On Statistical Distributions: A Review of "The Black Swan"

A few weeks ago, the Wall Street Journal published a review of the book, "The Black Swan," written by Nassim Taleb, and reviewed by David Shaywitz.

Taleb is currently a hedge fund manager, and, as such, takes particular notice of the distributions of various types of events. Distributions are important....they can undermine models when inappropriately chosen. Parenthetically, this Friday's Journal carried a piece on the recent cheating scandal at Duke University's Fuqua Business school, and I could not help wondering how much such cheating results in even more mediocre, mis-educated people wind up in positions where they can do real damage to others.

From other reading about Taleb, I know that he is keenly sensitive to a specific sort of anomaly- that of sudden and unpredicted market swings of the type experienced on the heels of Long Term Capital Management's difficulties in 1998. The following passage is from a 2002 New Yorker article about Taleb,

"Physical events, whether death rates or poker games, are the predictable function of a limited and stable set of factors, and tend to follow what statisticians call a "normal distribution," a bell curve. But do the ups and downs of the market follow a bell curve? The economist Eugene Fama once studied stock prices and pointed out that if they followed a normal distribution you'd expect a really big jump, what he specified as a movement five standard deviations from the mean, once every seven thousand years. In fact, jumps of that magnitude happen in the stock market every three or four years, because investors don't behave with any kind of statistical orderliness. They change their mind. They do stupid things. They copy each other. They panic. Fama concluded that if you charted the ups and downs of the stock market the graph would have a "fat tail,"meaning that at the upper and lower ends of the distribution there would be many more outlying events than statisticians used to modelling the physical world would have imagined."

In effect, the behaviors of people which follow power-law distributions can screw up financial theories and their implementations. e.g., LTCM, when those theories and their implementations are based upon the wrong distributional assumptions.

The larger lesson from Taleb, beginning with Fama's observation, is that purposeful, goal-directed human behavior is probably not random. Thus, it should not be assumed to approximate a normal distribution of possible occurrences.

Personally, I am not at all surprised by this phenomenon of mistaking one distributional assumption for another. It's been my experience, and belief, since 1985, that the inclusion of powerful statistical tools in spreadsheet programs began the inexorable slide in the quality of statistical analytical applications in business. In that year, a University of Chicago-educated MBA colleague of mine at the Chase Manhattan Bank managed to mangle a rather straightforward piece of stock price movement attribution analysis, thanks to his access to a regression analysis tool in Lotus 123, and an ignorance of how to build valid models.

This example of how a little knowledge can be a dangerous thing has, I suspect, been multiplied many times since in portfolio management and trading operations the world over.

Taleb's key insight is that what are often seen as 'once in a lifetime' events which are unrelated, per se, are, in fact, neither 'once in a lifetime, nor, strictly speaking, unrelated. To quote Gilda Radner's SNL character, Roseanne Roseannadanna,

"....it's always something......"

It certainly is.

1987: a major market drop of proportions not seen in one day since 1929.

1989: Chase Manhattan Bank's failure lend to UAL's ESOP for a buyout triggers this 'little crash.'

1995: Barings Bank fails due to Nick Leeson's trading losses and fraud in concealing them.

1997: Asian financial markets crash.

1998: LTCM's incorrect assumptions regarding various hedged financial instruments' behaviors under stress results in the firm's demise, and a brief but severe market downturn.

2001: 9/11 attack on World Trade Center towers causes a market slide already in progress for a year to deepen and lengthen.

2006: Amaranth hedge fund fails from overly-risky, wrong bet by one trader on natural gas prices.

Thus, courtesy of Fama and Taleb, we see that there is considerable risk in assuming that severe market disturbances of the sort which occurred in 1929 do not recur very frequently. And a market composed of investors and traders who predominantly model strategies with risk metrics that employ the wrong, normally-distributed assumptions about the frequency of occurrences of various outcomes, is inevitably going to react badly to the actually more-frequent occurrences of extreme outcomes which affect financial markets.

Perhaps my own approach, using consistency of membership in a class, rather than forecasting the value of each member of the class, is less susceptible to this type of risk.

However, it goes even further. Thanks to reading this review of Taleb's book, and the 2002 New Yorker article, my partner and I have developed a powerful new variant of my equity strategy which explicitly takes into account Taleb's preoccupation with extreme market occurrences.

I'll write more about this in an upcoming post.

