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Does Walter Hewlett Deserve an Oscar?
By Stephen J. ButlerArchives
When I'm asked about my column by my Safeway grocery checker, it tells me why, at a fundamental level, the proposed merger of Hewlett Packard and Compaq is more important to all of us than the outcome itself. My own thoughts on the subject begin with what I know about Walter Hewlett.
In the past
few weeks, I have heard a number of 401(k) participants express
concern about the losses in their accounts. As the reality of
last year's wild market fluctuations finally sinks in, some 401(k)
participants have been understandably traumatized by the experience.
For some of us, any confidence we might have had in our ability
to manage money has been shaken to the core. In fact, most people
have done pretty well if they have been contributing for five
or ten years. What we need is a working knowledge of a sophisticated
measurement tool that will tell us what we want to hear. We need
to calculate something called our Internal Rate of Return.
Walter was a college classmate. He is a very smart, quiet, and
unassuming guy. He drives a bright red, General Motors electric
car and he was a conscientious objector during the Vietnam Era.
Last spring, I peered under his huge sombrero to chat with him
between numbers as he was playing a Mexican acoustic bass guitar
in a Mariachi band. Music is a big part of Walter's life. He has
a PhD in the subject from Stanford. For what it's worth, music
majors were once considered to have some of the best innate talent
for writing computer code. Perhaps it's not surprising that the
son of a gifted engineer found himself attracted to an art form
that dovetails with computer science.
Sensing that the merger wasn't passing the smell test, Walter's apparent early decision was to enlist the advice of boutique investment banking firm, Friedman Fleischer & Lowe. Tully Friedman is an icon of the Bay Area investment community whose former firm, Hellman and Friedman, had advised on a number of high-profile transactions such as the move to take Levi Straus private. With Walter showing no hesitation to act on what he feels is right, and Tully helping to determine what IS right, proponents of the HP-Compaq merger found itself heading toward a buzz saw they never anticipated.
At the moment, the outcome of the proxy vote is still uncertain, but the true value of Walter's effort lies with the dialogue he spawned. It's a safe bet that either outcome will involve people working harder over the next five to ten years to validate whatever set of votes prevailed. It stands to reason that if the merger takes place, an extra effort will be made by the "survivors" (those not among the 15,000 to be laid off) to vindicate the winners of this close vote. It is a good bet, after all this, that company senior management five years from now will not be sitting around counting their up-front bonuses and reminiscing about how disappointing it was that things didn't work out. Instead of some sleepy big-company merger statistically doomed to failure, this one should have participants straining every fiber to make it succeed. AVIS should donate some of their "We Try Harder" buttons.
On the other hand, if the merger does not succeed, HP employees better recognize what Carly Fiorina is essentially trying to tell them... that they have reached a plateau. Back in the seventies, I talked with Bob Chambers who had started Consolidated Capital after making a lot of money on the Shopsmith ... a multi-tasking home-workshop tool. Consolidated was one of the earliest venture capital firms in the Bay Area, and Bob told me that the biggest nuisances in his business were the companies in his portfolio that had become "the living dead." These were companies that were providing a wonderful lifestyle for their senior management and employees, so they were not failing. However, they were just marginally profitable and offered no potential for the explosive growth and huge payoff all venture capitalists are expecting in return for their high- risk capital.
Could HP in its present form be just a huge version of "the living dead?" Steve Davenport, a former boss of mine, used to say, "When you quit getting better, you stop being good." Many CEO's have been fired when they couldn't "pull the trigger" and make the final decision to plunge their otherwise comfortable companies into what some term as the "creative destruction" that continuing success demands.
Walter's campaign, regardless of the outcome, will have served a useful function as a learning tool. As a nation of public stockholders, we are novices at shouldering the responsibility and looking out for ourselves. Until the early part of this century, there were very few public companies. Most large industrial concerns were owned by several generations of families. The idea of the professional manager and the growth of public ownership is really only about seventy years in the making. C. Wright Mills, in the book "The Power Elite," pointed out the low level of accountability enjoyed by the entrenched management of most public companies. The book is forty years old, but it could have been written yesterday.
