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Mark Cuban’s Take on CEO Pay

May 30, 2008 by 7 Comments

I read an article yesterday from Mark Cuban, My 2 Cents on CEO Pay, that I somewhat agreed with and thought deserved a post just before the weekend.

Do you agree, disagree or have a better idea on how to pay corporate CEO’s in America.

I tend to agree that CEO’s in the US have been screwing their own companies over the past few decades, if not longer. I am all for exceptional pay, bonuses and incentives if key benchmarks or financial goals are met but I don’t agree with rewarding poor performing CEO’s (especially when they walk away with half-a-billion dollar termination rewards after running the company into the ground; can we say Home Depot – or The Home Dumpo as I like to call it).

Incentive based pay is how I would run my company, from the most entry level employee to the top of the chain. Yes, I would offer base salaries but the majority of everyone’s pay would be incentive based. Enough of that; read Mark’s article and let me know what you think. Place all public perception aside about Mark’s character and focus on what he is writing.

My 2 Cents on CEO Pay
By Mark Cuban
April 15, 2008

“There is a game played by CEOs with the corporate issuance of lottery tickets. Otherwise known as stock. Stock can be issued in any number of ways, shapes or forms. Warrants, options, restricted or unrestricted stock. No matter what you call it, every CEO hired, is asking for equity knowing that their only goal is to hit the jackpot and create a pool of wealth that puts them in the “fuck you” wealth category. Thats enough money to buy or rent just about anything you can think of and put you in position to never have to work again. You just live off the cash in the bank.

Put another way, every hired CEO is looking to be in a position to look in the mirror , smile and tell themselves they have made it. They are living the American dream. The only way to do that is to grab as much equity equivalents as you can and do everything you can to get that stock price up as high as you can while periodically liquidating the stock and stuffing the cash in your bank account.

There is absolutely nothing wrong with doing so. Any CEO who doesnt take advantage of this golden ticket opportunity is an idiot. In fact, although I don’t have actual numbers, I would hazard a guess that more than 95pct of CEOs hired to run companies with a billion dollar plus public market caps probably do get themselves to the position of having more than 10mm dollars in equity very quickly. While those who manage to hold on to their jobs a while and not screw up too bad, can relatively quickly get past the 25mm dollar in equity mark and reach the 50mm dollar mark with in 10 years. Its actually pretty tough to screw up and not get there if you have any brains at all.

Why ?

Because you have the entire Mutual Fund, Hedge Fun and Brokerage industry doing everything they can to get you there. Think about it.

You can’t turn on CNBC or Fox Business without them cheerleading the market to go up. Every man, woman, child, fund, index or interested party who buys the stock is doing everything they can to get the stock of the company to go higher. They don’t really care how you run the company and they care less about the results of the company than they do about the performance of the stock. Heck, even if they did care, shareholders dont really own anything and have zero say in the company. If you really dig into it, its the ultimate in social networking. Everyone who owns the stock belongs to the fan page or group for the stock and they are telling everyone they can how wonderful the company is and why the stock will go up, all while praying it does so.

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Filed Under: Media, Wall Street

Summer Reading List

May 29, 2008 by 1 Comment

Learning about Stocks (Fundamental and Technical Principles):

System Development and Market Psychology:

Great All-around Reads:

All Others:

Filed Under: Books

Sell in May?

May 28, 2008 by 4 Comments

It’s that time of year again, “Sell in May and Go Away”, so I will upload up my annual post of statistics using the help of the Stock Trader’s Almanac written by Jeffery A. Hirsch and Yale Hirsch.

For the record, I don’t sell just because the calendar says May but I do enjoy sharring the statistical data (it is very interesting):

Worst six months of the year begin in May:
* All data is from the DJIA from 1950 to 2005

  • A $10,000 investment in the DJIA compounded to $544,323 for the period beginning in November through April over the past 56 years (termed the best six months)
  • Compare this to a $272 loss; yes I said loss for the same investment in May through October (termed the worst six months)
  • 44 of the 56 periods ended with a gain in the November through April period
  • Only 33 periods ended with a gain versus 23 losing periods in May through October
  • The average gain for the November through April period is 7.9% (56 yrs)
  • The average gain for May through October is 0.3% but the period did have an overall loss of $272 as mentioned above
  • The best six months gained 11,691.79 Dow points over the 56 yrs (data ends in 2005)
  • The worst six months actually lost 538.98 Dow points
  • Top performing period for best six months was a gain of 29.8% in 1985 and then 25.6% in 1998
  • Top performing period for worst six months was a gain of 19.2% in 1958 and then 16.9% in 1982
  • The poorest performing period for the best six months was a loss of 14.0% in 1969 and then 12.5% in 1973
  • The poorest performing period for the worst six months was a loss of 25.2% in 2002 and then 22.4% in 1974
  • The best six months has only had one losing period in the past 22 years and that was only 2.2%
  • The worst six months has had eight losing periods over the past 22 years with several in double digits
  • Seven of the past eight years have been losers for the worst six months
  • All of these results are based without timing the market using technical analysis
  • Using a simple MACD indicator to time the entries and exits, the gain during the best six months rises up to $1,548,121 while the loss during the worst six months increases to $6,646.
  • Finally, five of the last nine May months have been down for the markets; starting the period of the “worst six months”

One side note: the Stock Trader’s Almanac notes that the Nasdaq actually has a best eight month period from November to June.

