The following story underlines the reason for our aversion to employee stock options. On August 9, 2007, Dell Inc. announced that it made a - hold your breath - $48.5 million cash payment to former CEO Kevin Rollins relating to stock options that had vested at the time of his premature retirement.

On August 17, 2007, Dell owned up to past accounting problems that gave rise to a restatement of the past four years' earnings, effectively cutting such earnings by $150 million. The company "identified evidence that certain [accounting] adjustments appear to have been motivated by the objective of attaining financial targets." The company's new CFO, Don Carty, told analysts during a conference call to explain the restatements that "the ones [executives] who knew about it are the ones that are gone." As the size of gains garnered by the exercise of stock options are directly related to and enhanced by a rising stock price, the purpose of "attaining financial targets" is to buoy the stock price, so as not to imperil any potential stock option gains. In 2005, after completing our due diligence on Dell Computers, we issued a report under the title, "Perfect for your Dorm Room, but Bad for your Portfolio." Alas, when the best laid plans of management go awry and shareholders take the knock, executives walk away with a truckload of cash, thanks to stock options, that invisible enhancer of executive compensation. You won't find stocks of companies that use this form of obfuscation to transfer shareholder wealth to insiders in our fund's portfolio.

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