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February 2005 Read the Fine Print: We Dare You
by Todd Barrett, MBA '95 As disclosures of risk run rampant in the fine print of corporate publications, this investor searches the marketplace for somewhere to hide.The other day, having jaywalked back to work after knocking back a couple of cocktails, I was getting ready to operate some heavy machinery when I took a look at the latest 10-K of one of my favorite companies. And it was then that I got really scared. For it would seem that in this post-Enron, Sarbanes-Oxley era, equity investing is really risky business. SEC filings and prospectuses are chock full of risk disclosures. There are market risks, interest rate risks, weather-related risks, product development risks, political risks, risks of not disclosing enough risks. Hey, is this investing or skydiving? Take a gander at this passage from a recent Disney filing: “For an enterprise as large and complex as the Company, a wide range of factors could materially affect future developments and performance. These factors may include international, political, health concern and military developments that may affect travel and leisure businesses generally; changes in domestic and global economic conditions that may, among other things, affect the international performance of the Company’s theatrical and home video releases, television programming and consumer products; regulatory and other uncertainties associated with the Internet and other technological developments; and the launching or prospective development of new business initiatives.” Yikes. But is this really that complicated? Isn’t this like being told the contents of the coffee cup may be hot? Hey, this just in: Investing is risky. If you’re not prepared for the fact that what goes up might come down, hightail it to the bank and sign up for the Christmas Club. Doesn’t it boil down to: If the economy goes bad, Disney’s business goes bad. OK, got it. Or how about this: “Because these forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied.” Wait a second. Do you mean that the board’s Magic 8-Ball isn’t really predicting the future? If business really required soothsaying, wouldn’t the world be run by gypsies? How far will this go? What’s next? “Our CFO runs with scissors”? “Our Marketing chief swims too soon after eating”? Will disclosures have to cover any and all contingencies to calm investors and their class-action-hungry counsel? “Our directors are generally level-headed but they may just decide to take off to Vegas and let it all ride on lucky seven.” Don’t forget that California may drop into the sea just before that comet hits us right between the eyes. In trying to warn of every exigency, the disclosures end up covering none. As it is now, the cries of disclosure are just so much noise, tuned out by the marketplace and thus not really protecting anyone. How else to explain that a recent survey of investors by UBS found that nearly one in five investors expected to make 10 to 14 percent on their portfolios over the next year. Don’t they know the polar ice caps are melting? Haven’t they read that the killer bees are heading our way? For some investors, no amount of information will protect them from themselves. That’s why with investing, as with so many things, caveat emptor. We can’t and shouldn’t expect disclosures to protect us. In all of Enron’s disclosures, never once did I come across the line that said, “Hardy-har-har.” And I didn’t hear WorldCom tell anyone to “call Spitzer before we steal the light bulbs, too.” We don’t know what might happen, and that’s just the point. No amount of disclosure will ameliorate all risks. At some point, every investor needs to act on faith whether in taking a leap or a baby step. It’s not that I’m some libertarian; if my car is going to spontaneously combust, I appreciate a government-inspired heads-up as much as the next person. But markets are fickle and unpredictable, which, as I think about it, is about all the disclosure that any investor should ever need. Todd Barrett, an occasional contributor to this magazine, has another career as director of corporate staffing at Apple Computer. |
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