Rewarding Failure: Jackass Investing “Poor-folio” award for Hewlett Packard

Small business owners understand the need for hard work, integrity and perseverance. If they don’t, they don’t survive, let alone thrive. When I started my investment firm, Brandywine Asset Management, 30 years ago, there were no guarantees. I spent the vast majority of my waking hours researching trading strategies and the legal issues surrounding setting up and marketing a commodity fund, preparing marketing materials, establishing brokerage relationships… the list was almost endless. Fortunately, so was my energy at that time. But one ingredient that wasn’t endless was my bank account. When, after the first year, the business wasn’t yet paying the bills, I borrowed the money off my credit cards (Why and how I got the cards in the first place is another story). Fortunately credit card companies considered me a good credit risk and continued to extend credit as long as I paid their monthly bills on time. In time, with more than 100k owed to the card companies it became clear that I only had one way out, I had to make the business succeed. That was the only way to pay back the debt. (I know, another alternative would have been to renege on my commitment to the card companies, but I never considered that to be an option. I got myself into the situation. It wasn’t the card companies’ responsibility to get me out. It was mine alone).

Fortunately, with continued perseverance, I was able to grow the business and repay my debts. Brandywine thrived and became a highly successful managed futures trading firms. But believe me, I struggled to reach that outcome. I had many opportunities to fail along the way. Over the years I’ve come to recognize that millions of other small business owners can relate to this story. My story is their story.

But that’s not the story in “corporate” America. Unfortunately, corporate America rewards failure. How else can you explain the obscene severance packages doled out to failed executives by huge companies such as Home Depot, KB Homes, Merrill Lynch and most recently, Hewlett-Packard. Many of these companies’ CEOs damaged their companies financially or reputationally (or in the case of Merrill Lynch, actually took their companies to the brink of collapse), and then got paid tens of millions of dollars to go away. In the case of HP, Leo Apotheker mismanaged the company for just eleven months before the Board of Directors (incompetent boards is a topic for another post) showed him the door. But heh, while you’re on your way out, here’s $30 million as a reward for your failure. Huh!?

Apotheker was just the last in a string of HP executives who were rewarded for being fired (er, “resigned”). Just last year then-CEO Mark Hurd left after being accused of a variety of violations of HP’s Standards of Business Conduct, including “misuse of company assets” that was related to his “close personal relationship” with an HP contractor. An investigation uncovered that the contractor was paid yet there was a question about whether her services were actually provided (this behavior is illegal in all states except Nevada). Oops! And how did all this get past the HP Board of Directors the whole time? Oh right, Mr. Hurd was Chairman of the Board. Despite the damage his behavior caused HP, Mr. Hurd was paid $12 million to leave and was also entitled to an additional $53 million that he negotiated away in exchange for being able to take a leadership role at Larry Ellison’s Oracle.

Prior to Mr. Hurd there was Carly Fiorina, who received over $40 million in severance and stock grants for “resigning” in 2005. Look, I generally liked these CEOs (at least Hurd and Fiorina). They were dynamic and assertive. They should have been paid well. But they should have been paid well for the quality of their work and the value they brought to their shareholders, not for the quantity of the messes they left behind.

As a result…

Because of its continued legacy of rewarding failure in both the executive suite and boardroom, I am awarding HP the most recent Jackass Investing “Poor-folio” award.

Another Jackass Investing “Poor-folio Award”

This award goes to Moody’s, Standard & Poor’s and Fitch Ratings, the three credit rating agencies whose incompetence contributed to one of the greatest destructions of wealth and confidence in the global financial system ever, and helped precipitate the financial crisis of 2008.

The greed and incompetence of the credit ratings agencies is now well-known.  I first described this and their conflict-of-interest addled ratings process in Myth #13: “It’s Best to Follow Expert Advice” of my book Jackass Investing: Don’t do it. Profit from it. You can read the full text of that chapter here: http://scr.bi/nPGd9t. (The chapter also weaves in interesting references to stock market gurus, financial analysts, ways that rats outsmart humans, and the Apollo moon landings.)

But now it becomes apparent that the greed and incompetence of the ratings agencies were built on a foundation of corruption. The disturbing case of corruption was reported in a 78-page “comment” made by William J. Harrington, an 11-year employee and Senior Vice President of Moody’s, one of the big three ratings agencies. The story was reported by Henry Blodgett here: http://www.businessinsider.com/moodys-analyst-conflicts-corruption-and-greed-2011-8. (And Blodgett certainly knows corruption and conflicts-of-interest. He was sanctioned for putting public buy ratings on stocks that his employer was underwriting, when he personally believed them to be “dogs.”)

