To print article, click
Print on your browser's File menu.
Go back
Go back
Posted 1/17/2002
Details
 |
Recent Articles
• Watch the money on the sidelines, 1/10/01
• Hedge your bets when you look for miracles, 1/03/02
• Real bargains at Nasdaq’s After-Christmas Sale, 12/27/01
more...
|
The Speculator
'We're No. 1' usually means 'not much longer'
Call it the 'executive boast' indicator. When company leaders pause to say they're at the top of their industry, they're about to get passed by the competition.
By Victor Niederhoffer and Laurel Kenner
We'd all like to spot the next Enron (ENE, news, msgs) before it blows up, and after much testing, The Speculator has come up with an indicator: the Executive Boast. Remarks such as "We're the best" or "We're No. 1" cause a company's stock price to underperform the S&P 500 ($INX) by 25 percentage points, on average, according to our study.
| New
stock picks from market professionals every day on CNBC. |
The following letter from a reader spurred our search:
I am a retired person who invested all my savings in Enron since it was considered a blue-chip company and paid dividends. What do you suggest, I should do? Do you think they would successfully restructure the company? Will the stock come back to $20, if not to the high of $80? I would be very grateful if you would kindly reply to my e-mail. I am extremely depressed and very anxious to know your thoughts on Enron's future. Thanks. (name withheld)
Enron Chairman and Chief Executive Ken Lay himself provided the rest of our inspiration. "Our performance has never been stronger, our business model has never been more robust. We have the finest organization in American business today," Lay said in an Aug. 14, 2001, e-mail to employees, noted by Rep. Henry Waxman, D-Calif., in congressional hearings on Jan. 12.
Scaling the heights
The tendency for stocks to go down after executive boasting is part of a general character flaw that we will call, "Did you summit?" Outside magazine's February issue has an illuminating article on mountaineering search-and-rescue missions, observing that whenever a climber descends from the heights, onlookers rush up to ask, not "Did you enjoy?" or "Did you learn?," but "Did you summit?" The attempt to reach the top regardless of weather conditions and the abilities of the climbers is what leads to disaster. Many famous mountaineering deaths, including Mallory's fatal attempt of Everest in 1924, can be traced to it.
The problem with trying to scale the summit when you're a CEO is that competition is always high. Others are always coming up with alternate ways to produce or market your product, and the consumer is fickle. To believe that you're the best at something breeds an atmosphere of invincibility that opens the door for disaster. The mere fact that a CEO would show his lack of humility by boasting may indicate a cover-up of some other problem, or evidence of an unwillingness to face up to the harsh and ever-changing realities of the marketplace. Or maybe he's reluctant to spend the greater energy required for the humdrum pursuit of profit.
The desire to summit is not limited to CEOs. We also find it in money managers. In response to our previous article on hubris, "On Wall Street, pride signals a fall," in which we pointed out a statistical tendency for stadium-naming and Forbes magazine covers to precede a decline in stock price, a reader wrote: "Niederhoffer is the best example of pride signaling the fall. Right after he was the No. 1 hedge fund manager, in 1996, he wrote a book, gave the keynote speech at many conferences and promptly fell into oblivion."
We cannot deny the truth of what our correspondent wrote, but we can guarantee that in the future, Vic will never again strive to be No. 1 in the hedge-fund world. He has learned that sure and steady wins the race. The power of compounding is such that a slight but consistent edge over the 10% return from a buy-and-hold strategy is quite sufficient to achieve anyone's financial goals. To strive for a much greater return requires taking more risk. That extra risk can be ruinous, especially when the adversary's bankroll is much bigger than yours.
Many readers pointed out that one manifestation of the "summit flaw" is the tendency to erect big, lavish headquarters before disaster sets in. The soaring towers of Southeast Asia, completed before the 1997 crash, come to mind.
Our friend Don Siskind, one of the most respected real estate lawyers on Wall Street, singled out Lloyd's of London, Drexel Burnham Lambert at 7 World Trade Center and David Paul's savings and loan in Miami as some prime examples. "All of the foregoing took more or less the shape of a phallic symbol," he notes.
Hubris by the numbers
However, the headquarters indicator is far from perfect, despite the abundance of anecdotal evidence. Many companies build new offices not out of hubris, but in the normal course of business. To perform a systematic study, the problem is thus to define hubris well enough to allow its relation to the market to be quantified.
