Wednesday, February 11, 1998
Getting Foolish at the
Getty
by Chris Rugaber
(TMF Post 1)
Here at The Motley Fool, we aim to benefit the individual investor. However, a recent news article from the Los Angeles Times tells the story of the Getty Foundation, and how it lost $400 million through bad investments a couple of years ago. While reading the article, it struck me how much a multi-billion-dollar foundation such as the Getty could also benefit from a little Foolish advice.
The disaster took place in the 1995-96 fiscal year, and was the result of investing in stock index options. (Not index funds, which are good, but options.) According to the Times, it was "the costliest single investment the Getty has ever made and... a painful episode for the trust's management."
In fairness, the full article makes it clear that the Getty Board pretty much made an honest mistake, rather than one based on greed or ignorance. (You can look it up at the LA Times' archives. But you'll have to pay for it; unlike The Motley Fool, their archives are not free.) Nevertheless, the Getty's experience contains several lessons for individual investors.
First, beware of market timing. Funny as it now may seem, many Wise folk predicted a downturn in the market for 1995. As a result, the Getty Foundation decided to try and protect against any declines by investing in the above-mentioned options, which would increase in value as the market dropped. The Times dryly sums up the result: "Unfortunately, the market did not cooperate. Instead of dropping precipitously as many market pundits expected, stocks soared relentlessly higher." Thanks to their complicated option investment, this was a bad thing for the Getty Foundation.
The second mistake was summarized in a comment to the LA Times: "It's the only time we varied from our standard [investment] policy," said Getty Chief Executive Officer Harold M. Williams. No big deal, but let's just keep that in mind: the only time they varied from their generally successful, time-tested strategy in order to try some market-timing shenanigan is also the only time they lost $400 million in one year.
What's so interesting about the Getty mistake is how these guys should have known better. Only after the debacle did CEO Williams note, "We don't know how to predict the market. I think we proved that to ourselves." Note to all Fools: learn that lesson before losing $400 million.
Some of the Getty board were the Wisest of the Wise. The board member who recommended the option investment was John Whitehead, a former co-chairman of Goldman Sachs, Inc. Hardly an investing amateur, but then maybe that was the problem. Apparently, Whitehead felt that the index option investments were a way to "manage risk."
Which leads to the next lesson: why did they feel they needed to "manage risk"? Why not make their investments and ride out the consequences? Well, the Foundation was in a position where they felt they couldn't afford to lose any money in the short term. Many of you may have read of Getty's brand-spanking new Museum outside LA. The huge budget for this required Getty to keep plenty of money on hand. Since the board felt it couldn't afford to lose money if the market declined, they tried to "manage" their risk. Fools know, however, that if you can't afford to lose it in the short term, don't invest it in stocks!
In fact, the Getty Board did invest in other instruments besides stocks, which leads to the final irony: they already had a conservative investment mix that would have protected them in a short-term market decline. As another Board member lamented afterwards, "We all realized after the fact that we had downside protection by our relatively conservative asset allocation, and that's a better strategy." Exactly. They'd cut back on stocks, and while that might not have been smart considering how well stocks did in 1995, it's what they should have done with money they couldn't afford to lose.
But to play it safe, maybe from now on they should just get their investment advice from some Fools.
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