Harrington wrote that – surprise – Moody’s often gave out ratings that its clients wanted, against the private conclusions of its analysts; and that Moody’s product managers, those who were responsible for growing business and keeping clients happy, also voted on ratings decisions. You can read Harrington’s comments in their entirety here: http://www.sec.gov/comments/s7-18-11/s71811-33.pdf.

It would have been justification enough to issue this award on the basis of greed and incompetence alone, the charge of corruption makes Moody’s more worthy yet.

Related articles:

http://www.onwallstreet.com/news/credit-rating-study-asset-class-treatment-2674895-1.html

http://www.businessinsider.com/moodys-analyst-conflicts-corruption-and-greed-2011-8

http://www.credit.com/blog/2011/08/amid-multiple-scandals-standard-poors-ceo-resigns/

http://blogs.reuters.com/financial-regulatory-forum/2011/08/15/start-up-rating-agencies-urge-national-regulators-to-promote-competition-change/

New Jackass Investing “Poor-folio Award”

A Jackass Investing “Poor-folio Award” goes to…

European Securities and Markets Authority

Last Thursday, August 11th, four European countries banned or restricted short-selling in stocks. The bans were imposed in reaction to the sizable stock market losses recently suffered across global markets. This is a political move, not a logical financial one, and history shows it will be counter-productive.

In my book Jackass Investing: Don’t do it. Profit from it., I discuss the attempts that have been made by governments over the centuries to manipulate markets by banning the short-selling of stocks. They do not work. The most recent widespread ban of short-selling – that imposed during the financial crisis in 2008 – resulted in losses in the banned stocks that exceeded the losses on stocks for which short-selling remained permissible. The chapter in which this is covered, “Myth #10: Short Selling is Destabilizing and Risky,” can be read here in its entirety: http://scr.bi/rafKCC.

The reason short-selling bans are counter-productive is simple: free markets hate inconsistency. Knee-jerk rule changes wreak havoc on investor confidence. What greater statement is there to show a lack of confidence in the markets than to restrict people from selling stocks! Kenneth S. Rogoff, a professor of economics at Harvard states the issue clearly, “The short-sale ban really smacks of desperation.”

Because of their panic in the face of adversity, their lack of confidence in free markets and their signal of desperation to financial market participants, I’m awarding this Jackass Investing “Poor-folio Award” to the “European Securities and Markets Association.” Congratulations!

——————————————

The Jackass Investing Poor-folio Awards are given out to those who sink below the crowd by taking actions that contribute to the creation of “Poor-folios.” For more information about Jackass Investing and how to avoid a Poor-folio and create “Free Lunch” portfolios that earn greater returns with less risk, go to www.JackassInvesting.com.

Ryan Dunn & Jackass Investing

Friday, June 24, 2011:

Life is full of risks. Some are avoidable. Some are unexpected. And some are self-inflicted.

I am saddened by the death of Jackass movie and TV star Ryan Dunn. I didn’t know Ryan, although he was a local guy and the Jackass crew once shot a scene on my property. That came about because Bam Margera, one of Ryan’s co-stars, literally lived ‘around the corner’ from my office, which is in a renovated 17^th century grist mill. One day, unannounced (and uninvited), they appeared with cameras and crew on our front field. I guess they found the setting irresistible.  But as far as I remember, we never met.

Ryan left life as he lived it. He died early Monday morning in a fiery car crash behind the wheel of his Porsche. Unfortunately, his death, and that of his passenger and good friend Zachary Hartwell, was both avoidable and self-inflicted. He lost control and launched his car over a guardrail at a speed well in excess of 100mph. He did this while driving his friend home at 2:30 in the morning, after leaving a bar with a blood alcohol level that was more than twice the legal limit.

I’ve read numerous blog posts, articles and comments about the crash that are mean-spirited or self-righteous. Sure, Dunn essentially killed himself and he killed a friend with him. We were fortunate that he did not kill any others who crossed his path. But by all accounts, Ryan was a great guy. He had many friends and, despite his Jackass reputation, treated people with respect. My heartfelt condolences go out to the families and many friends of both Ryan and Zachary.

It would be hypocritical for me to demean Ryan Dunn for his actions. I too have engaged in similarly risky behavior. I like fast cars and have raced them – both on and (recklessly) off the track. I did my own stunts, and not under controlled conditions. It was only through good fortune or the grace of God that I or an innocent person, who intersected with me at the wrong time or place, didn’t meet a similar end. But that doesn’t mean I can’t exploit both Ryan’s and my risky behavior for a positive cause, as I’ll explain.

