Ep719: David Kass – Don’t Invest in a Company Unless the CEO Owns a Large Stake

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Quick take

BIO: Dr. David Kass received his Ph.D. in Business Economics from Harvard University and has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management.

STORY: In his early 20s, David invested $2,000 in a company giving out high dividends. Only after he invested did he realize that none of the senior executives in the company owned its shares. Soon enough, the stock went down to zero due to accounting fraud.

LEARNING: Only invest in a company if senior executives, especially the CEO, own a significant stake. The value of the CEO’s stock in his own company to his annual salary should be at least 3:1.


“Look carefully at proxy statements and make sure the CEO and other senior managers have skin in the game, that their interests are likely aligned with yours and have a large stake through their stock holdings.”

Dr. David Kass


Guest profile

Dr. David Kass received his Ph.D. in Business Economics from Harvard University and has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management.

Before joining the Smith School faculty in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis).

Dr. Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), FOX TV, Bloomberg Radio, Wharton Business Radio, KCBS Radio, American Public Media’s Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by The Wall Street Journal, Bloomberg News, The New York Times and The Washington Post, where he has primarily discussed Warren Buffett, Berkshire Hathaway, the economy, and the stock market.

He has also launched a Smith School “Warren Buffett” blog. Dr. Kass has accompanied MBA students on trips to Omaha for private meetings with Warren Buffett and Finance Fellows to Berkshire Hathaway’s annual meetings.

Dr. Kass received a Smith School “Top 15% Teaching Award”, a “Distinguished Teaching Award (Top 10%),” and the prestigious “Krowe Teaching Award” on two occasions.

Worst investment ever

David was fortunate to start as an investor in the stock market at age 12, courtesy of his grandfather, who gave him a gift of five shares of a $20 stock. Since then, David started following the market.

Fast forward ten years or so, in his early 20s, when David was working and earning some money investing in the stock market. In 1969 the stock market was doing reasonably well, and a stock caught David’s attention. Back then, every day, the Wall Street Journal, New York Times, or Financial News would list the ten most active stocks by number of shares traded. Near the top of the list was this computer software company called Scientific Resources. It had a common and preferred stock. David noticed that the preferred stock was paying a 9% dividend yield.

David didn’t understand the relationship between risk and return then. The average stock in the stock market then had an average dividend yield of 3%. Cash dividends were higher because more companies back then did not buy back their shares. They’d return capital to shareholders through a cash dividend. So a stock paying 9% was a huge deal. David bought 100 shares at $20 per share. The $2,000 was all the money he had to invest at the time. Then the share price started going down daily.

Once a year, shareholders would be asked to vote under SEC rules. David received a proxy statement from the company and a ballot to vote for senior management and other issues that came up. When he read the report, he realized that none of the senior executives, from the Chairman of the Board to the Executive Vice President and all the listed eight executives, owned any company shares. David wondered why none of these senior executives had a stake in a company they were running. He learned why when the stock he bought at $20 finally sold at about $2 as it went down to zeros due to accounting fraud.

Lessons learned

  • Only invest in a company if senior executives, especially CEOs, own a significant stake.
  • The value of the CEO’s stock in his own company to his annual salary should be at least 3:1. If the CEO is deriving most of his wealth or income from the company via his salary, then his interests are not aligned with shareholders.

Andrew’s takeaways

  • Alignment in the senior executives’ interests and of the shareholders is critical.

David’s recommendations

David recommends reading Berkshire Hathaway Letters to Shareholders to learn about investing in an easy-to-understand manner. He also encourages young people to start investing when they have some money, follow their company, stock, or fund, and experience the emotion of investing.

No.1 goal for the next 12 months

David’s number one goal for the next 12 months is to continue teaching at the Smith School of Business, University of Maryland, and to follow the current interesting, challenging global economic situation.

Parting words


“Try to be unemotional and learn from others’ mistakes. It’s better to learn this way rather than to have to learn from your own mistakes.”

Dr. David Kass


Read full transcript

Andrew Stotz 00:02
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning. In our community. We know that to win an investing you must take risk but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives to join me go to my worst investment ever.com fellow risk takers this is your worst podcast host Andrew Stotz from a Stotz Academy, and I'm here with featured guest, Dr. David Kass, Dr. David Kass, I'm gonna call you, David. David, are you ready to join the mission?

Dr. David Kass 00:37
I am, thanks very much for having me.

