October 1, 2013

Risky Business

By Laura Rittenhouse – Originally published on Forbes.com

This article is by L. J. Rittenhouse, president and chief executive of Rittenhouse Rankings and author of Investing Between the Lines: How to Make Smarter Decisions by Decoding CEO Communications and Buffett’s Bites: The Essential Investor’s Guide to Warren Buffett’s Shareholder Letters.

Elon Musk, Founder, Tesla Motors

Elon Musk, Founder, Tesla Motors

I drove a neon green Tesla roadster in Madrid this summer.  Low to the ground, it was responsive and very fast.  The owner is a Tesla enthusiast and an IT entrepreneur with a strong risk appetite.   To promote electric vehicles in Spain, Mark Gemmell is organizing owners of the Paradores—hotels built in castles, palaces, monasteries and other historic places throughout Spain—to offer free charging.  Soon guests vacationing in the country will not worry about where to power their vehicles.  This innovative network will spur more sales of Tesla and other electric cars.

Gemmell’s risk appetite allows him to see unique opportunities like this.  He has what I call an “opportunity mindset.”  I first noticed this quality in a passage from Coca-Cola CEO Roberto Goizueta’s 1995 shareholder letter.  He wrote: “When [our] people walk into any environment, they don’t see Coca-Cola,” he wrote, “they see where it is not.”  Imagine.  He expected employees to see what wasn’t there – and to change this.

When I read corporate communications, I analyze a CEO’s opportunity mindset  by examining his or her “relationship to opportunity”.  This will fall into one of four categories:

First, I find leaders who have no awareness of opportunity – and no vision.

Second, I look for CEOs who have a passive relationship.  They see opportunities, but don’t act on them.

Third, I ferret out leaders with an active relationship.  These executives take advantage of opportunities in the external environment, such as building charging networks to promote electric vehicles.

Finally, I identify leaders like Gemmell, who have a generative mindset.  They imagine the world in new ways and invent opportunities to serve unmet needs, like matching tourism and vehicle charging. Such leaders act from an inner vision.  Their belief in the future trumps their fear of the present.

Why is this important?  Because my linguistic research of CEO shareholder letters shows that fewer CEOs in 2011 and 2012 are growing their risk appetites and opportunity mindsets.  To size up these appetites, I counted the frequency of risk-related words (“risk”, “uncertainty” and “opportunity”) in CEO communications from 2002 to 2012 and found three patterns:

  1. The second highest frequency of risk-related words was in letters written after the passage of Sarbanes-Oxley in 2003.
  2. In 2005 and 2006 the two years leading up to the global financial crisis, I found the fewest number of risk-related words.
  3. The highest risk-related word count was in shareholder letters written in 2008 when the financial system seemed about to collapse.

In 2012, just when the worst of the economic crisis seemed behind us, I found the third-highest number of risk-related words.  In fact, one-third of the CEOs in the 2012 Rittenhouse Rankings Candor Survey™ described their general unease about global market uncertainties. Cigna, for example, wrote “Uncertainty and change have become the new norm.”  Utility giant, Southern Company, observed:  “In 2011, the world seems an uncertain place.”

Only twenty percent of these worried CEOs offered specific reasons for caution, citing volatility in Europe and political and regulatory uncertainty in the U.S.

One standout was Loew’s Corporation.  The Tisch brothers, James and Andrew, and first cousin Jonathan took the very long view and reminded investors that:

“The only constant is change.” When this now-familiar truism was first articulated in ancient Greece more than two thousand years ago, it was conceivably a stark new revelation. Today we acknowledge it is a fact, not only in life, but also in business.


Warren Buffett, Chairman and CEO of Berkshire Hathaway

Warren Buffett, Chairman and CEO of Berkshire Hathaway

Buffett echoed this sentiment in his 2012 letter when he chided CEOs for using “uncertainty” as a reason to delay investing growth capital:

I made my first stock purchase in the spring of 1942 when the U.S. was suffering major losses throughout the Pacific war zone. Each day’s headlines told of more setbacks. Even so, there was no talk about uncertainty; every American I knew believed we would prevail.

The country’s success since that perilous time boggles the mind: On an inflation-adjusted basis, GDP per capita more than quadrupled between 1941 and 2012. Throughout that period, every tomorrow has been uncertain. America’s destiny, however, has always been clear: ever-increasing abundance.

If you are a CEO who has some large, profitable project you are shelving because of short-term worries, call Berkshire. Let us unburden you.

Buffett’s wealth-creating track record over the years comes from a remarkable ability to evaluate risk/reward probabilities.  He knows that success requires a mindset focused on gaining competitive advantage, not risk avoidance.  He wins when he assesses risk/reward trade-offs better than his competitors.  Buffett bolsters this mindset by executing an innovative management model in which his insurance businesses fund new opportunities and loyal investors are treated like family.

LJ Rittenhouse, President of Rittenhouse Rankings in a Tesla

LJ Rittenhouse, President of Rittenhouse Rankings in a Tesla

Think about it.  The drive to invent (not just innovate) has made our nation great.  But what if Thomas Alva Edison had to prepare for earnings calls and manage quarterly guidance?  Would this have whetted his risk appetite?  Not likely.


Connect with me on Twitter @LJRittenhouse and for more information visit the Rittenhouse Rankings website.