory testing). Of course government plans are exempt from these nondiscriminatory tests! You might ask who are highly compensated employees (don't worry the government defines this!). For 2015, the government defines anyone who has a 5% ownership interest in a company or more than $120,000. As Walter E. Williams would say $120,000 doesn't classify anyone as rich (that isn't even Lear Jet money as he would say). The company has to look through their entire employee list and analyze total compensation and calculate whether or not they are meeting these tests (this can take time and is burdensome which forces companies to hire a 401k consulting firm to assist with the calculations). Not only does the company have to test to make sure enough people are participating in the 401k but also have to do this same testing on any benefit that the company offers employees.

Congress should consider repealing the ERISA law and allow companies in order to reduce the time, effort, and money that companies have to pay to comply with running a 401k plan and telling companies how many employees need to receive company benefits. Compliance costs/administrative cost for 401k plans are costing workers $7.6 billion a year. Why can't employers discriminate in terms of who gets company benefits and who doesn't.? Employers already discriminate on employees based on their salary. More importantly the government has no right telling companies who they have to offer benefits to, how much they can offer, and when these benefits can be distributed. 

Koch 2015 Seminar, Charles Koch Washington Post Interview, and "Climate Change"

So over the past few weeks so there has been some Koch news so I thought I would let people know my take on what is going on (after all I believe my blog has more posts about Koch than any other site on the internet).

The semi-annual seminars have been taking place since 2003. With a meeting from August 1-August 3, 2015 with private donors in Dana Point, California at the St. Regis Monarch Beach resort (as I write this rooms start at $655/night) 450 wealth donors (people who have created tremendous value in society) gathered for the semi-annual "Koch Seminar" which was has the title of "Unleashing Our Free Society". Membership fees are around $100,000 per year. Only 9 organizations were invited to the seminar. The conditions were that the media could not interview donors without there permission and had could only take notes pad and paper (very old-school indeed). Although the list of donors are not known this leaked memo from a previous seminar would give you a pretty idea of who would be at the seminar. In the note that Charles Koch sent out to attendees he also attached this 2014 Wall-Street Journal article about William Gladstone who was the 19th century Prime Minster of Britain. Charles Koch said that this current battle is for "the life or death of this country".

The actual text of the speech that Charles gave donors can be found here from Bloomberg. He says that "our mission, as we say, is to unleash our free society and expand opportunity for everyone". He goes on to talk about a free society being a "society that maximizes peace, civility, and well being for everybody". Charles then goes on to discuss how GDP is a bad measure for the economy. This article from FEE does a good job of explaining why GDP is a bad measure for the economy. Charles then goes on to talk about if we can achieve a 4% growth rate we can take the average American from $42,000 per year to $100,000 (just the magic of compound interest).

One area that I think liberals actually agree with the Koch brothers on is criminal justice reform. Even President Obama mentioned the Koch brothers effort on criminal justice saying "You've got to give them credit. You've got to call it like you see it" as this WSJ article discusses. In a recent interview with the Washington Post to the surprise of some people when talking about crime Koch says "to me, if someone is committing a crime, to deal with it to use minimum force necessary to prevent the crime..there has got to be a way to stop that. I mean, I'd let the guy go. No big deal. He's not really hurting-maybe he's avoiding taxes or something, but to end  up in death is outrageous". Perhaps to Charles Koch Black Lives Matter.

In a rare interview with the Washington Post Koch talked about the 2016 election and his views. People claim that the Koch brothers have so much power. This of course is just nonsense. Has a Koch brother ever forced you to pay taxes, stop at a stop sign, or get a permit? The answer to all these questions is obviously no. However, government can force people into doing all of these things since they are truly the ones with power. When asked about seeing a Republican in the White House Charles Koch replies that he is a "classical liberal". The problem is that Republicans do pretty much the same thing as Democrats once in office. The best quote from Charles in the whole interview is when he says "I think the Democrats are taking us down the road of serfdom at 100 miles an hour, and I think Republicans are taking us at 70 miles an hour". He is a big fan of Calvin Coolidge who would make modern day Republicans look like middle of the road candidates. One item that Charles would eliminate is welfare for both the rich (corporate) and poor. Koch then goes on to discuss in this article how the banks are the biggest proponents of corporate welfare.The banks he says "got massive bailouts,virtually free money from the Fed, and regulations that are crushing the smaller banks, the community banks". The Federal Reserve now decides what banks can do now, what products they can offer, and even can decide when a bank pays out a dividend. Of course the largest banks are major contributors to both political parties.

