hubris sucks, pt. 2
Posted by Jason Apollo Voss on Nov 11, 2008 in Best of the Blog, Blog | 11 comments
So I realized early this morning (5:30 here in the forgotten time zone) that I neglected to fully empower each of you with actionable information yesterday. I rambled on about hubris without giving you the full tools necessary to ferret it out at a prospective or current business.
Yes, it’s true that I defined the difference between “swagger” and “hubris,” but I got a little caught up in my ramble and did not tell you how you can have access to the behavior and words of the management teams of your investments. The place to go is to the company’s website and to then subscribe to their conference call alerts. You can listen to almost any company’s conference call either live or in replay. Let me use AIG, yesterday’s dog, as an explicit example (and no, I don’t mean that there will be more cussing)…
Note: I am including all of the missteps to finding this information so that you can see how a wee bit of perseverance will pay off in finding this stuff for almost any company:
- I fired up www.aig.com as a first stab…that URL re-directed me to http://www.aig.com/Home-Page_20_17804.html
- Now we want to look for the Company’s “Investor Relations” section of the website. That can be found approximately 2/3 of the way down from the top and 1/3 of the way in from the left. They have a little tab there that they have created entitled: “Investor Relations”
- Click on the link. OK, now I realize that it is not a link, because the actual pertinent information is already displayed. (see even us wily veterans have to work at this sometimes)
- So below the tabs that are splayed out, “Investor Relations,” “Latest News,” and “Corporate Information” there are 4 bulleted pieces of information and they are:
Annual Reports and Proxy Statements
Dividends
Financial Reports
Stock Quote and Chart
My intuition is telling me that we want to click on the link for “Financial Reports,” so I do.
- That click takes opens a new browser window and takes us to: http://ir.aigcorporate.com/phoenix.zhtml?c=76115&p=irol-financialreports. Now we are looking for anything that says something like “conference calls” or “webcasts” or “analyst calls” or “quarterly conference call” or ?. Indeed, there is a “Webcasts” link which is the second to last item on the list of things on the left, right above “Request Publications”
- Click on “Webcasts.” That little action takes us to http://ir.aigcorporate.com/phoenix.zhtml?c=76115&p=irol-audioarchives. On this page we are told, “Welcome to the Internet Broadcasts of American International Group, Inc.” The next place to give you attention to is the place where it says, “Note: A replay of the webcast will be available through Wednesday, November 26, 2008.” What that means is that it is possible to listen to the call so that you can evaluate whether or not management is possessed…heh, heh…of hubris, that is.
- My spidey sense (all apologies to Marvel Entertainment and Kurt Cobain) is telling me that we need to look for the link that will take us to the actual conference call page. Et voila! If you scroll to the bottom of the page you will see a link that says, “Proceed to Webcast” Click on that sucker. This directs us to the succint URL of: http://phx.corporate-ir.net/phoenix.zhtml?c=76115&p=IROL-Guestbook&UniqueId=2017438&mp=irol-eventDetails&mpdp=EventId~2017438!WebCastId~814906!StreamId~1219622&pp=IROL-EnhancedWebCast&ppdp=EventId~2017438!WebCastId~814906!StreamId~1219622&pph=540&ppw=788&rdu=http*^^www.aigwebcast.com&rdt=&upv=2
- As you can see (because you are following along aren’t you) this brings up a “Registration” page that requires you to provide your 411 before they will let you listen in. All of this is straightforward until you get to the “Company*” field. Just put, “n/a” and that should do it for you. Then click on the submission button at the bottom and that should take you right to the call.
- Damn, that didn’t work, it took me to a page that says, “If the webcast player has not launched within 5 seconds, please click here.” Well it hasn’t launched, so I click. That opens up an entirely new browser window that looks like an actual web media player. Push the play button – which looks points to the right, sorta like: >
- That should get you going.
Now aren’t you glad that I left in the mistakes? The key is to not get intimidated by the process and to know that these are publicly traded businesses. That means that their proceedings are supposed to be open to the public and especially to shareholders. Now aren’t you glad you follow the blog?
- Now it is your turn to choose a company that you invest in and listen to one of their conference calls. The procedure should be somewhat similar to what I described above. Is management possessed of hubris?
