Who Is Your Undercover Investor?
About this time last year I published a post on my previous blog that I’d like to share with you now on Switch and Shift: the title of the post was Undercover Investor. The impetus in writing it was simple, really. A once and, I’m sure, future business owner myself, I look at every company the way an owner would.
“Why do they do it like this?” I ask. “Is that good business? Does it lead to either short- or long-term profitability, or is it counterproductive? If I were the owner and found my company being run this way, how would I react?”
Since publishing the post, I’ve had a number of interesting conversations, online and off. Several people have asked me if I was writing about myself; if I am right now acting as the undercover investor I wrote about. No, I’m not. There is nothing up my sleeve – I’d make a terrible spy; I can’t lie worth a damn. Am I always learning, no matter where I am? Absolutely. Is someone sponsoring me to do so? Hardly.
Another interesting discussion, which I can neither confirm nor deny, came from someone who said, “Good post. I’m actually doing that right now.” He claims the details vary, but not as much as you might think. If it’s true, more power to him. This seems like the kind of thing a lot of investors would be wise to do. If only one guy is doing this, at one company in the world…? Man, what a loss!
Finally, I have an ask of you: tell me what you think? Would you ever buy a book about such a thing? The show Undercover CEO is popular enough, and the book Undercover Economist sold well. Would Undercover Investor be worth your time and your $25? Even when I’m working on one project, I’m always thinking about the next. Please, tell me your thoughts in the comments.
Imagine you’re a pension fund manager. You’re responsible for investing hundreds of millions of dollars for your fund, so you’re always evaluating companies for their worthiness. Over the course of the next few months/year/several years, will a given company’s stock rise faster than the market as a whole? If you pick them right, your fund will beat the market and the other funds out there and you’ll be very well-paid indeed. If not? Well, if not, then you haven’t really justified your employment, have you?
In order to do your job just as masterfully as possible, you gather all the intelligence on a company that you can – industry analyst forecasts, macro-economic forecasts, evaluations of senior leadership. You sit in on quarterly investor calls with with the CEO and his team, you pour over the annual report, you hire white-shoe consulting firms to analyze the products, market, and senior leadership even further – you leave no stone unturned as you gather information that will help you evaluate whether any given company will be a sound investment or a disaster waiting to happen.
You’re pretty good at your job. Your peers admire you. Your competitors try to hire you. Your own firm gives you even more responsibility, and added perks as you advance in your career. Still, you’re always nervous. You never feel that you’re on top of things. Despite your success, you’ve picked a number of dogs over the years, some lame and some downright terrible investments that still keep you up at night, wondering, “What if…? What else should I have done to know ahead of time that this stock was destined to tank? If only….”
And then there’s Enron. No, you didn’t have any money tied up with them. But your mentor did. He was the superstar of your firm, and then one day he was ruined, wiped out. He lives in a two-bedroom apartment in Ohio now, down the street from his elderly mother. His wife left him, and he only sees his kids two weeks a year. How could he have known? he asks you whenever you take his call out of pity. And while you’d like to tell yourself he should’ve seen it coming, that anyone could have seen under that firm’s shiny veneer to its rotten core, deep down inside you wonder: what if? Because you know that could have been you.
Then one evening you’re at a dinner party at a neighbor’s house, in the winter resort town where you have a weekend place so you can unwind occasionally and forget all about Wall Street for a day or two. You love these neighbors, a retired couple whose intimate parties always bring a fascinating collection of individuals. You’re never sure if you’re going to sit next to a hot-shot billionaire or the pool guy, but you know whoever it is, they’ll be one of the most interesting people you’ve spoken to all season. This couple collects brilliant minds like some of your other neighbors collect Picassos.
This evening in particular, you meet an author and serial entrepreneur, not much younger than you. Like your hosts, he doesn’t pursue business ventures to make money; he dives into something when he finds it sufficiently interesting. Right now he’s between projects, so he’s helping to run a nonprofit that he founded with his wife to help local school kids from disadvantaged families.
You like how this guy thinks. There’s something about him: completely unassuming, almost self-mocking, yet entirely sure of himself, all at the same time. And something he says sticks with you the rest of the weekend. “There’s a sea change transforming business right now,” he says. “The Twentieth Century is over, and many of our current leaders won’t get that till it’s too late. The age of using people as commodities, and of short-term profit, is already past.” It isn’t just the message, but how certain he is as he shares it. And it gets you to thinking.
When you get back to the city, you buy his first book. Interesting, so you check out his blog. Fresh. You keep asking yourself as you read, “Is this guy living in a dream world, or is he actually onto something?” And you read in Bloomberg about another bank caught up in another ethics scandal. Ouch. You own a piece of that one, and your team has spent thousands of hours trying to decide how much more of their stock to buy. No one, including you, has seen this latest hit coming.
Then, the final piece of the puzzle falls into place one day as you’re fixing yourself a coffee and your friend Bob joins you for a little break. “Hey, did you see Undercover CEO last night?” he asks, shaking his head. “My friend Wally always shorts the stock of any company on that show. After the episode featuring a given company, the next day its stock takes a dive. He’s bought a boat from the proceeds.”
Bob chuckles and walks away, leaving your gears whirling faster than they have in a long time. ‘What if?’ you think to yourself. ‘What if instead of a company’s CEO putting on a disguise and serving customers at the counter of one of his stores, what if a fund manager sent someone to work at a company? Not just for a week, but how about a long-term assignment – maybe even a couple of years? Something like this: the manager tells the guy, “Get hired if you can – no help from inside. The hiring process is important, after all. Then just… work. And learn. Observe the company from the inside-out. Where is it strong? Where is it weak? Are the CEO, his direct reports, the middle management, and the front line – all of them – are they doing it right? If we were to invest, should we replace anyone? Change any processes? Should we just walk away instead?”
‘This would require the right person for the job, of course. Someone with a fresh set of eyes. Someone whose insight I respect, whose outlook I admire. Also, someone who is between projects, and whose imagination would be captured by the assignment. This would have to be totally on the up-and-up, of course. No deceit to get in. No pay until the assignment is over – and certainly no reporting until the assignment is over, because I’m not about to do time for insider trading!
Most importantly, the person in question could have no incentive whatsoever to approve of or disapprove of the investment. The advice would have to be entirely unbiased by economic considerations. Same generous pay-out whether it’s thumbs-up or thumbs-down.’
Imagine if that fund manager knew just where he could find such an individual: his own spin on the reality show with the disguised CEO. His own Undercover Investor.
Yeah. Imagine that.