Koch Industries benefits from the fact that U.S. based companies are not allowed to export natural gas overseas to foreign countries where the price is actually much higher than it is here in the U.S. Something that I didn't know was that Koch Industries uses about 4% of the industrial consumption of natural gas (the division in charge of this is Koch Global Supply and Gas-company information can be found here. Currently, natural gas prices are near all time lows. Anyways, Koch benefits and as other liberal bloggers have reported Koch has received millions in corporate subsidies. However, Koch is still for abolishing all corporate subsidies. To be perfectly honest Koch does roughly $115 billion in revenue (profit as I estimated in this blog post is roughly $6-$10 billion/year). Koch could still be profitable without the subsidies. Charles Koch relies on the principal of treating everyone equal (this is a libertarian concept after all).

When asked about climate change Koch admits "well, I mean I believe it's been warming some". He goes on to say though there could be a measurement problem with how the temperature is measured (on ground vs. in the sky).  What he doesn't agree with is that it will be "catastrophic". According to Koch, "there is no evidence of that. they have these models that show it but the models don't work..to be scientific, it has to be testable and refutable". Let's remember that science is not a democracy. Charles also has a couple of masters degrees in engineering from M.I.T. too. The question is whether you want to reduce economic growth for something that may have a very small chance of happening. Charles Koch even had dinner with Bill Gates in which they discussed climate change (for the record Gates who is a big Democrat pointed out that Koch was a "very nice person". I honestly believe that if there was enough evidence to show that there was a large possibility of "climate change" destroying the earth Koch would shift his opinion on the subject. Brother David Koch has said that global warming is actually a positive since extending the growing seasons in the northern hemisphere which will allow more land will be able to produce food. In a breakfast speech that Bill Koch gave to 600 people at the Palm Beach Chamber of Commerce October 17, 2013 said he isn't a believe in global warming and actually believe we could be lead to a mini-ice age. Bill Koch has some science background since he has a PhD in chemical engineering from M.I.T. saying that people who are calling for carbon dioxide emissions are "on acid". He goes on to say the best way to reduce carbon emissions is to plant trees. Koch says that "to get away from carbon dioxide the human race will have to move to another planet".

It appears that the Kochs are being less secretive as they are now allowing the media to attend their events (although some of them complain about the access as reported here). Let's remember that this is a private party and people can either decide to be there or not. On the other side in this recent WSJ article Koch donors are tired of being demonized. Donors recently wrote a letter to the Dallas Morning News describing what the Koch brothers want.

If I were in charge of the seminar I would videotape and record all the sessions to show the public that these people are really not evil and just want to see more freedom and liberty. Part of the reason I don't think the media continues not to like the Koch brothers is because they still see them as secretive.  I personally don't think even some of the crazy liberals would go after 450 individuals who have different beliefs. If there were only 4 donors I might change my view. Part of the reason why I think Koch has been more open recently is the number of death threats, cyber attacks, and name calling that has been going on for years. This transformation was recently talked about by the New York Times here. If I would were advising the Koch brothers I would tell them to continue to be even more open so people can understand their values, beliefs, in order to not distort them which I would think in the long run lead to fewer death threats, cyber attacks, and just fundamental misunderstanding.

Koch "Secret" Meeting Summary of the Transcript of June 2014 Meeting

Well for a while now I have had the Koch transcript from their meeting from June 13, 2014-June 16, 2014 at St. Regis Monarch Bay resort, an agenda of the conference can be found here. It is clear the the people at these meetings are truly dedicated to free markets as the meetings start at 8:45 A.M. and go on until 9 P.M. Some of the meetings included titles like "Saving America: Our Fight to Advance Freedom and Reverse the Country's Decline", and a book discussion with Amity Shales on Calvin Coolidge as the forgotten President, and "Collectivism: Exploring Its Nature and Consequences" by Dr. Victor Davis Hanson. The actual transcript for the meeting fills about 80-90 pages worth of material which is pretty incredible. I have to actually thank Lady Libertine for posting the transcripts on her blog and also providing the audio which can be found here (if you go to the YouTube chanel you can see all of video from the meetings).

