Oil Company Profits and The Senator From Windfall

Of all the politicians complaining about the profits and practices of America‘s wicked oil companies, few can top Sen. Maria Cantwell (D-Wash.).

Among her latest ventures is a demand that the oil company executives who testified Nov. 9 be brought back to the Senate, this time under oath. In a letter to the chairmen of the two committees that held the hearings, she claimed that the CEOs “failed to answer the simple questions asked of them. This is unacceptable. If we’re going to get to the bottom of high gas prices, we need complete answers that Americans can trust.”

Of course, “getting to the bottom” of price rises isn’t difficult. Energy exists in a global commodity market. Demand is rising from China and India, as economic growth brings a better life to more than two billion people, and supply has been constrained by OPEC, Hurricanes Katrina and Rita and absurd policies that restrict domestic drilling and the construction and expansion of pipelines and other energy infrastructure.

Cantwell has opposed such supply-boosting policies in the United States, lately blocking measures that would have benefited her own state while increasing tanker traffic in Puget Sound.

Another sure way to reduce supply is to pass laws to stop “price-gouging” in fuel costs — legislation such as Cantwell herself has introduced — or to exact special “windfall” taxes on a few large energy companies. Windfall taxes have been tried before, in the early 1980s, and, according to a Congressional Research Service study, they had a predictable effect. The taxes cut production by U.S. energy companies and increased our reliance on foreign oil. So much for “Energy Independence 2020,” the Democrats’ organization that Cantwell chairs.

Cantwell voted “yes” on Nov. 17 to an amendment (No. 2626) that would have imposed “a temporary windfall profits tax on crude oil.” The amendment failed, but the irony lingers because, as it turns out, Maria Cantwell’s life story has revolved around her own windfall profits.

Back in 1992, when I was editor of the congressional newspaper Roll Call, a young woman from Indianapolis named Maria Cantwell, who had spent her life working on campaigns (at age 24 she was out helping Jerry Springer run for governor of Ohio) and serving in government, won a U.S. House seat from a Seattle district.

At the time, according to the Associated Press, Cantwell earned $33,789 in the year before she came to Congress, and she had a net worth under $15,000.

The House provided her with a $10,000 raise, but, alas, she was washed away in the Republican tsunami of 1994. She emerged from Congress practically broke, but, luckily, with some nice friends.

One of them, Rob Glaser, a former Microsoft employee, “recruited the out-of-work politician for his new company, Real Networks,” according to The Industry Standard.

These were the lovely days when many high-tech firms were handing out stock options like crazy, and Glaser showered them on Maria Cantwell. A few years later, her Real Networks shares were worth, according to a definitive 2001 article in the Seattle Weekly, “roughly $80 million.”

She was rich — so rich that she could run for Senate, in a great Democratic tradition followed that same year by Sens. Mark Dayton (D-Minn.), the department store heir, and Jon Corzine (D-N.J.), former CEO of Goldman Sachs.

She used $9.2 million of her own money in the campaign, according to the Seattle Post-Intelligencer. About $6 million came from stock sales and the rest from loans using her stock as collateral.

Cantwell’s Senate seat itself is a windfall profit. Without the lucky timing of her plunge into Real Networks, it’s unlikely she would be a member of the world’s most exclusive club today.

As fortune would have it, just as Cantwell started her Senate campaign, Real Networks was hitting a new high ($93 a share, adjusted for splits). By February 2001, after she was safely sworn in, the stock had fallen to $8, in which neighborhood it’s pretty much been ever since (Friday’s close was $8.89).

So, if Cantwell had run first in 2002 instead of 2000, she couldn’t have mustered $9 million from her Real Networks stock to put into the campaign.

Maria Cantwell is truly the Senator From Windfall, but I wouldn’t want to slap some kind of special tax on her just because she got a bit lucky — like her colleague, Sen. Judd Gregg (R-N.H.), another backer of windfall profits, who won $853,000 in the Powerball lottery in October.

But let’s contrast the windfalls of Cantwell and Gregg with the increased earnings of integrated oil and gas companies in the third quarter of 2005. Those firms use a big chunk of their profits each year to make huge long-term capital investments in the risky business of exploring for energy and producing it. (ExxonMobil’s capital expenditures over the past 10 years have roughly equaled its reported earnings.) The price of oil, like that of any other commodity, bounces around, so some months oil companies make more from their upstream operations than others.

Are such profits a windfall? Of course not. They are the result of serious investment and research and development. But Senators like Cantwell and Gregg — and others who should know better — continue to try to exact special tribute from the same companies that are trying to boost America‘s energy supply.

