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

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 profileDr. 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 everDavid 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...