*****
By the way, the typical structure for a conference call is that there are three major sections:
- A “Safe Harbor” statement will be read. This is done courtesy of Congress and the lawyers that toe the line for the Company.
- Management’s prepar…zzzzz….zzzzz….erhem…management’s prepared remarks. You can recognize this section because they will read verbatim from a script and you will be hard pressed to pay attention. But please do. This is the section that usually composes the business’s press release and that gets reported on the major news wires.
- Q&A. Ahhhh, the best part of the call. Here is where you can really evaluate management because you can see how they interact with Wall Street’s analysts (who are almost human). This section is usually dominated by the “sell side” of the business – but more on this another time.
*****
Interestingly enough, one of the ways that you could identify AIG’s hubris is that they were one of the extraordinarily rare firms that never used to host a conference call for analysts!!! Not only that, but once they did start hosting them, for a time they did not have a Q&A section. Not only that, but for awhile the Q&A section was literally like 15 minutes long!!! Maurice “Hank” Greenberg was not a very nice guy folks.
I hope that this posting was useful. Yesterday I made some posts on other Blogs to drive traffic here. Hopefully that will result in a more lively discussion here on some of these topics. Please, please feel free to ask me questions. The one question that I will not answer is “What should I be buying now.” Just about anything else is in-bounds, however.
I sincerely hope that each of you has a wonderful day!
Jason
Your latest post on how to navigate a company’s web site reminded me of something I feel somewhat guilty of: I don’t like to read prospectuses. I just got one recently as a SUPPLEMENT to the QQQQ’s original prospectus, and a casual glance showed that it was 100 pages of small print, tables, charts, and such. I looked through it briefly looking for any sentences that might say “we will take your money and head for the nearest tropical island to live high on the hog at your expense” but there was nothing to that effect anywhere to be found.
I know that as an investor I’m supposed to read all the prospectus on the funds and companies I invest in, but at a hundred pages a pop, that is very impractical. Plus some of it is of a technical nature, beyond my interest level by a large margin. So my question is, if I forced myself to read only three or four pages of the average 100-page prospectus, which ones would be the mose relevant and revealing? What I REALLY want to know is what is the risk I will lose my investment, and if it is a fund, what is the basic criteria for what is invested in, and how much will I have to pay, if a fund, for getting in, getting out, and maintaining my money in the fund? Oh, and the most important question, “are you lying about all this stuff?” I doubt they will answer that in the prospectus!
The “Risk Factors” section of this supplement alone was four full pages of tiny type. Give me a break! I come from the school that says that too much information can often be worse than too little information because of the limitations of humans to absorb large amounts of data at any one time. But I also realize the lawyers tell them they must be thorough, and there’s the dilemma.
I guess what I’m looking for is a “cliff’s notes” version of the prospectus with highlights from every area that I can read in five minutes or less. And that I can rely on to be truthful. Yeah, I also believe in the tooth fairy too!
I never invested in Enron, but would be curious to see what their prospectus told before their demise. Could not one make the case that a prospectus is no guarantee that there is a shred of truth in it? What about Fannie and Freddie? Some really smart guy should write a book on how their prospectuses did NOT fortell the demise of those institutions, and why we investors cannot depend on them since history has shown they are (as history has shown) virtually worthless. Or am I being too cynical, given the meltdown that has just taken place?
We lowly investors are very curious as to how, with reams of data and prospectuses by the ton, how any financial meltdown could happen without giving plenty of notice. I will never figure that out, and suspect I am not alone in my curiousity about that. I thought that after Enron this stuff was not supposed to happen, at least without prior notice? At least if I saw in a prospectus for Fannie or Freddie or Enron “we will take your money and head for the nearest tropical island to live high on the hog at your expense”, I could grasp that and understand that, but then find another investment to sink my hard-earned dollars into. But I WOULD appreciate their honesty, in any case!
