Over the years, I’ve developed a lot of rules for investing. These rules are meant to stop me from doing foolish things and over time, these rules have saved me a fortune. I am now adding another rule—You Can’t Argue With Stupid.
Let’s face it; some people just are not cut out to be public company CEOs. Everyone has their skills. Some guys are great with people and some guys are great politicians. Som guys can cut costs and some can motivate the troops. Some guys know how to really tell a story and get shareholders excited while some guys do brilliant acquisitions. However, it takes a special person to be a public company CEO. You need to be able to do all of the above and do it with a level of integrity that is almost unmatched in the real world.
It’s rare that you find a perfect CEO. Instead, you find someone with strong skills in some places and hope that they don’t completely blow it in other categories. Of the key skills, you NEED someone who is strong in operations. After that, you can be more forgiving. If they cannot tell the story, you just accept that the shares will always trade at a low multiple—I can live with that. What is dangerous is when a CEO doesn’t understand corporate strategy. That’s the place where you can lose everything.
When you look at creating shareholder value, you have to toil for years to build value. It’s very easy to destroy value. One stupid acquisition can do it, the same goes for raising capital at the wrong time. Some people are just comically bad at this stuff. There is nothing worse for a company than a CEO who thinks he’s good at it when he’s not. These guys are just walking patsies and they’re egged on by their investment banker buddies looking for fees. It’s a train wreck that you can see coming.
I cannot tell you how many times I have had an investment that seemed cheap and I was confident in everything except the CEO doing something stupid. Almost every time, my fear was eventually confirmed. As a large shareholder, you often get an inkling that something is about to happen before it happens. You can call the CEO up and try to stop it, but you just can’t argue with stupid. If they want to do something boneheaded, then they probably will. Now, you are stuck. You look at the company, it seems cheap and you justify holding on because it’s too cheap to sell. I mean, what are the odds that the CEO will do something that stupid a second time? Probably pretty high actually.
From now on, my rule is that I am hitting the bid as soon as one of these guys makes a sizable corporate mistake. If I cannot trust the guy, I am gone! I don’t care how cheap it is. I don’t care how many shares I have or how difficult it will be for me to get out. I’m not going to patiently sell and hope for a better price because the shares are cheap. No! I am going to blast my way out and just be done with the damn thing. You just can’t argue with stupid. Bad CEOs are walking time bombs. The shares might be cheap, the business might be going fine, but a guy who will destroy value once will destroy value a second and third time as well. I have been too patient with these guys in the past. I have tried to reason with them and educate them. Going forward, this will have to change. I’m selling all my shares before they can destroy everything.