On Murdoch's Bid for Dow Jones

There was a very interesting piece in Monday morning's Wall Street Journal. It detailed the Ottaway's and retired Wall Street Journal executive Peter Kahn's opposition to Rupert Murdoch's offer of $60/share to buy Dow Jones.

On the surface, it appears to be a rather complex situation.

On one hand, Kahn, Ottoway et. al. sound antiquatedly quaint in defending journalistic integrity and independence. That's the sort of thing we used to hear from broadcast newsrooms, before cable television put them under.

In this case, blogging and cable TV have pressured print journalism. Why else the tie-up between CNBC and the WSJ?

Further, as a letter to the editor in today's Journal noted, the Bancrofts and The Wall Street Journal are all for capitalism, until it comes home to roost at their poorly-performing, partially publicly-held company. In that case, however, they argue for morals, standards, and eschew the same free market winds that they claim must blow throughout the economy.

For the record, the closing price of Dow Jones Inc. rose from $36.33 on April 30th, to $56.20 on May 1st. That's a 55% increase in the market price, nevermind Murdoch's promise of $60, which would be a 65% increase in the value of the stock. On an economic basis, it's clear that the time has come for someone else to create value with the Dow Jones stable of assets.

The nearby Yahoo-sourced chart of the Dow Jones stock price, versus the S&P500 Index for more than thirty years, tells a sorry tale indeed. The media firm has barely managed one-third the return of the market over this time, and has been flat for the last five years and declining over the last seven years.

On the other hand, there is the argument of journalistic independence. Critics say Murdoch will sell out the vaunted Journal staff that has won Pulitzer's for covering investigative stories in China. Kahn was reported to be concerned that, under Murdoch, the WSJ would not have earned those two Pulitzers for covering stories critical of China and its government.

Now, that sounds like something to consider. Kahn pointed to Murdoch's many actions calculated to placate the Chinese, so that his BSkyB service could beam into the country. He is reputed to have eliminated BBC from the satellite service, cancelled Chris Patten's last book deal, and sold the South China Morning Post, all to remove material offensive to the Chinese government.

Such accommodation worries Kahn.

At first, it worried me, as well. Do you force private equity to afford such ethics? Can Dow Jones afford this, on behalf of its shareholders, independently? Or is this something capitalism will simply cost out and, if necessary, eliminate as too expensive? Trusting someone else to do the investigative reporting and write the needed criticisms of China.


Then, while discussing this issue with my consultant friend, S, I stumbled upon the real answer. Murdoch's answer, actually.


The reality is that print is a dead, bygone medium. The CBS franchise program, 60 Minutes, breaks tons of stories. How? By using television, not print. Do you think for a moment that the same program, as a print medium, could ever have lasted? Not a chance.


What Murdoch understands is that by marrying the Dow Jones assets and brands, particularly The Wall Street Journal, to his existing multimedia empire, he will enable those brands to actually create more value while doing even more investigative journalism.


The Dow Jones board's recent Chair has been trying to goose the company's performance, to little avail. My guess is that most investors understand that the old media pond within which Dow Jones lives is going to overwhelm the effects of any one firm's individual efforts. It's time for a more modern media vehicle to properly invest in and use the Journal's brand franchise.


No, the narrow version of the journalistic independence argument won't work for a publicly held company. Maybe if Ottoway and the Bancrofts wanted to take the firm private. But that's not what they want. They want top dollar and journalistic immunity from any economic realities.

The likely best outcome for the Journal and the rest of Dow Jones' media assets is to join a modern, global multimedia entity which can leverage their values further than is possible currently, while affording investment in them to retain their current competitive attributes. More than anyone else in media, Murdoch fits this description.


The crocodile tears over a potential loss of editorial independence and a standalone media presence are misplaced. This is about a too-small, old media company which has failed to properly take advantage of its best brands to create shareholder value. It's time for the Bancrofts to put up or sell. Either commit to investing in Dow Jones to enable it to consistently earn superior returns and realize its brand values, or sell it to someone who can.

More On GE's Breakup: The Right Idea

Today's Wall Street Journal featured an article concerning GE's breakup. It's in the middle of the Money & Investing section's front page. The headline is a complimentary "For GE, No Lack of Ideas."

