Courage!

If I could give financial services CEOs just one suggestion, it would be this: Please, please, ignore that free, friendly advice Wall Street analysts give you. That’s right, all of it! Have the courage of your own convictions, instead.

It sounds so simple, yet way too many CEOs do just the opposite. Rather than think for themselves, they’ll poll sell-side analysts for suggestions on how they should run their business, arrive at a “consensus” opinion as to what course they should follow, and then follow it. That’s a surefire formula for failure. Why? First, the typical Wall Street analyst doesn’t know much about managing anything. Most are thirty-something numbers geeks who’ve never run an enterprise bigger than a football pool. I should knowu00e2u20ac”I used to be one!

Second, smart CEOs have a much better resource to draw on: their own convictions. The canny CEO knows his business better than anybody. He knows his market. He knows the state of his competitors. And he knows the opportunities and risks his company faces. That knowledge can be a powerful competitive weapon when used properly; not nearly enough CEOs have the courage to make the most of it. They should.

Item: In the midst of the dot-com mania in the late 1990s, Wall Street’s conventional wisdom says that traditional bank branches will soon be obsolete, to be replaced by “low-cost” online banking. CEOs are urged to scale back their investment in brick-and-mortar locations, invest massively in Internet banking, and prepare for the day when branch networks might have to be scrapped altogether. Vernon Hill, CEO of Commerce Bancorp, doesn’t buy it. Rather than shutter his branch system, he plans to expand it aggressively via de novo openings. Plus, Hill keeps his branches open seven days a week, and until 8:00 p.m. on weekdays. Result: Commerce’s earnings have grown by 24% annually, on average, since 1999, while its stock has jumped by 127% in a market that’s down by 40% over the same period.

Item: With interest rates falling steadily throughout the 1990s, Wall Street predicts that the adjustable-rate mortgage will soon be extinct. Who’d want the risk of taking out a variable-rate loan, the thinking goes, when low fixed rates are so attractive? Herb and Marion Sandler, co-CEOs of Golden West Financial, beg to differ. They ignore the fixed-rate business and aggressively pursue their ARM-only strategy, instead. The result? Golden West’s mortgage portfolio is 3.5 times the size it was five years ago, while the bank’s earnings have jumped by 270%. Over that time, Golden West has been one of the best-performing stocks in the financial services sector.

Item: In the midst of its IPO road show in 1994, Capital One Financial finds that its “low teaser rate/balance-transfer” strategy, which it invented and has used to turn itself into a budding powerhouse in the credit card industry, is declining in effectiveness. Wall Street’s conventional wisdom is that the company should downplay the news and wait to shift strategies once the deal gets done. Rich Fairbank and Nigel Morris, Capital One’s CEO and COO, disagree. In mid-road show, they risk spooking investors by telling them that Cap One is making a major shift in its marketing strategy. The result? Cap One’s deal gets done; since then, its stock has outperformed the S&P 500 by a factor of five and Cap One’s earnings have risen at a compound rate of 30% annually.

Item: Investors are currently pelting MBIA Inc., the financial guarantor, for taking the “risky” step of insuring credit card securitizations. Given the shaky state of the consumer, the conventional wisdom says, MBIA will likely incur big losses as borrowers default. Jay Brown, MBIA’s CEO, says otherwise. Understanding risk is what MBIA does, he reasonsu00e2u20ac”so he expands the company’s consumer business, but on terms that (partly because of the rampant nervousness) are extremely attractive. The result? The adjusted direct premium of MBIA’s domestic structured finance business jumped by 35% last year, even as the par value of the securities MBIA insured declined. The company is likely to report its fourth straight year of record earnings in 2003.

It is no coincidence that these are some of the best-run companies in the financial services industry. What do they all have in common? All are run by CEOs who have the courage to regularly turn Wall Street’s conventional wisdom on its head. That sounds easy to do on paper, but often in the real world it’s notu00e2u20ac”particularly when the “experts” are speaking loudly and with one voice. When that happens, you’re almost always better off ignoring the expertsu00e2u20ac”and trusting your gut.