There was a time when I thought that prospectuses could be trusted to give an honest assessment of an investment. No longer. I now think they are essentially worthless when it comes down to the real meat of the matter of whether or not the company is corrupt, or your investment is in peril. Recent events have proven my point I think. I no longer trust individual companies, or for funds, those overseeing my investments, but then where do I turn? A can in the back yard? Maybe President Obama should push for a “Truth In Prospectus” bill that would help us investors get the info we need in a manner that is understandable and reasonably terse. Being honest would be a plus! Apparently what they have now is not working too well. It wastes trees but does not really protect the investor in my humble opinion.
From now on, when I see any page in a prospectus that says, “(This page has been left blank intentionally)” I will substitute the possibly more true phrase, “(This page has been left blank intentionally because we would otherwise have to tell you here that we will take your money and head for the nearest tropical island to live high on the hog at your expense.)”
Hello John…thanks for your comment. Let me try and answer you succinctly (not something I am known for).
THIS POST WILL BE ABOUT PROSPECTUSES
First of all, a prospectus is a document that usually lays out the contract between you and a mutual fund or similarly managed product, it is not a document that is published by a publicly traded company. The equivalent document for a publicly traded company would be called a 10-K, which is very similar to an Annual Report.
For now, let’s talk about the prospectus. This document is not going to answer definitively whether or not you are going to lose your money. All you are likely to get is “boiler plate” language talking about possible risky outcomes. However, you can get some idea of the kind of risk you are taking on as a fund investor by looking at the list of permissible investments. Ideally you ought to understand each of the possible investments that the firm might make on your behalf. If you don’t then you have two options: research it further, or punt.
Now a caveat before punting…sometimes prospectuses are written with lots of permissions for their portfolio managers, while it may be the case that they just invest in stocks, bonds, and money market securities.
The short of it is that to get a true evaluation of risk, you want to understand the investment philosophy of the funds you have invested in. Ideally, the risk profile ought to be in alignment with your own. The next thing to evaluate would be the annual report from your fund managers. Are they forthright with mistakes, or is everything presented in glowing terms. Evaluate these folks as you would a prospective spouse and you will make the right choice.
To your point about the prospectus being truthful…it is that. However, it is not particularly useful. It’s just a contract. What you are looking for is the annual report for the funds you have. That is required to be published twice annually.
THIS POST IS ABOUT A PUBLICLY TRADED COMPANY’S ANNUAL REPORT
OK, so John, you also asked about Enron (tk: ENE) and Fannie and Freddie and whether or not their catastrophe’s were foreseeable. The answer is absolutely they were foreseeable. In fact, I gave a little speech to a group of undergraduate students at the University of Colorado in 1999 in which I said that I thought there was going to be a financial scandal in the US rather imminently. I singled out Enron as an example of a bad company.
How did I know? Because Enron’s annual 10K report (go to http://www.sec.gov/edgar) was incomprehensible even to a sophisticated reader like me (Masters in Accounting). That was a bad sign. All of the necessary information was there, but it was hidden amongst a bunch of legalese and worthless information.
The dirty little secret of the investment business is that most mutual fund firms do not do their own research. No, I am not kidding. They use third party research that they typically will couple with some sort of proprietary stock screen and then they buy and sell based on that alone. Very few professionals know how to, or bother to, read a company’s SEC mandated filings. True story.
So how did the meltdown happen? Take a look at the first few postings on this Blog. The short answer is that the meltdown happened because of several factors:
1. Rampant greed, and other unethical behaviors, brought on by competitive pressures
2. Lack of transparency in the financial system that led to a lax regulatory environment
3. Horrible lending standards
In my experience there is only a small amount of lying in these official documents – it does, in fact, occur. However, that said, I think you make a very powerful suggestion. Namely, that annual reports have to be written in a clear manner so that anyone who has at least a high school education can understand them. As it is, they are not written in this manner and it IS possible for this to be done in this fashion.
Thank you for your continued interest and I welcome any follow up questions or feedback.
With smiles!
Jason
Jason,
Thanks for your thoughtful posts. Used to be that anyone who got a prospectus in the past was sophisticated enough to understand it and was a fairly experienced investor. Everyone else just bought CD’s at the local bank. Now with the proliferation of mainly 401(k)s even the least experienced investor may now get a prospectus and be expected to read it before they invest or send money. But yet prospectuses have remained the bloated legalese-filled documents that are hard to read and understand for even moderately experienced investors I believe. I think that they need to be simplified and shortened to help those who don’t want to dig through 100 pages of text and charts to find out what they are getting into.