Mark Holden Chief Counsel for Koch Industries starts the meeting talking about Democracy Alliance which is the equal on the other political side. Rob McCay heir to Taco Bell fortune, George Soros, Tom Steyer, and Chris Hughes (co-founder of Facebook) are all majors contributors to Democracy Alliance. This is interesting because you generally hear about all the Republican funding even though there is just as much funding on both sides. Mark Holden points out that he will no longer eat at Taco Bell (even though he likes it)  after he learned that McKay was a big supporter of Democracy Alliance. Actually according to Holden, Democrats have 172 groups in the "donor network" which is more than 31 groups within the Republican donor networks. Holden points out if you add in Big Labor (labor unions), Democracy Alliance, PACs, and super PACS, will spend around $2.2 billion (we shall see if this actually happens).

Norman Reimer discusses the criminal justice system and how it is is overly abusive (Charles Koch and Mark Holden wrote this op-ed that was published in Politco discussing the overcriminalization of America). What people on the left forget is that libertarians like Charles and David Koch believe people no matter what race, sex, color, or income should be treated equal in the eyes of the law. Reimer quotes interesting statistics "2.1 million people are in prison..the United States has 5% of the world's population yet 25% of the world's prisons".

Richard Fink who earned a PhD in economics from Rutgers gives a lecture on the current situation of America and how to change this course. Fink starts out by giving some stats on the current debt which currently is $16 trillion however including the present value of the unfunded liabilities is roughly $200 trillion. What Fink stresses is the "middle third" or 30% of voters who don't have any ideological preference. The problem with what "collectivists" do according to Fink is "they take people and tell them that you're a victim and the American dream no longer exists..and if they know anything about psychology and about people who have "victimitis" they are the most depressed, unproductive people. They become depressed, they become addicts, or they become aggressive". He goes on to quote that "90% of alcoholics are not psychologically built. They see their lives as without purpose. Same too with addicts same percentage. 85% of students who attempted suicide said life had [had no] meaning".

Charles Koch is one of the last speakers on the final days. He tries to rally everyone together explaining how the fight for liberty needs more freedom fighters. What many people may not realize is how Charles Koch and his family are at risk (Koch has received hundreds of death threats which he discusses in this article) and David Koch has to have security detail travel seen in this article. Koch Industries according to Charles the company has "10 million malicious hacker attempts on [their] IT systems every month"  What Charles Koch explains that we have two choices for the future of collectivism or freedom. The definition of collectivism to Charles is "based on the belief that people aren't capable of running their own lives, and those in power are capable of running it for them". One great example of this is the war on poverty which since 1954 we have spent $20 trillion. What is even more interesting is that the rate of poverty has virtually been almost unchanged even after spending vast sums of money. Another interesting statistic is that 1 in 3 jobs now require government permission. If you think about it so many professions (doctors, lawyers, accountants, financial planners, dentists, even repair people) have to be certified by some bureaucratic organization saying that they are deemed okay to work with the general public. Also government subsidies like ethanol increase the cost of food about 35% which generally affects the people who generally elect collectivists.

What seems evident is that the presenters at the Koch seminar don't really say anything that is crazy or evil. What is ironic are the people who often say the Koch brothers are evil, want to pollute the planet, and are just old and rich greedy guys are also the same individuals who want to resort to violence which leads to the death threats. Everyone no matter what political side of the spectrum should be treated with respect. Whether or not you agree with them Charles and David Koch are firm believers in individual liberty and trying to get support from individuals to make sure we can continue being free and prosperous. Society can't prosper when you have few producers and everyone else consuming what the producers create. As of January 2015 close to 93 million people were not working. The economically illiterate usually look the unemployment rate. However, the better measure is the labor participation rate which is near the same percentage as it was in the late 1970's (despite the fact that people can now work at home, some employers offer flexible working  hours, and medical care has greatly advanced). What is interesting is that the Koch brothers are attacked for just wanting to get rich and making everyone else poor. However, allowing people to pursue their own interests given their level of capability and talents and allowing them to create value would make everyone better off. By the government requiring permits, certifications, and training (some of which are not needed) makes it financially prohibitive for the people on the lowest rungs of the economic ladder to move up. Not allowing people at the bottom of the economic ladder to improve themselves increases income inequality since they don't have the financial capital, resources, or time to comply with regulation and rules. Charles and David Koch want everyone to succeed which we should find praiseworthy and laudable.

