Koch Industries Collection Reading List: What Koch Employees/Charles Koch Read

So Koch Industries every quarter publishes a company newsletter (mainly for employees of the company). The news letter is posted online for everyone to see though. Former newsletters can be seen here.  Usually the newsletter will have a recommended book to read. I thought I would compile a list of all the books they have recommended over the years. I started with the Discovery newsletter from April 2007 and worked my way on from there. Charles Koch himself credits F.A. Harper's Why Wages Rise which can be purchased here and Ludwig von Mises' Human Action which can be read here. What is interesting is that most of these books from Amazon start at 1 penny.

Economics in One Lesson by Henry Hazlitt
Changing Minds by Harold Gardner
Basic Economics (5th edition-recently was published)- by Thomas Sowell (probably the best and easiest economics book to read since there are no charts or graphs and Sowell is very clear as a writer)
Common Sense Economics by James Gwartney
Cool It by Bjorn Lomborg
Scared To Death by Christopher Booker
Climate Confusion by Roy Spencer
Pride, Prejudice, and Politics: Roosevelt Versus The Recovery by Gary Best
President's Ronald Reagan's Initial Actions Project by Art Laffer
Getting Off Track by John B. Taylor
Think Twice: Harnessing the Power of Counterintuition by Michael J. Mauboussin
The Big Ripoff by Timothy P. Carney
The Battle by Arthur C. Brooks
The United States Constitution-A Graphic Adaptation by Hennessy and McConnell
Civilization: The West and the Rest by Niall Ferguson
Throw Them All Out by Peter Schweizer
The Road To Freedom-How to Win The Fight for Free Enterprise by Arthur C. Brooks
The Miracle of Freedom: From Seven Tipping Points that Saved the World: By Chris Stewart
The Financial Crisis and The Free Market Cure by John Allison- I have actually read the book and find it pretty insightful. John Allison is probably one of the few people to actually comment on the causes of the financial crisis (he actually ran a large bank during the time of the financial crisis).
Coolidge by Amity Shales
Conscious Capitalism by John Mackey
Heaven on Earth-the Rise and Fall of Socialism by Joshua Muravchik
The Myth of Robber Barons by Burton Folsom
Creativity Inc. by Ed Catmull

Bonus-Books in the office of Charles Koch as seen in this photo
All It Takes Is Guts by Walter E. Williams
A Conflict of Visions by Thomas Sowell
The Road to Serfdom by F.A. Hayek
The Fifth Discipline by Peter Senge
The Keys To Excellence: The Story of the Deming Philosophy by Nancy Mann
Is Reality Optional? by Thomas Sowell

1984-2014 Charles and David Koch Historical Net Worth..Increasing 17% Per Year

So Forbes recently came out with their wealth rankings and it appears Charles and David Koch are the 4th and 5th richest people in America. Earlier this year their net worth was $40 billion each. Today it was announced that Forbes estimates Charles and David Koch are each worth $42 billion each (a 16% increase from 2013). It is interesting to note that the standard deviation of the return of the percentage annual change in net worth is roughly 44%. Usually the stock market (S&P 500 is roughly 13% over many years) while the standard deviation of the returns of Charles and David Koch is 44%!

Standard deviation is a measure of risk in terms of how much returns deviate from the mean or average return. The higher the standard deviation the more risk an investment is. So simply the Koch brothers have increased their wealth at an annual compound rate of 17%/year (greater than the long term return of the S&P 500 of about 10%) while taking on 3 times the risk! Koch Industries reinvests 90% of their earnings back into the business which explains the rapid growth rate. Charles Koch mentioned in a recent Discovery newsletter that the company is targeting a annual compound growth rate of 12%/year. If the growth rate of Koch Industries is only 15% per year (which is under their historical average) by 2020 they each should be worth around $100 billion each.

In an earlier blog post I covered the Koch family estate planning situation. In this recent article David Koch mentioned that Koch family stock will go to his children so Koch Industries can continue to prosper.

