You wouldn't think that a modest research report sent to a handful of subscribers could almost single-handedly whack a $9 billion chunk from the market value of an international conglomerate. But that would be because you haven't met John Gavin.
On January 2, Gavin hit "Send" on an unassuming four-page report e-mailed from his office in Plymouth, Minnesota. Within days, Tyco International Ltd., maker of everything from aspirin to undersea fiber-optic cable, had lost 7% of its market value. Investors went berserk; Gavin's e-mail inbox was suddenly jammed with tirades from apoplectic investors and livid Tyco employees. Death threats were bandied about; many messages had in them more expletives than not. The phone nearly exploded off the hook.
What did Gavin send, and what was his intent? Simply to share information, he says. In a cautiously worded alert inside the report, he shared his belief that, based on information provided to him by the SEC under the Freedom of Information Act (FOIA), there was cause to question whether Tyco was the subject of a previously undisclosed SEC investigation.
The outcry didn't rattle Gavin. Nor did the fact that the company's stock price dropped like a stone and kept on falling (from $58 on January 1 to a low of $23 on February 5). In Gavin's mind, he was just doing his job. By invoking the Freedom of Information Act, a 1967 law that guarantees citizens access to government documents, he had gained information from the SEC that indicated it was reasonable to suspect an investigation. He had taken pains to make clear that an investigation was only possible, not definite, and he was simply sharing that information with his subscribers. "We're just objective providers of information," says Gavin, 40, who splits his time between his investment research firm, known as SEC Insight Inc., and his own financial advisory firm, also based in Plymouth, Minnesota. "As long as we're consistent about how we do our work, without favoritism and without concern for upsetting people, then I think we're contributing to an efficient market, and we're giving people better information to make better decisions." Pause. "That doesn't mean that, personally, I don't sweat it sometimes"--he laughs sheepishly--"but hey, you have a policy, and you stick to it."
Under the auspices of FOIA, Gavin's research firm regularly gains access to unpublished correspondence between public companies and the SEC, examining the language closely for evidence of companies' shady doings, and comparing them to the firm's hefty collection of past correspondence. It's perfectly legal, but the information isn't common knowledge; Gavin notes that the documents contain information that "companies generally do not even acknowledge, let alone release." As Herb Greenberg, a writer for TheStreet.com who has cited Gavin as a source in his stories, says, "John has carved out a unique niche, knowing the ins and outs of getting Freedom of Information reports from the SEC. Nobody [else] does that."
Nobody else does it, says Gavin, because there are so many ways to screw it up. If you ask for the wrong document, ask in the wrong way, misread the implications of a document, or botch any of a dozen other details, your conclusions will be skewed. Worse yet, you may not even be sent the relevant documents at all. "I've made a lot of mistakes getting this right," he says, "but now I get clients who tell me, 'Holy cow, do you know how much money we spent with a lawyer trying to do this on our own? Where do we sign?'" What they're paying for is not only Gavin's expertise in gaining the right information, but his ability to interpret it, determine what's important, and boil it down into a succinct package, saving his subscribers time, money, and many headaches. Not even the gilt-edged price tag (think $30,000 per year for a standard subscription) is enough to prevent major institutional investors from lining up.
And while poring over hundreds of SEC documents might not be everybody's idea of a good time, it's clear that Gavin relishes the work. "It's so intellectually stimulating. It's 'Boy, oh boy, look at this!'" he cries, sounding like a kid who just dug up a buried treasure. "You found out someone's being investigated, or you think they are and they haven't told anyone, and you're helping get that information out there. That's really cool."
Fighting Financial Fires
With his research firm business off to a roaring start, Gavin has had little time to devote to the other firm he founded in 2000, a financial advisory firm called First Watch, Inc. But it's not for lack of wanting to. In fact, despite the enjoyment he gets from the SEC research, he isn't ruling out selling that firm in a few years. His heart and passion are clearly with First Watch.
Gavin is something of an anomaly in the investment world; while many advisors spend their leisure time wielding golf clubs or tennis rackets, Gavin, a CFA, spends much of his free time wielding a fire hose. A volunteer firefighter for more than 10 years, he is immensely proud of his involvement in the fire service. To his satisfaction, he's found a way to combine that interest with his investing savvy by managing money for volunteer fire and ambulance companies.
It started off on a casual basis, back when Gavin was still working in the Philadelphia area at SEI (where he worked for Gil Beebower, of Brinson, Beebower fame) and then at Delaware Investment Advisors (where he moved up the ranks to VP of institutional client services), all the while running fire calls in his spare time. Being one of the few guys around the suburban Philadelphia firehouse and ambulance garage with investment expertise, Gavin started checking into the books.
What he found at the ambulance company was a financial five-alarm fire. "They had less than $10,000 in the bank, they'd had a bookkeeper who had been embezzling money," he says. "The IRS was about to seize their assets; if the bookkeeper is writing checks to herself, do you really think she's paying taxes? And the Department of Labor was threatening to shut them down."
