By PÉRALTE C. PAUL
You might say the stock market crash of ‘87 was a test run for Charles E. Osborne. Then a college student at Wake Forest University, he had to manage a mock investment portfolio as part of an economics class project.
“I decided I would be contrary and basically I shorted the market. I shorted the stock, most notably Gap,” said Osborne, who is managing director of Iron Capital Advisors, the Atlanta firm he co-founded.
THE CHARLES E. OSBORNE FILE
“Of course I had no idea what I was doing but that was in September of ‘87. October of ‘87 came around and lo and behold I made a lot of imaginary money and that just kind of got me hooked.”
Twenty year later, Wall Street is in a meltdown but Osborne doesn’t have imaginary money this time around: Iron Capital, which points to its fee-based model as a point of distinction, has some $3.5 billion in assets under management.
Q: With so many firms out there offering investment services and 401(k) management, why start your own?
A: We felt like lot of people lost a lot more money than they should have (in the bear market of the early 2000s) primarily because they were getting bad advice both at the plan sponsor level and at the participant level. We saw a lot of conflicts of interest in the investment business that we don’t think should exist and we also saw just a lack of really competent investment advice to the end user.
Q: Why do you highlight the distinction between your fee-based business model vs. a commission-based business model?
A: Almost by definition, sales people get paid commissions. The person you’re dealing with, their training and background is not how to manage money, it’s how to sell a product. … When you hire someone that works only on a fee basis, we’re paid to represent the client. .. Our only goal is what’s in the client’s best interest and to provide the best rate of return that we possibly can to the client because that’s how the client is going to judge us.
Q: Is this market exciting or nerve-wracking?
A: I don’t think exciting is the right word. It is interesting. For the last several weeks I’ve talked to several of the younger analysts at our firm and have said, ‘You need to remember this.’ You need to consciously think about what we’re doing and remember this because 30 years from now, when you’re the grizzled veteran, people will be asking, ‘What was it like in ‘08?’ …We’ve been spending most of our time trying to be proactive in communicating to our clients and letting them know what’s going on, what we’re doing in reaction to what’s going on, why we think it’s the best thing and just saying, ‘Don’t panic.’ Definitely, when we hit that low on Oct. 10, we heard sheer panic from people and there were people we had to talk off the cliff so to speak.
Q: What’s the biggest issue for clients right now in this down market?
A: The biggest issue is trying to make sure that clients don’t make the biggest mistake they can make, and that’s to sell out right at the bottom.
Q: How do you convince them not to?
A: We believe in people actually owning companies and not trading stocks. So at some point when someone says they want to get out, you go down their portfolio, position by position and say, ‘Why would you sell that at this price?’ When you look at what you own and realize these are companies that are going to be around and survive and their stock price is going to come back. The other thing that helps is that we’ve been able to tell them that we and our clients have done much better than the market as a whole. The final thing is to get them to realize is we got some help from Warren Buffett in that you should be greedy when others are fearful and fearful when others are greedy. If anything this is a time to be buying and not a time to be panicking to get out.
Q: How difficult can it be to convince clients when they can see CNBC or watch FOX Business News, read the AJC business section and access the Internet and message boards 24/7 about various companies?
A: It’s difficult but one of the things we talk a lot about internally is that we’re really hired by the clients to bring them wisdom. In the Information Age we are bombarded by information but there is very little knowledge that’s being passed on by a lot of that information and even less wisdom. What you really need is to cipher through all that noise and information to get down to what’s happening and more specifically for our individual clients, what’s happening to what you own, not just broadly what’s happening and just making wise decisions.
Q: As a money manager with some of the bull markets we’ve had in recent years, how do you keep from being greedy or taking more risk than you really ought to?
A: Overconfidence is a major hurdle to investors, especially professional investors. There’s always those cases were you make the perfect call and you start to believe your own marketing materials so to speak. We have put into place serious risk controls for that specific reason, to make sure that we’re always asking ourselves, ‘Is there something we’ve missed?’
Q: With the recent bailout of Wall Street, if you subscribe to the theory that the free market will take care of itself, then shouldn’t it have been fine to have Lehman Brohers, Bear Stearns and all the other investment back go under?
A: There’s two different issues. One is a company-by-company issue and the other is the entire system. In our opinion, we think that the Fed and the Treasury did a poor job early on in this crisis, which necessitated the bailout. History will be a better judge of how (Treasury Secretary Hank) Paulson did but in my view I get the impression that he is running the Treasury like he’s running Goldman Sachs and if you’re running Goldman Sachs, which is a private investment bank and Bear Stearns comes to you and says ‘Will you come bail me out?’ You can say, ‘Yeah I like that deal and I’ll take that one.’ And then Lehman Bros. comes to you and you say, ‘No, I don’t really like that deal, I’ll pass.’ That’s fine if you’re running Goldman Sachs but that is very poor public policy because everyone else looks at you and says, ‘We don’t really understand what’s going on here.’ You could theoretically argue that if they just let Bear Stearns collapse and that they had not stepped in that everything may have righted itself. That may have forced everybody to clean house. But forever in American society we have not been a pure, laissez-faire, capitalist society. We have regulations, we have controls and most people think those things are good. But I think a lot of people who are arguing to let them fail and not bail them out don’t understand the full ramifications of what happens if the financial system fails. There’s not a single job in America that doesn’t rely on a functioning financial system.