Andrew Stotz 00:41
It's good to have you and I love your first name because that is my father's first name, Dave. I'm going to introduce you to the audience. Dr. David Kass received his PhD in business economics from Harvard University, and has published articles in corporate finance, industrial organization, and health economics. He currently teaches advanced financial management. Before joining the Smith School faculty in 2004. He held senior positions with the federal government. Dr. Cass has been featured on many different TV shows like Bloomberg, CNBC, bloom and nup Wharton Business, radio and many others, where he's primarily discussing about Warren Buffett's Berkshire Hathaway, the economy and the stock market. He's also launched a Smith School, Warren Buffett blog, and Dr. Cass has accompanied MBA students on trips to Omaha, for private meetings with Warren Buffett and finance fellows to Berkshire Hathaway's annual meetings, Dr. CASS received a Smith School top 15% Teaching Award, a distinguished teaching award and the prestigious Crowe Teaching Award on two occasions, David, take a minute and tell us about the unique value that you are bringing to this wonderful world.

Dr. David Kass 01:56
Well, what I view right now, I think is my most valuable contribution is conferring onto my students. lessons that I've learned throughout my life, working many years in federal government for different major government agencies. And I was there as a PhD economist, and killing the federal government right after my PhD. And then, after many years there, I took an early retirement from the federal government. And I was very grateful to the University of Maryland, the Smith School of Business at the University of Maryland, to give me an opportunity to teach, which actually was my original goal in life professionally, that might put off for a couple of decades or few decades, I suppose. And what I enjoy doing and what I feel was most worthwhile. Since I had been working as economist many years. And now teaching many years, I'm now actually entering my 20th year teaching at the University of Maryland at the Smith School of Business. And I have gathered as much information as we all do, as we get older. And I'm able to have the opportunity to confer some of my hopefully my wisdom experience, lessons learned, such as what mistakes to avoid along the way, and to be able to give the students a very good overview as well as specific information to sort of expand on various issues. As I teach corporate finance. Basically, I'm currently teaching undergraduate students, juniors and seniors finance majors at the Smith School to sort of illustrate and in my case, since I'm a big fan of Warren Buffett, lets you sort of confer lessons from Warren Buffett and incorporate them into my lessons every day. In fact, I joke with my students, I tell them that part of my written contract is to mention Warren Buffett's name at least once each class comes after they probably do. And here are lessons from Warren Buffett as well as my own life, to bring that in, so the students can learn. And I try to learn lessons that I'm teaching a little more clearly, and maybe to place them in starkel context, and as well as to place them in the world in terms of current events, how current events could relate to what has happened in the past, and what can we learn from the past that my might apply to the present and the future. So I really feel that my main contribution to society it you might say, is what I can confer on to this. Now, maybe more than one generation of students or for now 20 years. So hopefully they can benefit from my experience, education, knowledge, etc. Hopefully that's been useful to them going forward.

Andrew Stotz 05:23
Well, I'm sure it has been useful. I know what was useful for me was listening to an interview that you did with we study billionaires, which was a great interview. And but the first thing I thought about because you tell the story of how you first took students or went with students to see Warren Buffett, and I thought to myself, Hey, that was a reverse takeover, or that was a backdoor listing. And that's because it wasn't your original idea, someone else's idea. And then one of the students, maybe you can tell that story of how you first got to take students to meet with Warren Buffett.

Dr. David Kass 05:58
Yes, it was my first year teaching at the University of Maryland, that Smith School. I started teaching there, the fall of 2005. And it was early fall 2004. And it was early in 2005. That I noticed there was a poster on a bulletin board in the main lobby of the Business School, where a student was advertising for other students to join him on a trip to Omaha, Nebraska, where Berkshire Hathaway space to me privately with Warren Buffett, and there was a specific date. And I still remember the day it was May 23 2005. And anyone who wants it to go could go both undergraduate as well as MBA graduate students. And I looked at him and I said, Oh, wow, I'm a longtime fan of Warren Buffett. And up until that point, I probably read every book written about Buffett. So I contacted the student at the telephone number that the student provided. And I called him and I said, this may be a little bit an inverse way of doing it. And I said, Do you need a faculty advisor? Can I perhaps accompany you on your trip and provide some assistance to you? And then I explained to him that I have a strong background and interest in Warren Buffett, we discussed that a little roll while and he said sure. And then we had had to get approval of my chairman, for this to go happen. And I did and i plus another colleague, accompanied 50 students to Omaha for this trip, and it was the year was 2005. It was the first year that Warren Buffett started to meet with college students around the country. And according to his annual report, the following year, in his letter to shareholders, he mentioned that 2005 was indeed his first time meeting the students. And he mentioned when he met with students from something like 15 to 18 different universities during that year, and D when we went out there. We had a private meeting with him and student questions. He then took us to lunch. And we had the opportunity to pose for pictures with him as well. Incredible, really, so down to earth friendly. He loves students when he said, If he was not running a stock portfolio or a business, his second career choice would have been a professor. He loves teaching. He loves teaching students. Hmm.

Andrew Stotz 08:57
That's so fascinating. And I, you know, the other thing that you talked about was a mistake that he made that continued to compound. And I thought that would be a fun one, if you could explain a mistake that, you know, Warren Buffett made that as you said, and he says continues to compound and then after that, we'll get into your mistake.