Speaking of complex reading material, the last time I bought a house I had to sign like 100 documents (well, it seemed like it) all of which had tiny print and a lot of legalese. And no, I did not sit there and read each one, for we all wanted to be home in time for bed that evening! But having bought homes before, I was more familiar with the process than a newbie. I think there may be something to the theory that many people who are in home-mortgage-payment-hell now really bought homes without fully knowing what they were getting into. Can we honestly expect someone with just a high school education to understand most of that gobbeldygook? Does Joe Sixpack really know what an ARM is and how it works? I think that the truth in lending laws should be changed to make the summary of the loan simple and straightforward. To quote from an ancient Cheech and Chong album, “you pay 50 dollars down, 50 dollars a week for 50 years!” Now THAT most people can understand!
I guess my pet peeve is that even though I am college-educated, many of the documents having to do with my investments are bulky, convoluted, hard to read and understand, and intentionally verbose when it may not be needed. I think this is also true of house buying documents and to a lesser extent other types of loan documents. It is like the writers of those documents feel that if they are convoluted enough, no one will dispute them–or even read them. I feel that reform is needed in all the consumer legal documents area such that you do not have to have passed the bar exam or be a CPA to understand them. Or take three weeks to read them!
Wow, I believe all of Johnk’s points are excellent and valid. Johnk, I think you have identified one of the certain causes of the mess we are embroiled in at the moment. There have been rumblings for the better portion of this decade in financial circles (the SEC, Financial Accounting Standards Board, etc.) that financial documents need to be simplified.
The difficulty of course is that the perception of those documents in the legal community is that they protect you. Ironically, their density, serves to obfiscate and make consumers more vulernable.
Which brings me to my next point. In our consumer and capitalist culture isn’t it just about impossible to go through life without having heard the importance of understanding your financial documents? Notice that I did not say “read” your financial documents. I am a big believer in responsibility and think that the lawyers and businesses that hire them should be held to account for written documents that don’t actually communicate, which is what words are supposed to be about in the first place. However, I also feel that consumers need to step up to the plate and insist that the terms are explained to them.
I know what you might be thinking, “Yeah, and who would they rely on to explain it to them? The mortgage broker? That’d be like having the fox watch the chickens.” No, instead I am thinking that both the purveyor of the financial document (mortgage broker, stock broker, whomever) be on the hook for 1/2 the price of an independent arbitrator, the consumer for the other half, who would ensure that all questions were answered honestly and were in accord with what was written in the financial documents.
Another potential solution might be to simply provide “safe harbor” to institutions who could publish a summary page of the truly pertinent information. Right now they all feel so vulnerable to the chance of being sued.
Another solution is to make it mandatory nationwide that high schools start trying to provide financial acumen to its students. If nothing else, just to explain the structure of these things and to explain the jargon so that folks are better prepared.
Lastly, what about having regulators require that businesses provide “what if” scenarios to consumers so that they understand what would happen in different, potentially risk environments to their finances?
Johnk thank you for your posts!
Jason
Pretty good article. I just stumbled upon your site and wanted to say that I have really enjoyed reading your blog posts. Any way I’ll be subscribing to your feed and I hope you post again soon.
To Legalsounds: thanks for the interest. Because of the launch of my new book The Intuitive Investor there is a lot of traffic coming the way of the site and the blog. I hope to daily continue to earn your trust and confidence in my analysis. If I deliver on that, in exchange share the info about the blog with pals. And you should also check out the free chapter of my book. If you like that, buy a copy! Jason
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Wow Quicksilver! Thank you for the very kind words. I am very glad that you enjoy the blog. My promise is that content here will always remain commercial free. It’s important that there be an investment forum somewhere that you can trust is free of monied interest. My sole interest is to empower you and in the process get feedback like that which you left.
Now, in terms of commercial interest, you might want to check out the free chapter download of my book offered here on the site. If you like that then place an order for The Intuitive Investor. Its goal is very similar: to empower you to make more conscious investment choices in your life.
Jason
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Well that’s very kind of you to say. Jason