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The Intersection of Investing, Ethics & Human Nature

Each year, the trip to Omaha for the Berkshire Hathaway annual meeting continuously offers deeper engagement for learning—often in places never expected. Although the actual event is Saturday, the opportunities start well before and extend well past.

One of our due diligence meetings involved a quiet but thoughtful conversation with famed investment manager, Wally Weitz.
Weitz, who calls Nebraska home, is known as the “Other Oracle of Omaha.” He is not flashy or loud. You could easily confuse him for a professor or an accountant. However, his understated persona would rather let the results speak for themselves.

Although the hour long conversation had many worthwhile aspects, it was the discussion on the controversial pharma company, Valeant, which caught my attention.

Between January of 2012 and July of 2015 Valeant’s stock price increased an amazing 435%. It was the darling of the hedge fund community and high profile investors like Bill Ackman. Weitz had a position in the company, too.

Over the past three years we had quizzed the deep thinking investor about the position. At the time, no one could complain about the meteoric increase.

Despite the impressive performance Weitz chose to exit the holding in the fall of 2015.

It made me wonder what triggered the decision to sell. Was it a valuation call, new competition, a patent issue or something else?

As it turned out, the decision had little to do with fundamental analysis, patents or the efficacy of the latest skin cream. Rather, the decision had everything to do with human nature and the correlation to ethical behavior.

Weitz conveyed that he had an audience with Valeant’s then CEO Mike Pearson in which a person asked the hard charging corporate leader, “How does your company continuously make its numbers?”

Pearson fired back that he tells his people, “Make your numbers or I will find someone who will.”

Out of all of the dialogue, this was the statement that got Weitz’s attention.

Weitz recognized that when people are threatened with such an ultimatum their careers are in danger. When this occurs people’s ability to pay their mortgages, feed their children and provide the absolute necessities of life are all at risk.

In such a dynamic, people revert to survival mode. They will not have the luxury of saying “is this right or wrong” but rather, I have to feed my children—even if I know this is wrong.

This type of pressure and poor leadership causes people to ignore ethics and instead focus on self-preservation.

Recognizing this, Weitz made the difficult call to sell their highly lucrative Valeant investment at approximately $180 per share.

Although hindsight is 20/20, the Valeant story has continued to erode. The company took on too much debt to fuel rapid acquisitions. They received pushback from the medical profession and government on pricing of drugs and a lack of new acquisitions failed to keep their stock price afloat.

Since that time, the Valeant saga has been in the news virtually on a daily basis. Their controversial CEO Pearson resigned and the stock has tumbled from $180 to less than $30.

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During the Berkshire annual meeting Warren Buffett shared a story he has shared many times before. Buffett stated, “When evaluating people, you want them to have Integrity, Energy and Intelligence.” Then Buffett joked that if they don’t have integrity you want them to be lazy and dumb.

In assessing Pearson and Valeant, you had an organization led by very smart and aggressive people. Unfortunately, the integrity piece was missing. As such, the intelligence and energy components served as a lit match in an unethical dynamite factory.

It takes tremendous discipline, wisdom and rationality to walk away from situations that are powder kegs. This is even more problematic when money is on the line and the ethically challenged entity has made you a chunk of money.

These are not lessons taught in a graduate school text book. However, the long term investor (whether in private or public businesses) must recognize how important these elements are for success not only in investing, but in all facets of business and life.

Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.