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Lessons Learned

How four CFOs are investing their money these days.

Like many investors, Ed Goldfinger, CFO of Empirix Inc., in Waltham, Massachusetts, got “a bit overexcited” during the dot-com frenzy. And while he doesn’t consider himself to have been “burned very badly,” he says the experience taught him several lessons. The experience taught him several lessons.

For instance, he now avoids individual stocks and manages his investments by himself instead of through a broker. Moreover, Goldfinger — who says he believes “in placing good bets and holding them” — is diligently focused on the long term. To that end, he keeps most of his individual portfolio in a diversified assortment of mutual funds and currently holds less than 10 percent in cash, an approach he duplicates in his children’s 529 accounts and his 401(k). And though he rebalances his holdings one or two times annually, he doesn’t “believe I know better than the experts.”

Nonetheless, Goldfinger is still something of a contrarian. Last March, just before the Iraq war, he moved a substantial portion of his portfolio’s balance from money-market and fixed-income funds into much more aggressive investments, including large cap and international funds. The result, he says, was that “the percentage on my total portfolio went up by about half of what the market in general went up.” Sometimes, he confides, the best time to buy is when “consumer confidence hits an all-time low.”

Like Goldfinger, many other CFOs report that their experiences during the Internet bust have made them more conservative investors. Others remain willing to make aggressive moves if the opportunity arises. And a small minority have retrenched to the point where they invest only in what they know. Bob Leahy, CFO of Brooktrout Inc., for example, says the only investments he’ll make these days are in his equity stake in the Needham, Massachusetts-based telecommunications company. “I’m going to focus on what I can influence,” he says. “And if I’m going to make a bet, I’m going to bet on myself.”

Matrix Reloaded

Those CFOs who do invest tend to conduct more research and use the insights gained from their own companies to gauge the direction of the economy and individual stocks. B.J. Rone, a Dallas-based CFO partner with Tatum Partners, for example, specializes in turnarounds and tends to target stocks “that have the potential to come back,” especially in the industries that he knows best—high tech and health care. On his radar screen these days: Nortel Networks, Atmel, Sun Microsystems, and Texas Instruments.

To guard against the vagaries of the market, however, Rone now invests only about 15 percent of his available portfolio in stocks. And though he makes two to three trades a week, he has lowered his expectations. “I’m not trying to be greedy,” he says, adding that he’s happy if he makes “$1 to $2 a share.” Case in point: in July, Rone’s 6,000 shares of telecommunications firm Artesyn Technologies had gone from $6.30 to $7, and his broker recommended selling. “That was $4,200 in one phone call,” says Rone. And even though the stock went to $7.25 the next day, Rone says he was pleased with the trade “because that’s still good money.”

The way Rone gauges such potential has become much more specific in recent years. He has given his brokerage firm, Little Rock, Arkansas-based Stephens Inc., a “matrix” that outlines his criteria. Specifically, Rone wants answers to three questions: What has been the stock’s price range in the past 12 months, what is the caliber of the management team, and how strong is the company’s cash position? The matrix also takes into account the ratio of a stock’s market price to its book value, as well as revenue and cash flow per share as compared to those of competitors. “I don’t care what your profit position is,” he says. “If you have negative cash flow, eventually you are going to go bankrupt.” Rone has even managed to negotiate with his brokerage for lower fees in exchange for its use of the matrix.

Like Rone, Kelly Parsons, CFO of Accenture HR Services, says she “does a lot more research” these days, spending 5 to 10 hours a month scouring analyst reports, Securities and Exchange Commission documents, and news articles on potential investments. She pays special attention to the makeup of the management team, assessing “where they have been and how they left their previous firms.”

CFOs come in for additional scrutiny, she says, since “it is difficult not to be critical of your own profession.” In particular, she tries to assess whether or not a CFO can manage the dual pressures of meeting quarterly earnings and reining in a hard-driving CEO. And Parsons finds clues both by talking to analysts and examining the CFO’s track record, including where he spent his formative professional years. “Was it a big blue chip, solid, publicly held company or a small, private company?” she asks. “With the former, you can expect that there were significant numbers of good senior professionals from whom to learn. With the latter, there may not have been so many.”

Hedging All Bets

Whatever their own investment philosophies, CFOs can’t advise employees on their portfolios, according to Department of Labor rules. But that doesn’t stop some employees from looking to them for an informed opinion on the economic outlook. People have a way of saying, “How’s it going?” when they want to gain a little insight, says Brooktrout’s Leahy. He answers such inquiries with information on important customer wins or other key indicators of Brooktrout’s business prospects. Likewise, Goldfinger couches his assessment of the broader economy in terms of where Empirix “is hitting seams in the market.”

Still, no matter how optimistic those assessments, even CFOs sometimes make investment decisions based on purely personal reasons. Goldfinger, for example, does hold one individual stock in his portfolio — a sizable amount of PepsiCo, where he worked for nine years in various finance positions. After moving on in 1998, he says he retained the shares “as a hedge against the chance that I’d later regret the move.”

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