New Koch Book "Sons of Wichita" by Daniel Schulman

So on May 20, 2014 a new book will be released entitled Sons of Wichita which is primarily about the Koch brothers. Over the years I have uncovered some interesting documents like the trial between the Koch brothers which can be found here. I also covered Koch estate planning here, and did a three part series on the trial Koch brothers here (I, II, and III).Actually I pre-ordered record the book from Amazon in November when I first learned about it. The book had a sales rank near 10,000 over this past weekend and jumped today to about 500 or so on Amazon. I would be willing to predict it becomes a best seller (given how many people actually have no idea who the Koch brothers are/they have some interesting stories to tell: billionaires, family battles, and building a business). I was glad to see the book is over 400 pages and according to the book website will be based on thousands of "never before seen documents" and "hundreds of interviews".

Personally I think the book should be a good read. My own prediction is the book will cover much of their political activities. Also I think the average person who reads it (maybe Harry Reid included) will learn how the Koch brothers actually built a business and the personalities of each of the Koch brothers.

Most likely I will read the book in a night (okay let's be realistic most likely over Memorial Day weekend) so and provide a review on here.

Koch Industries (Koch Brothers) Actually Decreases Pollution and Recycles

So I have been following the Koch brothers/Koch Industries for a while. You often hear of many reports about how Koch Industries pollutes and is making the air and water dirty for everyone else to breathe. However, do Charles and David Koch breathe different air then the rest of us?

I have to admit even I thought Koch Industries made pollution a tad worse until I actually looked at some data. I found reports (this link has all years I will refer to) that showed they do indeed reduce their pollution, recycle, and are actually more green than most people think. The latest Koch EHS report from 2014 is here. 

Currently about 90% of Koch facilities are STAR certified. STAR certified is a voluntary program from OSHA that companies voluntary join in order to make their workplaces safer than even OSHA regulations. A better explanation of this program is explained here. Because STAR sites are safer (because of voluntary actions of the company) they are rechecked every 3-5 years instead of every year. OSHA reviews incident rates every year though. However, as we will see Koch through continuous improvement has reduced emissions and made their work environment safer.

From 1997-2006 Flint Hills Resources refinery in Rosemount, Minn (this facility is very large-as I have actually driven past it) decreased emissions of carbon monoxide, nitrogen oxide, and sulfur dioxide by 53%. Also in 2006 criteria air emissions were .07 pounds per barrel of refining capacity, which was 65% less than the industry average of the 50 largest refineries in the country. As of 2012 the Flint Hills Resources in Corpus Christi, Texas went 12 years without a lost-time incident. Even the Obama administration praised Flint Hills Texas facilities. In 2000, a senior EPA official praised Koch because their Koch Petroleum Group agreed to reduced emissions by 60,000 tons annually. 

Koch invests 90% of their earnings back into the company. Much of this is to improve or upgrade existing facilities. In 1999 Koch introduced a low sulfur product six years before federal standards would be mandated. The company spent $200 million at the Pine Bend refinery (which produces low sulfur fuels). At a Koch Mont Belvieu, Texas facility decreased plant flaring by 95% which decreased emissions from 40,000 pounds in 2000 to about 2,000 pounds by 2003. 

People forget Koch Industries has a division that actually purifies water (Koch Membrane-which David Koch is in charge of). Koch Membrane provides drinking water to municipalities which use cartridges to clean out the water and can clean millions of gallons of water every day. In fact Koch's reverse osmosis module removed 99% of total arsenic in order to provide clean water to agencies and municipalities. Is is ironic that critics claim Mr. Koch is polluting the earth when he runs a division that purifies water!

