Since I planned to take a course in Investments, I decided to read books on Investment strategies and the Intelligent investors. One of the most popular books suggested to me was the book, "THE WARREN BUFFET WAY" by Robert G Hagstrom. One wonders how a subtle and sober person like Warren Buffet be one the richest person in the world. After reading the book, I understood that it was mainly because of his intelligence and determination. The writer says, Mr.Buffet was mainly influenced by four people; Benjamin Graham, Philip Fisher, John Burr Williams and Charles Munger. It is extremely fascinating to know how the investment strategies of Warren Buffet is a combination of the ideals and believes of these four men. Quantitative analysis of Benjamin Graham, Qualitative importance of Philip Fisher, Discount model of John William and boldness from Charles Munger.
According to me, Mr. Buffet follows the bottom up approach where he does a careful analysis of the company, its growth potential, future cash flow, management, etc. He does not worry much about the industry for he believes that a great company will find way to come out of any kind of recession. Each one of his investments display if not all, a few of these characteristics. One of the other interesting things about Mr.buffet which in fact is contradictory to other investors is not to over diversify your portfolio. It is true that diversification is a tool to reduce the risk but at the same time highly dispersing one's portfolio may prove as a disadvantage. It is extremely challenging for a manger to watch various industry, economy on a timely basis. Mr.Buffet's advice is to invest in the areas of one's knowledge and competence.
Overall, the book gives an amateur investor, basic yet detailed explanation about Berkshire Hathaway's investment decisions in "The Warren Buffet Way".
It is extremely surprising to see how perceptions vary from person to person, culture to culture and country to country. Minxin Pei, Professor of Government at Claremont McKenna College and the author of China's Trapped Transition: The limits of Developmental Autocracyexplains how the ignorance and amplification may hurt the development of India. Upon studying the survey which included the Chinese, Mr. Pei observes that the Chinese can be divided into two levels, mass and elite in relation to their perceptions on India's growth. Poor and underdeveloped image of India seemed to have remained fixed among the mass. various factors can influence such varied awareness.
In my opinion, Media plays a very important role in molding the thoughts of common people. More they hear about, more are they convinced. needless to say Indian media has been impressively doing this from a number of years. Many Indians acknowledge the immense growth and power of china and believe India is not far beyond the chart.
As the discussion reaches the higher level, the elite group, awareness seems to be the opposite . They realize and understand the competition from India. Though the practices in India are completely contrasting to the single party rule, some of them appreciate the transformation and challenges of India and use them as a model, But for few, poverty, illiteracy and other social problems of India still remains as the criticizing tools.
Having written about the differences in awareness, initiatives should be taken by the Government and Mass for the free flow of information. As mentioned earlier, media should play a very important role in not only publicizing the information but also driving interest and respect for each other. Further, Government of India and China should must maintain and encourage mutual co-operation and appreciation between the countries. We as citizens must keep ourselves educated about the ongoing activities around us and act to further support spirit of 'Common Good'.
The movie centers on the Company Enron Corporation, which went Bankrupt in the year 2001 leaving hundreds of its staffs unemployed and thousands of its investors bereft. Enron Corporation was an American energy company based in Houston Texas. It was one of the leading energy companies in United States and was repeatedly named as “America’s most innovative company”. Enron was found to have used various accounting methods to misrepresent its financials. The company’s fraudulent activities brought a number of changes in the business of United States.
The movie begins with a lady describing the company as one filled with arrogance, intolerance and greed which led to a gigantic fraud. Within no matter of time, the company was bankrupt. The top executives made millions by cooking the books and hiding all the materialistic information from the customers. The key players in the scandal were Chairman Kenneth Lay, CEO Jeff Skilling and CFO Andrew Fastow. Enron being the major corporate contributor for the George W. Bush election campaign stressed on deregulating the energy market. Ken Lay along with few Texas based oil companies shared a common view that deregulation is the key for success. In the early stage, traders of Enron were involved in speculating the prices of oil. While such speculations were risky, Enron seemed to own a winning streak during the initial stage. Top Executives had offshore personal accounts and transferred millions of dollars in profits. Few employees tried to warn Ken Lay about the illicit trading his traders were involved in but ken Lay discouraged them by informing that speculation was the only part of business making money. Instead of warning the traders, Ken Lay asked the traders to keep making millions for the company which simultaneously increased the risk.
In few days the luck turned down for Enron. One of the two traders was arrested on charges of reckless speculation. Ken Lay now had to find somebody else to make money for Enron. Jeff Skilling, a Harvard Business school Alumni was appointed as the CEO of the company. Jeff came up with a magical idea where Enron would serve as a market to trade natural gas just like stocks and Bonds. In addition to this, he arranged for the SEC’s approval to use Mark to Market accounting. According to market to market accounting, Enron would record all the revenues from long-term contracts in the current year even though the cash would flow over the number of years. Lou Pai and Clifford Baxter were the closest to Jeff Skilling and helped trade the energy services. Lou Pai, like other Enron executives only cared about money. Employees described him as a mysterious figure who hardly asked for details. In just few months, Lou left Enron with $250 million.