Our similar misconduct and the scene the Jackass crew shot on my field are not the only connections I have with Ryan Dunn. He was in part the inspiration for the title of my just-published book, Jackass Investing: Don’t do it. Profit from it.” The book is all about risk – Avoiding risk. That’s why I say “Don’t do it.” To me, the definition of jackass investing is the act of taking unnecessary risks. Ryan Dunn got paid to take unnecessary risks – but that behavior also ended his life. In investing your money, you don’t get paid for taking unnecessary risks. Someone else takes your money from you.

But making people money is a far cry from saving lives. Or so I thought. Ryan Dunn and Zachary Hartwell, who was newly married, began their final night on Father’s Day. I am the father of three great boys, and what I’ve come to recognize is that the same philosophy I teach to investors is the basis for what I preach to my boys. Avoid unnecessary risks and take control of your own lives. Ryan’s and Zachary’s deaths cemented the realization that making and saving people money is only my job. My full-time occupation is being a father and shaping and saving the lives of Mitchell, Matthew and Charley.

With every opportunity, and Ryan and Zachary provided me a very public opportunity, I stress to my boys that they are in control of their lives, that whenever possible they should avoid placing their lives in the hands of others, and that they should avoid taking unnecessary risks. In summary – that they should avoid jackass behavior. I am grateful that my boys were not old enough to have been out on the road that night and that no one else’s son or daughter was in the way of Ryan’s car when he lost control. But my boys’ ages will not spare me for long. And that’s why Ryan Dunn, in his death, handed me a gift. He was able to teach my boys in a dramatic and very public fashion, the consequences of taking unnecessary risks. This week a very dark cloud enshrouds the lives of the families and friends of Ryan Dunn and Zachary Hartwell. But I am grateful to them for the silver lining they provided in the form of the unintended positive impact they’ve had on my boys.

New Book Review

Although the book won’t be published until later this month, I just got this great review for Jackass Investing:

“In the Introduction to Jackass Investing, Mike Dever states “This book should not be controversial, but it will be. That is because investing, which should be a rational pursuit, is not.” I agree with Mike. This book will be controversial. Not because what he presents is wrong. In fact, his book is thoroughly researched and logical to an extreme. It will be controversial simply because so many people have a vested interest in preserving conventional financial wisdom, and this book clearly refutes much of what is conventionally preached.

If I were to use one term to describe Jackass Investing, it would be “ground-breaking.” That is because Jackass Investing goes well beyond being a simple investment book. In it Mike Dever presents an entirely new system of thought. He introduces “return drivers” and explains how to use them to create trading strategies, which are the core components necessary to construct a truly diversified portfolio. He makes his case by systematically describing 20 common (and costly) investment myths, explaining why each is a myth, and not a fact. The author then shows you how to profit from them, precisely because others believe them to be true. The book clearly illustrates the author’s depth of knowledge and 30-plus years of investment experience. But although the concepts he presents are serious and well-supported, Jackass Investing is far from being a dull academic textbook. It’s a highly entertaining read, as he introduces his concepts with the help of entertaining anecdotes and comparisons to popular culture.

For example, In Myth #3 – You Can’t Time the Market,” Mike first recounts the Seinfeld TV episode titled “The Opposite,” where George Costanza comes to the realization that “every decision I’ve ever made, in my entire life, has been wrong. My life is the opposite of everything I want it to be.” Mike then shows how that relates to market timing, in that the market-timing instinct of the average person compels them to do the exact opposite of what they should do. And he shows the statistics to support this. But Mike doesn’t just provide entertaining anecdotes and statistical support. In the “Action Section” for the book, Mike shows readers a specific strategy they can use to profit by doing the “Opposite” of what the masses do.

The “Action Section” on the www.JackassInvesting.com web site is an exceptional bonus provided to readers of the book. All by itself, it is worth multiples of the price of the book. It is where Mike Dever puts into practice the concepts presented in Jackass Investing. There are more than a dozen specific actions presented that can be combined into a “Free Lunch” portfolio. A Free Lunch portfolio is one that produces both greater returns, with less risk, than those espoused by conventional financial wisdom. Each of these Actions could itself be the subject of a book. They are well-researched and immediately available to be employed by the reader. And their pedigree is impressive, often being based on actual trading strategies that have been used by Mike in his trading at the firm he founded, Brandywine Asset Management, or other professional investors for more than a decade.

There aren’t too many books that are able to both introduce ground-breaking concepts, yet also provide specific strategies to use to exploit those concepts. Jackass Investing is one book that does both. It’s a testament to Mike’s writing ability that he is able to combine both into such an entertaining read. Don’t be a Jackass. Read this book.” Robert “Bucky” Isaacson