As a child growing up in Venezuela, I spent a lot of time at the beach. And I really enjoyed it. Digging for mussels, building sand castles, feeling the warm sun over my shoulders and the wet sand under my toes, listening to the sound of my own breathing while snorkeling and perceiving the world above the water as distant and muffled… I loved it all.
One of the most rewarding beach activities for me, however, was also one of the simplest ones: riding waves to the shore on my way to buying ice cream.
Even from the water, it was still possible to hear once in a while the bell from the ice cream cart being pushed through the sand by young local boys toasted like coffee beans under the Caribbean sun. Every time I heard the bell, the conditioned reflex was immediate and strong --Pavlov would have been proud of me--, but I usually resisted the temptation to start running to the beach at once. Instead, I used to put my arms straight in front of me pointing to the beach --like Superman getting ready to fly--, and wait for the next wave, hopping for the best. Occasionally, on a lucky day, the next wave would turn out to be just the perfect size to take me all the way to the shore without walking or swimming. Whenever that happened, I felt like some kind of hero that had forced Mother Nature to work for me; and the ice cream served on a coconut shell became my prize for such a big “accomplishment”.
But even back then, I knew those feelings were silly. Simply riding a wave that was destined to hit the beach with or without me, couldn’t possibly make me or anyone else a hero. I still indulged on heroic thoughts, but absolved myself by concluding—well, I am just a kid—.
Today I am no longer a kid, but I see adult variations of my silly beach hero on a daily basis. These highly overrated idols can be found everywhere, but seem to flourish in areas like finance, business management and politics, particularly during good economic times. They are the Inflated Heroes, admired leaders who get an almost free-pass to fame and fortune by riding waves, this is, taking advantage of obvious trends in their respective fields to claim achievements that they didn’t really make happen.
The Inflated Heroes may not deserve the votes they receive from their constituency, the rankings they are given by analysts, the exposure they get from the media or the bonuses they are paid by their boards of directors, but it is clear to me that they deserve a place in my overrated series. Here are a few examples.
John Chambers is a good CEO. He has led Cisco Systems for a long time and has done a great job at it. I remember, however, the insane admiration journalists and market analysts had for him when Cisco was riding the wave of the early growth of the Internet (Cisco was the lead producer of routers and other hardware required to support the expanding Internet infrastructure). Fortune magazine ventured to ask… is John Chambers the best CEO ever? In reality, you could have assigned a college student or Mr. Bean to the job of Cisco CEO in 1996 and the company would still have enjoyed stellar growth. Only a tiny fraction of the company’s sales expansion during that period could possibly be attributed to John Chamber’s real and significant managing skills, the rest just came from the amazing growth of the Internet in the late 90’s, the time when people outside of the academia finally discovered the world wide web thanks to the launch of Mosaic and Netscape. The same Fortune Magazine recently ranked Chambers as the #1 of the biggest losers, highlighting that since March 2000, the market value of Cisco System has decreased by $425 billion.
Hugo Chavez was first elected president of Venezuela in December 1998. Back then, PDVSA (Venezuela’s state oil company), produced 3.8 million barrels per day and had plans to invest more than $40 billion to expand production to 6 million barrels per day by 2010. In 2002 Chavez fired 18,000 employees (40% of the total payroll of the company), in a successful attempt to replace PDVSA’s meritocratic culture with political loyalty to his socialist revolution. As a result, the company which constitutes the economic heart of the country and 80% of its exports will end up producing with luck 2.5 million barrels per day in 2010 rather than the 6 million originally planned. Luckily for Chavez, the growth in oil demand from emerging markets, particularly China and India, has been pushing the oil price up since he took office, from $11.9 per barrel in 1998 to a pick of $126 in 2008. This price increase of more than 1000% has allowed Chavez to finance significant spending in social programs that have made him a popular president among the poor in Venezuela and other Latin American countries. It is too bad that people forget about the other number, the much bigger figure that Chavez left on the table by throwing away PDVSA investment plans and the employees that were able to implement them. That number --perhaps $100 billion per year of forgone income-- is equivalent to almost $11 per day for every man, woman and child living in Venezuela, a country where roughly 50% of the people live under the poverty line, earning $1 or less per day.
But perhaps the most disgustingly inflated heroes are in Wall Street, even after this year’s financial debacle. Mutual fund managers, for example, are paid a percentage of the assets they manage in exchange for their investment ideas, with the goal of producing returns that beat the indexes representing the market. The reason why fund managers should beat the indexes is that there are investment tools based on indexes that are much cheaper than actively managed mutual funds. Therefore, rational investors should use index investment tools unless fund managers can justify their higher fees. In reality, very few fund managers get to beat the indexes and almost none beat the indexes consistently. According to Business Week, from 2004 to 2008, mutual fund managers failed to beat major indexes in every fund category. The S&P 500 outperformed 72% of actively managed large-cap funds, the S&P MidCap 400 index outperformed 76% of mid-cap funds, the S&P SmallCap 600 index outperformed 86% of small-cap funds and the emerging markets fund managers failed to beat their benchmark nearly 90% of the time during the period. And yet, mutual fund managers earn millions, regardless of their funds performance. How can this be explained? Simply, even the worst mutual fund manager has a big advantage: markets tend to go up. In the long term, a diversified portfolio will return close to 9% per year. Mutual fund managers just ride the market upward inertia, and even if they don’t beat the indexes, they still can impress unsophisticated investors with returns that are higher than those available by placing cash in a savings account or under the mattress. Why don’t investors use index instruments exclusively? Some do (index funds are growing quickly), but unfortunately most investors are as bad in their supervisory role as the mutual fund managers are in their investment picking strategies. One day, however, I hope the industry will change and make mutual fund managers receive just a salary plus perhaps a percentage of the gains they produce in excess of the index returns. That would be fair.
As the example of the mutual fund managers shows, sometimes it may be difficult for regular people to differentiate Inflated Heroes from real ones. That's why the media, with their journalists and analysts, should play an important role on this. Sadly, heroes sell newspapers and ads, so the media loves heroes, regardless of their authenticity and tend to revere Inflated Heroes with the same mix of admiration and respectful envy usually reserved for Hollywood stars: they interview them on prime time TV, but skip all the tough questions.
That’s too bad, because there are plenty of other Inflated Heroes out there that can cause serious damage to society before they go. Some, like Alan Greenspan, end up deflating only once the tide turns against them and it becomes very apparent that they didn’t have control over the wave in the first place. In Greenspan’s case, the wave was stable growth with little government regulation, and the result of our unchallenged admiration for him and his policies was the 2009 worldwide financial crisis. Others like Vladimir Putin, have a long way to go and a lot of damage to do before deflating. Putin's wave, shared with super-Chavez, is the Chinese demand for oil, and that won’t stop growing any time soon. If only Putin could be satisfied with a coconut ice cream…