The latest windfall profits tax proposals come in new guises — a change in LIFO inventory rules and a limit on the foreign tax credit. But the effect would be the same as the WPT disaster of the 1980s: to cut supply and increase dependence on oil produced by non-U.S. companies, many owned by nations like Venezuela and Saudi Arabia.

That would be a windfall loss for the public.

Originally published in Tech Central Station.

Three Huge Automatic Tax Increases — Courtesy of Congress

The first rule in government, as in medicine, is the Hippocratic one: Do no harm. Unfortunately, Congress is about to do severe harm to the U.S. economy if it fails to act in the next few months to stop three huge automatic tax increases.

Let me shift metaphors. The increases — 133 percent for the rate on dividend income, 33 percent for the rate on capital gains and what amounts to an infinite increase in the coming rate on what you pass on to your heirs — comprise a ticking time bomb.

The dividend and capital gains rates were reduced to 15 percent in 2003. The estate (also called death or inheritance) tax got an overhaul in 2001, with gradual reductions over 10 years and complete elimination set for 2010.

But the dividend and capital gains cuts turn into pumpkins (reverting to their old top rates of 35 and 20 percent, respectively) at the end of 2008. And in 2011, the pre-2001 estate tax reappears. Since backers lacked 60 Senate votes, all three of the cuts were only temporary.

The estate-tax cut can wait a bit for an extension, but the dividend and capital gains tax cuts can’t. My guess is that, early in 2006, the prospect of the big increases will weigh on markets. Investors will start selling stocks and other assets to take advantage of the expiring 15 percent capital gains rate, driving down prices.

Academic research has found that the dividend cut, by increasing what America‘s 57 million investing families can keep after taxes, boosted stock prices considerably. A paper for the prestigious National Bureau of Economic Research by Alan Auerbach and Kevin Hassett concluded that the cuts “had a significant impact on equity markets” — a broadly positive impact. Take the cuts away, and stocks will almost certainly head in the opposite direction.

As for the estate tax: It’s hard to say if the tiny changes so far have had an effect, but the elimination of all taxes at death certainly will. Surveys show the estate tax is the most broadly despised federal tax, hated even more than the income tax. Americans of both parties think it’s unfair to tax income once on receipt and again at death.

A good compromise — one that would likely have become law if it weren’t for the post-hurricane political meltdown — would have been to exempt, say, the first $5 million of an estate from all taxes (a figure that would be indexed to inflation) and tax the remainder at 15 percent.

That’s the golden number: 15 percent. It’s low enough that — for income and investments — it doesn’t get in the way of people’s decisions about working hard, saving and investing more and generally doing the right thing economically.

There’s not the slightest doubt that the tax cuts enacted in 2001 and 2003 (including those on personal income) played a big role, along with low interest rates, in keeping the recession short and shallow and in keeping the U.S. economy the most robust in the world. Today, we’re growing at better than 3.5 percent, compared with about 1 percent for Germany and France. Our unemployment rate is about half theirs.

But what about the budget deficit? It’s a non-issue. First, the deficit is small (2.6 percent of our $12 trillion-plus GDP), and it has had no effect on interest rates or the value of the dollar, which, despite Warren Buffett’s prediction (which cost his company a billion bucks), has risen strongly in 2005. Second, America‘s fiscal problem is too much spending. The problem is, emphatically, not the way that the funding for that spending is allocated, between taxes and borrowing. At these low interest rates, we should, in fact, be borrowing even more.

In a perfect world, an extension of the Big Three cuts could be part of comprehensive tax reform, along the lines recently recommended by the Mack-Breaux Commission. Let’s end tax breaks on real estate, health insurance, state taxes and other preferences and lower all rates to the 15 percent level. Then we’d see fantastic economic growth in America, just in time to engage surging China, India and Japan.

But I’d settle for a simple Hippocratic move: extend the dividend and capital gains cuts by April, then force a vote on an estate-tax compromise just before the 2006 elections. Defuse the ticking time bombs.

Interview: Dan Yergin on Energy Prices and Policies

James Glassman: Energy prices have been rising sharply, partly because of Hurricane Katrina and Hurricane Rita. We decided to talk to probably America’s number one expert on energy to try to separate some of the hysteria and the myths from the truth.