Elizabeth Koch (Daughter of Charles Koch) Views on: Relationships, Sex, Money, Traveling, and Mental Illness

Update: My response to the 2023 New York Times profile of Elizabeth Koch can be found here. 

So Elizabeth Koch is the daughter of the CEO of Koch Industries Charles Koch and really is not known for being in the tabloids or news. I find this interesting considering how often we hear about other kids of billionaires who sometimes get drunk, blow through trust funds, and lead wild and interesting lives. While reading Sons of Wichita I stumbled upon an interesting quote from Elizabeth Koch about her views on money, dating, sex, and even how she views herself. Actually I looked to see where the source of the quote was from and it was from a series of articles that Elizabeth ad published in the mid 2000's on Memoirville. Some of the articles are no longer online and I had to use the Internet Wayback Machine (which is an archive for the internet).

So I stumbled upon something that Elizabeth Koch had written back in 2006. It really is interesting, enlightening, dark, funny, and somewhat sweet/sad at the same time. Back in 2006 (Elizabeth would have be roughly in her early 30's she was dating a guy named Todd Zuniga (they even published a book together which is available on Amazon here). At the time Todd is the founding editor and President of Opium magazine. Elizabeth worked as an executive editor at Opium. He is also the co-creator with Elizabeth of Literary Death Match (were people read their work for 7 minutes or less and then judges decide who had the best material).

So apparently Elizabeth and her boyfriend Todd planned a travel trip that would serve as a compatibility test to see whether or not their relationship would last. Elizabeth moved in with Todd in San Francisco. During this Elizabeth and Todd were running a around the world seeing various places just two months after meeting. During the trip they went to Tokyo, Shanghai, Beijing. During the trip it is apparent that Todd and Elizabeth are constantly arguing but in some rare moments show compassion and love towards each other.

Elizabeth Koch was born in 1975 grew up in Wichita, Kansas and attended Princeton University from 1994-1999 and earned a degree in English. She then earned a graduate degree from Syracuse in creative writing in 2011. Elizabeth Koch is tall, thin, with model looks, and really does not look close to her age as evidenced in this photo.

When reading the articles it is clear that Elizabeth great at writing fiction (I personally am more of a non-fiction reader but found her writing very interesting and it very clear an concise). During the trip Elizabeth takes an introspective view of herself and her relationship with Todd. After losing Todd for a few hours Elizabeth comments, "I cannot go back to panic attacks and meltdowns and doctors and pharmaceuticals and terrifying my parents and staring down that dark well of nothing you do will ever be good enough you privileged waste of flesh". Elizabeth admits to having a "mental illness period" and taking drugs to help and is over it. What is interesting is that Elizabeth is pretty self aware of who she is a person. She describes herself as a "pinwheel of anxiety, a black cough of misery, critical and disgruntled to the extreme". I can't even imagine what it would be like to have Koch after your name.

