None of us has ever seen a time when so many companies are going out of business, needing to be consolidated, or teetering on the brink of bankruptcy. The management of these companies never seem to see it coming. It’s like some fantastic surprise that the economic or business outlook changed and they didn’t think about preparing for it.
So you are wondering how this affects us as investors. Trust me, it affects everyone. For the investors who are stock pickers, it’s like walking through a land mine. Straight from the CEO’s mouth, Bear Stearns is fine and you believe them. For the mutual fund manager it’s a huge challenge because they have hundreds of companies to track and can’t get intimate enough with the management to get a feel for who they can trust and who is competent.
That might be another reason why almost all mutual funds underperform their benchmarks over the long haul and why indexing with low cost ETF’s make makes more sense.
Let’s go back in time and I will show you a few examples of some very supposedly competent CEOs who have said things that make you wonder.
Robert Toll, CEO of Toll Brothers, was named one of Barron’s Top 30 CEOs worldwide in 2005. On December 6, 2006, Toll announced he’s seen the bottom of the housing slump.
As we know, over two years later and we still haven’t found bottom yet.
Hank Greenberg, former AIG Chairman and head for four decades. On September 18, 2008, Greenberg said AIG didn’t need a bailout.
In September 2008 AIG took in $85 billion from the federal government. In October 2008 an additional $38 billion. In November 2008 another $27 billion. Today AIG now needs more – lots more.
Rick Wagoner, CEO of General Motors. July 15, 2008 Wagoner said GM was a taking a series of actions that would add $15 billion of liquidity to GM’s already strong cash position.
November 2008, three months later, General Motors asked the government for aid and this February GM sought a total of up to $30 billion in U.S. government aid, more than double its original request in November. GM is certain to need billions more in order to survive.
I could go on, but you ge the point….often times CEO’s – even the best ones – can’t effectively project where their companies are headed. If they can’t, how can an individual investor? And how can an actively managed mutual fund manager who is supposed to be following hundreds, or even thousands, of companies?
