Good Morning Hillsboro Forum Series
September 10, 2002; 7:30 to 9:00am

Restoring the Public Trust: Corporate Credibility & Accounting Practices


Being a Better Business Owner - let the Buyer Beware

· The average investment portfolio has taken a huge hit over the past 30 months, causing concern among investors, especially those close to retirement

· The average investor, who bought hook, line, and sinker into the get rich quick greed of the 90's now views investing as a fixed game with insiders, celebrities, and the powerful benefiting at the expense of the little guy

· The playing field can be unfair, especially in the area of IPO's, momentum stocks, and hard to understand businesses (anything that involves a "get rich quick" flavor)

· It is very difficult for you, the public owners of a corporation, to control management, given the decentralized nature of public ownership

- Boards of directors are supposed to supervise management, but all too often end up in collusion as CEO's serve on each other's boards and give each other stock options as party favors

- Mutual funds remove the public owner further yet from control of management

- Government regulation is meant to control fraud, but bad business decisions generally go unpunished because of the insulation of management from their public owners

· When indexes were returning 20% a year, no one cared about exorbitant management salaries, high mutual fund expenses, or ridiculous business plans, "A rising tide lifts all boats"

- The stock market now has the full attention of the investor

- Given that investors need to use this flawed system to create wealth - let the buyer beware becomes extremely important



How do you protect yourself with all these obstacles to being a good public business owner?

- Successful investing in an unfair playing field involves strict discipline over your human nature and a historical understanding of how you can benefit. Most investors quickly give in to their human nature, even the power elite



In order of importance:

1. Understand that the stock market is about two things; historical averages and regression towards historical averages

- Get scared, and conservative, when stock prices and company valuations get above historical averages

- Get greedy, and aggressive, when stock prices and company valuations go below historical averages

- A good company is not necessarily a good investment, and a poor company is not necessarily a poor investment

2. Diversification

- Don't make huge sector bets, such as technology, especially when the sector gets elevated above historical averages

- Diversification means owning a basket of investments that represent all sectors of the economy, not a mutual fund with 500 technology names in it

3. Know your investments or pay someone to know your investments

- Mutual funds make it nearly impossible to follow the companies you own

- Understand your business and its valuation relative to its competitors, sector, historical averages, and the market in general

- Watch management, their patterns of insider stock sales, their board of directors, and whether their financial incentives are tied to the long-term creation of shareholder wealth

Summary

- In spite of an unlevel playing field, stock returns have never been outperformed by any other investment class over any 25-year period

- As an individual investor, you have no control over corporate accountability, but you do have a tremendous amount of choice over which corporations you choose to own

- Given that there are over 10,000 publicly traded companies, you can afford to be a very picky business owner in selecting a dozen or so companies in diversified industries that you can reasonably follow. The key is buying them when they are out of favor, i.e. going against human nature

- By paying attention to detail and controlling your human nature (or hiring someone to do this for you) you can participate in the wealth creation process without being a member of the power elite

- While the system needs overhaul, and corporations do occasionally defraud investors and misuse power, to work within the system the average investor has to look out for themselves and being a good public business owner means letting the buyer beware

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