In 1997, Koch Petroleum's refining operations had 45% fewer criteria air emissions that the average amount peer refiners. By 2000, Koch Pipeline transported 650 million barrels of liquids (including crude oil, natural gas, and other chemicals) and only one quart of product even touched the water. Between 1995-2000 Koch operated pipelines were able to reduce their leaks by 92%. In order to run these pipelines Koch spent $33 million in order to build a control center that had a fiber optic cable, customized software, plus a power supply that isn't uninterrupted.  In December 2012 Koch Pipeline and Flint Hills Resources went 8 years without a lost time incident. Speaking of Flint Hills from 1997-2012 the company reduced its emissions by 76% and emissions were 38% lower than peer refiners for 2012. 

Koch Industries is also into recycling between 1999 and 2000 Koch Industries more than 326 tons of material which was a 19% increase.  From 2000-2003 the recycling amount per person increased 29%.

Koch operates in a pretty safe environment.  Koch's Matador Cattle company for many years has operated with no incidents. Koch Aviation which flies about 2,300 hours per year had a four year OSHA recordable injuries in the mid 2000's that was 80% lower than the industry average. John Zink worked more than 4 million hours and 850 consecutive days without an injury resulting in time away from work. John Zink at this time had 700 employees working 1.7 million years annually. In 2006 six Georgia Pacific facilities had more than 1 million hours in each facility without a lost day of work. A Koch Nitrogen facility in Oklahoma recorded 3 years with no lost time injuries. An Invista facility in the Netherlands went 15 years without a lost workday case and Invista site in Brazil went 32 years without a lost time injury! At the same plant from 2003-2011 which makes LYCRA fiber reduced the amount of water used and actually saved enough water to fill 80 million one litter bottles.

To my knowledge Koch no longer explores for oil/gas. The company does refine oil which is turning the crude oil into other byproducts that are used into everyday goods like plastics. Koch just purchased Molex which is a connectors company that makes connectors for iPhone and other electronic devices. The company makes plastics, fibers, refines oil/gas, minerals, fertilizer, sends oil and gas through pipelines, and even does ranching. It seems as if though Koch Industries voluntary invests 90% of their earnings back into the company to make company assets and employees safer. By reinvesting the earnings back into the company Koch increases productivity and reduces lost work time due to accidents. By reducing the amount of waste Koch is able to make more money and use fewer resources. How many people would have guessed that Koch Industries actually reduces pollution and makes the world a greener place?

FDA Make Another Boneheaded Move on Lemtrada: Meanwhile Patients Suffer

I recently was reading this article and started to get somewhat frustrated while reading it. Basically the FDA recently announced that last December a drug called Lemtrada which is used to treat people with multiple sclerosis (MS) was not approved because according to the FDA the studies were not adequate and well controlled.

The drug Lemtrada is used to currently treated people with leukemia. The drug is an intravenous drug and produced by a company called Genzyme. The drug has been approved in Canada, Australia, and even all members of the socialist European Union (according to this Wall-Street Journal article). One no brainer for the FDA is to have reciprocal approval with other countries-so if Canada or Switzerland approve a drug by their equal FDA than it should be okay for the United States.

When the trials were conducted they found a 50% decrease in symptoms (1,400 patients took this drug). The nice thing about the drug is that you only have to administer it essentially once a year as opposed to taking numerous pills and multiple weekly injections from other MS drugs.  We have to remember that these patients are real people with a real illness who I would imagine spend a fair deal of time worry if they will ever get better. The FDA said the issue with the trial was that it was not double blind (which is the gold standard for FDA trials). However, if you have a serious chronic illness and you actually do get the placebo (sugar pill) and get worse and worse who does that help? Doctors and patients correctly pointed out that Rebif which already FDA approved did not used double blind trials when it was going through approval.

The only thing Genzyme can do now (after it has already spent many years and hundreds of millions of dollars in running the drug trials) is to run a double blind study trial which would take at least 2 years and would cost another $100 million for a drug that nearly every other rational country has approved.