Dan Yergin is the Chairman of Cambridge Energy Research Associates. He’s also a Pulitzer Prize winner for his book, “The Prize: The Epic Quest for Oil.” He’s also the author of “The Commanding Heights: The Battle for the World Economy,” which received wide attention for analysis and narrative and was made into a six-hour documentary by PBS. And he’s also the recipient of the United States Energy Award for lifetime achievements in energy and the promotion of international understanding. Dr. Yergin received his BA from Yale and his Ph.D. from Cambridge University.

Dan, Speaker of the House Dennis Hastert today said that he wanted to pass a law that required oil companies to reinvest their profits in increasing refinery capacity in the United States. What would the impact of increasing refinery capacity in the United States be?

Dan Yergin: There is a tendency to think that the refining problem is a U.S. problem, that we don’t have enough refining capacity. The problem is a global one and it is really more concentrated in Europe and in Asia and we are feeling the impact of it. In Europe, half the new cars sold are diesel and they don’t have enough of what is called conversion capacity in the refineries to turn out that fuel and there is also rising demand in China for that type of fuel. So that’s what really put the pressure on the refining system. In the United States we could certainly use expanded capacity to process difficult crudes, although we are kind of the world leader in that as it is.

The big problem is not a lack of cash; it is the regulatory and permitting process that makes it very difficult to do almost anything new and significant in refineries and certainly makes it almost impossible to build a new refinery.

Glassman: Speaker Hastert has called on oil companies to invest in America’s energy infrastructure but hasn’t Congress kept the hands of energy companies tied to some extent by limiting their ability to develop domestic resources?

Yergin: Yes, the capital is there to invest. It’s a question of access and opportunities. You see enormous sums, billions of dollars go into the off-shore Gulf of Mexico because you can drill there. You have seen astonishing improvements in technology. But there is no point drilling where there are no oil and gas resources, and we do also have a lot of resources that are closed off, for instance, off the east coast. I mean it is a strange situation. We can drill off the Gulf Coast but not off the East Coast and yet there may be very extensive resources as well.

Glassman: There is a great deal of concern about rising natural gas prices — something that Federal Reserve Chairman Greenspan pointed out in 2003. We have seen prices go from $3.00 a little bit before he made his speech to $13.00 or $14.00 today. Some people believe – including, I think, Chairman Greenspan — that it’s not just a question of developing U.S. resources, but being able to import foreign resources which we can’t do now with a lack of LNG terminals. Are those LNG terminals — liquefied natural gas terminals — going to get built?

Yergin: I think that we have gone from plans and proposals for just a few natural gas re-liquefaction facilities to literally dozens, and we think that at least four, six, something seven like that — maybe eight — will end up being built and that we will have the capacity to import LNG. The big question, of course, is where are they going to be built? Are they going to tend to be built on the Gulf Coast, or will they be spread out? And will at least one or two of them be on the East Coast, which is near the demand centers, near where people are heating their homes with natural gas? And that is a question not of national politics but of local politics.

Glassman: The statement that Speaker Hastert made just recently was perhaps in response to growing sentiment on the Democratic side for a windfall profit tax on oil companies. This has been tried before. Is it effective at reducing oil prices?

Yergin: What a windfall profits tax does is introduce a lot of distortions. It reduces investment, it increases a sense of political risk and it doesn’t achieve the goal that is intended, if it is to facilitate investment in new sources. It obviously responds to a political demand, but it has the opposite effect of increasing supply. It really will lead to decreased supply, not only here, but it will be something that will have an impact around the world. And this is a time when you want to increase and encourage investment, not provide disincentives to investment.

Glassman: There is a lot of the use of the term ‘energy independence’ in Congress. Is it possible for the United States to stop using foreign oil and turn to domestic resources? What does energy independence mean exactly?

Yergin: You know, that is something that I have puzzled over. It has been part of the political lexicon now since the 1970s. For a long time, during all this period when we have been talking about energy independence, our oil imports have gone up from being about a third of what we import to close to 60 percent, and will probably continue to rise as our consumption rises. And we are entering into the era of where we have built an enormous amount of new natural gas demands in terms of electric power usage — building lots of gas fired electric power plants — and we will be importing much more natural gas in the form of LNG. What we need to do is say, well, how do we manage our role in a global economy in terms of energy, make sure we have diversified sources to make sure that the development is going on around the world that we can call upon, and also trying to reduce unnecessary regulatory barriers or delays, which is so characteristic of the system of development in the U.S., so we can maintain a vibrant, domestic industry; but recognizing that we are part of this larger picture and pursuing all those other things like alternatives and renewables and certainly conservation.