Meanwhile, the proliferation of 401(k) plans, that wonderful accident of legislative history, has transformed over half of America's working population into a group with an intense self interest in how the companies they effectively own are being operated. Before, most of us never had a reason to care. We were several steps removed from a pension system offering only a vague promise of a benefit...and then only for the few of us who worked for one company most of our lives. "This time it's different." We 401(k) participants have five times the retirement resources we otherwise would have had under the old system, and this is our money we each control. Suddenly, the business of America has become everyone's business, and the glare of publicity can only be a positive element in the minds of directors.
Walter Hewlett is a rare commodity. He is a single director in the unique position of controlling 5% of a major national institution, and he happens to be a guy with no qualms about standing up for what he feels is right. He doesn't need this. He is doing it for us. Whether you agree with him or not, you have to admit that he deserves an Oscar for his effort.
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You're Smarter Than You Think
By Stephen J. ButlerArchives
A stream of money flowing into an investment program generates
a different rate of return than a single amount of money contributed
once. To take a simple example, if we had $10,000 in a mutual
fund that earned $1,000 in the first half of the year and lost
$1,000 from July 1st through December 31st, the return for the
year would be 0%. However, if we started with $10,000 and invested
a second $10,000 on June 30th, our loss on what became a $20,000
account would be $1,000. The second $10,000 wasn't in the fund
to enjoy the success of the first half of the year. Instead, it
was only around long enough to get saddled with the loss. It therefore
dragged our total account value down to $19,000... a 5% loss for
us with a mutual fund that showed zero change in value for the
year.
Timing can be everything. A single investment in a Total Stock
Market index at the beginning of 1993 would have accumulated to
2.8 times its 1993 value as of the end of 2001. This represents
a 14% per year average rate of return. However, a constant annual
investment in the same mutual fund for the same nine-year period
would have generated an internal rate of return (IRR) of only
7%.
Why the difference? The steady contributions over time meant that
the latest contributions only reached the account in time to get
slammed by the 20% combined loss of 2000 and 2001. It is a real-time
experience of the example outlined above. This is why our recent
account balance results can appear to be a little discouraging.
There is also a temptation to make an inaccurate comparison of
401(k) results with those of an older IRA that has had no new
contributions. It would appear that the 401(k) hasn't done as
well, but this is only because those inbound contributions create
a moving target for calculating our percentage gains.
Fortunately, the Excel spreadsheet software in the Windows program
of everyone's computer offers a calculator for determining how
well you have been doing with your 401(k) investments. The "paste
function" on the same toolbar where you find the icon for
"print" will lead you to a selection of different financial
calculations. "IRR" is one of the options the computer
will calculate. You start by lining up the contribution amounts
(as negative numbers) on an Excel spreadsheet in a row of cells
for the years you have been a participant. In the last cell, insert
as a positive number the total value of your account as of
the end of last year. Move to an empty cell, go to the "paste
function" icon and click "IRR." Enter the line
of cells for which you want the calculation performed (i.e. A1:L1)
and click "OK."
Most people who have been contributing a consistent regular amount
for several years will find that their returns are in the 7-8%
range. This is not a bad return. Money compounding at this rate
doubles every ten years. The biggest mistake that some people
are making is to recall their amazing account balance at the end
of the March in 2000 and adopt the mindset that they have "lost"
by whatever today's lower account balance reflects. That extraordinary
market performance was a fluke, and too many future retirees made
the mistake of assuming that it was somehow locked in by some
kind of ratchet effect.
In the face of recent disappointments, calculating our IRR can
be reassuring. It generally indicates that we can do pretty well
using a "minimalist approach" to investment management.
Calculating our return with a tool that considers a steady stream
of contributions over time helps us avoid doing anything rash
like moving everything into cash.
Finally, we need to recall that retirement plan contributions
include money that would otherwise have disappeared in taxes.
For most families or single people, the last few dollars of income
contributed to the plan would otherwise have been taxed at roughly
36% (state and federal). Now, go back and reduce your contribution
amount in your IRR calculation by 36% to reflect your actual cost
in take- home pay of those contributions. This raises your return
from 7% to 16%. The lesson? It doesn't take a super-heated stock
market to make you look like a genius. Just use the right measuring
tool 
