Talking markets with Tom Sedoric
Scandals, trials and a very loudly burst bubble wound up giving some people a phobia about investing in the stock market, whether it’s individual stocks or mutual funds. But it’s probably pretty safe to say that the clients of Tom Sedoric, senior vice president at AG Edwards & Son in Portsmouth, weren’t so inclined.
Sedoric, known for being a straight talker in an industry that’s not particularly dominated by people of his sort, has been a well-respected Seacoast investment adviser for some 20 years. He’s also very much involved in his community, both on the Seacoast and around the state, in such organizations as CASA — Court Appointed Special Advocates — and the Jump Start NH Coalition, which focuses on personal financial literacy among young people.
Q. Why is it important that companies, publicly held companies in particular, play by the rules?
A. If every sports game is rigged, people stop showing up. I think that if everybody in this environment thinks it’s rigged, they wont show up. That’s why I think we have to have a certain degree of oversight and regulation, otherwise bad behavior can take over.
The difficulty is this difficult yin and yang of how much is too much and how little is too little before you find the right balance. But anything that raises the dialogue about corporate governance, corporate behavior, ethics and morals is healthy.
We don’t all have to agree, but getting shareholders to ask questions like, “How’s our management paying it’s people?” “How are we treating our customers?” “How are we compensating our executives?” “What are we doing to the environment?” Having shareholders ask those questions is nothing but good. We didn’t have that before. People were lackadaisical — they didn’t ask hard questions.
Q. How do you view the mutual funds scandal, which is the latest corporate scandal to capture the unflattering headlines?
A. The mutual funds fiasco has a lot to do with corporate governance. Some fund companies are very good about how they select their trustees and their fund managers and everybody else. Others are very cozy about how they select them so nobody has to ask them the hard questions.
Q. What kind of questions?
A. There are certain fund companies where management clearly may not have been acting in the best interests of their shareholders. You don’t want to cast a stone on all of the mutual fund professionals, but clearly some were doing things that they shouldn’t have done.
Q. Why do you think they did those things?
A. Because it wasn’t necessarily illegal, and — I can’t speak for them, but I think they recognized that there were certain inefficiencies in the market on how mutual funds were being priced, particularly as it relates to overseas shares. For years we’ve known there were inefficiencies, and I would argue that probably the hedge funds had as much to do as anything in pushing it. It’s the job of hedge funds to find inefficiencies in the market and capitalize on them. It seems that hedge funds were pushing this stuff and the brokers and the mutual fund companies were kind of the unwilling participants.
Q. It seems that the mutual funds mess reflects what’s going on in the whole corporate world. Just because something’s legal doesn’t mean it’s not wrong.
A. The discussion of corporate ethics is much more prominent today because of the stock market bubble that formed in the late ‘90s and how it collapsed. But there were scandals in the ‘20s. There were scandals 10, 15 years ago in Australia, for example. There will always be people to take advantage of things for their own advantage, which is very unfortunate, but that’s what they do. As I said, you can’t legislate ethics, but you can try and institutionalize ethical behavior in your organization, and I think a lot of companies try to do that.
Q. Have you changed the way you recommend investment strategies in the years after the Enron scandal first broke?
A. Yes. I clearly look at the kind of disclosures that you see in the financial filing. For instance, in one of the mutual funds, we could see some indications two or three years ago in that they weren’t naming in their SEC filings who was managing the money. They were going through a rotation of managers. Now, if I put my money in that mutual fund, I want to know who’s running the dough, whose interests are aligned with mine and not aligned with mine.
So two or three years ago, we were reducing our exposure to that fund company for a reason — you could see it.
Q. What’s a typical investor supposed to do?
A. I think that you look at companies that try and put their shareholders first, and there are some very good fund companies that do that as well as public companies. They’re probably going to be reasonably good companies to invest in.
Q. But how do I, for example, approach looking for those investments?
A. The first thing the individual investor needs to do is to understand that everything has risk — cash has risks, bonds have risk, stocks have risk, just different types of risk. So the most important thing that anyone can do is sit down and do a balance sheet, and it will automatically tell you where your risk are. It shows you where the pieces of the puzzle fit and how they might be complementary and not complementary.
The other thing I’ve seen after 20 years of doing this is that when people make mistakes it’s because their individual investment decisions are either dictated by emotional reactions — sell everything, buy everything, chase this trend, whatever — or are overly sensitive to tax issues. In both cases I’ve seen a lot of bad investments result.
For instance, the Internet bubble. Why should any company be worth 5,000 times earnings? It makes no sense. That’s emotions, and it fascinates me that only recently people are starting to understand behavioral economics. Economics is all about behavior.
Q. Where do you yourself find your information?
A. Here’s what I read every morning — The New York Times. I scan the Financial Times of London. I look at the Bloomberg Web site, the Marketwatch Web site. But the most important publication I read every day is The Wall Street Journal.
Q. What goes through your mind when you read about excessive executive compensation packages that sometimes run into the hundreds of millions of dollars?
A. I’ve read statistics that the pay for our top CEOs vs. the lowest-paid workers in the plant is a factor of 100 times x, and in other industrialized countries, it’s only x or two times x. I don’t understand why we can justify those types of premiums for our talent. It seems to be allowed by the shareholders — institutions vote for this stuff. But if you raise the dialogue, raise the debate to a higher level, I think that’s a very good thing. I think it’s great when investors ask hard questions.
Shareholders have every right to ask hard questions. That’s why you’re seeing this great bubbling up of shareholder actions — requests for proxies, requests to have a vote put on the proxies. The companies probably hate it, but if you’re a good company what have you got to worry about? Having the dialogue, having the questions raised, is a very healthy reaction.
Q. Is shareholder vigilance enough to bring bad actors into line?
A. It should be, it’s ultimately their money.
I think you’re going to see that the companies that get attention are the ones that recognize the shareholders’ interest.
There are three things you can do with free cash flow. You can buy stock back, which is kind of an accounting trick. You can make an acquisition, and they’re not always good ones. Or you can pay a dividend. Why not pay it to the people whose money it is? I think that trend is going to come back into favor — in fact, we’ve seen it to some extent. I think that you will see companies recognize that it is the shareholders’ money.