We moved, therefore, to a more specific hypothesis. Our study of the performance of boastful companies began with a search of certain phrases on google.com. "We're the best," "best company" and "We're No. 1" yielded over 100,000 entries. We found 11 companies that used these magic phrases. We threw in a couple of beautiful examples from Martha Stewart (MSO, news, msgs) and Priceline.com (PCLN, news, msgs) for good measure, although they didn't contain the exact wording. We then calculated performance of the stocks against the S&P 500, from the date of the remark through year-end 2001.
The sample size is too small for any degree of statistical confidence, but the results are shockingly bad. The average relative performance was an astonishing 24 percentage points below the S&P 500. Five of the companies -- Enron, Gateway (GTW, news, msgs), Human Genome Sciences (HGSI, news, msgs), Priceline.com (PCLN, news, msgs) and Sprint PCS (PCS, news, msgs) -- fell more than 50%.
The date, the quote that triggered it and the subsequent performance are shown in the table below.
The Boastful 13
| Stock | Boast Date | % Chg to 1/14/02 | Diff vs. S&P 500 | Quote |
| Enron (ENE, news, msgs) | 12/31/1999 | -98 | -76 | " From the worlds's leading energy company... To the world's leading company!" |
| Priceline.com (PCLN, news, msgs) | 8/17/1999 | -92 | -77 | "Priceline will reinvent the environmental DNA of global business," and produce "a totally different form of energy" |
| Gateway (GTW, news, msgs) | 3/26/1999 | -80 | -69 | "Gateway's goal is to become No. 1 on the Web, not because we are the biggest, but because we are the best." |
| Sprint PCS (PCS, news, msgs) | 7/21/2000 | -71 | -48 | "We're the best wireless phone service available." |
| Human Genome (HGSI, news, msgs) | 5/7/2001 | -52 | -42 | "We are No. 1 by at least an order of magnitude, possibly two." |
| Rational Software (RATL, news, msgs) | 4/20/2000 | -38 | -17 | "We are the best-kept secret on Wall Street." |
| LaSalle Hotel Prop (LHO, news, msgs) | 7/2/2001 | -33 | -25 | "We were the best-performing REIT in 1999." |
| Delta Air Lines (DAL, news, msgs) | 6/14/2001 | -31 | -25 | "We are the best in the business." |
| Continental Airlines (CAL, news, msgs) | 1/18/2000 | -27 | -5 | "We're the best-positioned airline for the future." |
| Dell Computer (DELL, news, msgs) | 9/28/2000 | -16 | 6 | "We're No. 1 in the U.K., Sweden, Ireland and France in the business market." |
| Martha Stewart (MSO, news, msgs) | 8/21/2001 | -15 | -14 | "I can almost bend steel with my mind. I can bend anything if I try hard enough." |
| KPMG Consulting (KCIN, news, msgs) | 6/7/2001 | -6 | 5 | "We are the best in the industry." |
| Fidelity Nat'l (FNF, news, msgs) | 6/14/2000 | 45 | 68 | "We're No. 1 in all leading financial indicators versus the competition." |
| Average | -39.5 | -24.5 |
We aren't recommending that any of these stocks be shorted. We don't believe in shorting, as it goes against the upward drift of the market. Even more importantly, we don't know enough to recommend shorting this group, or any other group, for that matter.
One remark was so hot off the press that we didn't include it, but it merits an honorary place among the Boastful. The horn-tooter was George David, chairman and chief executive of United Technologies (UTX, news, msgs), as reported in the Nov. 2, 2001, issue of Business Week: "We're No. 1 in practically everything we do." Be forewarned.
While we may have missed some boastful remarks, we made an effort to include the performance of all companies that satisfied the criteria, regardless of subsequent performance. We'll be grateful to any readers who transmit other examples that meet the criteria. Write to dciocca@bloomberg.net, and we'll send you a workout showing that the best performers in the Dow Jones Industrial Average ($INDU) for the last 12 years have tended to outperform the average in the next year. And none of them boasted.
At the time of publication, neither Laurel Kenner or Victor Niederhoffer owned any of the stocks mentioned in this column..
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.