The FDA approval panel should have a rule that states "you must have a loved one, family member, or someone you deeply care about that suffers from the illness from the drug you are trying to decide on". If this where the case I would imagine different results if they actually stopped to think how many people are harmed by the FDA holding back drugs to people with chronic illnesses. Maybe the FDA needs a mental evaluation.

Charles Koch Wichita Business Journal Interview

                                          Photo Credit: Kellen Jenkins of WBJ 

So last Friday morning the Wichita Business Journal (the article is only unlocked for a week) in an effort to revamp their journal came out with a profile of Charles Koch. Koch is not known to give very many interviews. Although in the past few years he did one with Forbes and one with the Wichita Eagle. The story of how the interview came about is interesting (more on that later).

In the interview done in February 18, 2014. From the pictures Charles Koch looks very relaxed wearing an Oxford Polo Shirt (who would think a billionaire would wear Ralph Lauren-that isn't Ralph Lauren). Koch talked about a number of different things like why Koch Industries is still in Wichita (I was even surprised he quoted Hayek on that). On innovation when asked why Charles Koch who is 78 years old and still shows up up to work everyday. According to Koch "I may be old, but I'm not dead yet". Koch Industries is still trying to integrate Molex from their merger last year. I would imagine Molex employees are learning more about Market Based Management. Koch said that Molex has to "get an idea built and get it commercialized immediately". Molex makes connectors that go into computer and electrical products (wait I thought Koch Industries was an oil giant). What is really interesting was Koch discussing products that can learn themselves. He discussed about building a computer into a glass mirror that could learn to adjust the temperature or the amount of light to come through the mirror all with the press of a button. Koch Industries has also made some interesting investments like into American Greetings (a card company). Essentially, Koch provided capital to American Greetings in order to take the company back. Charles Koch points out that it is hard to give a loved one the same message from a digital card as a hand delivered card. Koch said he liked the new technology in the drilling business (however he doesn't want to get back into that industry).

Chase Koch is the son of Charles Koch and earned his BBA in Marketing from Texas A&M University and has been with the company since 2003. I talked about Chase Koch and possible estate planning here. Charles Koch even challenged if his son would be the best person for the job. I honestly believe that if Charles Koch didn't believe his son was ready he would not have him on board with the company. Koch Industries has a large bench to pool from in terms of talent in the future if needed.

When talking about his political views Koch is really trying to save the country by promoting limited government and free markets. He talks about cronyism and the barriers to entry (taxi medallions or required schooling for hairdressers). Koch does correctly point out that make it harder for poor people to advance "for disadvantaged people trying to get started, its unconscionable in my view". Honestly, it seems clear the Charles Koch does want to help poor people. Thomas Sowell once said that the difference between Democrats and Republicans is that Democrats want to give the poor money while they are poor and Republicans want to help poor people stop being poor. Koch talks about long-term interest instead of short-term interests. Since Koch is private they don't have to worry about analyst meetings or quarterly earnings. In this interview from 2007 Koch said "a public company has to cope with the extreme focus of the analysts and the equities market on quarterly earnings. Someone misses quarterly earnings projections by a penny, and their stock goes down 10 percent". Most people actually incorrectly believe that companies are just into the bottom line for the short term. However, if you constantly make bad decisions in the short run you won't be around for the long run. Koch points out that "people should only profit to the extent they make other peoples lives better. You should profit because you created a better restaurant and people enjoyed going to it. You didn't force them to go, you don't have a mandate that you have to go to my restaurant on Tuesdays or Wednesdays or you go to prison". Gee, for some reason I have this feeling if I don't purchase healthcare I get some time of penalty. When talking about political contributions and his interests it should be noted that Charles Koch, David Koch, and Koch Industries are subjected to death threats, cyberattacks (speaking of which a 24 year old Iowa man got busted for trying to launch a cyberattack on the Koch website). I saw someone from Young Turks explaining how it was nice that young people were realizing that Koch Industries was a bad an evil corporation and even liberals should feel a little proud when the company gets hacked.