During the same period, stock market rose everyday making new records. Enron’s stock went up by 30%. Stock prices reflected the reported earnings of the company and these earnings rose every quarter. The company’s executives pushed the stock prices and cashed their stock options. They made billions of dollars during this period. In reality, the reported profits of Enron were just imaginary and the real profits were fading. Enron had power plants all over the world, but the performance of the most of them were terrible making no profits for the Company. Now, Ken Lay had to come up with another new idea to keep its imaginary profits and stock prices high. Enron went ahead and bought Portland General (PGE) and became the largest electricity and natural Gas producer of the industry. The profits of the company kept decreasing while the stock prices hit the sky.
The company then was amused at the growth of the internet industry and announced its diversification into dot com and made a deal with Blockbuster for the online streaming of movies. It treated band width as any other commodity which could be bought and sold in the market. The deal with Blockbuster soon fell apart but the Company’s financials seemed healthy as the mark to market accounting allowed the company to record the future profits in the current year. The fraud began to unleash when Bethany McLean, Fortune magazine reporter asked a basic question to Jeff Skilling, how was Enron making its money? Jeff could not answer this simple question but instead blamed the reporter to be unethical and unprepared.
Enron then entered the deregulated electricity market in California and created artificial demand for the power. Very soon, the employees of Enron, the analysts and investors suspected the growing profits of the company with the repeated articles on Enron from different authors. This led to an informal investigation by Securities Exchange Board. As soon as the investigation was announced, Enron’s accounting firm, Arthur Andersen destroyed tons of paper documents related to Enron and there began the endless blame game.
ANALYSIS
Ask Why? This caption of Enron Corporation was designed to convey the message to its employees and investors to question before acting. The major accounting scandal, Enron is famous for suggests that neither the employees nor the investors questioned before trusting Enron. The top executives did not question themselves on their morality, employees were not aware of the moral intensity[1] and we, the investors were not morally aware[2]. It wouldn’t have been so easy for the Enron’s executives if we, the public acted as a devil’s advocate and questioned the continuous profitability of the company even at the time of difficulties. Instead we trusted the emperors of Enron completely who did everything but say the truth.
Greed, a human characteristic played a major role in materializing the fraud. Top Executives were focused on increasing their bank balances through cash compensations and stock options. They chose to follow the right versus almost wrong[3]. Analyzing the issue in systemic approach helps us identify the stakeholders of the company who were directly or indirectly affected by this scandal.
Investors: They include the small and large investors who invested in the stock of Enron. Upon bankruptcy these investors got very less or nothing from the liquidation. They lost most of their savings as the stock prices dropped to few cents. These investors are still battling to receive as much returns as possible.
Government: Government of United States suffered a huge protest and outrage from public. They were blamed of being careless and negligent. Since the scandal, Government has taken number of regulatory measures to avoid such fraudulent activities. However, during the scandal, the government seemed to have been aware of the companies taking advantage of the deregulations in most of the states but never went against these major players in the industry. The politics of United States also provided favorable grounds for such activities.
Employees: Approximately 22,000 employees lost their jobs after the company filed for bankruptcy. Dreams of many of them were shattered into pieces. Families of the employees were left devastated.
SEC: Securities Exchange Board was constantly criticized for inadequate supervisory measures. This gradually led to the formation of Sarbanes Oxley Act in 2002, which incorporated strict administrative measures and held CEO and CFO accountable for all the activities of the company.
Business Organizations: Business perspective of the various organizations changed after this scandal. Various measures were taken to establish an effective internal control measures. Companies not only performed to make profits but also to be socially responsible.
Public: A critical component of the human relation, trust was challenged after the scandal. Public lost their trust and confidence on the government. Their moral awareness increased and they learnt to see more than just the financials of the company.
Analysts and Credit rating agencies: Analysts and credit rating agencies understood the importance of look ahead of the reported profits and executives’ explanations. They learned to criticize more in order to reveal the hidden truth.
Above all this, this scandal taught us a very important lesson; one’s greed can martyrize several others. All the executives of Enron acted in their own best interest. Many of them were heavily influenced by the CEO and Chairman of the company that they failed to move ahead of the conventional stage[4]. Ethics did not play any role in decision making. We can understand that the culture of the company was ethically weak. Traders were not disciplined and for most of them, money was the only motivational factor. The leadership team was extremely weak in terms of morality and did not convey any message to act ethically. Rather, the company was lead by a bunch of bad apples who not only were dishonest but also corrupted the whole system. The company’s performance review had no weightage to ethics. Employees were only rated based solely on their ability to make money for the company. Whistle blowers were not encouraged by the top leaders.
Enron scandal has bought major changes in the business world. More and more companies are focusing on moral business. Main motive of the companies have now shifted from profit maximization to wealth maximization. They have emphasized the importance of customer and investor relations. Though, the Enron scandal has alarmed the business world and increased the awareness, such activities still prevail in the industry but certainly with lesser intensity. Accountants and business men have been very creative with accounting. Each of us should differentiate between ethical and unethical activities and act accordingly.
[1] Linda Klebe Trevino & Michael E Brown, 2004: 70
[2] Linda Klebe Trevino & Michael E Brown, 2004: 70
[3] Linda Klebe Trevino & Michael E Brown, 2004: 70
[4] Linda Klebe Trevino & Michael E Brown, 2004: 70
