"Greed is good." -- Gordon Gekko
This is perhaps the most famous line said by Gordon Gekko, the trader brilliantly portrayed by Michael Douglas in Oliver Stone's movie "Wall Street." In human history, utility maximization seems the root of all major developments; it is what prompts individuals to get rich, to become powerful, and to influence the direction of society. But is greed really that good for investors? In particular, do greedy executives make their companies good for investments?
That doesn't seem to be the case.
Warren Buffett is not greedy -- he committed to donating almost all his worth to the Bill and Melinda Gates Foundation. Over the decades, Berkshire Hathaway (BRK.A) (BRK.B) consistently beat the S&P 500 index and created amazing returns for its shareholders. But if one reads a little bit about Warren Buffett (I recommend Roger Lowenstein's "Buffett: The Making of An American Capitalist"), it is not hard to understand that on the way to pursuing his investment dream Buffett isn't being greedy; he is just doing what he truly enjoys -- understanding businesses and finding the ones with be best value.
By the same token, Bill Gates is not greedy. When Gates co-founded Microsoft (MSFT), he was just a nerd doing what he enjoys. It cracks me up every time I see the photo of a young Gates and Steve Jobs sitting together. Gates built Microsoft into the empire it is today not because he was aiming at becoming the richest person in the world, but because he slowly and gradually accomplished his dream.
Steve Jobs was not greedy. For years, he had been taking $1 salary from Apple (AAPL), while he could have demanded any salary imaginable given his invaluable contributions to the revival of Apple. He could be a ruthless leader, but he had been doing the things he enjoyed most -- by turning his obsessions into reality, from Pixar (DIS) to Mac, from the iPod to the iPhone and iPad. Had Jobs been a greedy person with only profits in mind, he would have taken shortcuts and he would have cut corners -- we would not have seen the kind of innovative products that were miles ahead of their peers when they launched.
Tim Cook is not greedy. He has just forgone a $75 million dividend from his Apple shares. If he is greedy and money is his incentive to work hard for Apple, he has every right to collect that money. But he didn't. And he is not working for money alone.
With leaders like Buffett, Gates, Jobs and Cook, investors have one less thing to worry about -- they will not sacrifice the company's long-term prospect for short-term monetary rewards. People like that love what they do. Money is not their incentive. They are not spending their companies' money lavishly, as in Google's (GOOG) case; instead, they are letting go of their personal income to show people their true obsession.
On the other side of the spectrum, JPMorgan Chase's (JPM) CEO Jamie Dimon allowed profit-chasing greed to exist in the company; the department that lost money is supposed to do "hedging" (avoid risk), but it was actually seeking risk -- to make a profit. It is ridiculous that the incentive of a hedging department is profit maximization, or "to be greedy." The company's trader nicknamed "London Whale" lost at least $2 billion, and in turn shareholders lost more than $10 billion collectively over a matter of days. The recent debacle at JPMorgan shows the fundamental flaw in the banking industry, largely rooted in the "greed is good" philosophy. Greed is not good for JPMorgan Chase shareholders.
Facebook (FB) originally planned its IPO price to be between $28 and $35. But when the demand for shares exceeded expectations, Facebook's executives and bankers -- including Morgan Stanley (MS), JPMorgan Chase, and Goldman Sachs (GS) -- became greedy. They put the shares on the open market at $38, giving the company a whopping market cap of more than $100 billion. As I wrote earlier, the ridiculous pricing doomed the IPO. Today, the stock price has dipped to below $29. Original IPO investors incurred ugly losses. Greed is not good for Facebook shareholders.
In summary, executives do a much better job when they do something they enjoy. And on the way to pursuing their dreams, those executives make sure investors in their companies are rewarded too. If money is the only thing that executives of a company care about, investors should use a lot of caution -- because greed is not good for your portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