Dr. David Kass 09:17
Right. There are a couple of major mistakes that he made. One was Dexter shoe, the acquisition of Dexter shoe several years ago. And the mistake he made instead of paying saying a few 100 million dollars for the purchase of the company in cash. The mistake he made was paying for it with Berkshire stock. And Dexter shoe itself went bankrupt several years later, but the shares that he paid in Berkshire kept compounding in values over the years But may have been a $350 million, or something like that acquisition, recently may have been worth about $8 billion, or something like that in Berkshire stock. And it keeps mistake keeps compounding. As Berkshire Hathaway stock keeps hitting new all time highs. Recently, Berkshire just hit the Berkshire he shares recently passed $550,000 A share an all time high. And it has compounded and incidentally is compounded and evaluated. It has grown 20% per year compounded since 1965, when Berkshire was acquired by Warren Buffett, and over the same time period, the s&p 500 is compounded by roughly 10%. And then it has been compounding at 10% versus 20% is a huge, so Warren Buffett is one of the wealthiest people in the world worth with. Certainly he would have been worth more than 100 billion is worth close to 100 billion. Now, he's already given away a large percentage of his wealth to charity in the form of Berkshire stock. And just and that's an example of illustrating how his Dexter shoe mistake has compounded and it keeps growing larger every day.

Andrew Stotz 11:30
And that just to clarify that for the listener. So what that means is that when the person or the company that was selling the shares in desk Dexter, basically instead of receiving cash, they receive the shares. And then they see Yeah, have the business make what you can of Dexter shoes. And I'll see you later I'll hold on to this the share of Berkshire Hathaway. And so there's the lucky recipient of that instead of that person just receiving cash, and they're going to do whatever they want. They received a Golden Ticket basically.

Dr. David Kass 12:05
Exactly. Right. Exactly. Right. Yeah. And of course, a second major mistake that Warren Buffett made was his initial investment and Berkshire Hathaway itself, which is a basically a failing textile company in the 1960s. Warren Buffett early on, had purchased shares in Berkshire Hathaway, it was a New England textile company. And he reached an agreement with the CEO that come in and sell back the shares at a certain price. And then when the contract appeared with the agreement, the CEO decided to lower the price by a few cents a share. And Buffett was so upset that he was being cheated, that his guests been very young at the time. I guess he would have been 35 years old, roughly was born in 1930. So because 19, roughly 65. He's 35 years old. So he decided, Well, what I'm going to do, I'm going to turn around and buy his company, and then I'm gonna fire him. So he buys basically, he goes in, buys this company, he's able to fire the CEO. But now and but and then he takes the name Berkshire Hathaway, for his own company's own business. He borrows the name. But then he learns the hard way that Berkshire Hathaway was indeed a failing textile business that basically went bankrupt over time. So from an investment point of view, it was basically another big mistake, but one made out of emotion. And something, you know, Buffett has always argued that one of the key characteristics of successful investors is your temperament, you can be very smart. But if you're not emotionally balanced, let's say you overreact on the upside, as well as the downside, you probably will not succeed. And at a recent Berkshire annual meeting, he basically said, we at Berkshire don't, some shareholder asked him. This was this past May, I was at the annual meeting. In Omaha, a shareholder asked him, Do you ever make you and Charlie Munger is Vice Chairman ever make emotional mistakes? And the answer was we make lots of mistakes, but we don't make emotional mistakes. Well, he did make one at age 35 When he acquired Berkshire Hathaway, but since then he's stay true. For in fact, he's, he's joke to you said that all you really need is a somewhat above average IQ of 125. But you don't need anything more than that. But you really once you have that IQ, of course, hard work is this basic temperament on emotional, and he jokes, saying if you have any IQ, your IQ is higher than 125, you should sell the extra points, so you don't need them as an investment.

Andrew Stotz 15:32
The only hurt you, you know, I want to grab a book off my shelf while we're talking. And this is i, for the listeners out there, I'm just holding up the Berkshire Hathaway letters. And I like this because I can go back and look at his returns. But what was fascinating about Buffett was that in 1976, I believe it was the he had a the share price was up 129%. And then in 1979, it was up 100%. Those are some amazing gains that he made in the 70s. I haven't figured out exactly what were those. But I'm just curious if you have any knowledge or ideas about what was going on in those years or in the 70s for him?

