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Enterprising Investor
Stephen Foerster, CFA: Trailblazers, Heroes, and Crooks
00:26:03
Stephen Foerster, CFA, discusses his new book, "Trailblazers Heroes and Crooks: Stories to Make You a Smarter Investor." In the book, Professor Foerster shares intriguing stories that illustrate valuable lessons for investors, drawing from...
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- [00:00]
CFA Institute
Get ready for cfa Institute Live 2025 with free power packed webinars designed to inspire and inform. Led by industry experts, these concise sessions tackle game changing topics like how AI is transforming investment strategies in emerging markets. Don't just show up, show up ready. Gain the insights you need to drive meaningful conversations this May in Chicago. Claim your spot now@cfainstitute.org Foreign.
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Mike Wahlberg
Welcome to the Enterprising Investor, the flagship investment podcast for CFA Institute. I'm Mike Wahlberg and we have a rare commodity in the studio today, someone who is able to teach by showing A storyteller with far more stories than we'll have time for, but which reside in his excellent new book. I'll be Speaking today with Dr. Stephen Forster, CFA about his new release, Trailblazers, Heroes and Crooks Stories to make you a smarter investor. I read and enjoyed the book, but you don't have to take my word for it as it was endorsed by the likes of Burton Malkiel, Marty Fritzson, Charlie Ellis and others. A finance professor at the Ivy School of Business at Western University, another fellow Canadian here, and a prolific writer of journal articles, case studies and books, Dr. Forster is also working now on the authorized biography of William Sharp, something we'll have to have him back for when that hits the shelves. But today we're focused on learning from history. Not just debits, credits and discount rates, but also what we can learn from professional sports, salad oil fraud and Indonesian wild ape attacks. Say that five times fast. Welcome to the show, Stephen.
- [01:40]
Dr. Stephen Forster
Pleasure to be here, Mike.
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Mike Wahlberg
Stephen, maybe you could start us off where Robert Hagstrom, the author of the Warren Buffett Way, who he was back on the show back in May, where he left off with a story you feature in the book about one of Warren's earliest and most successful investments. What happened there and what can investors learn from it?
- [01:57]
Dr. Stephen Forster
Sure, this goes back to the early 1960s and this is a story that brings together an unsavory character, Tino de Angelis, who may have had some ties to the Mafia. It includes a anonymous tipster known as the Voice. It includes a visionary CEO of American Express, which was just finding its its legs as a credit card and traveler check company. That was Howard Clark and of course it includes the iconic Warren Buffett. And as I describe it, it's all mixed with salad oil. So what we had with this particular story is we start off with Tino DeAngelis, who owned a vegetable oil refining company and the connection to American Express is he needed a place to store this salad Oil, and it happened to be in one of the subsidiaries, American Express. And so American Express's job was to make sure there was actual oil in the refinery. And based on confirmation of that, then. Then this became something that the Angelus could borrow against, as would be. As would be common. Well, it turns out he was a crook, one of the crooks in our book. And he actually didn't store oil in there. It was a fraud. He just stored seawater in there. But on the basis of the alleged oil, he speculated in futures. And of course, eventually this all came crash, crashing down. But along the way, this almost took down American Express, because at the time, in the early 60s, American Express was actually one of the last and certainly of the largest companies that was known as a joint stock company, not a limited liability company, which it eventually became. And so that meant that American Express, through its subsidiary, potentially face unlimited losses. It wasn't clear whether the subsidiary was a complete standalone, but American Express made the decision to stand by and make good any losses from this. This fraud. Well, of course, when all of this was going on, the American Express stock took a major hit. And this is where Warren Buffett comes in. And this was in the early days of his. His partnerships. And he did his homework. He looked to see whether there might be a connection between Main street and Wall Street. In other words, while the stock had taken a big hit, did everyday customers still have faith in American Express and its products, its credit card and its traveler's checks? And he found out that, indeed, the reputation on Main street was still there. So he decided to make some major investments, and he was really all in. He invested almost up to one fifth of the partnership in one stock in American Express, and it paid off fabulously. In two and a half years, he bought near the bottom, and within two and a half years, the stock was up 124%. So lots of themes. I'll pause there. Lots of themes that we could talk about what some of the lessons and takeaways were.
- [05:31]
Mike Wahlberg
Yeah. What did you see other than sort of nitty gritty, sleeves up, hard work on Buffett's part. That was sort of the key to success there.
