Individual Stocks and CEO Risk

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NYBoglehead
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Individual Stocks and CEO Risk

Post by NYBoglehead »

Another confirmation that holding individual stocks opens you open to enormous risk. Last year JC Penney was a profitable company and paid a dividend. Then Ron Johnson was annointed as CEO, basically because he worked at Apple and everyone thinks Apple is just so cool. Last quarter JC Penney lost a cool $147 million, their second straight quarter operating at a loss. The dividend has long since been cut and the share price has plummeted. Same store sales were down more than 20%

But at least they've got a cool CEO who worked at Apple right?

Nothing wrong with holding a few individual stocks outside of your retirement accounts for a little fun. If anything, I'd recommend it so you can compare the returns of those against your index funds (it has affirmed my belief that index funds are superior).

Just thought I'd point out that holders of individual stocks are just one overpaid moron away from losing their shirt on their investment.
Bob.Beeman

Re: Individual Stocks and CEO Risk

Post by Bob.Beeman »

I agree. Individual stocks are incredibly risky. That's why I am slowly liquidating my Apple stock that I bought (mostly as a souvenir rather than an investment) back during the "Apple is going broke next month" days.

Hopefully Tim Cook is an excellent CEO, but Steve Jobs is a really tough act to follow. And given that I will be on "Required Minimum Distributions" on my IRA in a few years, taking a 150x capital gain 15000% is pretty tempting anyway.

Plus, Apple has gotten into the "planned obsolescence" mode (e.g. eliminating "Rhapsody" in "Lion" so that programs designed for PPC machines won't run anymore). Actually, that's why I haven't upgraded from OS 10.5 yet. Apple blindsided the developers of some programs I use a lot and a few are still not finished with upgrades yet. When they catch up I'll happily go to OS 10.8.

- Bob.
Sidney
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Re: Individual Stocks and CEO Risk

Post by Sidney »

Individual stocks carry with them many non-systematic risks. Management is just one of many.
I always wanted to be a procrastinator.
Topic Author
NYBoglehead
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Re: Individual Stocks and CEO Risk

Post by NYBoglehead »

Sidney - agree 100%, just thought I'd point out that a lot of people thought Ron Johnson was the greatest thing since sliced bread since he came from Apple and has since managed to lead the company to hundreds of millions of dollar of losses, the elimination of a dividend to investors, and a share price that has taken a nose dive.

Bob - Congrats on the capital gain, that's great news. Another consideration in regards to selling it this year is the fact that unless some agreement is reached, the capital gains tax is set to go to 20% from the current 15% level. (not making a political statement, this is a fact)

That 5% can be a big deal given the size of your gain.
Muchtolearn
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Re: Individual Stocks and CEO Risk

Post by Muchtolearn »

Didn't I read a statement by Warren Buffet at some time that you should only invest in a company that a fool can run because one day a fool will run it?
xerty24
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Re: Individual Stocks and CEO Risk

Post by xerty24 »

I was close to shorting JCP when they announced their "new pricing strategy" back at the start of the year. There's money to be made both ways.
No excuses, no regrets.
Sidney
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Re: Individual Stocks and CEO Risk

Post by Sidney »

NYBoglehead wrote:Sidney - agree 100%, just thought I'd point out that a lot of people thought Ron Johnson was the greatest thing since sliced bread since he came from Apple and has since managed to lead the company to hundreds of millions of dollar of losses, the elimination of a dividend to investors, and a share price that has taken a nose dive.
Yes, and even more frustrating is when a CEO walks away from the crash and someone hands him/her the keys to another company (which then gets run into the ground).
I always wanted to be a procrastinator.
Wagnerjb
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Re: Individual Stocks and CEO Risk

Post by Wagnerjb »

NYBoglehead wrote:Just thought I'd point out that holders of individual stocks are just one overpaid moron away from losing their shirt on their investment.
What you really mean to say is "holders of undiversified portfolios of individual stocks....". Your mutual fund is nothing more than a diversified portfolio of individual stocks.

Best wishes.
Andy
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NYBoglehead
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Re: Individual Stocks and CEO Risk

Post by NYBoglehead »

What's even worse is when these clowns run the company into the ground but walk away with millions of dollars.
Grt2bOutdoors
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Re: Individual Stocks and CEO Risk

Post by Grt2bOutdoors »

NYBoglehead wrote:What's even worse is when these clowns run the company into the ground but walk away with millions of dollars.
Hate to break it to you, but nearly every company within any of the indexes is set up to pay millions to the departing management while the shareholders take it on the chin.