Dr. David Kass 16:23
Well, I think what was going on, and he and Charlie Munger have made similar comments in a general sense, is and they basically said nice words, that they had a lot less competition back then. And it was a lot easier back then to find undervalued investments, and proceed in 19. Yes, I can expand on the mid 70s. Specifically, what happened. And now just to follow up on my comment, that today, there are indeed in recent years, very, very smart people who've entered the investment area, it's very competitive, far more difficult. It's far to find undiscovered opportunities. But back in the mid 70s, would happen. There was right after we had there was an oil embargo in the 1973 oil crisis when the Middle East war, the oil embargo, a severe recession 1974 75, interest rates went very high and inflation problem because of oil, and the stock market was driven way down. I think the Dow Jones average back then hit a high around nine in 19, January of 73 to 1000. For the first time was today it's considerably higher, 34,000, something like that. But back then it was hit 1000. And then in December 1974, as I recall, it was down to 570. It dropped over 40% 570. And the opportunities were phenomenal. So Warren Buffett and Berkshire jumped in. Among his investments, I think maybe 9073 74 in that area. A very large stake in the Washington Post company worked very well for him. There were investments he made in American Express, there was a company in capital cities broadcasting, a predecessor of ABC and Disney etcetera. And they were just wonderful opportunities in wonderful companies as the stock market was just sold off and the psychology was extremely negative back I remember a cartoon in the Wall Street Journal in 1974. Still remember this, like funny, the funniest financial cartoon I ever saw the journal got into some trouble because of it. And the cartoon. You have two two stockbrokers talking to each other. One of them says to the other as follows He says, This is what I call an institutional market. Anyone who invests in this market belongs in an institution. And let me tell you, the Wall Street Journal got a lot of feedback. the brokerage industry was not happy. They got a lot of nasty letters that came in, but I couldn't stop laughing when they had that came out. And it really did describe the psychological atmosphere at that time, that people were just running away and just dumping stocks Have you had an oil crisis, very high recession, inflation. And the opportunities were just overwhelming or were very bright. And that's where Warren Buffett certainly benefited quite a bit with Berkshire.

Andrew Stotz 20:15
And it's a good lesson in having the cash and the guts when the market really crashes because then you can take advantage of that volatility. And all of a sudden, you know, what we often call in the world of finance volatility risk, which we say volatility is risk, actually volatility when markets down and you've got cash and you've got good skills of picking stocks, that volatility is actually opportunity.

Dr. David Kass 20:40
Absolutely. In fact, Warren Buffett has actually criticized he and Charlie Munger, have actually criticized that business, the standard business school definition of risk, as you mentioned, as volatility, standard deviation, etc. He said, Now, the real definition of risk is the risk that you will lose money long term, he's a long term investor, not a short term trader. So for example, he all he held on to, for example, Washington Post company stopped for decades, in buying seventh 1974. And salad a year or two later, or a month or two later. It was decades later. And only then when the Washington Post itself was sold. So, so his definition of risk, and volatility certainly presents situations where investors might panic. And know that general advice is buy low, sell high. And many investors may do the opposite. Because psychologically, it's, it's a lot easier to buy something that's going up and it takes a lot more courage, maybe to invest in something that's going down.

Andrew Stotz 21:57
I always teach my students in my valuation masterclass that I do, you know, the bandwagon effect, and how easy it is to join a bandwagon and how hard it is to do an independent action. You know, it's hard for everybody. But I think that's where you talk about the emotional stability and not making emotional mistakes, you know, don't let the smashing symbols and the boom and the buzz of the bandwagon. get too excited that you just go chasing that, you know, thing.

Dr. David Kass 22:29
Right? No, no, absolutely.

Andrew Stotz 22:33
One last question before we get into your story is that I was about 10 years old in 1975. And I can remember some of the stuff going on there. Not much. But I remember some lines at the gas station and stuff. I was living in Wilmington, Delaware at the time, my dad was working for DuPont. We later moved to Ohio in 1977. And then I just remember, you know, it was a hard time during that time, with inflation and all that. And, uh, now, you also mentioned that there's a lot of really smart people investing we've got also the Fed is such a key component compared to the past. How does somebody think about the stock market these days? You know, in some ways you could think, well, we could be heading for a huge crash. But if the Fed comes in, you know, hey, market goes back up. It just seems like such a different type of market compared to the past. I don't know if you've got some observations or thoughts on that.