Upon arriving in Tokyo (tired and hung over) and spending $40 for a cab they find a place that seems run down and not well maintained. So after realizing this they take a cab and book a room at the five star Park Hyatt (one of the more expensive hotels in Tokyo). Currently as I write this post rooms for Park Hyatt are roughly $560 (after converting back to American dollars).  Elizabeth has an interesting quote when talking about staying at the hotel saying "I realize that I'm not one to judge rich people who walk around depressed and semi-suicidal for no apparent reason. Nor am I one to judge rich people who hemorrhage money when their surroundings fail them, as much as I detest that sort of person, for that's precisely what I'm about to do". What is ironic is when pulling up to the hotel Elizabeth feels guilty and almost sick. Elizabeth goes on to say that she knows that her boyfriend Todd is aware of her views on money saying "Todd is fully aware of my disturbed and convoluted relationship with money...I do not toss money around like garden fertilizer, especially not in places where anyone is likely to see me. I want people to like me, and as a small child growing up in a small town, I learned that having money makes people sort of hate you on the spot, so for most of my life I've invested great amounts of creative energy into pretending I don't have any". Elizabeth goes on to talk about being thrifty saying that she prefers "moth-eaten sweaters and flea market jeans", rarely does she wear make up, and her mother (Elizabeth Koch-yes this can get confusing) disapproves that her daughter is "poor-boying it". The daughter feels like she has to spend money to get approval from her mother. Elizabeth admits when it comes to buying items she doesn't like to haggle (compared to her father Charles Koch who will take the hyphen in a 50-50 deal).

Todd and Elizabeth get into a fight over headphones that Todd needs after his headphones are broken. Elizabeth offers to buy the $200 headphones for Todd but then feels bad and doesn't want to deny him something because she knows she has been a pill to deal with. This makes Elizabeth think back to 6th grade when girls on the playground called her "rich bitch" because her last name was Koch.

Speaking of approval Todd went to visit the Koch family for a weekend in April 2006. During dinner Elizabeth felt that she had to justify her accomplishments in the form of a PowerPoint presentation to avoid questions from Charles Koch (her father) like "Are you sure you are busy enough?".You have to remember Charles Koch worked around the clock for many decades (even on Saturdays and holidays) trying to build and grow Koch Industries. During the trip Elizabeth opines about her work history and between 1996-2006 she quit five jobs in publishing and writing, did freelance publishing for 6 months, thought about a quasi memoir (I would have been the first one to buy that book!).The remainder of the weekend Elizabeth was showing her father (Charles) articles about corn subsidies (to prove to her father that she was curious). Although Charles would be proud of his daughter when she observes a hotel and a large train station in Kyoto together which seems to be creating issues that "this is a perfect example of the clusterfuck of misery from central planning". Well I guess those Sunday economic lessons with father Charles Koch paid off.

Elizabeth has a dark view of the world saying that she will kick people out of her life who make her feel uncomfortable, until there is no one left to kick out but her. During the whole trip Elizabeth seems bored, anxious, depressed, and irritable. One morning (they both wake up late) and Todd is interested in having sex and Elizabeth wants to feel some type of connection so they have sex and after sex Elizabeth starts to cry and comments that "For the record sex has never made me feel closer to anyone. Sex has always made me feel like a mutant". Todd also expects to have sex in every country too and when Todd tries to make an advance after they have a fight Elizabeth says he "fucked that one up". On the third date with Todd Elizabeth said that Todd was narcissistic and egotistical and thought that all of these traits would be part of his downfall. Elizabeth says " I want my boyfriend to be strong and confident, and when behaving badly, to verbally knock me around a little".

During her entries Elizabeth does have some funny comments saying if she goes to bed hung over and stuffed (with food) she doesn't want to be touched. Elizabeth has interesting taste when it comes to food as she likes to dunk candy into hard liquor. During the trip Elizabeth gets her mother (Liz Koch) a long bill cap because she knows her mother is out in the sun six days a week paying tennis despite having skin disease.

These journal entries give a rare view into the world of Elizabeth Koch. For some reason there is some mystique about her since she is smart, dark, complicated, irritable, yet can be caring at times. What I find interesting is how much detail she has in the entries she posted. She appears to  have a very good memory and is able to remember the slightest detail during their trip.

These days Elizabeth live in New York and in 2010 founded Black Balloon Publishing (which publishes the unusual, odd, and quirky pieces of work) and continues to run it. Actually her father published a book on Market Based Management (currently he is working on a second book "Good Profit"), Harry Koch (grandfather of Charles Koch) was in the publishing business. It appears the Koch family does have a literary gene.