As I wrote recently, here, even as the Journal touches this potential third rail topic, it is doing so gingerly. Here are some of the more forgiving (of Immelt and GE) quotes:

But some shareholders and analysts argue that GE's sprawling businesses are better off together than apart. GE's big umbrella, these investors say, can balance differing product and economic cycles, while helping all its businesses financially. And that would boost the stock price over the longer term.

The "keep GE together" crowd appears to have a strong ally in Mr. Immelt, who has resisted past calls to sell NBC Universal. Mr. Immelt has repeatedly expressed his frustrations with GE's stock price, which is down 7% since he took over in September 2001, while the Dow Jones Industrial Average is up 35% over the past five years.

What's more, splitting off big pieces of GE could ultimately lower the entire company's valuation. If, for example, it divested itself of NBC Universal, the company would be even more heavily weighted toward financial-services businesses, which generally get lower valuations than the industrial units. In the first quarter, financial services already accounted for more than 60% of GE's profit.

What I noticed about the above-cited text was that no salient, sage investors were actually named as the 'some shareholders' who 'argue that GE's sprawling businesses are better off together.' Who are these shareholders- seasoned hedge fund managers, or your great aunt Hilda, who has held GE in her portfolio since 1980?

To say that GE CEO Immelt 'appears' to want to keep GE whole is an understatement. After six years presiding over this failed conglomerate, do you really think he's ready to throw in the towel and fire himself? Because that is the logical conclusion of beginning any divestiture, or the complete breakup into all its six constituent units.

I wrote about a GE breakup here, last August. Contrary to the sentiment expressed in the third paragraph I cited above from the Journal article, I think a split up would result in more value all around for shareholders. If one unit becomes valued as a financial service company, so be it. That's what it is. Shareholders would be free to sell shares of that spun off company.

Simply put, corporate diversification for cash flow smoothing has been a discredited management approach for creating consistently superior total returns for some time. My own proprietary research, which drives my equity portfolio selection of consistently superior large-cap companies, confirms this. Back some thirty or forty years ago, when trading equities was expensive and information and innovation were in shorter supply, it may have made sense for investors to hold shares of conglomerates. And, in the day, they existed- Gulf&Western, ITT, and Litton, to name just a few. But they are gone now. ITT still exists, but in nothing like the shape it had under Harold Geneen.

In fact, even GE went through such change in the past. Besides publicly available information, I have additional knowledge from my old mentor and boss at Chase Manhattan Bank. He worked for the CPO of GE as it moved between CEOs Fred Borch, Reg Jones, and Jack Welch.

Few today realize how Jones, of whom I have heard it said, "once a beanie (accountant), always a beanie,' stripped much of the strategic vision from GE that Borch had instilled through his business unit investments. Jones retooled the company to be a cash machine because, well, he was an accountant. He liked cash.

Welch, upon taking the helm from Jones, faced an unprecedented period of high inflation and a wide array of non-strategic businesses at GE. He rapidly cut and pruned the company's businesses, earning the now-forgotten moniker "neutron Jack." I can't believe it's so long ago that I probably need to explain the meaning of this nickname to younger readers. At the time, the neutron bomb was under development. Its salient characteristic was to 'kill the people but leave the buildings standing." You can figure out the reason for the nickname from that.


Today's large firms are usually focused on a particular product/market. Diversified conglomerates are pretty much a thing of the past. Mediocre analysts and fund managers might confuse large focused global firms, such as Intel, Cisco, or ExxonMobil, with yesteryear's broadly diversified giants. You should not. I don't think investors do, either. That's why GE's stock is in suspended animation. Everyone can diversify more cheaply today than they can by paying an enormous tax on operating earnings of GE's business units in order to keep them under one administrative regime.


What's ironic is how everyone seems to have forgotten GE's heritage of being subjected to wrenching change with each new CEO of the prior forty years, except for Immelt. He's the only one not to have actually made a big change in the firm, and it has stalled.

In the past, the company was led by CEOs who were unafraid to put a significant personal stamp upon the shape of GE. Immelt, however, eschewed that approach. Instead, he's pretty much kept the cards Welch left on the table. Too bad it's evidently not the right hand for today's business environment.

As I've argued in prior posts (which you may find by searching on the label 'GE,' and following links to even earlier posts), Immelt has been paid far too much for simply keeping Welch's seat warm, but not even managing to beat the S&P. How many of Immelt's own managers do you think he would keep for six years if they had his performance record?