Dr. David Kass 23:33
Well, yes, I basically, I think there's some very key lessons to be learned from the financial crisis, fairly recently. 2008. It's 15 years ago. It's not that long ago. It's about ancient financial history. And there to quote Warren Buffett himself that we were on the brink, if certain moves were made. There was a key weekend in 2008. September 15, I remember I think it was Sunday. So on September 15 2008. over that weekend, really Lehman Brothers failed. Bank of America acquired Merrill Lynch. And then a large insurance going American. He was bailed out, basically or insured. Those who had insurance policies with guaranteed AIG and Warren Buffett made a comment afterwards. And he said, If Bank of America and not went out Merrill Lynch on Monday on Sunday, it would have failed on Monday, Morgan Stanley would have failed on Tuesday. And Goldman Sachs would have failed on Wednesday, he made some comment very close to that. And we would be right back in a really deep depression, similar to or maybe even worse than the 1930s. And it took, and we were lucky that the right people are in the right place doing the right things. The people at Treasury bill and doing the right Congress initially, there was important bill before Congress, and he signed seven or $50 billion to backup the banks. And initially, Congress voted it down in the stock market that day plus 5% 7%, something in that ballpark range. And only I think the next day, maybe that they did pass this bailout bill. Congress in the end did the right thing. We had the right people, Ben Bernanke. Guess at the Federal Reserve, Tim Geithner. Paulson, are cutting across a couple of several months. Over at Treasury, we have the right people in the right place doing the right thing. Those are words from Warren Buffett Buffett's words, and we came awfully close to something a real serious problem. And fortunately, so even though we're so we should have learned lessons from the past. One thing approximately, with Ben Bernanke, Ben Bernanke, his PhD thesis at Princeton, or his PhD in economics, was a history what caused the Great Depression. So he was an expert on the Great Depression. And he learned what lessons were learned from it. Maybe more money, not less money going into the economy. There were a lot of mistakes made by the Federal Reserve in the early years of the Federal Reserve, and contributing to the Great Depression. And he made sure that we were not going to we're going to learn from those mistakes, and move forward. So even though we could say with confidence, so things look pretty good, the Federal Reserve will jump in, there are still we came awfully close to total disaster 15 years ago. And then we have the pandemic, the pandemic in 2020. Well, the pandemic comes along, basically, if you look at world history, once every 100 years. What do we do the last pandemic was, I guess, the Spanish before this one, the Spanish Flu of 1918, when you were 100 years, so that make it 102 years, and you get the year 2020. In 1918, we didn't yet have a Federal Reserve, the Federal Reserve Act was passed in 1933, in response to the Great Depression. And so there was no Federal Reserve in 1980. What can we do to get our economy everyone is told to quarantine stay at home, the whole economy is shutting down. How do we handle this? We may have learned from previous depressions. When interest rates are high inflation, we don't know what happens during we know, we survived World War One World War Two major crises, but how do we get through a pandemic? What do we do? And fortunately, we were able to work our way through that courtesy of the Federal Reserve, both monetary and fiscal policy, Congress and the president, a couple of administrations coming through doing the right thing. So just because we're in pretty good shape today, we've come pretty close over the last 15 years to two major potential disasters. So I think we all learn and we are learning from each experience. We're learning more, I think we're better, we're more sophisticated. I think we'll minimize mistakes going to the future, but new situations will occur. And we'll have to deal with them at that time.

Andrew Stotz 29:25
Yeah, and when you look at the current day, you know, you can see the banks, I would say are in much better position. The balance sheets of the banks, I think in the US in particular, but outside of the US also pretty strong and they were tested through COVID.

Dr. David Kass 29:40
Yes, yes, with the bank's least in the US and hopefully, I think around the rest of the world Western countries. An ancient, I think, a much better capitalized today than certainly they were 15 years ago during the financial crisis, but certainly the Large banks, I think are far more likely or more able to survive of future crises that may occur.

Andrew Stotz 30:09
The other thing is that profit margins are very high for companies generally. And particularly, of course, we've got the tech companies that are leading in that. But generally, the profit margins are pretty strong. And so that also gives a little protection. I guess the only thing that remain is, you know, very high interest rates, you know, can have an impact, number one, and number two is government debt. And so maybe the next crisis is the dollar rather than something else, or I don't know, but it's just incredible the amount of debt.

Dr. David Kass 30:45
Yes, but there's certainly a lot of government debt, I think there's less debt. In the private sector, the financial crisis in the US. In 2008, there was much too much debt in the housing market, subprime mortgages, housing prices, lot of speculation in real estate. And so in the private sector among consumers, there was much too much debt. Certainly there today, I think the amount of debt in the US in the corporate sector, private sector, I think, is reasonable. But yes, governments are taking on have taken on a large amount of debt. And it does raise a concern, because as part of the approach to having our economy recover from the financial crisis 2018 And the pandemic of 2020, was to drive interest rates down to zero. And when interest rates zero, money is free to borrow, doesn't cost anything. So and governments did some corporations, also wisely took advantage of low interest rates and consumers as well. But governments took on a lot. And, and now its interest rates have gone up by in the US five full percentage points. In a year, a little over a year, it's gone from zero, the federal funds rate has gone essentially from zero to five and a quarter, and maybe a year and a half or less than a year and a half. And all of a sudden as governments roll over their debt, yes, the debt they took out at 0%, or 1%, or half percent, now has to be refinanced at 5%. And all of a sudden, wow, that's a huge interest bill to be paid. And I guess one way of addressing this over time, is maybe reducing the budget deficit over time, of course, that's gets into political issues. And they do that to raise additional revenue to cut spending, try to cut down on the budget deficit, and that's for future for again, future financial and monetary policy to address.

