How to Profit from Rampant Incompetence
Friday, January 23, 2009 | Ethan RobertsRating:
Last week a participant on Tickerhound.com made an extremely astute observation. Basically he said that when you have a stock portfolio, you should treat it like a business, and you become the CEO of that business. You will have some "employees" (aka stocks, ETFs, or mutual funds) that will perform well, but you may also have some "employees" who are under performing. Under performing "employees" who show no sign of improvement should be "fired" (ie. sold), and replaced with "employees" who can do a better job.Words of wisdom, for sure.
So this week, I intend to have a sit down meeting with my own portfolio, and a few of my "employees" are about to get pink slips. The main one that comes to mind is General Electric (GE), which has been an "employee" of my company for quite awhile now, and has cost my "business" a fair amount of money. I am not happy at all with GE's performance, and he is going to have to convince me why he should remain a member of my otherwise competent staff!
Nice job, Stan...
It just seems like incompetence is everywhere today. From the fast food restaurants that can't seem to get your order right, to the doctor's office that faxes confidential patient records to the wrong fax number (I actually have received these on my fax twice!), to the car manufacturers whose cars constantly get recalled, to the schools that let students who can't spell graduate, to the management of the Detroit Lions football team (who had an 0-16 record this year and haven't won a playoff game since 1992), incompetence is rampant, tolerated, and sometimes even rewarded! Sometimes we even reward incompetence, such as lowering mortgage principal for people who can't pay their mortgages because they bought homes they couldn't afford!
We must demand better, from ourselves as well as others.
But we can also use incompetence to our advantage. For example, look around your work environment. See any incompetence among your colleagues? You know who they are, the slackers, the lazy guy in the corner office, the woman who makes mistakes constantly, etc.
Sometimes it becomes infuriating because you feel like you are the only one who is actually working! But the most important thing is to do your job and do it well. Take the extra time to make sure that the quality of your work is superior. People may think their manager doesn't notice the goof-offs from the good workers, but I have been in management, and believe me, managers do see all that goes on.
With others under performing, your efforts will stand out from the pack and should eventually land you a promotion or nice raise. But if that doesn't happen, then your talents are obviously being wasted on an unappreciative company and you should consider looking for another job or career where your abilities and hard work will be noticed.
We must demand better, from ourselves as well as others.
But we can also use incompetence to our advantage. For example, look around your work environment. See any incompetence among your colleagues? You know who they are, the slackers, the lazy guy in the corner office, the woman who makes mistakes constantly, etc.
Sometimes it becomes infuriating because you feel like you are the only one who is actually working! But the most important thing is to do your job and do it well. Take the extra time to make sure that the quality of your work is superior. People may think their manager doesn't notice the goof-offs from the good workers, but I have been in management, and believe me, managers do see all that goes on.
With others under performing, your efforts will stand out from the pack and should eventually land you a promotion or nice raise. But if that doesn't happen, then your talents are obviously being wasted on an unappreciative company and you should consider looking for another job or career where your abilities and hard work will be noticed.
Incidentally, I think Tycoon readers as a whole do expect competence. I can write a 3,000-word article, and if I misspell one word, someone out there is sure to let me know about it! Make a bad stock pick, and people will still remind you about it a year later. But I think Tycoon readers are also fair and tend to be very complimentary when they enjoy your work. So I have no complaints.
I believe that our elected government officials are the absolute champs when it comes to incompetence, red tape, and inefficiency. Take the recent Presidential election, for example. Barack Obama was clearly able to capitalize and profit from the last four years of economic incompetence and passive inefficiency of the Bush administration. Americans were so fed up with the substandard performance of our so called "experienced" leaders, they were eager to elect someone new and exciting, even if that candidate's political resume was a little short. I wish Obama well, and truly hope that the gamble of Americans trading freshness for experience pays off.
I also believe that, on the whole, Congress has been extremely incompetent in allowing the sub prime mortgage fiasco to drag our economy down, and I urge all Americans to think twice on future Election Days before they automatically re-elect the incumbents who represent their districts, regardless of which political party the incumbent is from. Ask yourself, have they really done anything to deserve re-election?
So if incompetence is to be found almost everywhere, can we really make money from it?
The answer is yes!
The trick is that you have to recognize the incompetence early on, before it becomes the catalyst for a company, sector, or market meltdown. Examples in the last few years include Detroit automakers, banks with large amounts of sub prime mortgages on their books, and retailers such as Circuit City (CC), that bastion of lousy customer service and the poor consumer buying experience. Sometimes, as with Circuit City, all that's needed is a trip to a few of their stores to realize the level of incompetence that will eventually bring down the stock price and the company itself. At other times, a bit of research into a company will uncover increasing debt levels, decreasing earnings over several quarters, and other red flags of incompetence that are creating profit opportunities for investors, especially those who like to short stocks or use options.