Where's the business media's outrage at Immelt's egregious overcompensation? Oh, yes, that's right- GE is a big advertiser. Wouldn't want to offend a company that lines the coffers of so many print, network and cable media firms. Same with most of the financial service firms.

However, I firmly believe that, now, lurking somewhere in the shadows, are the private equity wolves. Perhaps they are beginning to form a pack and slowly circle the ailing, misled GE. It may take a private equity offer to loosen the business media's collective tongue on this matter, but don't expect too much until they are pretty sure that GE is well on the way to some sort of break up before they feel it's safe to agree with everyone else and proclaim the wisdom of a GE dissolution.

Dana Telsey v. Warren Buffett on Wal-Mart

Yesterday on one of CNBC's morning programs, retail analyst Dana Telsey gave a wonderfully informed, sensible analysis of Target as preferential to Wal-Mart. It happened to coincide with an excellent interview of the company's leaders in that day's Wall Street Journal.

As is often done, the network placed a Wal-Mart booster opposite Ms. Telsey. All he could really do, though, was reiterate that he hoped Wal-Mart CEO Lee Scott might be fired by year's end, leading the stock to be 'value priced' for some sort of hoped-for turnaround.

As it happens, Warren Buffett had recently (perhaps at his Berkshire Hathaway annual meeting last weekend?) proclaimed himself a buyer of Wal-mart stock.

Thus, Mark Haines of CNBC ceaselessly hectored Dana Telsey with comments like, 'so you think Buffett's wrong,' and 'so you're disagreeing with Buffett' throughout pauses in her remarks.

Hey, Buffett has made his share of mistakes- US Air and Salomon Brothers, to name a few. I believe Mark Haines is wrong to deify the guy. In fact, yesterday on CNBC, one critic described Buffett as basically over the hill, with less-than-stellar recent returns.

He characterized the current search for a new CIO as essentially much ado about nothing, counseling viewers to find the 'next Warren Buffett.' With many billions of dollars to allocate, the commentator (I wish I could recall his name) rather irreverently, but, I believe, correctly suggested that Buffett isn't the same as he was when he was younger, with less money to invest, and that his successor will be unlikely to keep the assets around for long.

With that in mind, I pulled the Yahoo-sourced chart on the left (please click on chart to see a larger version) comparing Berkshire vs. the S&P500 for the past five year. The firm appears to pay no dividends on its stock. Thus, this price chart is essentially a picture of total returns as well. Frankly, I was stunned at what I saw. Berkshire has not significantly outperformed the index over the entire period. For most of the years, it tracks nearly on top of the S&P, with a less pronounced dip in 2002, and a less pronounced rise in 2004. Lately, it's paced the index. Not exactly the kind of return performance that would draw attention, were it any other company than the one Buffett operates.

Back to Target vs. Buffett's pick, Wal-Mart. Dana Telsey noted that a buy of Wal-Mart is for turnaround, but that Target is poised to perform much better. On that note, the Journal interview revealed a stunningly smart, confident team of executives who don't look at their business as cost-cutting discount retail, but, rather, designer-brand and unique-retail experience marketing to selected customers.

Furthermore, they regularly take a common consumer problem and make it part of "The Big Idea" contest. To quote the article, Michael Francis, EVP of Marketing said,

"I challenge my team to solve a problem or see things a new way. We've done everything from what's the next consumable product that we would like to repackage to what product in your pantry frustrates you the most. The winner gets a cash prize, recognition and sometimes we create the product or campaign.

I have people who are brilliant all over the country and they feed in ideas on a regular basis. I probably have about a dozen of them- trend people, movie people, advertising people. We pay them. And we get monthly missives- emails or letters.....it's people who we trust, who we know have the right taste level, who understand our brand."

On that subject of brand, CEO Bob Ulrich said,

"We created the whole trend of designers making products for discounters, starting with architect Michael Graves in 1999....These things keep evolving. You can't just be unique in one category. You can't be really mundane in small electrics if you're trying to be innovative in textiles. You can't be really forward in linens and beat down in shoes, so you have to start to get more consistency across the board....our guests, who are on average about 20% more affluent, more highly educated, come from more sophisticated areas."

And, again, Michael Francis, on brand advertising and promotion,

"I don't want to be on a billboard along some freeway in some dense metropolitan area. I want to be where there is a smart, sophisticated audience, who's experiencing that venue for reasons other than brand awareness......(the buzz is) a powerful, powerful component of what we do. Buzz has had an astonishingly important ability to amplify our entire marketing message."

