How I Learned to Pick Tech Stock Winners From an $80 Million Software Disaster

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As an investor, even when your focus is technology, you can't forget the people factor.

That cardinal rule of high-tech stock picking is one that I never forget.

I learned it back in my journalism days, when I broke the biggest story of my career … a national news story about an $80 million debacle at Bank of America Corp. (NYSE: BAC).

The focus of that debacle was technology. But the catalyst was human.

Let me tell you the story and show you the big impact it has in the way I analyze winning tech stocks.

This took place back in the 1980s, when I was working as the bureau chief for American Banker – the bible of the financial-services sector.

I had already broken a number of stories that showed, in graphic financial fashion, that BofA was in much worse shape than most investors knew.

After pursuing the usual fix-it initiatives, the bank finally seemed to get back on track.

That's when I broke "the story."

You see, I discovered that BofA had squandered a small fortune on a high-tech package that was hurting some of its most valuable customers. When all was said and done, the bank would spend $60 millionto "fix" a $20 million piece of software that was basically beyond repair.

Oh yeah, and two executive vice presidents would be shown the door.

I was reminded of this the other day after reading that former BofA CEO A.W. "Tom" Clausen had died.

Clausen, who'd also served as the head of the World Bank, had a reputation as one of the toughest bankers around. Even now I remember him as one steely-eyed hombre.

I've interviewed hundreds of senior leaders in all sorts of industries and Clausen remains one of the few with whom I couldn't really build a good personal rapport.

Of course, my blowing the lid off the BofA story didn't exactly endear me to him.

You see, I had just finished a stint covering Silicon Valley. I interviewed lots of executives about winners and losers in the epicenter of high tech. Then I took over as the San Francisco bureau chief forAmerican Banker.

With a strong background in investigative journalism, I jumped all over the BofA story.

Quite simply, the bank was in a shambles.Things gotten so bad that the board sacked Sam Armacost, Clausen's hand-picked successor as CEO. Then it brought back Clausen, the architect of BofA's go-go growth era in the 1970s.

Convinced he could turn around one of the world's biggest banks, Clausen hit the ground running and quickly launched a plan that would prove very successful.

Of course, there was this one little scandal…

I have to confess that I fell into this story almost by chance.

As part of my reporting on the bank's recovery plan, I set up an interview with Louis H. Mertes, executive vice president and head of its systems- engineering and data-processing unit.

But as I headed back to my office, I had nagging feeling that something wasn't right. After hitting the phones, I uncovered a source who briefed me on the problems with BofA's "MasterNet" trust system for high-profile clients. That sounded like a juicy story to me.

Turns out, I was right.

Five years and $20 million in the making, MasterNet was supposed to be a showcase piece of technology. It was designed to keep track of pension funds and other employee-benefit programs.

Maybe it was because the program was so far behind schedule, butMertes and team made a decision to convert to MasterNet without a good backup of the previous system.

Fatal mistake…

The conversion was a nightmare. It messed up accounts so badly that Clausen had to apologize to more than one board member who had tried to use MasterNet.

My sources told me that my reporting showed the problem was much worse than Clausen thought it was. Determined to get to the bottom of this mess, Clausen brought in a retired judge to investigate.

The judge's report put the blame squarely on the shoulders of Mertes and Clyde R. Claus, another EVP. Both were sacked on Oct. 21, 1987.

The story of their firings made national news. That meant that reporters from The New York Timesand The Wall Street Journalwere forced to follow up on the MasterNet story that I'd broken wide open.

Of course, I am telling you all this because it is much more than a trip down memory lane.

As I said at the outset, the lesson that I learned from the BofA debacle is both simple and crucial: It was this incident that showed me for all time the continued importance of the "people factor" in business, finance and investing.

It's a lesson that other investors too often ignore. In this era of the ubiquitous Web, mobile computing, smartphones, stem-cell therapies … and all sorts of other cutting-edge technologies that repeatedly grab the spotlight, I continue to understand that management is everything.

You can have the greatest tech platform ever invented but if you don't have the right people in charge, in the long run you will fail.

This is why, whenever I'm studying a stock as a potential recommendation, management is at the top of my checklist. I never recommend a stock until I have thoroughly vetted the background of that firm's senior management team.

Naturally, I'm looking for their bona fides, a track record of success and a history of increasing level of responsibility. I also then see how good they are at telling the company's story by downloading and reading their investor presentations.

And I don't stop there.

Unlike so many "analysts," who are content to crunch numbers and limit themselves to the standard exercises in arms-length research, I often engage a firm's senior managers to learn as much as I can about their capabilities, plans and perceived opportunities and threats.

Earlier this week, for instance, I told you how I had dinner with the CEO of a promising synthetic vaccine biotech. And early last month I recounted my long discussion with defense-industry insider Bob Beyster, founder of one of the most innovative companies in U.S. history.

My focus on the people who back the technology directly benefits you – in two ways.

First and foremost, this strategy makes sure that our technology recommendations are the most-thoroughly researched that you'll find.

And, through the years, this philosophy has allowed me to amass a personal network of knowledgeable, well-placed innovators – industry insiders who keep me on the cutting edge of the global high-tech revolution.

Even in the Era of Radical Change, where science fiction becomes science fact, the people factor continues to be the key to windfall profits.

Armed with that insight, you, too, are now ahead of the crowd.

Together, we'll stay there.

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About the Author

Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.

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