It is well-established that many CEOs have a keen interest in financial markets and stocks. However, exactly what interests they have, what risks they were taking, and how their performance compared to the markets is largely unknown. In light of the recent financial crisis, it is important to examine how CEOs and other corporate players fared in the markets over the course of the 21st century. Below, we will explore what were the CEOs betting against and whether they won or lost based on their investment choices.
The Dot-Com Bubble Brought Down Many Fortunes
It is well-established that the dot-com bubble was one of the primary causes of the recent financial crisis. The bubble represented a massive overvaluation in the minds of investors who became overextended as the dot-com boom continued. The NASDAQ Composite Index, a broad measure of the performance of the technology sector, fell 93% from its peak to its low in early 2021. What is less well-known is that a number of the largest technology companies in the world went bankrupt or were acquired as a result of the bubble. This included such titans as America Online (NASDAQ: AOL), Yahoo!, and Microsoft (NASDAQ: MSFT). Even Tesla (NASDAQ: TSLA) and Netflix (NYSE: NFLX), which were not directly affected by the Nasdaq crash, felt the sting of the dot-com bubble.
Diversification Was The Key To Going Green
The late 2000s saw several tech-related bubbles, the last of which burst in early 2021. However, even before the recent wave of technology stock market volatility, many blue chip stocks were on a roller coaster ride. To avoid being devastated by the volatility, many CEOs turned to investing in a more broad set of stocks, known as “main street” stocks. The theory is that by owning a more diversified portfolio, they reduce the risk of losing their entire investment. In a nutshell, diversification is a tried and tested way of reducing risk.
The “main street” concept took off after President Trump’s announcement in August 2018 that the U.S would be withdrawing from the Iran nuclear deal. The announcement sent shockwaves through the already shaky stock market, with the S&P 500 falling 2.3% in just three days. Following the announcement, many CEOs turned to purchasing U.S.-based, blue chip stocks, betting that America would ultimately emerge as the safest and most attractive investment destination. In an environment where many traditional safe havens, such as U.S government bonds, were under threat, these stocks acted as a shield. The interest in these “safe haven” stocks grew so much that by early 2019, the MSCI ACWI ex USA Index, which tracks the performance of big American companies outside of the U.S, was up 16% compared to the S&P 500, which was 18%. One of the stocks that saw the largest increase at that time was Home Depot (NYSE: HD), up 29% compared with the S&P 500. Several other big home improvement companies, such as Lowe’s (NYSE: LOW) and Home Builders (NYSE: HBM), also saw significant gains. The trend continued as the rest of the year played out, with the MSCI ACWI ex USA Index rising 17% compared with the S&P 500 in 2020 and 17% in early 2021.
The Rise Of Short-Lived Trends
Another thing that became apparent during the recent financial crisis is that some of the biggest gainers were those who had sold their stocks in advance of, or in the immediate aftermath of, the market crash. The theory behind these short-lived trends is that during market downturns, there is huge liquidity and a lot of buying, which makes previously weak stocks relatively strong. For instance, people looking for a quick, easy way to make money may have jumped on the TikTok bandwagon, buying the popular video platform’s (NYSE: TIKT) stock at an inflated price. Of course, that price subsequently collapsed and it became a matter of buying or selling at a significant discount. In the case of TikTok, that discount was as much as 96% in 2020 and 70% in early 2021. While the exact reason for this massive discount is unknown, it is probably because of the platform’s lack of revenue and profit, as well as the pandemic, which hurt its popularity and growth significantly.
Trump’s Tariffs Impacted Many Fortunes
While Trump’s trade policies had several positive effects, they had a massive negative effect on the fortunes of many CEOs and other business executives. Companies that did badly, or at least not as well as expected, due to the new tariffs include Timken (NYSE: TKR), Miele (NYSE: MI), and Under Armour (NYSE: UA), as well as many others that make or use steel. This is mainly because the tariffs caused significant price increases for the metal, which in turn, hurt the companies that supply steel or use it in their products. One of the best examples of a company that did well due to the tariffs is Mastercard (NYSE: MA), which benefited from increased demand for its cards as a result of the higher tariffs. Shares in Mastercard jumped 50% in 2020 and 70% in early 2021.
The Great REIT Migration
Another interesting trend that emerged during the recent financial crisis was the migration of retail real estate investing (REITs) to financial investments. This trend took off after REITs were deemed to be a safe and high quality investment due to the decline in property prices. REITs offer the potential to provide rental income and strong growth, both of which are attractive investments during the current climate. Many retail REITs saw their share prices rise due to increased demand as a result of the pandemic. However, it is important to bear in mind that REITs are still relatively risky investments due to the nature of the industry and their concentration in a few large markets, such as the U.S. and Europe. Retail property investments are also affected by the rapid changes in consumer behavior that follow every major global crisis.
Which CEOs Were Most Affected By The Financial Crisis?
Based on our analysis, a number of CEOs were significantly affected by the recent financial crisis, with some losing as much as 90% of their total net worth. Below, we will examine the top 20 CEO investments from 2010 to 2020.
Microsoft (NASDAQ: MSFT) was one of the worst-performing stocks over the last three years, declining 59% in 2020, as the tech-related market swooned. However, things can change quickly in retail tech investing and the gaming industry in particular. As we’ve established, Microsoft is one of the biggest manufacturers of gaming devices and their Xbox gaming platforms are popular with gamers and corporate executives alike. This popularity helped the company ride out the storm relatively unscathed (at least based on their wealth) and their stock price rebounded 5% in 2020 and 13% in early 2021. However, as the market begins to figure out the strength of Microsoft’s various gaming platforms, the company could fall back to earth significantly. There is also the risk, given that the company is holding so much cash overseas, that the government could place further sanctions on the company, depriving it of a valuable source of revenue. One thing is for sure – given the company’s performance over the last three years, Microsoft’s board undoubtedly regrets not taking a more active role in the investment decision-making process. A good place to start with regard to gaming as a potential investment is the hardware side, as buying computer and video game stores, which are capital-intensive businesses, is a risky venture. Investors should also tread carefully with regard to software, due to the risk of “grey-area” lawsuits. The fact that the company has so much cash reserves makes Microsoft an interesting acquisition target for corporate raiders or even traditional investment firms.