What struck me about these comments in the Journal interview is how much Target's management and strategy is about consumer needs satisfaction and problem solution, not just logistical cost-cutting. They practice a flair for dramatic, exciting retailing that Wal-Mart never had. So when the latter saturated its market segment, going upmarket, as I wrote in a post in late 2005, was very difficult, if not impossible (as I predicted). Target, on the other hand, has kept a finger on the pulse of its more upscale market segment, and continued to give them reasons to return to its stores.

Thus, as the Yahoo-source price chart for Target, Wal-Mart and the S&P500 on the left shows, Target has outperformed Wal-Mart over the past five years. However, even Target has not quite surpassed the index, which explains why it's not on my equity portfolio selection lists. Further, Target seemed to be experiencing similar performance pattern as Wal-mart up until late 2004, when it finally deviated from Wal-Mart's downward path, and began to soar. Still, in those two years, Target has only just would have outpeformed the index.

So, personally, I'd side with Telsey, although Target is not in my selection list. I've seen Telsey for years on retail and luxury beat, and she appears to know her stuff. Combining Buffett's recent performance, and the pictures of Target's and Wal-Mart's recent performances, along with information about Target's more consumer-focused strategy, I would be inclined to back Dana Telsey's prediction that Target will continue to outperform Wal-Mart in the years ahead.

Motorola v. Carl Icahn

The Wall Street Journal carried a short piece on the back of its Money & Investing section, in the 'breaking views.com' column. The writers, listed as Robert Cyran, David Vise, and Dwight Cass, are on record as stating,

"Carl Icahn doesn't deserve a Motorola Inc. board seat. His ability to bellow isn't enough of a justification to give him a directorship. He has already repudiated his one big idea for the cellular-telephone maker. Now he appears fresh out of ideas- and he is overbooked."

Further on in the piece, the authors selectively cite Blockbuster's loss of 'close to half' of its value since Icahn arrived on the board. In contrast, they provide one example, that of Nelson Peltz influencing Heinz to take actions, the alleged results of which boosted the stock's price 40%.

I don't propose to do an extensive analysis of Icahn's investing track record. However, by Googling Carl Icahn, I came across two interviews which suggest, in Icahn's own words, why the Journal writers are just plain wrong. One is this interview dated yesterday in Time Magazine. Here are some excerpts from that piece,

Do you accomplish anything besides making money?

(Icahn) Yes. America is going to lose its economic hegemony if we don't do something along the lines of what I'm doing, where you make managements accountable. Our companies are really not competitive with Asia, and this is the great new threat.

You're trying to get on the board of Motorola, which you think has too much cash on its books. Does CEO Edward Zander need to go?

(Icahn) I'm not looking to remove Motorola's board. I'm only saying that there's no reason for that company to be sitting with $12 billion of cash that would be better used by shareholders.

Why are you buying car-parts maker Lear?

(Icahn) I thought the American auto industry was dying. When most investors, including the pros, all agree on something, they're usually wrong. The number of cars being bought, with Asia coming on so strongly, will increase substantially over the next decade.

Last year you pushed for big change at TIME's parent, Time Warner--breaking up the company, ousting CEO Dick Parsons--but none of that happened.

(Icahn) Dick Parsons agreed to do what we wanted most--a $20 billion buyback of the stock. He did what he promised, and the stock is up 30%. That helps all shareholders. Our fund made $250 million. It's a nice way to lose.

I also found this transcript of CNBC's David Faber interviewing Icahn on Friday(Evidently done via some sort of voice-to-text program, given the errors. That's also why it is all caps.). It's worth using the link and reading all three pages of the transcript, but here are some pertinent passages, for purposes of my post,