Andrew Stotz 33:04
Yeah, such a, you know, challenging time. And I remember when I was young, and getting out of university, and then working in the field, I really railed against government debt, and I felt like excessive government debt, you know, was just such a bad thing. And but I never, ever would have thought it would got to this level where it is pretty much unstoppable. I mean, any under no Republican or Democrat is gonna go in and say, we want to cut spending by 50% and get this budget deficit, you know, into surplus or into a small deficit. I can't imagine anybody going and saying that, and the population can't handle it. But yet, the cost of the interest is just rising, too. We're going to be at, you know, a trillion dollars in interest expense. It just like it just has to someday just blow up, I guess I really don't know.

Dr. David Kass 34:00
Yeah, again, there will have to be a main major changes and through the United States, a big chunk of the budget and the social programs, Social Security, Medicare, as examples, that there could be ways that we're addressing it such as, as the population, for example, is living longer than maybe Social Security payments, would. You have to wait to an older age to start receiving payments, and maybe again, with Medicare, Social Security, some extent maybe that's already happening? Have these basically based on your income those who have the ability to pay on their own so to speak would have no interest, in essence, pay higher Medicare taxes, or Social Security taxes, or be less eligible, less qualified or receive lower benefit? fits their higher incomes so that it could be addressed that way. But it was I think, in the late 90s in the United States, so we're talking 25 years ago roughly believe the budget budget for a year or two, a couple of years was balanced under Clinton. Democrats. Absolutely. Under President Clinton, it was balanced. But we're all doing it in the 90s. I think we could get back there gradually over time as well.

Andrew Stotz 35:28
Well, let's hope I think this highlights the number one question for my clients in Thailand, as well as for clients around the world and investors around the world is like, do I buy the US dollar to buy US Treasury to buy US stocks? Or am I exposing myself to some kind of currency risk? And I think, so far, it's been a good deal, to buy the US dollar to be able to buy, you know, good performing stocks and the light. But that's definitely the question on everybody's mind outside of the US.

Dr. David Kass 36:01
No, and I think the dollar is likely to remain the reserve currency for many years to come. Because right now, I'm not aware of any good alternative. Things could change over decades or thing, but certainly in the foreseeable future. I think the world has more confidence in the US dollar than any other single currency.

Andrew Stotz 36:25
Yeah, I would agree with that. I would agree with that. I mean, it takes time. Well, now it's time to show your worst investment ever. And we waited a long time because we had a great conversation. But if you could just maybe, you know, what I always say is no one goes into their worst investment thinking it will be. Maybe tell us about the circumstances leading up to it, then tell us your story.