Gavin appointed himself the financial rescue squad, dealing with the IRS and the DOL, and reorganizing the company's finances. "The main thing was bringing financial discipline, and impressing upon the members that the ambulances don't roll unless we have the money," he says. "As well-placed as our intentions may be, we just can't deliver if the dollars aren't there." The company was skeptical at first, but there was a kicker that sealed the deal: Gavin promised the members that if they did what he said, they would be able to replace one of their six ambulances with a brand-spanking-new one every year, forever. They went for it.
A little over 10 years later, with the ambulance company now on the roster of his new advisory firm, Gavin can hardly contain his enthusiasm for the results. "Today, the ambulance company has $1.3 million and a modern fleet. It's talking about a new building, it has a sophisticated board of experts from the community, and it's wonderful," he says. "When I go back there to see them, it just warms my heart. Knowing that there are ambulances rolling 24/7, literally saving lives, because of work you did and continue to do--that's just awesome." These days, Gavin is working with the company on more advanced initiatives, including the proper financial structure for a capital campaign, how to set up an endowment, and how to accept gifts given through charitable giving vehicles and bequests.
Speaking in Tongues
No offense to the financially-minded, but if you sit your average, non-financial person--say, a volunteer firefighter--down and start hitting him with terms like "asset allocation" and "expense ratio," chances are you'll reduce him to a slack-jawed, eyes-glazed-over zombie faster than you can say "tax loss carryforward."
Fortunately, Gavin knows this. Using the same skills that allow him to translate obscure SEC documents into compact, readable reports, he makes a point to translate financial jargon into language his audience will understand. While most advisors make at least some effort to speak plain English to their clients, Gavin's language is striking in its clarity and the precision with which he tailors it to his audience.
In a seminar he's developed especially for firefighters, Gavin compares the steps of investment management with the decision-making procedures firefighters are trained to follow at the site of a fire. "We have a way of thinking on the fire ground which is amazingly similar to how you think about running a portfolio, believe it or not," he says.
For instance: "Let me walk you through what a firefighter does," he says. "Pager goes off, and you have what? You have chaos. The first thing the first-arriving truck or officer does is what we call a 'size-up.' You are assessing what you have. Do I need to effect a rescue? Is somebody hanging out of a second-story window? Or is it just an empty car in the middle of an empty parking lot that's burning?" Also factored in are the resources available, Gavin notes: How many trucks do you have? How many firefighters are at the site? Do you have enough equipment, and the right kind?
"So you set your priorities, and you decide what level of risk you're willing to take for the reward that you will [potentially] get. And routinely in the fire service, we take risks proportional to the reward," he says. "That's why any firefighter in the country understood why all those firefighters went into the towers in New York; the reward was assessed as far greater than the risk. But if you had an empty barn burning, you're not going to risk lives to save it."
From there, the officer in charge puts together a plan. Significantly, he says, the most important decision here is not what kind of fancy ladders or nozzles or equipment are put to use. It's how many firefighters go in the front door versus how many go on the roof and how many stay outside. (Remind you of anything in the investment realm? Remember, this guy worked for Gil Beebower way back when.)
In firefighting as in investing, diversification is essential. "If you put too many firefighters in the front door, you're not doing ventilation, you're not watching for exposures, and your operation isn't balanced," he says. "If you put all your assets where the orange glow is, where the excitement is, you're ignoring the protection of the rest of the operation."
After implementing his plan, the officer, like the investment manager, periodically reassesses the situation. "You do the same exercise: size up what you have, figure out what the resources are, what the new priorities are, and redeploy assets," says Gavin. "Which is exactly what you do in managing people's money."
For firefighters who have never heard of basis points and volatility, this translation into familiar terms makes a world of difference. "Every time I teach this class, people come up to me and say, 'I can't believe how simple you made that. I totally understood what you were saying,'" says Gavin. And when speaking to ambulance companies, he revamps the analogies and changes the language, comparing each step of the investment process to the process of providing emergency care to a sick or injured patient. "It's a matter of knowing who your audience is, and figuring out what language it is they need to hear."
The Marketing Plan
Once his work with SEC Insight settles into more of a routine, Gavin plans to renew his efforts to woo new emergency services companies to his financial advisory firm. Before the research firm work gained so much visibility, starting with a report on Enron in October and really kicking into high gear with the January Tyco report, Gavin had developed a special Fire Investor Newsletter for current and prospective fire company clients. He even trademarked the term "Fire Investor." "I have some fire companies that have been prospects for some time, more because of my doing than theirs, because I didn't feel comfortable bringing them in until we were better able to manage all the growth that was happening with SEC Insight," he says. "First Watch is still just a peanut"--he laughs--"because SEC Insight exploded in ways none of us had ever anticipated."
As he turns his attention back to the fire company market, he also hopes to expand his work to other nonprofit organizations. "So many nonprofits do such important work, and yet are so terrible about money," he says. "I would love to do more work with that sector."
Disclosure and Simplicity
Gavin's two firms may seem odd bedfellows: one caters to highly experienced, professional investors, while the other serves people who may have never invested anything in their lives. One targets suit-wearing high-rollers in posh offices, the other targets salt-of-the-earth folks in fire halls. You can almost imagine Gavin going around with a double-sided business card, and cringing when people ask him, "What do you do?" and expect a one-sentence answer.