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Dr. Stephen Forster
Sure. Well, I think lots of takeaways. First of all, character, reputation really matters. And a lot of people got involved with this unsavory character, DeAngelis, and this is where greed really comes in. And they got greedy and ignored his very checkered past. It's a story of the importance of doing your research, doing sound analysis. It's a story of how long Term value can trump short term profits. And Buffett, unlike other fellow shareholders, really saw that it was a great move that American Express was making to stand behind its subsidiary, even though they might not have had to, because that would pay off in the long term. And it's really a story of a famous saying of Buffett to be fearful when others are greedy, and greedy when others are fearful.
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Mike Wahlberg
So there's another great story in the book. It's an apocryphal story in many ways about the soccer superstar Ronaldo. Tell us that story.
- [06:43]
Dr. Stephen Forster
Sure. That's a more recent story. It goes back to 2021, the previous euro Cup. And this was at a press conference where Ronaldo, just a backstory, one of the greatest influencers and to this day has the greatest number of followers on Instagram. And so at this press conference, one of the big sponsors as a backstory as well, was Coca Cola. And so at this and other press conferences, there would be two prominent, prominently displayed bottles of Coca Cola. As Ronaldo sat down, he immediately took the two bottles, moved them aside and grabbed a bottle of water and said, no Coca Cola drink water on that day. What else happened then is Coca Cola's stock value dropped by $4 billion. So this became a huge story picked up by the Washington Post then and other reputable mainstream news organization. And the storyline there was look at this influencer, look at the impact he had on. Well, it turns out that's not the story. And so digging deeper, you find that there was something else that was going on that day. And to get a little bit technical, and this is important backstory, Coca Cola, like many major companies, pays dividends regularly, quarterly. And there's a certain time when the dividend is going to be paid in a couple of weeks. And so if you own this stock on that day, you get the upcoming dividend. If you own it the next day, you don't. And this is very well known. It's called the ex dividend date. Turns out the ex dividend date happened to be the same day that this press conference was taking place. And what is expected to happen and did is on the ex dividend date, you expect the stock price to drop roughly by the amount of the dividend. So when the stock Coca Cola stock opened up, it immediately fell on the Monday morning compared to the Friday close, just as we would expect for any stock on the next dividend date. And what's interesting is all this happened just before the press conference. So the price drop had nothing to do with Ronaldo and the press conference. And so the real story here and the real important takeaway is this classic case of correlation versus causation. Was there a correlation between the day that Ronaldo moved the Coca Cola bottles and Coca Cola's value drop? Yes, there was absolutely a correlation. They both happened on the same day. Was there causation? Absolutely not. We know what the cause was of the drop, and the cause was this ex dividend date. So that's the starting point. And I tell some other stories of how we can get correlation mixed up with causation and some important academics who contribute to our knowledge of what really drives stock prices.
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Mike Wahlberg
So what are the main things you're hoping readers will take away from this collection of stories once they've read through it? They're entertaining. You get little sort of tidbits along the way and cool little insights. But is there an overreaching or overarching rather takeaway that you hope that they'll have?
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Dr. Stephen Forster
Yes, absolutely. So first of all, Mike, as you point out, this is story. So even though I'm an academic and I'm a professor, this is not about lecturing and telling you what you need to do. This is providing you with some narrative and hoping that you will take away some nuggets from this that will help you to develop your own investment philosophy. What are your guiding principles that will help you to make better investment decisions? And so really, it's learning through history some of the important investment principles, such as diversification, such as recognizing risk, such as avoiding common investment mistakes. So if you can recognize these through stories, my hope is that that you will repeat these mistakes and you will be in a better position to develop a solid investment from us.
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Mike Wahlberg
So the title of your book promises stories about crooks. We heard about one in the salad oil debacle with Amex off the top There you also deliver on one that is near and dear to my heart, seeing as I sit here in Vancouver, which, for those who don't know, is generally known as. It's known for lots of things that are positive, but it's also known as the shady junior mining capital of the world. Tell us about Bre X.