It was interesting to see the Charles Koch Foundation is working with Michael Rowe from  "Dirty Jobs" in order to explain to people they don't need to get a liberal arts degree and that some people who have certain talents can make very good money my satisfying needs and wants of people.

A nice feature of the article is when former Koch employees reflected on there time at Koch. Nearly all of them said it shaped how they thought and had a positive effect on who they become as business people. Former employee Patrick Ahern said that in one year he learned so much he would have paid to work at Koch Industries.

According to reports Koch Industries decided at the last minute not to allow video during the interview (probably for security reasons). It is pretty clear that Charles Koch and his brother David Koch unfortunately have to have armed guards 24/7 to protect them because people fundamentally don't agree with their ideology. The ironic thing is that these people who complain are most likely using a Koch Industries product. If they use the toilet they most likely used Georgia Pacific toilet paper. If they dried their hands they used a paper towel from Georgia Pacific. After the purchase of Molex, if anyone has a iPhone it was created partly by Koch Industries. The list goes on and on of products that Koch creates that every day people use (probably without even realizing it). What is even more interesting is that Koch to my knowledge doesn't explore for gas like actual companies (Chevron, ExxonMobil, and the rest).

1984-2014 Charles and David Koch Historical Net Worth & Bill Koch Loses $200 Million in Net Worth

Forbes came out with their ranking of billionaires today. Charles and David Koch are each worth $40 billion. I have followed the net worth of the Koch's for some time now (30 years worth of data. What is interesting though is that the compound annual growth rate of Charles and David Koch's net worth is close to 17%/year which is much better than the market.

If Koch were a publicly traded stock it would be outperforming the S&P 500! However, the standard deviation is 44% which is vastly much higher than the stock market which has a standard deviation of a large fraction of that. Koch prefers to remain private because they don't like to have to be meet quarterly numbers or care what Wall-Street analysts think and instead rely on the long-term view. Koch does invest 90% of their earnings back into the company (which I estimate to be about $5.5 billion/year). Most corporations pay a dividend and buy back shares (in order to provide a return to shareholders). Bill Koch once remarked (when he was a shareholder) that Koch Industries was so low he couldn't afford to purchase a nice house. Speaking of Bill Koch his net worth actually went down from $4 billion to $3.8 billion. Yes, a Koch brother did lose $200 million in one year! What is even more interesting is that Oxbow Energy (founded by Bill Koch claims returns of 30%/year while Charles Koch declared a 12% annual return in their 2014 January Discovery newsletter.  Interesting how 3 out of 4 brothers from one family are billionaires. What happened to Frederick Koch?

David Koch $600 Million and Counting To Charity: Arts, Medicine, and Theater

So it seems like David Koch has been pretty generous with his money lately. A while back I talked about how generous David Koch was with his money which can be found here.  This year Koch was very generous again donating $100 million (over 10 years at $10 million per year) to New York Presbyterian Hospital (I guess Mr. Koch does care about helping people). A list of large gifts Mr. Koch has given since 2007 can be found here.

In 2012 Koch donated $137 million to charity ($35 million to a museum, $20 million for a day care center at MIT, and $10 million to a food allergy institute at Mount Sinai.

Notice that David Koch has been generous with his own money even though he doesn't have to give anything back. He has already given back to society by helping create a company that now employs 100,000 people helping them put food on the table, help pay for tuition, and helping people pay for vacations. Also people criticize David and his brother Charles of increasing pollution when in fact Koch Industries has been decreasing pollution by making their plants more efficient using fewer resources and David Koch himself is in charge of a Koch subsidiary that purifies water in order to make it drinkable to people around the world.

