Being a Crappy InvestorPosted: April 1, 2013 | |
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Quite recently I wrote a posting with the title Being an Excellent Investor (you can find it here) in which I argued that being an excellent investors is about being engaged in your investment.
Most investors, by far, including investors with sizable portfolios and institutional investors, are completely passive with their investment, taking no action whatsoever to ensure that their investment in a company is protected except perhaps to pray at night before they turn out the lights.
Yes, institutional investors are, indeed, for the most part passive (I paint with a broad stroke brush here and, of course, exclude the so-called investor activist,) and, yes, in most cases they don’t have a firm idea of what a company that they have invested in is actually doing.
This passivity, which, for reason that should be obvious, is silly to the extreme, manifests itself consistently throughout the investor community with even the simplest action of all, to vote in annual proxy events, not being exercised. This is puzzling to me since the proxy is the sole vehicle available to investors for directly and forcefully impacting upon the company’s decision through voting on issues and determining who gets to manage the company that they have invested in.
I encounter many reasons or excuses for this passivity, but most of them are not valid, and I believe that the real reason why most investors are passive with their investments is that they have adopted a view that investments are like lotteries where the most important decision is when to buy in.
Needless to say, investments should not be treated like the lottery. Perhaps trading and speculation, two sides of the same coin, should be, but investment should not.
The lottery angle has more facets than it appears to at a first glance. Primo, it is the ugly twin of the famed diversification argument, and, so, is inherently suspicious. Secundo, exists in the market because of another, more sinister reason, which I have never heard voiced by insiders, but, nevertheless, am certain is accurate, namely that the portfolio mix of the average institutional investor is simply too broad and contains too many individual equities for a fund manager and his or her support stab to be able to manage it in any detail.
I was reminded of this incredible level of passivity today, when a Yahoo Finance message board poster responded to a posting that I had made.
My original posting related to a particular tendency of the Board of Directors of ClickSoftware, a company that I follow (you can read more about ClickSoftware in my posting, here,) to, on an annual basis, issue significant numbers of employee options, a large portion of which was assigned to the company’s CEO and founder, Dr. Moshe BenBassat.
The details of my posting are not important. The essence of my posting was simply that I, as an owner, felt that ClickSoftware’s issuance of employee stock options, in general, and issuance of employee stock options to Dr. BenBassat, in particular, was unnecessary, inappropriate, and highly dilutive upon the common shareholder.
The response to my posting by a poster with the handle maxben11 almost blew me away, forcing me to yet again reset my expectations about investors’ level of engagement and understanding. in his posting maxben11 wrote:
Go start your own company…Benbassat founded the company and he just wants to get his just rewards. These options you talk about is just a trifle in the much larger scenario. IF you are complaining, then just sell.
I will ignore the rudeness for a second, since, compared to other postings by maxben11, this posting was actually quite polite (the norm is for him or her to refer to posters with any opposing views as idiots.)
If you consider for the moment the ramifications of maxben11‘s attitude, you will see that it distills investment down to precisely the act of buying and selling, and, catastrophically, does so on the basis of erroneous information.
First, investors are owners and they should exercise their ownership privileges, not simply sell if they don’t agree with what their employees do (selling because the company’s employees are running amok does not seem like a proper response for an owner on any level.) In fact, not only should they exercise their rights, they should do so on an ongoing basis.
Second, Dr. BenBassat is, in fact, simply an employee — nothing more, nothing less, and, in his role as the most senior of all the employees, he is managed by the Board of Directors, who is acting as a proxy for the owners (including, in a loopy kind of way, Dr. BenBassat who, himself, is an investor in ClickSoftware.)
Third, the employee options that we discussed were not a trifle in a much larger scenario. In fact, the options being issued at ClickSoftware was so significant that hey had been a major contributing factor to the earnings per share not increasing during a period where the company’s net income grew significantly.
Dr. BenBassat has no rights to “get his just rewards,” whatever this terms means. When the company went public, Dr. BenBassat’s role changed from that of being the sole or majority owner of ClickSoftware to that of being an employee of ClickSoftware with some ownership stake in the company. As an employee, what he is entitled to is exactly the same as any other employee, that is to say just and performance-driven compensation. What he is entitled to as a co-owner and investor is a return on his investment on an equal footing with any other co-owner and invesor.
The fact that maxben11 could exhibit this level of ignorance — or, even worse, be so cavalier with his or her investment — is staggering, but certainly help us understand why investors, as a general rule, lose money and why management teams often feel that they can act in whatever way they want.
Working on Wall Street
Here is the kicker, though… Through a little sleuthing (read more about sleuthing for the identity of posters on Yahoo Finance’s message board here,) we can reach a (quite possibly wrong!) conclusion that maxben11, who has been posting on Yahoo Finance message boards since 2008, is a 73 year old gentleman, residing in New Jersey, holding a B.S. degree in math, and having evidently … wait for it … worked on Wall Street in some investment capacity for most of his professional career.
Incidentally, perhaps not surprising, every time the winds of investment misfortune blow in a direction that is not consistent with maxben11’s position, he resorts to speculations about AMEX specialists abuse, market maker conspiracies, and general mischief by the companies that facilitates trading in the market.
Now, had you approached me fifteen years ago and told me that you knew of someone who worked in the financial industry — on Wall Street, no less — and that this person did not have the faintest idea of what it meant to invest and what the proper role is of a professional manager in a publicly traded companies, I would have refused to believe you. Today, after the boom of 2000 through 2007 and the meltdown from 2008 and onward, however, I would have no problem believing you, and, in fact, I would wager that the track-record of most people working in the financial industry is one of losing their clients’ money.
This view, by the way, is entirely consistent with some research from Columbia Business School that I read a couple of years ago, which, in a nutshell, concluded that the enormous amounts of capital thrown into IRAs and mutual funds over the last decades had mostly, on a net-of-fees basis, resulted in zero or less returns for investors, while it had caused the size of the financial industry and the compensation for individuals working therein to double many times in size.
Think about this next time you consider investing. Should you really use a financial institution? Should you really be cavalier about proxy statements that you receive in the mail? For the sake of your retirement, I hope the answers to these questions are no, but if you lean towards letting some nameless institution manage your money, I hope that you think back to this article and maxben11’s comments.
In an priceless coincidence, maxben11, who appear to also operate under the handle givaatnaar was outed by thegunnerab, another Yahoo Finance message board spammer, whom I wrote about in a previous posting (here.) Hilarity ensued, magnified enormously by the fact that thegunnerab (whom I discussed in this posting and in this posting) is no paragon of virtue and the fact that givaatnaar has been engaged in systematic support of maxben11‘s postings throughout the years — and vice versa. Here is the outing posting thread:
Priceless! maxben11 getting confused about what account he is posting from; thegunnerab, a spammer, expressing that he feels that he can’t trust maxben11; maxben11 claiming that he has worked as a trader, a merchant banker, and an oil company CEO; and thegunnerab thinking that he is moving the market with his buying activity.
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