Making money can be hard.
That’s why so many everyday investors and wannabe rich people follow the people who seem to have it easier. These supposedly smart guys make a ton of money running mega-conglomerates, private equity shops, and hedge funds like kings.
But, beware. When ego gets in the way of what they do and how they want to look doing it, the fallout can be devastating. It damages not only them but the investors riding their coattails as well.
Here are three excellent examples of stupid ego mistakes that three financial world “celebrities” made, hurting their reputations and everyone who believed their hype…
A Failure Fit for a King
First up, the last wannabe king of General Electric Co. (NYSE: GE).
If you own General Electric stock, you should be disgusted. Not just with its performance, but with the company’s just-retired chairman and CEO, Jeffrey Immelt.
Talk about a meltdown. Since Immelt took over in 2001 from legendary GE boss Jack Welch, GE’s market capitalization dropped from $394 billion to $175.25 billion, a 56% tumble. In comparison, Welch had increased the company’s capitalization by 5500% over his 20-year run.
Sure enough, the company’s capitalization fell because Immelt jettisoned some business lines, most noticeably slashing GE Capital. But slashing unprofitable businesses is different than cutting profitable revenue-minting units. Under Immelt, revenue dropped 33%.
While the stock market soared 710% over the years Welch ran the conglomerate, GE’s stock climbed a far more remarkable 2790%. Since Immelt took over 16 years ago GE’s stock is up barely 8%, while the market’s up 213%.
Obviously, Jeff Immelt was a poor caretaker of the company’s businesses and stock.
Ego may have had something to do with it. While Immelt was low-key in public, at the company, he was the king. And he acted like it.
Company benefits were rich. From club memberships and extravagant executive getaways to the 700 company cars Immelt doled out (460 times as many as Welch approved), to moving headquarters and building fancy new digs as home base, the spending on executives and perks outweighed spending on growth strategies.
And then there’s the plane. I’m not talking about the six company jets, or the one Immelt hopscotched the globe in. I’m talking about the empty jet that followed him on more trips than the company will admit to.
I’ve known real kings, and none of them has a second, empty jet follow them. Sure, some have a second jet for their luggage, but hey, a real king’s family has to dress the part.
Of course, a GE spokeswoman said, “two planes were used on limited occasions for business-critical or security purposes.”
And Immelt said, “The corporate air team was overseen by our senior human resource manager. Given my responsibilities as CEO of a 300,000-employee global company, I just did not have time to personally direct the day-to-day operations of the corporate air team. I had every right to expect that it was professionally run. Other than to say hello, I never spoke to the leader of Corporate Air in 16 years.”
That says it all, folks. The chairman and CEO had an empty company plane following him at the cost of at least $6500 an hour, and he didn’t know it? That’s the work of a stupid ego.
GE’s got a new chairman and CEO who is cutting costs and figuring out what went wrong. I still wouldn’t touch the stock, in case he finds more Immelt skeletons. At some point in the future, after they do some good housekeeping, GE stock MIGHT be worth a long hard look.
A $2 Billion Lie
Next up, the U.S. Commerce Secretary, Wilbur Ross.
The bottom line with the smart bankruptcy lawyer (and banker and private equity player) is that he’s got an ego that apparently led him to lie about his net worth for years.
Personally, I like how low-key Wilbur Ross has always been. But, according to several articles over the past few days, former colleagues at Rothschild and his private equity partners (including a top lieutenant and the number three guy at WL Ross and Co.) have come forward. They say that Ross has always exaggerated his victories and his personal wealth to attract business and play in bigger and better sandlots.
While a little fluff is one thing, this level of lying has brought millions of dollars’ worth of lawsuits and settlements against the company.
Of course, in the private world of private equity, that has always been under the radar.
Being nominated to become Secretary of Commerce by President-elect Donald Trump last year forced Mr. Ross to fill out some of those intrusive financial statements Congress requires. Wilbur claimed he’s worth $2.75 billion, on the low end.
But when Forbes, who had Wilbur on their list of the 400 richest people, took a deep dive into his submitted financials they scratched their heads. Ross’ net worth had always been questioned at Forbes, but they always ended up relying on his representations. At least, until they did some new math.
What they found was a $2 billion difference. As in, they couldn’t account for $2 billion of his fortune.
Forbes subsequently reported they couldn’t see Ross’ $2B fortune because they were told he had put it in trusts or gifted it between his nomination and confirmation.
Then he backtracked.
The Department of Commerce subsequently issued a statement saying, “Contrary to the report in Forbes, there was no major asset transfer to a trust in the period between the election and Secretary Ross’s confirmation.”
And who was the person who told Forbes that the transfer had taken place, that it had happened after the election, and which meant that more than $2 billion of family assets weren’t on the disclosure? Why, that was the now-sitting Secretary of Commerce himself, Wilbur Ross.
Now six Senate Democrats are asking a top ethics official in the federal government to figure out what was going on with Ross’ finances. “It is imperative that Congress and the Office of Government Ethics know the full extent of Mr. Ross’s holdings to ensure he is not putting personal gain ahead of the interests of the American people.”
Now, that’s a stupid ego. What’s wrong with being worth more than $700 million anyway?
Loose Lips Sink Hedgie Ships
Our third stupid-ego manager is none other than Bill Ackman, founder and ruler of Pershing Square Capital Management hedge fund.
Ackman, once a high-flying manager who took big positions in companies and turned out good gains, let his success in a world of egomaniacs go to his head.
He figured the world was watching his every move because he was so smart, and with investors and traders and hedge fund managers following him, he’d make public pronouncements about his hot new positions. Because, you know, he’s so smart. Why wouldn’t they follow him into trades?
Of course, the idea was that he’d get into his positions and try and talk them up or down if he was short, publicly, so follow-on traders would jump onboard and make his positions profitable.
That’s not illegal, but it is ego-stupid.
There’s always someone bigger than you, always someone or some group that has more capital than you, and sometimes announcing your positions draws their attention.
That’s what Ackman did, to his great misfortune.
Starting with his big-deal announcement that he was shorting Herbalife because it was essentially a Ponzi scheme, other investors have played Ackman’s ego to his detriment.
Investor Carl Icahn, who makes “billionaire” Bill Ackman look poor, “faded” Ackman publicly. Faded is a Wall Street term that means take the opposite side of someone’s trade, betting that they’re wrong.
Icahn bought Herbalife and kept on buying it, handing Pershing Square a monumental beating.
Icahn did better homework than Ackman and partnered with the company to squeeze him, his reputation, and his short position. Then he got friends of his to join him in betting against Ackman. He cost Pershing Square almost $200 million at one point.
Then, ego being ego, Ackman went the other way and announced he owned Valeant Pharmaceuticals and was adding to his position. Plenty of other investors did better homework and ganged up on the company and Ackman.
VRX stock fell 94%, landing Pershing Square an almost $4.6 billion loss when they finally liquidated their position.
Next up was Chipotle Mexican Grill, Inc. (NYSE:CMG), and Ack just couldn’t help himself.
He bought the stock and announced to the world its E. coli problems were a mere blip and from his average per share cost of $405, shares would be heading back to their highs above $750.
Poor Bill Ackman, CMG shares are trading at less than $275 today.
These days, hedge fund traders can’t wait to hear what Big Bill’s ego is doing next, so they can all fade him.
That’s what stupid egos can do. Following egomaniacs isn’t smart, and it can be dangerous for your financial health.
Not to mention the effect it can have on your own ego.