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Investing Lessons of 2008: Balance Sheets and Management Matter

By Alyce Lomax - Updated Apr 5, 2017 at 7:50PM

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It's high time for a little rationality and restraint.

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.

Sirius XM (NASDAQ:SIRI) is a fine example of why a good balance sheet matters. The entities that now comprise the company weren't able to manage profitability in even the best economic times and with less competition; now the economy is in the toilet and there are serious concerns as to how the company can pay its obligations coming due in February ... and May ... and next December. That would explain why it's now a penny stock.

Borders (NYSE:BGP) is another example of a company with too much debt to contend with. Although it has recently made some progress in this area, the severe consumer spending slowdown means far less money is coming in. Its debt load is the major reason I believe we may have to kiss this retailer goodbye.

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 matters
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 (NYSE:MER), AIG (NYSE:AIG), Fannie Mae, and Freddie Mac -- even as those companies required government assistance to stay afloat.

And let's not forget that both Merrill's Stan O'Neal and Citigroup's (NYSE:C) Chuck Prince got out so early that they did receive massive payouts, even as more and more strategic missteps came to light after their departures.

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.

Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) measure up on both fronts. Both have massive stockpiles of cash and no debt. Both have CEOs and founders who have declined the lucrative base salaries and bonuses that are so common in the corporate world. (Granted, they do have plenty of stock and stock options.) Although I certainly don't think all CEOs must insist on making a buck a year, the spirit these guys exhibit in regard to pay should be emulated.

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.  

Apple is a Motley Fool Stock Advisor recommendation. Google is a Motley Fool Rule Breakers pick. Borders is a former Motley Fool Inside Value selection. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

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Stocks Mentioned

Sirius XM Holdings Inc. Stock Quote
Sirius XM Holdings Inc.
SIRI
$6.74 (0.45%) $0.03
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$119.70 (2.63%) $3.07
Apple Inc. Stock Quote
Apple Inc.
AAPL
$169.24 (2.62%) $4.32
Citigroup Inc. Stock Quote
Citigroup Inc.
C
$53.19 (2.11%) $1.10
American International Group, Inc. Stock Quote
American International Group, Inc.
AIG
$54.92 (2.56%) $1.37
Borders Group, Inc. Stock Quote
Borders Group, Inc.
BGPIQ

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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