Glassman: If we were less dependent on foreign sources for oil, let’s say, would the price of gasoline drop?

Yergin: Really there are two things that will determine the price of gasoline. One is how much spare production capacity there is in the world. In other words, what is the balance between the ability to produce oil and consumption? Right now it is very tight and that is the number one reason that we see these high prices. The second reason is the lack of the kind of what is called deep conversion capacity in refineries to make the type of products like diesel fuel that the world increasingly wants. So those two things are interacting. If our demand went down, if we became more energy efficient — which I think is a highly desirable goal — that we get more miles to the gallon and then if that took some pressure off the world market, you know, all other things staying constant, then we would see lower prices.

Glassman: So there is a lot of political pressure building and you have heard about a windfall profit’s tax or Senator Lieberman is trying to get energy independence from foreign oil and now we have heard about what Speaker Hastert wants to do. I mean, what would you do in response to this political pressure? Is there anything that can be done on the public policy side?

Yergin: I think that there are two things that we can do as we are heading into the winter that would be significant. The first thing is that we really ought to make sure that people really have the information and the knowledge about the minor changes in behavior that they can make that will not only save them money but in a total sense would reduce natural gas prices and take the pressure off. If all of us this winter reduced our thermostats by two degrees, homeowners, commercial establishments, we would save more natural gas than has been lost because of Hurricane Katrina.

The other thing we ought to do is not wait until a cold winter, if we do have a cold winter, and address now how to build flexibility into some of these environmental regulations so that for instance, in an area where a utility is only allowed to burn oil four days a months, perhaps in January if there is really pressure on prices they can burn oil eight days a month and reduce their consumption of natural gas. And there is no shortage of residual fuel oil, the type of oil that does get burned in utilities, so it wouldn’t add to the price pressure on oil but it would take pressure off natural gas.

Glassman: Well thank you very much Dan Yergin.

As you can see, Dan Yergin is separating the myths from the reality. The political overreaction could actually be counterproductive when it comes to trying to solve the problems of energy. In fact, it’s fairly straightforward — the best way to get energy prices down is by increasing supply, to some extent reducing demand, which happens anyway in response to higher prices. But how do we increase supply? Not by political intervention. That disrupts capital markets, makes investors think, well, maybe putting money into energy companies is not the best use if there’s going to be political repercussions to doing that. So, perhaps Speaker Hastert, Senator Lieberman, Senator Dorgan, and others who are responding in an earnest, and heartfelt way to the complaints of their constituents about higher oil and gas prices, are really doing exactly the wrong thing. We need to make markets work. That is Dan Yergin’s advice. Sounds sound to me.

“Windfall Profits Tax ” Will Increase the Price of Oil

“An angry public wants quick relief from high prices” at the pump, says Business Week. That’s hardly a surprise. Over the past year, the Energy Department reports, a gallon of regular gasoline has gone from $1.86 to $2.96.

But even at less than bottled water, $3 gasoline hurts consumers and the economy as a whole. The question, however, is what to do?

The worst approach is one now being considered by the Senate: slap a windfall profits tax, or WPT, on oil companies.

The United States has tried this before, between 1980 and 1987, and the results were hugely counterproductive, according to a 1990 Congressional Research Service report.

“The WPT reduced domestic oil production between 3 and 6 percent, and increased oil imports from between 8 and 16 percent,” says the report. “This made the U.S. more dependent upon imported oil.”

It’s not hard to understand why. Energy companies are in a very risky business. They (and the investors and lenders who back them) commit hundreds of billions of dollars annually to searching for oil and gas, and to building or expanding refineries, ports and pipelines. These projects take many years to complete and the payoff down the road is highly uncertain.

It’s tough enough to make investment decisions in anticipation of market conditions that can change overnight, but why spend vast sums to develop energy if — as a reward — government hits you with a special tax? So, with a WPT, oil companies cut back.

As for the WPT’s professed rationale, profits have indeed risen lately, but, according to Business Week data, second-quarter earnings of oil and natural-gas companies were 7.7 percent of sales, compared with 7.9 percent for all U.S. industries.

The price of oil — like the price of any commodity — bounces around as a result of changes in supply and demand. In the early 1980s, a barrel of oil was more than $80 in today’s currency. By the 1990s, oil was less than one-third the current price and gasoline was just over a buck a gallon. When oil fell to $9.39 a barrel six years ago, was Sen. Byron Dorgan, D-N.D., author of the current WPT, proposing a windfall losses rebate?

Nope. You take your own risks, and you’re entitled to your own gains — or losses.