Dr. David Kass 36:46
Okay, the circumstances. I'm young, in their early 20s. I recall, investing in the stock market low I got started actually, at a fairly young age, I had the good fortune actually. Start as an investor in the stock market at age 12, courtesy of my grandfather gave me a gift of five shares of a $20 stock. And since then, I started following the market. But I'm now let's fast forward 10 years or so, I'm in my early 20s and investing and working and earning some money investing in the stock market. And I believe the year was 1969. And stock market doing reasonably well at the time. And there was a stock that caught my attention. And back then, every day in the Wall Street Journal, New York Times or financial news, they would list the 10 most active stocks of the day by number of shares traded. It wasn't necessarily the the largest stocks like Apple, Microsoft, Google, Amazon, Facebook, etc. It was just what stock was being actively traded. And near the top of the list was this company called scientific resources and a common stock and preferred stock. It was a computer software company. And I noticed that the preferred stock was paying a 9% dividend. And I said wow, I can earn 9%. At that time, I didn't understand the relationship between risk and return. That if the average stock in the stock market then may have been paying an average dividend of say three back then the average should have been 3%. Cash dividends were a little higher, more prevalent stock companies back then did not buy back their shares. They return capital to shareholders through a cash dividend. Today, it's somewhat different, primarily stock buybacks. But back then come the average cash dividend was three, three and a half percent. Here's the stock paying 9% Whoa. So I run out and I buy 100 shares at $20 A share was probably all the money $2,000 All the money that had to invest at the time maybe. And then it started going down every day it was actively traded. I didn't have to look very far to get the price. And then as a shareholder back then I received this mailing just the timing very interesting. Once a year, shareholders are asked to vote under SEC rules. I get a proxy statement from the company and a ballot to vote for senior management or other issues that came up and I open up I look at the proxy statement within the proxy statement. It shows stock ownership by senior executives Love the company, this is a standard in every stock proxy fruit today. And it was true back then. And I opened it up at turn a few pages. And I look at the chairman of the board, number of shares owned zero to number of shares owned zero, Executive Vice President and all the way down listed six or eight executives, not a single one own any shares. And I said, Oh, this doesn't look right. Oh, why should I as an outsider invest all my $2,000 when the insiders who and their salaries I think may have been also given in the prices, as well. So they're earning a lot, let's say a lot more than I am well was at the time, why aren't they invested. And I found out soon enough, that as a stock, I think I bought it at 20 finally sold it at about two as it went down to zeros and accounting fraud. And went down to zero and lesson learned a very big lesson. Don't invest in a company, unless senior executives and I focus on the CEO, I focus number one on the CEO, if the CEO does not have a large stake in the company, then run away go away. And I am by large stake. And in fact, I wrote an article actually published an article, I was asked to come and I was at a conference around 1986. And I published an article and the title of it was anti takeover measures obstructions to the market for corporate control. And it was published in contemporary policy issues, July 1986. And in that article, I came up with my own measure. And I related this, my own measure that a CEO that I formed the ratio of the current stock market value, the value of the CEO stock in his own company to his annual salary. And I think I came up with the ratio, which should be at least three to one or five to one, something of that nature. And if it isn't, at least say three to one, then run away, do not be careful, be careful when the stock is still work out. It's not necessarily a problem, but be really careful. And usually, what I found, and I wrote a little bit in this article, that company where CEO is deriving most of his wealth or income from the company via his salary, then his interests are not aligned with shareholders, only if he holds a large stake in the company, what his interests be aligned with shareholders, and therefore taking actions that like not maximize shareholder value, which means maximizing shareholder price. But if it's not there, then all the manager wants to do was hold on to his job and maximize his salary income. And there, you will find that I found I think I mentioned a couple of examples. Companies like that when there was a takeover bid, this is the gist of the article I wrote, when there's a takeover bid, then they'll take various defenses ankle poison pill, crown jewel sell off the best division, then I keep my job wherever it's coming after me. We'll go after the southern division. So I call up pac man defense, golden parachute. For example, in case I'm taking over, the company's got to pay me $100 million. And that is $100 million. So the cost of a takeover, and you're certainly not acting in the best interest of your shareholders. So the lesson I learned from there, as my $2,000 essentially went down to zero was looked carefully at proxy statements, make sure the CEO and other senior managers have skin in the game, that their interests are likely aligned with yours. They have a large stake through their stock holdings. And that was a lesson I learned at a very young age and still applies today. And today. It's a lot easier to check this back then we didn't have the internet. If you want it to find out wanting to look at a proxy statement. You couldn't go online to the SEC filing, you have to probably call the company and ask them to send you there proxy statement or write them a letter and maybe two weeks later, you get something in the mail. Now, it's very easy. Now anyone could just go on the internet, go to the company's Investor Relations website and look at their SEC filings, look at their proxy statement they share with every year, or alternatively, alternatively, go online to the SEC directly through their EDGAR database. And you could within minutes, today, you could have access to this information, which back then may have taken days or weeks to obtain. But certainly, this is information that is critical. And something that I think was least back then totally ignored. I hope investors have learned something over the years from this.

Andrew Stotz 45:53
Well, I think we've got a masterclass from your corporate finance, teaching, because I know this is part of the agency theory of the concept of you know, when you're investing in something, you're counting on that person, the CEO or others to represent your interests. And if they're not, you know, aligned with that, then you've got a problem. And I'm sure you do a lot of teaching about that type of stuff in your course.

Dr. David Kass 46:18
Yes, yes, I do. And we're doing the discuss agency theory and conflicts of interest? And does the CEO really look out for others, or just himself or herself as the case may be? And this just, I think, illustrate this issue quite well. Yep.

Andrew Stotz 46:41
I have a private investment in a company that I've owned for now 28 years, a coffee business with my best friend. And we both own an equal amount, though he runs the business. And it just comforts me every day to know that we both in him in particular, has a huge stake in making sure that our business is successful and growing over the long run. And so that type of alignment is what you know, we want when we're investing in, you're never going to get that type of alignment in the public markets, because, you know, the original owners are going to be diluted down, but still some alignment is critical.

Dr. David Kass 47:21
Right? Absolutely. You know, the market for corporate control? Yes. And the original founders of a business, yeah, gets diluted over time when they're no longer there. And then the professional managers come in who might be more interested in their own careers and their own personal wealth than they, they don't have the original stake in the business or emotional state, as well as financial stake in the business that the founders had.

Andrew Stotz 47:51
So let me ask you, what's a resource that you'd recommend? I mean, you've got stuff that you've done. There's so many different things that you've read that you've experienced for a young person who's learning about investing? What would be your recommendation?