But the Circuit City meltdown will also be a boon for Best Buy (BBY). The announcement last week that Circuit City was closing all of its stores pushed BBY stock up 8% in one day. With their largest competitor out of the way, and despite being hurt in the short term by Circuit City's liquidation price cuts, BBY is now poised to see better long term earnings going forward, although it may not happen right away in this tough economic climate. A smart investor can now profit from Circuit City's incompetence by picking up Best Buy shares for the long term, especially at a stock price which is 40% lower than a year ago.
Most often a company's incompetence begins at the top. Ask any long time Home Depot (HD) employees what they think about former CEO Bob Nardelli, who alienated both employees and customers with his staff cuts and replacement of experienced full time staff with neophyte part timers. By 2005, Home Depot was last among major retailers in the University of Michigan's annual American Consumer Satisfaction Index. It is no wonder that Lowes (LOW) stock, with better management, and more of a focus on customer service, has outperformed Home Depot for so many years.
I also believe that, on the whole, Congress has been extremely incompetent in allowing the sub prime mortgage fiasco to drag our economy down, and I urge all Americans to think twice on future Election Days before they automatically re-elect the incumbents who represent their districts, regardless of which political party the incumbent is from. Ask yourself, have they really done anything to deserve re-election?
So if incompetence is to be found almost everywhere, can we really make money from it?
The answer is yes!
The trick is that you have to recognize the incompetence early on, before it becomes the catalyst for a company, sector, or market meltdown. Examples in the last few years include Detroit automakers, banks with large amounts of sub prime mortgages on their books, and retailers such as Circuit City (CC), that bastion of lousy customer service and the poor consumer buying experience. Sometimes, as with Circuit City, all that's needed is a trip to a few of their stores to realize the level of incompetence that will eventually bring down the stock price and the company itself. At other times, a bit of research into a company will uncover increasing debt levels, decreasing earnings over several quarters, and other red flags of incompetence that are creating profit opportunities for investors, especially those who like to short stocks or use options.
But the Circuit City meltdown will also be a boon for Best Buy (BBY). The announcement last week that Circuit City was closing all of its stores pushed BBY stock up 8% in one day. With their largest competitor out of the way, and despite being hurt in the short term by Circuit City's liquidation price cuts, BBY is now poised to see better long term earnings going forward, although it may not happen right away in this tough economic climate. A smart investor can now profit from Circuit City's incompetence by picking up Best Buy shares for the long term, especially at a stock price which is 40% lower than a year ago.
Most often a company's incompetence begins at the top. Ask any long time Home Depot (HD) employees what they think about former CEO Bob Nardelli, who alienated both employees and customers with his staff cuts and replacement of experienced full time staff with neophyte part timers. By 2005, Home Depot was last among major retailers in the University of Michigan's annual American Consumer Satisfaction Index. It is no wonder that Lowes (LOW) stock, with better management, and more of a focus on customer service, has outperformed Home Depot for so many years.
Chart of Lowes stock price (red) vs Home Depot (blue) from 2000-2009
The examples of Circuit City and Home Depot illustrate the principle of how competently run businesses can benefit from the incompetence of others. Home Depot's loss of business during the Nardelli era was Lowes' gain, and the removal of Circuit City as competition will serve Best Buy well. With Linens N' Things now going out of business, a stock like Bed, Bath, and Beyond (BBBY) could also perform much better.
So you need to take a close look at your investment portfolio. Using websites like www.bigcharts.com or www.stockcharts.com, you can run interactive performance charts of all your stocks to compare their relative strength. If you are a competent CEO of your own "business", you will want to remove the poor performers and replace them with more shares of your better performers, or perhaps new shares of stocks which are showing good relative strength vs the overall market.
For now, I'm going to get cracking on my own portfolio, and a good place to start may be to dump my GE stock and pick up some shares of BBY or even BBBY! (Careful not to confuse those two companies, as their symbols are almost identical). The bottom line: If I don't perform more competently by making the necessary moves, I may soon find this fortune cookie upon my next visit to my local Chinese restaurant:
Oh well, as long as I get the Stan O'Neal $everance package, I'm cool with that!
Are there any Tycoon readers would like to share who is their most incompetent "employee" that needs to be shown the door? Or perhaps you have a few thoughts on which "employee" should replace the one that is getting the pink slip? Would love to hear from you.
Remember, do not settle for incompetence. Always demand competence in all walks of life!
See you next week!
Are there any Tycoon readers would like to share who is their most incompetent "employee" that needs to be shown the door? Or perhaps you have a few thoughts on which "employee" should replace the one that is getting the pink slip? Would love to hear from you.
Remember, do not settle for incompetence. Always demand competence in all walks of life!
See you next week!
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Ethan Roberts
Contributing Editor
The Tycoon Report