Here's another piece of advice - never buy retail sector equities, the business is much too fickle, customers are much too fickle - you can have the "in" product today, only to be "out" tomorrow - just ask Kresge (aka the blue light special over at Kmart), ask the old Macy's before Federated took them over to right the ship, ask Alexanders. The street is littered with the bodies of retail chains gone bust.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Grt2bOutdoors
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Re: Individual Stocks and CEO Risk

Post by Grt2bOutdoors »

NYBoglehead wrote:What's even worse is when these clowns run the company into the ground but walk away with millions of dollars.
Bob Nardelli laughed all the way to the bank with Home Depot. This is the result of a board of directors enamored with star quality. They fail to realize, it is usually those who worked for Bob that were responsible for the results. He just happened to be in the right place at the right time.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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NYBoglehead
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Re: Individual Stocks and CEO Risk

Post by NYBoglehead »

Tracking on that, and I know it is not limited just to JCP. I didn't invest in JCP for clarity's sake, just wanted to highlight yet another reason to index and avoid the allures of the next great thing/try to make money based on personalities.
Wagnerjb
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Re: Individual Stocks and CEO Risk

Post by Wagnerjb »

GRT2BOUTDOORS wrote:Hate to break it to you, but nearly every company within any of the indexes is set up to pay millions to the departing management while the shareholders take it on the chin.
Yup. Like it or not, that is how the very top executives are paid. They are under contract, and the contracts stipulate a severance pay (I believe 3x pay is typical). There is probably a clause for criminal activity or other serious offence, but most of the time underperformance is dealt with by forcing the CEO to retire....triggering the severance aspect of the contract.

Athletes in some sports - at the very top of their profession - have similar contracts. They get a guaranteed salary whether they play or not. So if that stud pitcher loses his fastball he may still collect $5 million per year for four years even though he was cut from the team.


Personally, I own individual stocks in the Fortune 500 area, and I can and will vote for - or against - Directors when I don't feel like they are evaluating or compensating the top executives properly. You cannot avoid the severance package for the CEO any more than you cannot avoid paying the washed-up pitcher. They lose their jobs, and that is the only consequence that you can bring to bear.

Best wishes.
Andy
Sidney
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Re: Individual Stocks and CEO Risk

Post by Sidney »

GRT2BOUTDOORS wrote:
NYBoglehead wrote:What's even worse is when these clowns run the company into the ground but walk away with millions of dollars.
Bob Nardelli laughed all the way to the bank with Home Depot. This is the result of a board of directors enamored with star quality. They fail to realize, it is usually those who worked for Bob that were responsible for the results. He just happened to be in the right place at the right time.
After that I think he had no options other than PE - maybe public boards were on to him.
I always wanted to be a procrastinator.
Grt2bOutdoors
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Re: Individual Stocks and CEO Risk

Post by Grt2bOutdoors »

Sidney wrote:
GRT2BOUTDOORS wrote:
NYBoglehead wrote:What's even worse is when these clowns run the company into the ground but walk away with millions of dollars.
Bob Nardelli laughed all the way to the bank with Home Depot. This is the result of a board of directors enamored with star quality. They fail to realize, it is usually those who worked for Bob that were responsible for the results. He just happened to be in the right place at the right time.
After that I think he had no options other than PE - maybe public boards were on to him.
Why would he need to work?, after absconding (willfully on the boards part :annoyed ) with over $100 million. Ridiculous, when you look at European companies and see their executives get paid a fraction of what they pay people here in the states. :oops: Then again, it is only a mere fraction of the overall workforce that ever sees compensation like this, most are just earning a living wage.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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CABob
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Re: Individual Stocks and CEO Risk

Post by CABob »

Muchtolearn wrote:Didn't I read a statement by Warren Buffet at some time that you should only invest in a company that a fool can run because one day a fool will run it?
I don't know if Buffet said this, but, I like it and may use it.
Bob
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CABob
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Re: Individual Stocks and CEO Risk

Post by CABob »

xerty24 wrote:I was close to shorting JCP when they announced their "new pricing strategy" back at the start of the year. There's money to be made both ways.
My wife is the JCP expert in this family, but, we both were confused by the new strategy. She used to visit JCP a couple of times a month. Since the new strategy her visits are once every 2-3 months and she usually leaves without a purchase.
Bob
Carl53
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Re: Individual Stocks and CEO Risk

Post by Carl53 »

I am reading Bogle's "The Battle for the Soul of Capitalism". Published in 2005, he describes our stock market system in his down to earth way of corporate management now managing for themselves, not us the owners, the directors being in bed with the management and not performing their duties as overseers for the owners, mutual fund management not providing proper fiduciary oversight by not holding companies and their directors accountable, bankers in cahoots with Wall Street and corporate management. We owners, whether of small numbers of individual shares or collectively as mutual fund holders have bought into the concept of quick profits as witnessed by the fantastic numbers of shares traded daily. I have not yet read much of him hitting on regulators/government but I expect that the topic will come up. I find it quite interesting that despite of all of these problems with investing in stock and the huge haircut he says we are all getting, that even he does not run from all stock related investments.
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