Dr. David Kass 48:06
Okay, when I recommend, again, I'm a big fan of Warren Buffett. So I'm gonna come back to Warren Buffett, I think, the best reading material, I think it's basically the book you just pulled off the shelf. At Big at the outset, letters to shareholders, your holding up 1965 to 2014. I think that's the best book to read. And let me explain. And of course, the letters since 2014, are available online for free. at Berkshire hathaway.com. Warren Buffett has said each of his letters written so his sister could understand them. And his sister has no background in finance. So his sister can understand his face basically written for anyone to understand where he's explaining the economics and finance not only of Berkshire, which he certainly focuses on, but on the overall economy are really excellent lessons to be learned. And his examples of mismanagement, good management. And I think as you go through this, I think that those letters are over time, are better than any textbook that I'm aware of any one book that one can read their various books, Benjamin Graham, Warren, Warren Buffett's favorite books that he refers to and you can certainly learn something from there. But even there, they're just, you know, to me, they're just a drop in the bucket compared to the wisdom that's conveyed by Warren by after year after year, and just going through, again, the 50 letters of the book you held up. And then going online right now you, I guess get the last 30 years or so or more, they're available right now online, for free. Just go to letters to shareholders each letter, by the way, in recent years, I guess maybe close to Warren Buffett's age, he's 92. And at the moment, and or shortly will be 93 is getting a little shorter recent years since letters been reduced to maybe 15 pages down for maybe 25 pages a few years back. But even when they were at 25 pages, they were very readable. And he has lots of humor, and puts in a lot of humor into his writings. As he does when he meets with students I brought soon sitting with him on four separate occasions, the first one, we referred to earlier that it was a student who initiated that first visit, but then I became sort of a liaison between my university and Berkshire, and right through 2016, since 2016, Warren Buffett, unfortunately, no longer meets with students, but it's understandable given his age. And, you know, it's just even in those meetings, especially in those meetings, he is just very funny. Now, he'll, he'll give you examples, like the best way to learn, in fact, he'll tell students, you can read a book about investing, but you don't really experience the emotion of investing until you put your own money into a stock. And you experience the feeling, the exhilaration, maybe when it goes up, and let's say the sick feeling when it goes down. It really experienced that and deal with it, and control your emotion, then you find out then you really learn about investing. So in addition to reading his letters, I would encourage young people, people starting out investing when they have some money that's available to invest. Thirdly, go ahead and invest and then follow your company, your stock or your fund. That could be an s&p 500 Index Fund, which incidentally, Warren Buffett recommends for almost everybody. And just experience the emotion of ups and downs. Stand a little bit about what investing is about.

Andrew Stotz 52:45
Great. Last question, what is your number one goal for the next 12 months?

Dr. David Kass 52:51
Well, my number one goal, I guess, for me is to continue what I'm doing. Continue teaching, certainly at the Smith School of Business, University of Maryland and finance and to certainly follow it's very interesting, challenging situation economically. I have both the macro economic and background as well as the finance or macro or the micro economic, financial analysis perspective as well, certainly following developments over the next year. And the US, for example, avoid a recession over the next year, will inflation be successfully brought down Federal Reserve in the US has a 2% goal for inflation. And that goal will be achieved, will interest rates have to go much higher to achieve it? If they do go much higher? Will there be much higher unemployment leading to a recession? Well, can we have something called a soft landing in which inflation can be brought down without a recession without too much pain in the economy? We have right now? Unemployment rate of around three and a half percent, which is the lowest it's been 50 years. Sorry, I don't remember any recession will hear you having historically low unemployment. Usually, session employment is quite high, 567 percent or higher. In 1980. I remember back in the early 80s. We had double digit inflation and double digit unemployment, things went really bad back then. Now they're relatively calm. But what will happen over the next 12 months, and of course, they're always external shocks. The war in Ukraine is an example what will happen there? Will there be another external shock there? There's some concern. Certainly. In Asia, will there be any geopolitical risk in Asia? Could that lead to a major situation Should similar to Ukraine. What impact will that have on the world? So there's always the world is a risky place,

Andrew Stotz 55:10
you're going to have a busy 12 months David

Dr. David Kass 55:13
has. Yeah, so things. One never gets bored just following what's going on in the world.

Andrew Stotz 55:20
Exactly. Well, listeners, there you have it another story of loss to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. As we conclude, David, I want to thank you again for joining our mission. And on behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Dr. David Kass 55:44
Oh, thank you very much. I hope the audience can learn something from my mistake, as well as Warren Buffett's mistakes as well, trying to be unemotional trying to learn from other mistakes. And certainly as Warren Buffett has said, This, I think you said yourself, it is better to learn from others mistakes rather than to have to learn from your own mistakes. So I hope this session has been quite educational for everyone.

Andrew Stotz 56:17
It definitely has. And that's the whole premise of this show. And that's a wrap on another great story to help us create, grow and protect our wealth fellow risk takers, let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. This is your words podcast. Oh Is Andrew Stotz saying I'll see you on the upside.


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About the show & host, Andrew Stotz

Welcome to My Worst Investment Ever podcast hosted by Your Worst Podcast Host, Andrew Stotz, where you will hear stories of loss to keep you winning. In our community, we know that to win in investing you must take the risk, but to win big, you’ve got to reduce it.

Your Worst Podcast Host, Andrew Stotz, Ph.D., CFA, is also the CEO of A. Stotz Investment Research and A. Stotz Academy, which helps people create, grow, measure, and protect their wealth.

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