FABER: IS MOTOROLA NOT BEEN LISTENING TO YOU, CARL? MY SENSE IS --

ICAHN: THAT'S NOT THE PROBLEM, DAVID. THE PROBLEM WITH MOTOROLA IS IT WAS SUCH A SURPRISE. EARNINGS WERE SO, WERE SO BAD, IT WORRIED ME A GREAT DEAL THAT, THE COMPANY HAD NO MEASURE WHAT THEY WERE DOING. JANUARY 9th THEY SAID MARGINS 8% WHICH IS HUGE. AND IN MARCH, ONLY TWO MONTHS LATER. THEY WERE NEGATIVE FIVE. MEANING THEY LOST 500 DRAL MILLION IN THE FOURTH QUARTER ON, THE, HANDHELD BUSINESS. THAT MADE ME WORRY QUITE A BIT ABOUT THIS COMPANY, ABOUT THIS BOARD. THEY CHANGED DIRECTIONS SEVERAL TIMES. AND, WHAT'S INTERESTING THEY KEEP COMING OUT, TODAY, FOR INSTANCE, AND TALKING ABOUT THE FACT THAT, THEY HAVE HAD, A GOOD RECORD BUT IF YOU LOOK AT IT THEY HAVE SORT OF OBFUSCATED FACTS. IN DECEMBER 04 AFTER THEY SPUN OFF FREESCALE. IF YOU PUT $100 IN MOTOROLA IT WOULD BE STILL WORTH, 100 MAYBE A LITTLE LESS. IF YOU PUT $100 IN NOKIA YOU WOULD BE WORTH $160. THEY HAVE DONE A TERRIBLE THE JOB AND THE BOARD HAS NOT DONE A DAMN THING ABOUT IT IN MY OPINION.

FABER: ORIGINALLY WHEN YOU AND I SPOKE ABOUT THIS WHEN YOU FIRST TOOK YOUR POSITION SEEMS LIKE YOU WERE LOOKING AT BALANCE SHEET SEEING AWFUL LOT OF CASH AND POSSIBILITY OF RETURNING THAT CASH TO SHAREHOLDERS. YOU SAID TO ME AT TIME. THESE GUYS ARE NOT MONEY MANAGERS. THEY SHOULD GO TO WALL STREET. THAT'S OFF THE TABLE RIGHT NOW, RIGHT?

ICAHN: IT'S OFF THE TABLE THE NUMBERS THEY SAID THEY WOULD COME UP WITH IN JANUARY THEY DID NOT COME UP WITH. IT'S A TREMENDOUS DIFFERENCE I CAN'T UNDERSTAND HOW THEY DIDN'T KNOW IT. IN JANUARY, THEY WERE TALKING ABOUT EIGHT, 9% MARGINS. TALKING ABOUT 3 1/2, 4 MAYBE YOU NEED SOME OF THE MONEY TO WATCH WHAT THE HECK IS HAPPENING ON HOME FRONT.

FABER: WE HAVE MORE TIME WE'LL GET TO THAT. LET'S TALK ABOUT THIS.

ICAHN: THE NAMES WOULD BE THE SAME. YOU JUST DON'T NEED ANOTHER BIG NAME GUY IN THE MOTOROLA BOARD, SORT OF FROM THE SAME COOKIE CUTTER. YOU KNOW THE BOHEMIAN CLUB, AUGUSTA GOLF CLUB. MAYBE I WON'T BE INVITED. MAYBE MY SECRETARY LOST MY INVITATION.THAT'S WHAT, THEY'RE TALKINGABOUT.AND YOU DON'T NEED THATHERE. THE -- INVITATION. THE TROUBLE IN THE COUNTRY THESE BOARDS DON'T HOLD THE EXECUTIVES ACCOUNTABLE. I DON'T THINK THEY DO THE JOBS AT ALL. ISSUE SAID HEY, IF YOU DON'T REALLY WANT ME ON I WOULD PUT ANOTHER LARGE SHAREHOLDER ON. THEY DOESN'T WANT THAT. SO, YOU KNOW SORT OF HAS TO BE ME EVEN THOUGH I FEEL I'M HELL OF A NICE GUY AND I FEEL THEY WOULD GET TO LIKE ME.

FABER: ALL RIGHT. ON THE, SUBJECT OF CORPORATE GOVERNANCE WE HAVE ABOUT A MINUTE LEFT. YOU AND I HAVE HAD MANY CONVERSATIONS ABOUT IT, YEARS AGO, I'M HEARING YOU SAY MANY OF THE SAME THINGS. YOU DON'T REALLY BELIEVE THINGS HAVE CHANGED AT ALL OR IMPROVED ALL OVER LAST LET'S SAY FIVE YEARS?

