investiledysfunction

We do lots of work in the financial services industry and so we tend to look at what the sell side is saying about public companies we work with.

From past lives, we even know some of the guys on a social basis and will occassionally shoot the breeze with them.  Overall, they tend to be smart, driven and very good with Excel.  These are all essential ingredients for a good time.

But like the internet days when we had superstar analysts (Henry Blodget anyone?), we now have the new market guru of the financials arena in Meredith Whitney of Oppenheimer & Co.

She’s undoubtedly made some prescient calls and hasn’t been shy in making them aggressively and in an outspoken manner, but the question really is whether Meredith Whitney is more sizzle than steak?

When you look at her performance as reported in the August 18, 2008 issue of Fortune, you get some perspective into this.  They write:

“Whitney’s insights haven’t always translated into lucrative investment picks. Based on the performance of her buy and sell recommendations relative to her industry peer group - what analyst tracker Starmine refers to as an analyst’s “industry excess return” - Whitney’s stock picking ranked 1,205th out of 1,919 equity analysts last year and 919th out of 1,917 through the first half of 2008. That said, evaluating Whitney solely on the timing of her buys and sells misses the point. It’s not just that she’s bearish on the entire banking industry. What makes Whitney so interesting is the brutality of her arguments and the evidence she summons in making them.”

Based on the statistics aka something we call the facts, Meredith Whitney isn’t that great a stockpicker.  And if I’m a client or investor, I’m guessing that the correctness of stock picks is what makes me money and not the “brutality of her arguments and the evidence she summons in making them.”  Looking at her stock picks as a metric for measurement doesn’t “miss the point”.  It is the point.

However, the media love a story and Meredith Whitney provides it.  She is married to a WWE wrestler (JBL for those like me who are former WWE fans.  And no I’m not ashamed to admit that.  Okay, I kind of am).  And more importantly, she makes swing for the fences calls which attract attention.  If she was wrong, she’d have faded into obscurity.  But because she has been right on some of these big, hairy prognostications, she’s been appointed a guru and CEOs and CFOs spend time with her (most recently Ken Lewis, CEO of Bank of America, CFO Nelson Chai of Merrilly Lynch and CEO Ken Chenault of American Express).

Unfortunately, it seems the frequency of being right which I presume the folks who are ranked highly in the equity analyst crowd are is being drowned out by the magnitude of correctness no matter how frequent.

Let’s remember the primary objective of an equity analyst should be to make good calls that inform clients’ investment actions and enable their success.  As a result of this, they should be rewarded.  Somehow, being 919 out of 1917 equity analysts doesn’t seem worthy of much praise, but once again, style sells.

The question now is if Meredith Whitney’s stock picking skills don’t improve, how long will the hype last?

Ken Chenault, the CEO of my alma mater, American Express, was one of the folks questioned in “The Three-Minute Manager” column of Fortune Magazine May 5, 2008 and was presented with the following query “My company is getting big.  How do I continue to grow without focus?”

On the topic of innovation, Chenaullt mentioned the company’s inaugural $50 million Chairman’s Innovation Fund which I set up, led and managed before leaving for Brilliont.  He specifically stated,

“We’ve set aside $50 million for an innovation fund.  People at every level can submit ideas, and the top management team selects several different projects for seed money.  We also work with our partners.  We believe very strongly that our partners can help us come up with ideas.”

AmEx was named the most innovative financial services company by Fortune for 2007 so the company’s efforts are yielding benefits.  Of particular note is that with our work on the innovation fund, we’d made sure to carve out this $50 million to ensure innovation wasn’t something we do when convenient but all of the time.  Also, the push towards getting ideas from partners also ensures the best ideas are captured from not only employees but others who have a vested interest in the company’s success.

Before leaving American Express recently, I’d established and led the company’s inaugural Chairman’s Innovation Fund.  I was glad to recently see that Fortune Magazine recognized American Express as the most innovative company in the Financial Services industry.  The company’s CEO, Ken Chenault, spoke about the organization’s innovation efforts and the Chairmans’s Innovation Fund in particular.

“A difficult economic environment argues for the need to innovate more, not pull back,” says American Express CEO Ken Chenault. A few months ago he established a $50 million innovation fund to finance “employees’ ideas for how to transform our business long term. We want great ideas to come from all over the company, not just the chain of command,” Chenault says. AmEx (AXP, Fortune 500) (No. 13) has a venerable history of making risky moves during downturns. Back in 1958, despite a slumping economy, the company launched a little thing called the American Express card. “When I first came here, I saw a copy of a letter from an analyst that earnestly explained to our then chairman why the card was a terrible idea and how it would cannibalize our traveler’s check business,” says Chenault. “It was an impeccably logical argument - that couldn’t have been more wrong.”