The future should be interesting as Elizabeth Koch will most likely inherit Koch Industries stock in some form or fashion. The question is will there be a battle with her younger brother Chase Koch (who is now President of Koch Argonomic Services) over the direction of the company which could lead to the lawsuits and legal battles between Charles, David, Bill, and Fredrick. Not only will Chase and Elizabeth be likely shareholders of Koch Industries stock but in addition to this David Koch said in this interview that most of his net worth is in Koch Industries stock and his children (David Koch Jr., John Mark Koch, and Mary Julia Koch) will inherit the stock. So between these five children will own about 84% of Koch Industries stock with the remaining 16% held by the Marshall family. This could lead to an interesting situation where the family has to offer multi-billion dollar buyouts to relatives if certain family members simply just want to cash out. I would be interested to see how Elizabeth Koch will respond to this. Will she continue to be a publisher and writer or will she change her mind once she sees how much Koch Industries pays in dividends and begin living a different life style? I personally could see her inherited billions and continue to publish and write and continue to do with what makes her happy. Her writings show a very complicated, guilty, and almost torturous  relationship with money. However, it will be interesting if the money will make her have feeling of guilt and anxiety. After doing this research on Elizabeth Koch I truly find her the most fascinating Koch of all.

Koch Industries Dividend Analysis: How Much Do Charles and David Koch Earn a Year?

Update: Recently in 2021 I updated this analysis which can be found in this post. 

For a while I have wondered how much Koch Industries pays out in the form of a dividend. I know the company has a history of a low dividend payout as Bill Koch complained in this 1992 Sports Illustrated article that he "had to borrow money to buy a house.. and [he] is one of the wealthiest men in America". Using publicly available data I estimated how much Koch Industries shareholders earn in the form of a dividend.

So there has been no question that Koch Industries has grown dramatically since Charles Koch has taken over. Speaking of Koch Industries growth recently in the Koch Industries newsletter Discovery (archives of the newsletter can be found here) Charles Koch in the last page talks about the growth of Koch Industries over time. Koch Industries has grown 4600 fold since 1961 while the S&P 500 has grown 160 fold over the same period.

Add to this Charles Koch is coming out with a new book on October 13, 2015 called Good Profit: How Creating Value For Others Built One Of  The Most Successful Companies which discusses how "Charles took a company from a $27 million company in 1967 into a company with $110 billion company over many decades". This would say that Koch Industries has increased at a rate of 19%/year since Charles Koch took over which is quite impressive when you consider the stock market over a long period of time has earned roughly 8-9%/year. However, I do remember the current CFO Steve Feilmeier saying in this video that since Charles Koch took over the company has grown about 15% per year. According to this Wichita Eagle article from 1994 (last page) Koch Industries had $177 million in revenue in 1966 (the year before Charles took over). This would say at current revenue Koch Industries has really grown ~15%/year. 

Charles Koch took over Koch Industries after his father Fred Koch passed away in 1967 from heart issues. At the time Koch Industries had some divisions that were barely breaking even. With Charles Koch taking over he grew the company by literally working long hours (according to this Fortune article from 1982 Charles was working 10 hour days) during the week, weekends (he once had a meeting in August 1968 that began at 4 P.M. and ended at midnight) and it was expected that Koch executives were expected to work Saturday and sometimes well into Saturday night-so much for a social life) . What is even more interesting is that Charles Koch is 79 years old and according to this recent article from the Wichita Eagle these days Charles wakes up around 6 A.M. gets to the office by 7 A.M. and then works until 6 P.M. and is in bed by 9 P.M. (brother David Koch told Avenue magazine recently that at the age of 74 he still gets to the office around 9 A.M. and usually leaves by 7 P.M. and 12 hour days are not unusual for him). It is important to keep in mind that many people with this type of money would be on the beach or off vacating somewhere. You can't become a billionaire working 40 hours a week.

