By Jeffrey Lee Funk and Gary N. Smith
How many times have you heard, “If you had invested in Microsoft at the beginning…” If you had invested in Google at the beginning…” If, if, if.
If you invest $1,000 every month and pocket a 10% annualized return, you will have $1 million after 23 years. But who wants to wait 23 years? It would be so much easier to hop on a rocket-like stock before it takes off.
Some people did buy Microsoft /zigman2/quotes/207732364/composite MSFT +3.37% or Google (now Alphabet) /zigman2/quotes/202490156/composite GOOGL +3.13% at the beginning or made other spectacular investments that catapulted them to fame. We yearn for heroes and are easily seduced.
One of the most flamboyant stock-market gurus ever was Joseph Granville, who sometimes enlivened his speeches by talking to a ventriloquist’s dummy, emerging from a coffin, or preaching in a prophet’s robes: “The market is a jealous God. It rewards winners and chastises losers.”
It was preposterous, but investors loved it. After some initial successes, Granville’s forecasts were so awful in the early 1970s (due, he said, to an addiction to golf) that he abandoned the stock market completely. Then “golfers anonymous” cured his addiction and, after four years of uncanny market predictions in the late 1970s, he boasted that he had “cracked the secret of markets,” promised that he would never make a serious mistake again, and nominated himself for a Nobel Prize. As a bonus, he predicted that Los Angeles would be destroyed by an 8.3-magnitude earthquake in May 1981.
Granville made so many bad predictions over the next 25 years that it’s hard to select the worst. A comparison of investment newsletters over the period 1980 to 2005 ranked Granville dead last, with an average annualized return of negative 20% while the S&P 500 /zigman2/quotes/210599714/realtime SPX +2.59% returned 14% annualized.
Granville is hardly unique. We could write a long book about false prophets on Wall Street. What is interesting is how easily people are enchanted by charismatic personalities — some who peddle advice, some who run companies. A decade ago, for example, Yahoo tried to save itself by paying almost $1 billion to five charismatic CEOs (Terry Semel, Jerry Yang, Carol Bartz, Scott Thompson, and Marissa Mayer), four of them outsiders, who were hired over a five-year period and arguably did more harm than good.
Charisma is rarely the solution to a company’s problems. As Warren Buffett put it, “When a manager with a great reputation meets a company with a bad reputation, it is the company whose reputation stays intact.”
Another example is Masayoshi Son, founder of Japan’s SoftBank Group /zigman2/quotes/207303954/delayed JP:9984 +5.10% , who made billions with an early investment in Alibaba Group /zigman2/quotes/201948298/composite BABA +0.58% . When Son announced that SoftBank had a 300-year plan based on investing in the best start-ups, it was easy to assume that his crystal ball was perfectly clear. Hey, he bought Alibaba! Surely he can find the next Alibaba — and dozens more.
It turns out that Son’s Alibaba investment might have been more lucky than prescient. SoftBank stock has clawed its way back to where it was in 2000, while an investment in the S&P 500 has more than quadrupled.
Ironically, Son has himself been attracted to companies with charismatic leaders, quirky names, and arguably dodgy business plans: Uber Technologies /zigman2/quotes/211348248/composite UBER +0.83% ; WeWork /zigman2/quotes/222085303/composite WE -0.38% ; DoorDash /zigman2/quotes/222973991/composite DASH +2.16% ; Coupang /zigman2/quotes/225253473/composite CPNG +4.86% , and DiDi Global /zigman2/quotes/227703899/composite DIDIY +5.61% . Join the crowd. A Harvard Business School study, “ The Curse of the Superstar CEO ,” found that charisma is often desired, and usually disappoints.
Writing in Wired magazine, anthropologist Manvir Singh called the Silicon Valley cult of personality the “ Shamanificiation of the Tech CEO .” Investors think that the vegan fasting eating habits of famous founders are somehow important: Apple’s Steve Jobs, Twitter’s Jack Dorsey, Evernote’s Phil Libin, Y Combinator’ Daniel Gross, and Theranos’ Elizabeth Holmes.
In addition to noting her spartan brew of kale, celery, spinach, parsley, cucumber and romaine lettuce, a 2014 New Yorker article described Holmes as more like a humanoid alien or the offspring of a human-ghost mating. She is “unnervingly serene” and speaks in a “near-whisper.” According to Henry Kissinger, she has “a sort of ethereal quality.” Alas, Theranos was just another fake-it-til-you-make-it.
Venture capitalists, investors and the media are obsessed with the outsize personalities, peculiar eating habits, and other fluff — metrics far-removed from market share, revenue, costs, profits and the technological details that come from hard-working scientists and unglamorous engineers.
For a stunning contrast, consider Apple’s Tim Cook, who is the antithesis of charismatic. Since Cook becoming CEO in 2011, an investment in Apple /zigman2/quotes/202934861/composite AAPL +3.08% has grown by a factor of 13.8 while an investment in the S&P 500 has grown by 3.9 — an absolutely extraordinary achievement for such an enormous company. Competence is far more important than charisma.
Dividends, earnings, free cash flow, return on assets, return on equity, economic value added. None of these metrics are sexy, but all are important. When it comes to investment ideas, sensible investors look for real profits, not false prophets.
Jeffrey Lee Funk is an independent technology consultant and a former university professor who focuses on the economics of new technologies. Gary N. Smith is the Fletcher Jones Professor of Economics at Pomona College. He is the author of “The AI Delusion,“(Oxford, 2018), co-author (with Jay Cordes) of “The 9 Pitfalls of Data Science” (Oxford 2019), and author of “The Phantom Pattern Problem” (Oxford 2020).
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