When a CEO buys an extremely showy house, there’s your warning that the company’s performance is about to tank, according to a study by Arizona State University and New York University a couple of years ago.
The researchers, who used an extensive array of public records and databases, found the median home in such cases was valued at $2.7 million, more than 10 times the median home price nationwide in 2004, and that CEOs often took the plunge the same year they got the top job—as did 164 of the S&P 500 execs in the study.
About a third of top execs sold shares in the 12 months before buying a mansion. Immediately, their companies started losing share value. On the other hand, chief executives who bought homes without selling shares first, or who lived modestly, outperformed their flamboyant peers, beating the Standard & Poor’s 500 by about 25% while CEOs in ostentatious digs underperformed the S&P by about 25%.
Fresh example: Blackstone Group chief Steve Schwarzman bought a 35-room triplex on Park Avenue that ranges more than 20,000 square feet, and the IPO price of $35 per share of his financial services firm plummeted to four bucks.
Lesson: Don’t buy the biggest house on the block.
— Adapted from “8 Lifestyles of the Rich and Incompetent,” Justin Rohrlich, Minyanville blog, www.minyanville.com.