Will it blend? When sticks bite

Drop us a line...

Send Message

Smartest guy in the room

This article originally published in The Northern Daily Leader on 10 May 2014.

An old friend of mine from university, Mike, only just avoided financial disaster a few years ago, and it was purely by luck. Mike worked in the London office of Enron, the large US-based energy company. Enron traded in commodities such as electricity, natural gas, communications and just about anything else which could be bought or sold for a profit. At its peak, the company had revenues of nearly $100 billion and it was regularly named as one of America’s most-admired companies. Enron even figured out a way to make money from the weather, buying and selling futures and derivatives based on potential future weather outcomes. If it rained in Spain, Enron would most likely make money, based on how they structured a complex swaps trade involving the future profits of olive farmers in Catalonia. Wherever there was an opportunity to exploit and make money from, Enron found it and jumped in feet first. But back to Mike. After years of employment at Enron, Mike moved to another company, taking his pension plan with him. Much like our superannuation, Enron had set up a pension plan for employees, but when you left you had to cash in the proceeds and transfer it somewhere else. The difference with Enron’s plan was that it invested almost solely in Enron shares. So every employee in the company had their entire retirement riding solely on the fortunes of Enron.

In 2001 it was revealed that Enron had been falsifying its financial statements for years, with much of the reported profits being simply figments of management’s imagination. As you would expect, the company collapsed into bankruptcy and all 15,000 employees lost not only their jobs but also almost all their retirement savings, which was largely invested in now-worthless Enron shares. What is most surprising about the Enron saga, is that the people running the company and working for the company were widely viewed as some of the smartest people around. In fact, the documentary movie charting the rise and fall of Enron is titled ‘Enron: The Smartest Guys in the Room’, because that is often what they were: the smartest guys in a room full of other people usually were from Enron. But smarts counted for little when the company collapsed, everyone lost their jobs and the top executives ended up in jail. In the world of investing sometimes you can also just be too smart for your own good. A fancy title and a large office often leads to hubris, not humility, and that’s where the trouble starts. So next time you’re thinking of investing with someone who thinks they’re smarter than anyone else in the room, think of Enron and maybe think again.