Investor Education: Stock-Based Compensation (SBC)
Stock-Based Compensation (SBC) is a way for companies to pay employees in the form of equity compensation in addition to their base salary. Companies can offer their employees a few different forms of SBC: Shares, Restricted Share Units (RSUs), Options, Phantom Shares, and Employee Stock Ownership Plans (ESOP). Options or Restricted Stock Units are the forms of SBC that companies typically will offer to their employees. Technology companies have been issuing SBC to their employees for a long time to retain them and create an incentive for solid performance. Employees can participate and get rewarded when share prices increase but may be inclined to leave a company if the equity price falls for an extended period.
Read our overview of Stock-Based Compensation (SBC)
A Thousand Times
“There is a strong family resemblance about misdeeds, and if you have all details of a thousand at your finger ends, it is odd if you can't unravel the thousand and first.” —Sherlock Holmes
It was a good week for the stock market. The S&P 500 gained 5.9% on the week, and the Nasdaq climbed 8.1%, including 7.4% on Thursday alone, after the inflation data came in slightly lower than expected.
It wasn’t such a good week for FTX. The popular crypto exchange was on the verge of collapse, was being acquired, wasn't being acquired, and then filed for bankruptcy.
This was a surprise to many, such as the celebrities that endorsed the company or the high-profile venture capital investors that put tens and hundreds of millions of dollars into the company. Just a few short months ago, Fortune magazine asked if FTX founder Sam Bankman-Fried was the next Warren Buffett, or if his strategy was doomed to fail. We now know the answer.
But the demise of FTX wasn’t a surprise to everyone. For example, noted short seller Marc Cohodes, in a video interview just a few weeks ago, called out both the company and its founder for what they really were. You can watch that video online (starting at the 35:40 mark) and—assuming you don’t mind the language Cohodes uses in the video, which can best be described as “extra colorful”—judge for yourself whether the downfall was something other investors should have seen coming before writing big checks to the company.
Like the quote from Sherlock Holmes above, Cohodes was able to analyze the situation with clear eyes because he'd seen a thousand similar cases before.
The FTX story reminds us of the Valeant Pharmaceuticals story from several years ago. In that case, the company was public, and there were intelligent and well-known investors on both sides of the trade. The short sellers ended up being right as the story they’d seen a thousand times before played out again. The longs wanted another version of the story to be true. They refused to believe some of the facts they were being presented—or refused to dig deep enough to uncover certain truths.
Due diligence can be a fragile thing. Done correctly, it can be almost all that matters in finding profitable investment opportunities. Done incorrectly, it can feed the confirmation bias that makes it difficult to change one’s mind.
In his January 2020 talk and essay on Frederick Taylor Gates, Peter Kaufman described a specific chapter of Gates' memoirs like this:
In Chapter XXXVIII of his memoirs Chapters In My Life, Gates offers a masterful recounting of how cleverly he conducted his scrutiny of Rockefeller’s non-Standard Oil investments, as well as why he thought his upbringing had prepared him so well to do so. To follow is a copy of this chapter for you to take home this evening. I encourage you to examine it closely, as it is a primer on expertly conducting due diligence, "from the bottom up."
We suggest investors of all levels and all asset classes use the FTX case study as a reason to read or re-read that chapter, which Mr. Kaufman included at the end of his essay.
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