Another cautionary tale from a person who should have known better comes from the life story of Warren V. "Pete" Musser, founder and until 2001 chief executive officer of Safeguard Scientific. A local business legend in Pennsylvania, Pete Musser began life in the business world as an engineer and then a stockbroker.
He eventually branched out to become a venture capitalist, although that term wasn't around back in 1953 when he started the company that was originally called Lancaster Corporation. Two name changes later, the company when public in 1967 and began trading on the NYSE in 1971.
Safeguard has been a holding company that invests in small firms. In the past 10 years the company has invested in or acquired 180 businesses and has been involved in 40 mergers and acquisition exits as well as 24 initial public offerings. The company has been an incubator of companies, and it knew the ropes better than any average investor could. Yet Pete Musser began to buy the shares of other high-tech companies in his own account, and with it began to run up his margin account.
Safeguard shares changed hands very quietly for years and only caught fire after the public learned it was an incubator of small companies and could have a series of hot initial public offerings from its pool of holdings. Throughout the initial excitement Musser was a cool customer, but soon the ghost of Sir Isaac Newton took position of his soul and it was off to the races.
At Safeguard's peak in 2000, Pete Musser's 8 million shares were worth close to $700 million. I guess any of us would have bought in to the hype, but this is a guy who understood business. He understood how nuts the systems was—or maybe he didn't. There was talk of the "new paradigm," when earnings and even sales really didn't matter. I bought in to it for a while, too.
Safeguard shares began to tumble hard. Even though the stock's descent was almost straight down, terra firma didn't come until late 2002. By this time Pete Musser was in terrible financial shape.
Recently Safeguard Scientific settled a class action lawsuit for loans of $10 million and guarantees of $35 million to Musser to help him cover margin calls. In addition, Musser sold 7.5 million of his shares. By all accounts Musser is a great guy, a visionary, and a charismatic figure who got caught in the swirl of hype and promises of endless riches. Perhaps he should have known better. Like Bernie Ebbers, whose defense was that he didn't know what was going on, didn't own a computer, and was a victim of poor business execution, he was in the eye of the storm. If there were such a thing as a bird's-eye view, these guys had it.
In the end, it doesn't matter if you are one of the puppet masters or the greatest mind of your generation. Anyone is capable of succumbing to the thrill of the game and greed. Even when the jig is up, it's typical for investors to hold on to visions of riches and images of grandeur and take the ride all the way down. In fact, sometimes the smarter the investor, the bigger the financial hit when the wheels comes off an investment.
Call it arrogance or ego, but as a broker and analyst I've seen doctors lose a lot of money in medical and biotechnology stocks over the years. I think it is partly a factor of doctors feeling like they are the supreme authority in their field (much like Alec Baldwin in Malice). This leaves them vulnerable to making huge mistakes in the stock market. They hear a story, decide the story is great, buy the stock, and go into autopilot mode.
Once they've bought into the potential of a company they're all in, hook, line, and sinker. The same happens to other intellectual professionals, folks whose mental prowess brings home the bacon. If they have it all figured out, it's tough to get them to unfigure the situation even as the underlying share price of their stock tumbles unabatedly.
During the 1990s I had the toughest time trying to get people who made their living in Silicon Valley to sell any tech stocks. I can still hear the echoes of these brainiacs (and I don't say that in mean-spirited way) saying things like "XYZ can't lose, it makes a blah blah blah that allows for fast transfer of information through a unique blah blah blah." Obviously, back in the 1990s, you didn't have to have a degree in computer science to think you knew everything about tech stocks.
I used to work hours trying to keep up. During the troughs of the tech rally, there were corporate fillings and a ton of other material to read. Magazines like Red Herring and Business 2.0 were the size of the Manhattan phone article, and it was impossible to stay completely abreast of the newest thing. Yet I would have folks who didn't even know what a company did tell me with unshakable resolve that their investment was foolproof.
Like the famous song says, "Everybody plays the fool sometime." And if you're in the stock market, you don't begin being foolish until you have totally ignored all the writing on the wall.
Of course, there is always hope and there is always the future, which goes on forever, so in theory any company could "eventually" be a gigantic winner. I've seen a lot of stocks, once left for dead, come back over the past few years, but it still would have been smarter to bite the bullet, rather than waiting for the crash landing.
Swearing Off Stocks
A lot of investors have been bailed out of the negative aspect of sulking this time around because of the unprecedented rally in real estate. However, I think that, just like in the stock market, most people piled into real estate during the eighth and ninth innings of the boom and a large percentage will be hammered. (Although real estate doesn't go "no bid," the probably soft landing was harder than some expected or wanted, especially for those who jumped out of the frying pan of stocks and into the fire of the late-stage real estate rally.)
The point is that while it hasn't received the ink that the housing market has, the equity market was climbing off the canvass, and folks who dumped but bought other stocks that were excessively oversold are doing well and will be doing great over the next couple of years.
Thus far the bounce that began on the eve of the war in Iraq has seen a lot of money being made, but not by a lot of people. If you're saddled with a bunch of nonperformers like Lucent and other former high fliers and are reluctant to buy other stocks until those chestnuts come back, then you've compounded the problem. (My son is long in his college fund— I'm happy he's still young, plus there's always state school.)
If you're holding a stock simply out of ego, and the company's margins are falling apart, revenues are decreasing, the product pipeline is drying up, and there are rapid losses of market share, then sell.
That's one piece of the Captain Ahab puzzle. Another piece of the puzzle is being able to bite the bullet and then get back into the game. Sooner or later you are going to either get back into the stock market or at least seriously consider getting back in. If you put through the best periods to be a buyer, then you've shooting yourself in the foot for the second time.
Even if you own a stock that climbed off the canvass from $10 to $15 (a 50 percent move), if your cost is $45, you may have wasted a lot of time and opportunity by not investing in other stocks that aren't merely bouncing with the broad market. (If you have such plays and have been able to create additional holdings, then it's not such a big deal.)
By failing to jettison the old laggards in your portfolio, you create a series of problems, including:
· The emotional toll of looking at huge loses every time you look at your account.
· The financial limitations of not creating cash to find a better investment.
· Wasting time monitoring yesterday's losers when you could discover tomorrow's winners.