- [11:26]
Dr. Stephen Forster
Sure, Bre X was not the. Not the best Canadian story, but. But. But it's a fun story to tell as well. This is set in the. In the mid-1990s, although it goes back to 1988 in Alberta, not British Columbia, so. So at least you escape that notoriety. It was started by a fellow named David Walsh, and Bre X was essentially a penny stock listed on this. This Regional Alberta exchange. And in 1993, Walsh hired a geologist named John Fedorov, who was living in Indonesia. And his sidekick, who is really important in this story, was a Filipino geologist named Mike de Guzman. After some discussions in 1993, Bre X paid $80,000 to explore some property. It was called the Busang property. Property. The drilling expanded to a nearby area in 1994 and continued through 1996. And by then, the claim was that BRE X had gold reserves of about 47 million ounces. Although it wasn't absolutely clear how they arrived at that estimate. But to put it in perspective, that represented about 3/4 of the. Of the known gold reserves in the entire world at that time. And then by the next year, without any new drilling results, somehow that estimate had ballooned to 200 million L. So this made Breech ostensibly the largest gold discovery by far in history. But it turned out it was all a mirage. And apparently what happened is de Guzman had spiked the samples with. With Goldust. And he's a really interesting character. As I tell in the story. I start the story by talking about how one evening he's enjoying karaoke and belting out that famous Frank Sinatra song of My Way, which perhaps was foreshadowing. The end is near and the final curtain. Because the next morning Guzman took a helicopter ride through the Indonesian jungle and never safely arrived. Because when the pilot turned around, he had heard a sound and de Guzman was gone. And this is where the conspiracy theories come in. And the interesting backdrop. It was an apparent suicide. This came to a shock for De Guzman's wife, but also his other three wives who knew nothing about the other wives. So quite an interesting character there. And the conspiracy, just like Elvis. Was de Guzman dead? Or perhaps he was alive and there was a reported sighting in Alabama and other places or report that he had been tortured. So no one really knew. But certainly what was known is that $6 billion of value of Brex stock disappeared. And that did not come back. So lots of interesting stories we could learn from that fraud.
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Mike Wahlberg
And my reference off the top there as well is the theory that I remember reading at the time was that they never found the body because it was torn apart by wild apes in the. In the Indonesian jungle. And it just goes on and on. It's an incredible story. I think you were saying as well that they made you think they made a movie out of it. I was. I. I never remember seeing it. I remember watching for it because it just seemed too fantastical to not have a movie made about it, and I.
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Dr. Stephen Forster
Believe there is a Hollywood movie about it.
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Mike Wahlberg
Yes, it'll make a heck of a holiday movie. But so, so how did the analysts and, and investors fail in this case, Stephen? Like what, what could or should they have done differently? And, and are we any, any better today, you think, than we were back in the 90s?
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Dr. Stephen Forster
So this is where a lot of biases come into play that we tend to be over optimistic. We, we put on these rose colored glasses and, and we just see what we, we want to see. We don't ask the tough questions that, that we should and this can be a failure. And, and I make some parallels today with what's happening with many cryptocurrencies. A lot of so called investors in crypto have lost billions of dollars just in, in the last five years or so from hoping and wanting these investments to pay off and yet finding that they were just totally fraud. So you really have to be aware of the risks in any kinds of investments that might be out there. So we want to learn from these frauds and learn from history so we don't repeat the same mistakes.
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Mike Wahlberg
So the father of value investing is apparently not a father at all, but a mother, Hetty Green. Listeners to the show may remember Mark Higgins talked to me about her from his book, his excellent history of the US Financial markets back in March of this year. You wrote about Hetty as well in your book, Steven. What stood out for you about her story?
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Dr. Stephen Forster
Yeah, and shout out to Mark as well for talking about Hetty Green and bringing listeners to her attention. And you're right, she predated Ben Graham and really was ostensibly certainly in the US probably the first well known value investor. She inherited some money from her father who was in the whaling business, but went on to amass an immense fortune from really shrewd investing. And it was in a wide variety of areas, in railroad stocks and bonds, in mortgages, steamboats, mines, telegraph and telephone companies. She really did her homework. Again, back to the Buffett story. She really did her homework. She also predicted a run on the Knickerbocker Trust Company which was one of the largest trust companies in New York, and took her money out. Prior to a run on the bank in 1907, she had this, this reputation as, as a shabbily dressed character, very frugal. She often lived in a boarding house so that she would avoid property taxes. Apparently she was so cheap that rather than pay for cab fare, she would pull a pair of heavy woolen stockings over her shoes and walk through snow to parties. But Again, back to these value investing principles. She was quoted as saying that she only used common sense. She would buy things that were low and nobody wanted them, and she would keep them until the price went up and people would go crazy for them. The other important lesson that she taught us, this was around the panic of 1907, she had converted a lot of her investments to cash. And this was when there was a real liquidity crunch and people needed money. The city of New York was almost bankrupt and she lent money to the City of New York on very fair terms. So I think again, we have to turn around this well known saying that cash is king and say that in the case of Hetty Green, cash is queen.
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Mike Wahlberg
And it seems like she embodies one. You write in the book about there's three, three levers to achieve financial goals. And it's, it's, it's simpler than, than most people might think. And one of those that she was embodying was, you know, how much you save and invest. But can you talk just briefly about what those three levers are and what, what the average investor can do to have a better success long term in terms of getting some money saved and invested and squirreled away?