For further detail, grab a copy of the Almanac as I buy one every year for the excellent statitical information and the great quotes.

For all CP sell articles, visit my category on selling or short selling!

Filed Under: General Market, Selling, Wall Street

Expectancy

May 27, 2008 by Leave a Comment

I received a few questions about expectancy after my article on Expected Value (EV), so I decided to respond with a fresh post (expectancy has always been grouped into the position sizing and expectancy article from last year).

What exactly is expectancy?
Expectancy tells you what you can expect to make (win or lose) for every dollar risked. Casinos make money because the expectancy of every one of their games is in their favor. Play long enough and you are expected to lose and they are expected to win because the “odds” are in their favor. Most games at a casino are completed in a short period of time so they can increase their odds of winning.

The same holds true for trading. If your expectancy is positive; you can make money with a certain number of trades within specified periods of time.

Expectancy is your profit percentage per win multiplied by your win rate minus your loss percentage per loss multiplied by your loss rate. I will use an example of Expectancy from Dr. Van K. Tharp’s Book: Trade your way to Financial Freedom:

Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss) Expectancy = (PW*AW) less (PL*AL)

PW is the probability of winning and PL is the probability of losing.
AW is the average gain (win) and AL is the average loss

So let’s do an example using another basic approach (assume $12,500 per position, a $100,000 portfolio using 1% equity risk):

If my trades are successful 40% of the time and I realize an average profit of 20% but I lose an average of 5%, my expectancy is $625 per trade.

(0.4 * $2,500) – (0.6 * $625) = $1,000-$375 = $625

I lose 60% of the time yet I show a profit of $625 per trade. If I have a system that produces 65 trades per year, I would realize an annual gain of $40,625 (hypothetical scenario). A 40% gain on the original $100,000 (minus all commissions, fees, taxes and compounding).

Let’s look at the calculation one more time using only percentages:
PW: 40%
AW: 20%
PL: 60%
AL: 5%
(40% * 20%) – (60% * 5%) = 5.00%

What this tells me is that I have a positive expectancy of 5% or $625 per trade from the original $12,500. It doesn’t mean that I will make $625 on every single trade but my system will average a profit of $625 per trade over the course of a year with a combination of winners and losers. I can always make more trades or fewer trades in a year so my total profit will be adjusted accordingly.

Filed Under: Expectancy

Smelling Trouble

May 23, 2008 by 4 Comments

Well, DRYS is now down 16.81% this week and volume is peaking at the largest level we have seen in years – huge distribution!

This is what I had to say a few weeks ago in my post titled DryShips (DRYS) Drying up?

All in all – I am not a buyer of the stock at this level. It may be a solid short term buy for traders that make these types of plays such as Blain and Rajin but it does not fit into my criteria for a trend trading opportunity.

I see a decent consolidation over the past few months but I have a problem with the current pattern that is forming if it does not test former highs near $130. Volume is increasing as it moves higher but the stock is starting to struggle near the last peak of $88.

I stick to my original analysis as I am watching the stock from afar or the weekly chart. I am not day trading DRYS or any stocks for that matter so I can cut through the noise and view the market on a weekly basis to assess the “true overall trend”. Don’t get me wrong, many traders made money on the recent spike in DRYS but I wasn’t touching it with a 10-foot pole. I look for the big runs and couldn’t be bothered with a few points here and there (and I am not about to support my broker with constant buy and sell commissions, even if they are minimal).

The easiest way to characterize this trade and the market in general is to view it all as a risk/ reward potential or an expected value, as I wrote yesterday. DRYS was not a +EV trade in my trading system but, it very well may have been an excellent +EV trade for a shorter term day trader such as Rajin or Blain.

Anyway, here are a few more charts that are starting to look suspicious (some more than others). The bottom line or point of today’s rant is the fact that I still feel that the market is headed for a decline or as I phrased it a couple weeks ago:
The Big Decline (long term perspective of course).

These charts are just examples as many more exist but they were some of the first I viewed Thursday night:

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Filed Under: General Market, Selling, Shorting, Uncategorized
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