2008 was a crazy year and nobody knows for sure what 2009 will bring. We’ve spent the past month reflecting on 2008 and making predictions for 2009. Be sure to check out all of our coverage, including more Investing Lessons of 2008.
2008 has been the epitome of the Latin term annus horribilis on many, many levels. You might not have made money, but you can gain something important out of such a horrible year: valuable lessons. For investors, one major lesson for 2008 should be that corporate balance sheets and reasonable, restrained management teams matter. Really matter.
Balance sheets matter
We are all recovering from an extended phase of absolute debt gluttony. Many companies took on way too much debt, and while that seemed to make sense to a lot of people at the time, nobody seems to have considered that the good times couldn't last forever. Unfortunately, greed and stupidity went on unchecked for quite some time, and the excesses are currently getting worked out of the system in a painful manner.
Debt can be a tool, but too often people forget how dangerous it is, particularly when the economy goes into recession. KB Toys is a good example, as it has suffered a swift descent into liquidation when the consumer spending slowdown kept it from paying its debt obligations. We will see many debt-laden companies fall as the recession drags on.
Management teams that took on too much risk and even felt entitled to big payouts for failure helped build our current crisis. We shareholders need to be vigilant about -- and adverse to -- this type of attitude, and that's another 2008 takeaway.
The past year has overflowed with controversy and outrage about the idea that high-ranking corporate heads could pocket lucrative salaries, bonuses, or golden parachutes at companies like Merrill Lynch
And let's not forget that both Merrill's Stan O'Neal and Citigroup's
These are examples of management teams that did not show restraint, good stewardship, or even much, if any, personal accountability. Beyond 2008, investors must look for -- and push for -- management teams that take their responsibilities to heart and think of more than their own personal paydays.
Cash and constraint
As the current crisis continues to unfold and takes more and more companies down with it, investors' best bet is to look for companies with stellar balance sheets and solid managements. These are the companies that will not only survive, but thrive, despite the current crisis.
In addition, both companies achieved pretty incredible things during the last recession, too -- Google gained furious momentum, becoming synonymous with search, and Apple's iPod took the world by storm. The fact that both companies have so much cash means they are still free to innovate in tough times.
Companies with debt and cultures of excess can poison investors' portfolios; seeking cash-rich companies with solid, reasonable management teams is a practice that should protect and enrich investors going forward.