- [19:05]
Dr. Stephen Forster
Absolutely. Let's suppose you are a 20 year old and your goal is to retire at age 60. So what can you do as a 20 year old? So three things that we want to look at is how much you can put aside each year, so what your savings or investing are. The second thing is how much time you have. And so in the example I gave, you've got 40 years, but maybe you'll decide you can extend that to 45 years and retire at 65. So the number in years you have is another lever. And then finally it's how much you earn each year. And this is where the main principles of asset allocation come in. For example, how much of that mix should be in stocks versus bonds, to put it in the two traditional investment categories. And so this relates to what kind of expected returns and how much risk you're prepared to take, how much that allocation should be in stocks versus bonds and what your desired goal is. So again, working backward, what kind of lifestyle you want to have, try to envision that and then turn that into some kind of financial equivalent and then work backwards in terms of how much you have to save, how long you have to save, and what kind of return that you need. And if it turns out the expected return is some huge number like 15% per year, which even all in equities historically would not provide you with that return. Then you have to change the other levers. Then you have to consider not retiring at the age of 60, but 65 or later. And you have to consider the trade offs, giving up some of your consumption today and investing more on an annual basis. So that's how the three levers come into play and tie into the nature of the investments and the expected return and risk trade off.
- [21:04]
Mike Wahlberg
While I have you, Steven, I would be remiss if I didn't ask you a little bit about working on William Sharp's biography. I'm curious about that. But for listeners who don't know, William Sharp was. He received the Nobel Prize for Economics along with Harry Markowitz for their work on on CapAm back in 1990. And a bit of a titan in our industry. So what's that process like? I would struggle to know even where to start.
- [21:27]
Dr. Stephen Forster
Yeah, so it's a fantastic project, probably the most rewarding that I've been involved with so far. So this goes back to a book that I wrote, came out in 2021 with Andrew Lowe from MIT, and that was called In Pursuit of the Perfect Portfolio, where we basically looked at the history of modern portfolio theory, starting with Harry Markowitz, followed by Bill Sharp and others. And each chapter we devote to one of these titans and legendary figures. And so that's how I got to know Bill Sharpe. The current book. I've already immersed myself in the writing process. I've got a sabbatical coming up in January, so hopefully I'll be able to get the book done by late 2020 25. Had a fantastic time back in December 2023, spending a week with Bill and interviewing him. It's going to be about his life, obviously, but also the times. And so Bill recently turned 90. So we will start back in 1934 and part of it will be the evolution of the investment industry since 1934. And the big contribution that you mentioned, the capital asset pricing model, which the punchline of the capital asset pricing model is that if you believe in that kind of a world, then you should be all in in terms of investing in the market portfolio. And so Sharpe's model predated the index fund, which really is the implementation of what we mean by investing in the market portfolio. I'll say one other thing. Bill Sharp, what many listeners don't know, his contributions actually went beyond the investment industry. In fact, way back in 1959, when he was at the Rand Corporation, he was involved in a seminal study that basically called for a carbon tax in California. So fast forward to today where carbon taxes are are hugely in the news. It really can be traced to some work that, that he did that many decades ago.
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Mike Wahlberg
Wow, an early environmentalist. So, Stephen, you've been researching and teaching for many years at Western there in London, Ontario. And I wonder, as you, as you look back to the early part of your career, your first day in the professorship, if you could go back and take yourself for coffee on your first day, is there a key piece of advice that you would offer yourself?
- [24:07]
Dr. Stephen Forster
Yes, absolutely. And it's funny you mentioned my first day or the first month happened to be in September 1987. And I recall vividly the first time I was protected by the media to comment on a news story happened to be October 19, 1987, which is the final chapter in the book. So I've come a long way since those days. But I think the key thing that I've learned is the importance of coming up with your investment beliefs based on evidence. And so I've spent decades looking at stock market performance, capital markets performance, and how tough it is to try to outperform the market. I've made my own mistakes in terms of trying to time markets, trying to select individual securities, for example, the time that based on my own research, even looking at how IPOs after the first day tend to underperform, made a bet on a new tech stock that was outperforming. And so I bought, bought some put options, long dated put options. That company was Google. I turned out lost all of my money on that investment. So this is the kind of advice that I would give myself back when I was starting out to carefully consider the importance of diversification and how tough it is to beat the market.
- [25:45]
Mike Wahlberg
I've been Speaking today with Dr. Stephen Forster, professor of finance at Western University and author of Trailblazers, Heroes and Crooks, stories to make you a smarter investor, available now in a fine bookstore near you. Thanks so much for coming on the show today, Stephen.
- [25:59]
Dr. Stephen Forster
My pleasure, Mike.
- [26:00]
Mike Wahlberg
If you are enjoying the podcast, please consider rating or commenting on it in your player. It really does help get it in front of other listeners and we appreciate hearing from you. I'm Mike Wahlberg and this is me, the enterprising investor.