Your Executive Newsletter with Sun Wu.
How Famous CEOs Usually Underperform the Market and the Value of Powerful Brands
Friday, July 26th, 2019
CNBC, in collaboration with ACORNS, published a short but insightful video this week trying to answer a question we've tackled before: Do famous CEOs outperform the market?

In the video, Josh Brown, CEO of Ritholtz Wealth Management, compares the performance of famous CEOs like Elon Musk and Steve Jobs with some of the best-performing CEOs of all time, from an investor's point of view.

Here are my main takes after watching the video:

1. Wall Street loves a great story, more than they like profits
Looking at the evolution of Microsoft's stock price, you can clearly see how Wall Street loves a great story, even more than they like profits.

During the time Steve Ballmer was the CEO, Microsoft's stock price tanked even though its net income more than doubled.

Satya Nadella, the new CEO, came to the top job with a better story about Microsoft transitioning into a cloud computing company which has gotten better traction with investors and the stock price has exploded as a result.

2. Wall Street loves a great exit of a stock, more than they like the stock
Over time, investors have learned to look at the stock price as their preferred measure of profitability, instead of profits.

Ironic, right?

Here's what I mean: when investors buy a stock, what they really care about is whether the company's stock price will appreciate, or move in the opposite direction, from the time they buy it.

So, their main concern about a stock it is not so much about whether or not the company will be profitable, but about whether they'll be able to sell the stock at a higher price later, even if the company, in its financial statements, is losing money.

Take the case of Uber, which we covered in a previous edition of this newsletter.

In 2018, Uber made $11.2 billion in revenues but lost, on a net income basis, a bit over $3 billion.

Here's how I expressed my concerns about Uber's frenzy at the time of its IPO:
"...the fact that a company that's nine years old makes it to the public market with losses measured in the billions is a bit insane to me. But more shocking is that some experienced investors bought into the hype and jumped on the wagon like nothing."
Of course, my comments back them totally missed the point that investors buying Uber's IPO were not really buying the story of Uber becoming profitable and that they were counting instead on things like self-driven cars and robotaxis boosting Uber's stock price at some point in the future, giving them a chance for a rich exit of Uber's stock.

So these investors don't care about the company per se, what they care about is the stock price, even if the company bleeds out.

That's why as executives, we need to be clear about where we stand because we do care about our company and people (or so I hope).

3. Capital Allocation is still the most powerful weapon in a CEO's toolkit
It took Steve Jobs and Apple 35 years to hit a $300 billion valuation, but it only took Tim Cook seven years to triple that.


Because he is a great capital allocator. I mean, he manages Apple by sitting on its balance sheet and income statement all day long.

Yes, he's achieved such impressive numbers, mostly, with products that Steve Jobs launched.

Remember, Tim Cook is not a product guy.

But the fact that he took Apple to a trillion-dollar valuation without any major breakthroughs, highlights how capital allocation is still one of the most powerful weapons in a company's arsenal, and when combined with a solid innovation strategy, it can put any organization on a path to maximum profitability; however you define that.

Here's CNBC video in case you want to check it out.

The Value of Powerful Brands
Powerful brands can help you defend your market share, slow down customer churn, and retain a profitable position in your market. They can also help you through price wars and finding growth when you go through tough times.

However, brands also can lose power over time.

Professor David Aaker of Berkeley's Haas School of Business provides three reasons why brands lose relevance:

  1. A decline in the relevance of the product category,
  2. A decline in the relevance of the brand with respect to other brands in its marketplace, and
  3. The emergence of a reason not to buy.

Let's go through them one by one.

To start, if the product category is in decline, it will be hard to find growth even if the product is highly differentiated or is the cheapest on the market. Sony's Walkman might well be the best MP3 player ever made with a reputable name in the space, but its relevance is in decline because so is the entire product category (MP3 players).

If you face decline in one of your product categories, you have a few options. You can continue to extract any value left in the category through innovation and the positioning levers until it naturally phases out, you may try to reposition the brand, or you can just exit the market, either by closing the business or selling it out.

The second reason for losing relevance relates to the brand itself losing ground and visibility with respect to other brands in the market. This is a case where the category is strong, but your brand delivers weak results and loses share to others.

This decline might be relative to some extent. For example, a brand could be losing relevance with respect to a particular consumer segment, like Facebook lagging behind in the preference of younger crowds who prefer Snapchat and Instagram to connect with friends, or the brand could be losing relevance in an entire market like Levi's declining market share in apparel.

When your brands are losing relevance in strong markets, you need to pay special care to identify the drivers of the decay and act energetically to fix problems before is too late. Among the actions to fix a brand degradation, you may want to consider major rebranding efforts, which might include piggybacking on more established brands, and/or promotion through sponsorships, partnerships, and other programs.

Finally, a brand might be affected by the emergence of strong reasons to stop using the product.

For instance, concerns about health risks have diminished sales of tobacco-related products over the last two decades. In a more recent example, many users have stopped using Facebook because of the network's seemingly weak response to scandals involving Russians meddling in the US presidential elections and the manipulation of the network to influence indecisive voters.

Bad reputation is one of the hardest things to clean off once it's ingrained in consumers' minds. To deal with it, my recommendation is that if you are affected by something damaging your reputation - and you actually have some responsibility for it - you should engage in open, fact-based discussions to reveal any truth behind the headlines and get the accounts straight moving forward.

Negating facts rarely works. If something is broken, you are better off acknowledging it and quickly proposing a path to right the wrongs. If you do the right thing people will usually forget faster.

Powerful brands are some of the most valuable assets in your portfolio and must be handled with care as they can be destroyed in a blink.

If your products are losing relevance you must try to understand the reasons driving the decay: Is it because of a category decline? Or is the "brandable" value moving to other product features? Is it because your products are becoming obsolete, or falling behind competitors' solutions that offer more value and fresher innovation? Or is the decline associated with a growing bad reputation of your products or your company? If so, what are you going to do about it?

You must ask these types of questions and always come up with realistic, fact-based answers and never try to mask a bad situation. Always face the bad news, acknowledge when needed, and move on quickly.

Enough for this week, checking out now.


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