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In Reply to: Bill Mann is a Little Mad

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By TMFOtter
July 17, 2002

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Lemme tell you the coolest thing about the online medium. If a writer ever makes a point that you don't understand, or need clarification of, you can always ask him.

Thanks, y'all for your comments. What Andrew doesn't know is that I follow him around stealing all his best stuff.

So, let's discuss motivations, shall we?

The Motley Fool is and has always been about trying to help the individual investor do the best that he can, and we believe that historical evidence points specifically to the stock market as the best place to generate wealth for the everyman.

When there are elements that threaten the very fabric of the stock market institution, I believe that we quite rightly need to fight them. I do believe that the obscene granting of stock options provides managements with perverse incentives, some of which have helped bring some awfully big companies to the point of collapse. I have been convinced for years that there were billions in horrible capital allocation decisions made all in the name of keeping the share price up over the short term.

Investors do not trust the marketplace. We at the Fool have been warning for years about stock options, but what they have been in the past was a dilutive element, not one that causes that very resentment. I believe that the narrowly defined interests of certain corporations (and their management) threaten to derail the markets in a way that is much worse than we have seen to date.

Now, am I such a one-issue ninny that I'm willing to sacrifice a portfolio based on the membership of certain companies in trade associations? No. But that's all the leverage we have.

My first job out of school was with a Washington lobbyist. That is what the AeA is, a lobbying group. It's not a membership organization like the Boy Scouts. It takes fees from its members and it presses THEIR interests in Washington. That's how it works. And the big companies in the industry control the lobby. When AeA is fighting so diligently for friendly stock option treatment, you can bet there is a 100% chance that its biggest members are united. Who are the biggest members? Why, they happen to be nearly coextensive with the companies held in the Rule Maker. This is not transitive guilt, in any way. It is direct. And yes, "guilt" is the wrong word. My editors don't copy edit, the defibrillate.

So, the lobbyist spreads money around in Washington, in no small way so that the individual companies do not have to.

I feel very strongly about this issue from both philosophical and from practical standpoints. For me it is not a lack of accounting, but the gross abuse of stock options that is dangerous -- and a legitimate reason to sell any company, no matter its prospects otherwise.

Do this. Last year eBay granted 6.7% of its sharecount away in options. Of course, not all of these will be exercised, but take a 100% position in a company and dilute it by 6.7% per year for 10 years and calculate the impact.

Of course, eBay's still a development stage company. What about Microsoft? 4.1%. Do that math. Cisco? Using Black-Scholes the theoretical cost of their options for 2001 was $1.7 billion. Cisco has 1 billion shares in granted but unexercised stock options 14% of the float, with an implied value of $15 billion.

This was a reason (Not THE primary reason, just a big one) why the Rule Maker sold Yahoo as well.

If I cannot be sure that a company's future growth is going to accrue to me, there is no reason in the world that I'd own it. THAT's my motivation. The investing public is now as scared as it's going to get. Legislators are champing on the bit. If good corporate governance initiatives do not come forth from this environment, they will be hard pressed to come forth at all.

And unhappily, I am generally opposed to legislated solutions. It would be best for FASB to come in and make a mandate based on best practices, and in the promotion of accuracy. They tried once before 1994, but received enormous pressure from Congress, pressed forth by? Yep, the AeA. It is in no small part completely self-interested that I try to use the only leverage that I have. If members of the AeA feel some real pain by virtue of a stockholder revolt, perhaps their collective tunes change a bit. Take away just a tiny bit for their power, and perhaps FASB can get sensible stock options expensing added into GAAP. Thus, I sell off AeA companies as a sign that I believe that their past pursuits of self-interest have damaged shareholders. I let them know that this time someone is watching, and does not approve.

Wow, that sounds arrogant. At a minimum, I sit back on an underlying principle of Rule Maker investing, and on Foolish investing -- I am putting my money in the hands of managements that have my best interests at heart -- or at least consider them.

So, the anger. What am I angry about? Without going too far down the populist route, we get emails from investors who trusted us that the market was a great place to put their money, and now they are scared out of their wits. And they blame me. I am angry that there is this enormous drag on their potential for future gains, and many of them cannot even see it. And whether I like it or not, there are people who look at the Rule Maker portfolio as some sort of endorsement of the investability of the component companies. Do I really want to lead them toward these companies, when I am unsure about their merits myself?

I am angry that it took this much pain for this to even come up as a subject. And I am really, really angry that the AeA takes on the mantle of "protecting the tech worker" in the fight to keep stock option costs transparent to investors. But options themselves? Nah, I don't care so much about them. They are, in fact, morally neutral. But companies have the power to offer broad based options packages. I support these very much. However, the mere suggestion from AeA (and they're not alone at all on this) that expensing options will cause them to be denied to the rank and file...whew! I find that simply breathtaking.

One thing about Warren Buffett. He's been talking about stock options and whatnot for more than a decade. His influence at Coke took that long. Another one of his holdings, American Express, is an AWFUL abuser of stock options. Do you really think that I could do something as a shareholder? No, it won't work that way. If it would have, the articles the Fool released about the subject in 1999 would not have been greeted by chirping crickets.

There is a simple calculus here. It doesn't have much to do with anger. It has a lot to do with trying to do my part to help fix what ails the markets. Unchecked greed is one thing that really, really ails the market. Stock options are among the core underpinnings of that unchecked greed. The AeA is an organization that spends the most money trying to keep stock options treatment the same as it was before. Among its members are companies that a) are certainly in complete control of the organization, and b) constituents in a portfolio I am managing, and publicly so. I want to do my part to fix the market, I sell the companies that undergird the organization that is spending the most money to lobby the congressmen to keep the most insidious element of the biggest threat to the market in tact.

And I squawk about it, ideally to get others to put a little bit more pressure on the members of the AeA, who are as a group pressing interests that are contrary to those of their shareowners. And in the end, I'm going to go find companies that represent the ideals that I hold dear, and look after my interests. I can live without Microsoft in my portfolio. So can most people.

Sorry to intrude on your board, but thanks for giving me the opportunity to express my feelings on these issues to you. I can't tell you all how much the denizens of this board have added to the Motley Fool.

Bill Mann


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