State Of The Union: My RA: The Myths, Lies, and Illusions

So the other night President Barack Obama spoke on many different issues (first starting off which how a teacher worked extra hours) and then moved on to income inequality and talked about how this was the year of action. However, what caught my attention was a program he wanted to push forth called myRA. Note that this would actually the program would actually be passed by Congress before actually becoming part of the ever expanding tax code. How myRA works by guaranteeing "a decent return with no risk of losing what you put in". Let's step back a second to understand how false/hypocritical this statement is. Investment management companies and firms are highly regulated by the SEC. If any investment firm had this as advertisement they would be investigated by the SEC and charged with misleading advertising and possibly shut down (however when a government that is already going broke states it there is no issue).

The WSJ lays out how this would actually how myRA would work. The account would just allow for one investment (most corporations and companies that have 401k plans have options-under federal ERISA rules plans have to offer at least 3 investment choices- so choice is obviously not part of the plan). The principal is "protected" however to my knowledge inflation could erode this away as the bond is not adjusted for inflation. What the government is offering is a Treasury bond that will offer a variable interest rate (fluctuates with present day interest rates). The annual return from 2003-2012 is not great of only 3.61% (however the President did mention how the stock market had done well yet this new program wouldn't let people participate in it). Vanguard ran calculations and said if you put away $50 every other week for 11 years you would have $15,000 which does not solve any type of retirement crisis. The cherry on top of this regulatory sundae is that once the balance reached $15,000 participants would then be required to roll over the funds to an IRA at a private sector financial services company (think Fidelity or TD Ameritrade) and then could select a variety of options. I could only wonder who would be lobbying for this to actually become legislation.

According to the American Benefits Council there are over 650,000 401k plans. There are roughly 88 million participants in these plans.  In my experience some people don't trust 401k plans for a few reasons 1) They don't trust a 401k plan 2) They would rather spend the money or 3) They don't understand a 401k which leads them not to invest in it. 

If the President actually did some research he would find that most companies do in fact offer 401k. In a survey done 98% of companies surveyed companies already offer a plan with an employer match. In addition to this companies are also simplifying the investment options, providing more investment education, and increasing the employer match. There are many regulations that surround company benefits including 401k plans. For instance any employee that works more than 1,000 hours in a 12 month period of eligible for a 401k.  Essentially 401k plans can't be non-discriminatory (they have to be offered to at least 70% of the people who are eligible). This has to do with non-discriminatory laws that govern company plan benefits. People also forget that when a company matches an employees contribution that is essentially free money. Companies also have to hire plan trustees, custodians, and sometimes investment advisors who are themselves highly regulated by the SEC which does cost money. 

The obvious course of action is to stop providing programs such as Social Security that let people on to believe they are okay in retirement. If Social Security wasn't around would people be more or less prudent with their saves. The current taxation on Social Security is actually over 15% (if you include the employee and employer portion). Not only is Social Security taxed when you paid in but also the benefits are taxed as well. Martin Feldstein from Harvard has done some work in this area and actually found that Social Security reduces private savings by roughly 60%. Social Security is a whole different issue that I won't blog about here but the default program let's people sleep at night when in actuality they could manage their own money or hire a financial advisor to help them.

In summary, the President is proposing a retirement plan for people with little to no means when nearly 50% of people already live paycheck to paycheck. According to the report 44% of Americans are living with less than $6,000 in savings for a family of four. Now there are people who through their own misfortune or bad luck can't work and therefore can't save but that is a very small fraction of the overall population. I would be okay with even cutting these people a check and letting them at least decide how they use their resources instead of having a bureaucracy decide for them.

Many people choose not to pay attention in class during K-12 education, choose not study hard, choose to go out and party, get a job and choose not to put in the extra hours needed to get a promotion, choose to have children before they are financially ready, choose to spend money on things they possibly might not need (do you ever wonder how many people at the Cheesecake Factory really can afford it?). The right approach would be to get rid of the ridiculous burdensome laws that govern 401k plans (custodian, fiduciary, bookkeeping, etc.) in order to allow more companies (manly small businesses to offer them). The President seems to be separated from reality as he has never had to answer to customers, shareholders, or had any serious type of accountability.