Consider farmers, abundant among Dorgan’s constituents. The December 2005 futures contract for a bushel of corn has varied, over its brief lifetime, from $2.05 to $2.89. Should a farmer who scores a big gain because of the movement of corn prices on the open market pay a WPT? Faced with such a penalty, why plant new acreage?

The same open market determines oil prices. Demand from emerging nations has boomed. ExxonMobil’s Energy Outlook now forecasts that, between 2004 and 2030, energy use by China will rise 100 percent; India, 164 percent, and Latin America, 85 percent.

With such potential, energy companies can be expected to invest more in finding and producing oil, and price increases should modulate — level off or even fall — as supply increases. In fact, this year, exploration spending was anticipated to hit $180 billion.

But what if supply is constricted for political reasons? That’s the problem going forward. Environmental extremists have put vast areas off-limits to exploration and have made building refineries, liquefied natural-gas facilities and nuclear plants (to name a few sources of supply) extremely difficult.

Now, there are new threats to supply: 1) the proposed WPT; and 2) price controls on gasoline and home heating fuel, already imposed in Hawaii and under consideration in Illinois, Massachusetts and elsewhere. This is a combustible combination. The 1980 WPT was an attempt to offset the decontrol of oil prices. The 2005 WPT may accompany recontrol of oil prices.

The good news is that, for now, markets are working. Crude oil and gasoline prices have dropped in the past two weeks as rigs, refineries and pipelines come back on line in the wake of Hurricane Katrina and as drivers balk at $3 gas. My guess is that we’ll see $2.50 soon.

Beyond that, the ball is in the politicians’ court. They’ve got two choices: Create a recipe for energy disaster with a windfall profits tax and price controls, or take steps to encourage more supply. It’s the latter course that will calm the public’s anger.

When to Sell a Stock

My biggest mistake in 25 years of writing newspaper and magazine articles about the stock market started innocently.

My intention, in a February 23, 2003, column for the Washington Post, was to show readers how to analyze a stock and decide whether to buy it. The mistake was to choose a single, real-live company as an example and then to render a personal judgment: that, based on the evidence amassed, I myself would purchase the stock.

I ignored something I knew very well: that readers take the judgments of columnists about specific stocks far, far too seriously. Despite issuing admonitions, I should have known that many of my readers would rush out and buy what I said I was buying myself.

The stock was the Shaw Group (SGR), a company that provides engineering services, as well as pipes, to power plants around the world. Shaw went public in 1993 at $14.50 a share, and, after gaining a reputation as growth stock, soared to $63.50 by mid-2001. “But growth slowed,” I wrote, “and disappointed investors dumped their shares.” That was understandable; the company had problems. The question I was considering was whether the market had “become too pessimistic.”

My judgment was that it had and that Shaw was a bargain. The company “is risky, no doubt,” I wrote, “but the price reflects that risk – and then some.” So I said I would buy the stock. And, indeed, I did, shortly after my article came out.

Unfortunately, Shaw immediately took a dive. From $10.67 when my article was written (and $10 when I bought my own shares), Shaw fell within a couple weeks to $8.58. As you can imagine, I got lots of e-mails from frightened readers. Should they sell?

To the contrary, I bought more. Shaw rallied to $12 by early July but, within another month, had dropped below $7. It was sickening. Still, I held on and told inquiring readers so – at the same time urging them to use their own judgment and not follow my lead.

Then, in mid-2004, Shaw began to rise, closing the year at $17.85. A few months later, shares were over $20. I decided to sell.

Why did I dump my shares of Shaw? More important, why should anyone sell shares of any stock? That’s the toughest question in all investing.

You should buy a stock with the intention of holding it forever, or at least until the Twelfth of Never. As Warren Buffett, the most successful investor of the 20th Century, once said, “Inactivity strikes us as intelligent behavior.” Great companies have their ups and downs, but, over long periods, thanks to the power of compounding, their values soar. Despite the disaster of 2000-2002, the average company on the Standard & Poor’s 500-Stock Index has returned 13.2 percent annually over the 20 years ending Dec. 31, 2004.

Also, if you don’t sell (assuming you have made a profit), you don’t have to pay capital gains taxes. Plus, when you don’t sell, you have only one difficult decision to make (what and when to buy), rather than three (the additional ones are: when to sell, and what and when to buy with the proceeds).

