A Place for Humility
Updated: Jun 6, 2019
Valeant Pharmaceuticals Company is in trouble.
The company grew itself dramatically by acquiring other drug companies.
Once they acquired the company it appears they tried to increase profits by reducing the company’s research and development budget and tweaking the pricing to charge more.
To make the acquisitions they borrowed a lot of money and currently have approximately 37 billion in long term debt.
To truly represent how well they were doing they used a different financial metric –cash earnings. In essence they said “don’t pay attention to our GAAP earnings where we need to follow “specific rules”. Look at our “cash EPS” which allowed them to eliminate certain acquisition costs from their reporting.
Big money flowed in to this model and the stock rose. Everyone calls this money “the smart money” because they supposedly know so much more than the average person. They all talked about “cash EPS” and how wonderful this business model is/was.
Some big investment firms even held 10% or more of their assets in this one stock.
With the share price up, all the “smart money” clapped. “We are so smart” they probably said. “Look at how much money we are making the firm”.
Along the way, like anyone lost in their own bubble, the “smart money” stopped asking the right questions:
This business model is legal but might it present moral problems as we buy up specialty drugs then push up the pricing and drop the research budgets?
What happens to the people using these drugs? How are they affected?
And what about our shareholders? Is “cash EPS” a metric that clarifies the company’s strength and position or is it a metric that helps us simply justify our position in the stock?
Have we lost our objectivity to the detriment of our shareholders?Are we creating real value or are we just rolling up firms and exploiting niche drugs?
Is this really the best long term investment for my shareholders?
Well people have begun to poke at the stock and it has dropped from over $250 per share down to around $93 as of last week.
But a lot of the “smart money” people spent a lot of time last week defending the stock and, consequently, their purchase of the stock.
This may seem ridiculous but it is what happens when any of us lose our humility.
A lack of humility stops us from reflecting – “Is this stock’s value truly what I am saying it is”? “Is there a moral dilemma”?
A lack of humility stops us from accepting – “I’m the smart money, I know more than everyone else, and I am going to hang on to my position no matter what to prove it”
A lack of humility stops us from thinking about others – “Is it truly best for my shareholders that I hold on to this stock”? I might believe in it but the market is going the wrong way and I have lost them a lot of money.
In the end, the point is that “smart” is never enough. In fact “smart” can blind us.
It can take away our humility.
And with it, sometimes, our humanity.