All the hard work that David, Charles, and Bill put into Koch Industries during the 1970's and 1980's paid off. In 1979 David and Bill Koch were earning $250,000 working as vice presidents of divisions at Koch Industries. To give you some perspective $250,000 in 1979 dollars would be worth a little over $800,000 in current dollars. In addition to their salary David, Charles, and Bill were earning $3 million a year in dividends (back then-which would today would be $9 million today). In 1978 Bill Koch was earning $1.167 million in salary with $747,000 in dividends. The following year (1979) Bill Koch was earning a salary of $1 million in salary and $1.9 million in dividends. By 1980 Bill Koch was receiving $3.7 million in dividends. Around this time Bill, David, and Charles Koch each owned roughly 20% of Koch Industries stock (Fredrick owned about 14% of the Koch Industries stock, however didn't work at the company). So doing a roughly estimate the total dividends payouts for Koch for 1978, 1979, and 1980 were roughly $3.7 million, $9.5 million, $17.5 million respectively. When Fred Koch passed away in 1967 dividends for all of Koch Industries was $300,000 (according to the book Sons of Wichita) and by the early 1980's was about $28 million. Fredrick Koch complained 1980's here that the dividend that was paying out only 1% (take into account that Fredrick in the early 1980's was earning roughly $4 million didn't even show up to work!

Charles and David Koch however are not the only current shareholders of Koch Industries. Elaine Marshall and the Marshall family own the other roughly 14% of Koch Industries stock. According to This file (a 2007 trust tax return for Elaine Marshall who owns about 15% of Koch Industries stock that she inherited from E. Pierce Marshall-who is the son of J Howard Marshall (the guy who married Anna Nichole Smith) in 2007 had dividends of about $72 million of dividends from various trusts that she had. Koch Industries had $90 billion of revenue in 2006 (according to a book Charles Koch wrote called Market Based Management). What is interesting is that in addition to the dividends are about roughly just $11 million of interest income (so total income received by the Elaine Marshall and family is about $83 million in 2007).The trust earned roughly $413 million between 1996-2006)  Koch Industries regularly reinvests 90% of the earnings back into the company which actually results in a lower short term dividend, however in the long run if you are growing your dividend will also continue to grow.

Daniel Fisher from Forbes estimates that Charles and David Koch could borrow from Koch Industries a $40 billion dividend. Fisher also estimates Koch Industries for 2014 earned roughly $10 billion per year. From 2003-2014 Koch Industries spent $70 billion in capital expenditures and acquisitions. So on an annual basis this is about $5-6 billion per year of re-investing. Since Koch Industries reinvests 90% of their earnings back into the company this would say that Koch earns roughly $6-$7 billion per year. This would say that the annual estimate that the annual earnings is between $6-$10 billion. Of course this amount is before taxes. So take out roughly $3 billion for taxes and it would leave a net profit of about $7 billion.

So assume net profit is about $7 billion and the payout of Koch Industries is about 7% (which matches this article from 1992). Assume 90% of the earnings are reinvested back into the company, 7% of the earnings are paid out as a dividend, and 3% is held for short term liquidity/cash needs. Also assume Elaine Marshall (and the trusts she owns) have continuously held a 15% ownership of Koch Industries stock. This would mean that Elaine Marshall would have about $74 million in dividends (which is very close to her 2007 trust tax estimate showing $72 million of dividends). Charles and David Koch own the other 84% of Koch Industries (assume the other 1% is held by Koch executives/employees).

 If Charles and David Koch each own 42% of the company then if we take $7 billion in net profit x a 7% dividend payout x a 42% ownership interest it could be estimated that Charles and David Koch each pull in about $200 million a year from Koch Industries stock. Forbes has Charles Koch worth $42 billion as of March 2015. According to Bloomberg Billionaires Index Charles Koch is worth roughly about $51 billion (with $1 billion in cash-which would barely cover estate taxes since they are at 40%-Charles would need roughly $20 billion just to cover the estate taxes-I covered Koch estate planning in this post). At any rate if you take $200 million and divide it by say $42 billion that would mean that the dividend yield for Koch Industries is less than .5% which is fairly low compared with other large companies in the S&P 500 (usually these companies have a yield between 2-3%). So in essence Charles and David Koch are trading off a lower dividend payout for higher long-term growth.

This illustrates the result of compound interest. As Koch Industries has grown at roughly 15%/year over a four decade period would mean that every 5 years the company would double in size. Over time this would increase the dividends that are paid out to shareholders. As Koch Industries continues to grow the dividends will grow as well. The billion dollar question is what happens to the ownership of Koch after Charles, David, and Elaine Marshall are no longer around.