Most people sell for one of two contradictory reasons:

1. The stock has fallen in price. If you have faith in the businesses you own, then when their prices fall, you should buy up more shares. They’re on sale. Instead, many investors cut their losses by selling, often by putting a “stop-loss” under a stock. I bought Shaw at $10 a share. Imagine if I had decided to sell the stock if it dropped 20 percent, to $8. I would have been whipsawed, missing the run to $20. All stocks are volatile, and there’s a decent chance you will lose 10 percent or 20 percent before you make 50 percent.

A decline in a stock’s price can certainly be a signal that something is wrong, but it is not an alarm bell that should panic you into selling. Instead, check the company’s fundamentals; if they’re sound, hang on.

2. The stock has risen in price. It’s the big winners, what Peter Lynch calls the “four-baggers” (stocks that quadruple or more), not the small winners, that produce profitable portfolios.

Say you bought Legg Mason, Inc. (LM), the Baltimore-based financial firm, in 1999 for $20 a share. Less than two years later, it doubled, to $40. Many investors would be tempted to sell, and, indeed, Legg Mason hit the skids and didn’t breach $40 again until 2003. But on Aug. 19, 2005, shares were trading at $106 (all prices adjusted for splits). That’s a five-bagger in six years.

The movement of a stock’s price — either up or down — is no reason to sell it. Nor is the performance of the economy. It’s a good bet that over long periods, the U.S. economy will grow at roughly its robust historic rate. And don’t worry about what the stock market as a whole is doing either. The market, too, bounces around but goes higher over time. And no one can guess when the bounces will occur anyway.

So when should you sell?

The best answer was provided by the elegant Philip A. Fisher, who died in 2003 at the age of 96 after a 74-year career as a money manager. In his important book, “Common Stocks and Uncommon Profits,” published in 1958 and currently available in a paperback edition, he wrote, “It is only occasionally,” he wrote, “that there is any reason for selling at all.”

The occasional reason? According to Fisher, it is the deterioration of a company’s underlying business. “When companies deteriorate, they usually do so for one of two reasons. Either there has been a deterioration of management, or the company no longer has the prospect of increasing the markets for its product in the way it formerly did.”

In other words, sell if something has gone wrong — not with the economy or the market, but with the business itself. A key product has failed, or new competition has driven down prices, or management gets distracted.

Also, realize that you can’t know when to sell a stock unless you know why you bought it. For instance, I am a big fan of Starbuck’s (SBUX), but I would sell shares in an instant if I heard an announcement that the company was branching out from coffee and entering the hamburger business. In coffee, Starbucks has almost no competition. In hamburgers, it would be up against four or five experts.

There are other reasons to sell. You might, after all, need the money. Stocks are long-term investments (that is, you should plan to hold shares for five years or more), but emergencies come up, and your cash reserves might not be sufficient.

Also, consider selling if a stock has risen so much that it makes your portfolio lopsided. I had this pleasant problem with the Apollo Group (APOL), a for-profit education company whose shares rose from $15 to $90 between 2000 and 2004. If the other companies you own rose, say, 20 percent over the same period, then, of your total holdings, Apollo could have represented one-fifth or more. That’s too much. The solution is to sell some Apollo and use the proceeds to buy more of your other stocks. Or, avoid capital gains taxes by donating Apollo shares to charity.

Finally, sell when you have the slightest doubts about the integrity or focus of management. When a company is accused of deceptive accounting, for example, examine the charges and, if they seem serious, sell the stock. Don’t wait for the jury’s verdict.

So why did I sell Shaw? Not because I had doubled my money. And not because I was worried about the economy or the stock market as a whole.

I sold Shaw for a couple reasons. First, despite the rise in the stock, the company had consistently failed to earn as much as I thought it would. That is, its business wasn’t as good as I thought it would be. When I first wrote about Shaw, it carried a price-to-earnings ratio of 5; in May, the P/E ratio was 28. Earnings did not keep pace with the rising stock price. I knew why I had bought Shaw: it had problems, but it was cheap. It still had problems, but it was no longer a bargain.

Second, I was bothered by the activities of Shaw’s CEO, Jim Bernhard, who became chairman of the Louisiana Democratic Party. Bernhard may be a talented guy, but he also appeared to be a headline-seeker; I want the person who runs my company to work only for me.

Writing an entire column about a single stock — and then recommending it at the end — is an endeavor I have learned not to repeat. Still, the Shaw story turned out fine. I made some money, and so did many of my readers, and, right now, on Aug. 19, Shaw is trading below $17, a decline of four bucks since I sold it. My only worry is that in the next few months, Shaw will double again and again and