ICAHN: DAVID, IT'S ONE OF THE THINGS I WANT TO REALLY TALK ABOUT FOR A MINUTE. I THINK THIS IS A WATERSHED EVENT FOR CORPORATE AMERICA AND CORPORATE GOVERNANCE. I THINK THERE IS NO SUCH THING CORPORATE DEMOCRACY. WHAT YOU HAVE TOO MANY BIG COMPANIES ARE SORT OF FRATERNITIES. I'VE SEEN IT SO MANY TIMES. THEY'RE SO MANY COMPANIES IT JUST BADLY RUN. I MEAN THE FACT I CAN GO INTO THE MEDIMMUNES, TIME WARNERS, AND, FAIR MONTH, JUST TO NAME A FEW, KERR-McGEE, MAKE MONEY FOR ALL SHAREHOLDERS, WE MADE OVER $50 BILLION FOR SHAREHOLDERS SINCE I STARTED THE HEDGE FUND. REASON YOU CAN DO IT --

From Icahn's remarks in both interviews, we see that he has an overriding concern with lax and ineffective American corporate management and its putative overseers, their boards. From Faber's interview, which occurred Friday, and to which the Journal writers could have had access, we know that Icahn had already dismissed the funding/cash dividend aspect of Motorola's situation, turning instead to a management so out of touch with its own financials as to suffer a financial disaster in one quarter, and be surprised by it. I heard one CNBC on-air guest today, in defense of Icahn, describe Motorola has having blown 'several' recent quarters.

For some perspective, I've pasted three price charts for Motorola vs. the S&P500 for the past two, five, and thirty years. In the two-year view on the left (please click on charts to see a larger version), it's clear that the company's performance has been anemic for at least two full years, sliding steadily since last September, and having more or less stalled prior to that, after a brief upturn in early 2005.

So, in rereading the Wall Street Journal piece, I find that it is mostly way off base. The authors offer no comprehensive track record of Icahn's investment performances via his public battles at firms such as Kerr-McGee, Blockbuster, Time-Warner, and Motorola. Icahn himself alleges that they've earned $50B for 'shareholders,' presumably all those present when he bought into those corporate situations, since he began his hedge fund. Again, from a CNBC source, charted on-air today, it looked as if Icahn's record is overwhelmingly positive amidst his several corporate crusades of the past few years.

Second, the Journal writers mistakenly attribute Icahn's focus and value to just arguing over Motorola's cash hoard. In fact, Icahn is concerned by the lack of effective management and, further, the even more out-of-touch board. It's no surprise, given Icahn's invective for boards in general, that the entire Motorola board came out against him joining them.

Looking at the five-year price chart above, Icahn's attitude is well based. The firm's longer term performance is decidedly erratic and anemic. It features a drop off a cliff in 2002, followed by the Razr-led recovery. Since then, it's stalled.

In the Faber interview, Icahn notes that he has left several boards, because his work there was complete. Further, he explained, in the cited passage, that he didn't need to join the board of Time-Warner to have impact. Overall, given Icahn's effect on the value of the corporate situations to which he has turned his attention, I would venture to believe that most intelligent shareholders would and should welcome his board membership at their underperforming companies. The Journal article writers seem to miss Icahn's sort of 'global' effect on company boards and managements. Not every time, but most times, and for significant total return impact.


To me, Icahn's most persuasive arguments for a Motorola board seat are two-fold. First, he's a large shareholder. I don't know the exact percentage, but evidently he feels he is proportionately significant enough to merit the seat. Second, he's documented recent management ineptitude, compounded by board member complacency and complementary ineptitude. At this point, simply shouting "what's going on here? does anybody know why this place is out of control and underperforming," would apparently be a breath of fresh air for shareholders. The board seems to have abdicated its responsibility to that group.

Lastly, the thirty-year price chart, above, tells a stunningly unusual story about this technology firm. When you post this type of long-term chart for most tech firms, they more or less handsomely outperform the index over such a long timeframe. While nobody has this kind of foresight, the ultimate 'buy and hold' would have generally served most investors well for companies like Dell and Microsoft, recent travails notwithstanding. Motorola is different. For all its erratic performances of the last fifteen years, investors would have not been rewarded for this risk, relative to simply holding the S&P500. Over fifteen or thirty years, Motorola has failed to outperform the market, even though it tends to engage in rather higher-risk, allegedly higher-growth businesses. That's a shocking legacy that ought to give shareholders pause before they vote against adding Carl Icahn to their board.