Gavin admits it's sometimes a struggle to wear two hats at once, but he does see themes that unite both businesses. "For both companies, a big issue is disclosure," he says. "On the SEC Insight side, it's disclosing better information that institutional investors need to make better decisions--actually that's our tag line, 'Better Disclosure for Better Decisions.' And on the First Watch side, it shows up a lot in the classes I teach--helping the investors understand where the conflicts are, how the way an advisor gets compensated might not be in the investor's interest, and where extra expenses show up."
The second common issue, as evidenced by his efforts to translate SEC documents into plain English for institutional investors and turn investment-speak into language firefighters will understand, is simplicity. "The number-one thing we get paid for, with both companies, is taking the complex and making it simple."
Gavin, who grew up in south Philadelphia as the fourth of six children and the first to go to college, is refreshingly modest about the attention he's received from the press and investing community (he's been quoted or mentioned in The New York Times, BusinessWeek, TheStreet.com, and The Wall Street Journal, among others). Although he's clearly very proud of his work, he attributes some of the attention to the simple matter of timing. "SEC Insight was never designed to be a headline-grabber," he says, "but we were disclosing this stuff at a time when anybody saying 'SEC' sent a shockwave through the markets." With Enron unraveling, investors were, and are, keenly attuned to the issues of disclosure. "In a post-9/11, post-Enron environment," he says, "I think the issues of disclosure and simplicity are really resonating with people."
As those issues continue to reverberate, Gavin is planning to expand both firms. He's looking to hire an office manager soon, and although he'll continue to work from home, he plans to trade the shared professional office suite he uses for client meetings for a private office.
He chuckles when he notes that he may be one of the few advisors whose top criteria for an office are its smoke detectors and fire sprinklers, but he also wants the new office to be no more than five minutes from the nearest fire station--not so that the fire trucks can get to him in a flash, but so he can get to them. "If a [fire] call comes in and I don't have appointments and can juggle my schedule, I'll go drive the ladder truck," he says. "This keeps me in touch with reality. I remember when I would go to work at American Express, and somebody would miss their earnings and the stock was way down and everybody was grouchy. And you'd think to yourself, 'This doesn't bother me,' because you were out at an auto accident last night where someone died, or someone just lost their house last night in a fire. That's something to be upset about."
Despite all the pressures on his time and attention, the satisfaction of helping his neighbors in times of emergency is not one he's willing to give up. "You know how they talk about living the life you want to live and doing what you love and all that?" he says. "Well, this is what I love."
First Watch Sec Insight Inc.
First Watch, Inc., and SEC Insight, Inc.
Two Carlson Parkway, Suite 350
Plymouth, Minnesota 55447
Year both firms were founded: 2000
Number of advisors in office: 1 advisor, 2 part-time assistants
Number of clients: 10 clients of First Watch, 30 clients of SEC Insight
Compensation method(s): First Watch clients pay asset management fees or hourly rates. SEC Insight clients pay an annual subscription for investment research reports
Average fee for a comprehensive financial plan: Fee is included in investment management (planning provided on an as-needed basis)
Fee for managing assets: 1% of assets
Hourly rate: $250/hour
Client demographics: Clients of First Watch are fire departments, ambulance companies, and married couples nearing retirement. Clients of SEC Insight are major institutional investors
Education: BA in economics from Elizabethtown College (Pennsylvania). MBA from Thunderbird American Graduate School of International Management (Arizona)
Previous incarnations: Associate portfolio manager and analyst for American Express, analyst for Roulston Research (Cleveland), VP of institutional client services at Delaware Investment Advisors, research assistant at SEI
Professional designation(s): CFA
Outside interests: Volunteering as a firefighter, gardening
Quotable quote: "With both companies, I think the number-one thing we get paid for is taking the complex and making it simple."
A Closer Look
Tyco isn't the only company to fall under John Gavin's investigative microscope. Armed with documents procured under the Freedom of Information Act, his investment research firm, SEC Insight Inc., has also published reports raising questions about the possibility of SEC investigations of Enron, Computer Associates International, Take Two Interactive Software, Calpine, and most recently, IBM. With regard to Take Two Interactive, "He let us know the SEC was there when folks thought the SEC was gone," says Herb Greenberg of TheStreet.com. As for Enron, "Enron stock was still around $25 to $30 when we published our warning," says Gavin. "Now, were we late to that party? It depends: Is $30 late when it went to zero?"
Gavin takes great pains to be as clear and as fair as possible in his reports. For instance, by law, the SEC can refuse to send out "records or information compiled for law enforcement purposes, the release of which could reasonably be expected to interfere with enforcement proceedings." If access to documents about Company A is denied, it may mean the company is under investigation. However, as Gavin emphasized in his much-ballyhooed report on Tyco, "it could also mean that the SEC is investigating someone else and the documents are part of the investigation in some way. Or, it could mean that the documents requested are important to another [government] agency that has requested that the SEC not release them. Let us be clear: We do not know for sure that there is a new investigation. All we know is that our most recent request for information on Tyco was denied [under the law enforcement exemption]."