Don’t put stock in size of CEO’s home
TEXT OF COMMENTARY
KAI RYSSDAL: The Securities and Exchange Commission is trying to figure out how, or even whether, pay is tied to performance. And to be honest, it’s not having much luck — the Commission released a report today urging companies to disclose how pay levels are set for their executives.
There’s also a slew of recent studies linking social factors, like a CEO’s personal life, to a firm’s stock price. Commentator and economist Susan Lee isn’t convinced:
SUSAN LEE: Economists have been studying the size of a CEO’s house, whether that CEO has a trophy spouse or appears on magazine covers. One recent study concludes that, on average, stocks of companies run by chieftains who buy or build mega-mansions will under-perform the market.
But before you run out and start trading on this information, think about this: These studies are often screen out some factors that could influence their outcomes.
Not only that, one of the most successful investment strategies ever deliberately ignores sleuthing around in management’s private life. It’s called “value investing,” a technique for picking stocks outlined in the classic work Securities Analysis. Benjamin Graham and David Dodd wrote the book more than 70 years ago.
Value investing doesn’t give a fig about the personal lives of CEOs. Instead, it focuses on balance sheets. Value investors, like Warren Buffet, look for companies that are trading for less than their intrinsic value.
They scrutinize various ratios, like price-to-book value, to find undervalued assets. Then value investors buy and hold onto those stocks, for far longer than a CEO’s average tenure of five years.
Corporate performance depends mostly on the state of the economy. So it doesn’t matter if the CEO of a widget firm just married his third trophy wife and has an 8-by-11-inch photo in the annual report. If a gangbuster economy needs lots of widgets, his firm’s stock will soar. And vice versa.
Even if the CEO of widget firm has been married to same person for 30 years, the price of her stock will be in the dumps if a sagging economy doesn’t need widgets.
The net-net? Collecting gossip about a CEO’s private life is about as useful for stock-picking as having monkeys throw darts. And a lot less fun.
RYSSDAL: Economist Susan Lee lives in New York City.
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