The Roaring Eighties

The Roaring Eighties

The Roaring Eighties had its fair share of speculative excesses, and again unwary investors paid the price for building castles in the air. The decade started with another spectacular new-issue boom.

The Triumphant Return of New Issues

The high-technology new-issue boom of the first half of 1983 was an almost perfect replica of the 1960s episodes with the names altered slightly to include the new fields of biotechnology and microelectronics. The 1983 craze made the promoters of the sixties look like pikers. Fifteen billion dollars’ worth of new public offerings were floated, approximately four times the previous record established in 1981 and greater than the cumulative total of new issues for the entire preceding decade. For investors, initial public offerings were the hottest game in town. Just getting a piece of a new issue automatically made you a winner, or so it seemed, as prices often soared in the after market.

Typical of the period was a promising new technology stock, Diasonics, Inc. a manufacturer of medical imaging equipment located in the heartland of technological America, Silicon Valley, south of San Francisco. Diasonics’ shares were offered at $22 each. By the end of the first day of trading, Diasonics had spurted over 20 percent to 26 ¾. Nothing to get excited about there. After all, the market value of Diasonics stocks was “only” 10 times the company’s total sales for the previous year and 100 times the previous year’s earnings. In the feverish new-issue market of 1983, such multiples were commonplace. Arthur Rock, the chairman of Diasonics’ executive committee, thought the price was so reasonable that he sold 50,000 of his shares for a total of $3.3 million.

Aldershot Landscaping maintenance. Photo by Elena

Down the valley from Diasonics, another group was working hard to throw something on the table for investors. They thought a machine should do the dishing up – specifically a personal robot. Was the robt ready for the task? Well, not quite. The company, called Androbot, planned to manufacture a line of personal robots. The company’s major product, B.O.B. (an acronym for Brains on Board), was nearly ready for manufacture; there were just a few small problems. Apparently, product development was not yet complete, and it was not clear that the “significant technological obstacles” mentioned in the prospectus, could be overcome. Moreover, software applications had not been developed, and the prospectus suggested that early prototype models were not yet, in the computer vernacular, user friendly. Finally, it was not clear that any of Androbot’s products could be at the prices that would have to be charged. But the proposed market capitalization of Androbot was less than $100 million (for a company with no sales, earnings, or net assets), and that didn’t buy much in the heady new-issue market of 1983. Incidentally, the underwater for this proposed flotation was not one of the small schlock houses on the fringe of respectability, but the thundering herd itself, Merrill Lynch.

The flood of new issues contained such names as Fortune Systems, Spectravido, and Whirlyball International. As was true in the earlier new-issue booms, even companies in more mundane business were favored in the market. A chain of three restaurants in New Jersey called “Stuff Your Face, Inc.” was registered with the SEC. Indeed, the enthusiasm extended to “quality” issues such as Fine Art Acquisitions Ltd. This was not some Philistine outfit peddling discount clothing or making computer hardware. This was a truly aesthetic enterprise. Fine Art Acquisitions, the prospectus tells us, was in the business of acquiring and distributing fine prints and art deco sculpture replicas. One of the company’s major assets consisted of a group of nude photographs of Brooke Shields taken about midway between her time in the stroller and her entrance to Princeton. Apparently, there were some potential legal problems, such as a suit by Mo Shields, who had some objection to the exploitation of these pictures of the prepubescent eleven-year-old Brooke. But, after all, this was for “artistic”purposes and obviously this was a class company.

The bubble appears to have burst early in the second half of 1983, The market itself had peaked by mid-year had declined slightly, but the carnage in the small company and new-issue markets was truly catastrophic. It was probably the offering of Muhammed Ali Arcades International that started the debacle.

In a sense, the proposed Muhammed Ali Arcades offering was not particularly remarkable considering all the other garbage that was coming out at the time. But the offering was unique in that it showed that a penny could still buy a lot. The company propsed to offer units of one share, and two warrants for the modes price of one cent. Of course, this was 333 times what insiders had recently paid for their own shares. That wasn’t unusual either, but when it was discovered that the champ himself had resisted the temptation to buy any stock in his namesake company, investors began to take a good look at where they were. Most did not like what they saw. The result was a dramatic decline in small company stocks in general, and in the market prices of initial public offerings in particular. The following table describes how in the course of a year many investors lost as much as 80 or 90 percent of their money.

Company; Initial 1983 Offering Price; High Price; Price Mid-1984; Percentage Decline from High to Mid-1984

•     Activision 12; 12 3/4; 1 3/8; 80.
•     Diasonics 22; 27 1/2; 1 7/8; 93.
•     Fine Arts Acquisitions 2; 2 1/8; 14/4; 41.
•     Fortune Systems 22; 22; 3; 86.
•     Spectravideo 6 14; 16 3/4; 1/4; 99.
•     Teleram Communications 7 1/2; 31; 1 1/2; 95.
•     Victor Technologies 17 1/2; 22 1/8; 3/8; 98.
•     Wilcat Systems 18; 18 1/4; 1 7/8; 89.

Nor were these isolated examples or simply the worst of the new issues of the early 1980s. A study by the investment firm of Wertheim and Company looked at all initial public offerings from late 1982 through mid-1983 whose offering size was $5 million or more. They calculated that, by early March of 1984, the average price decline for these offerings was more than 50 percent from the most recent 52-week high. These stocks declined even further as the market weakened during the spring.

Source: Burton G. Malkiel. A Random Walk Down Wall Street, including a life-cycle guide to personal investing. First edition, 1973, by W.W. Norton and company, Inc.

Concepts Conquer Again: The Biotechnology Stocks Bubble

Concepts Conquer Again: The Biotechnology Stocks Bubble

What electronics was to the 1960s, biotechnology became to the 1980s. This technology promised to produce a group of products whose uses ranged from the treatment of cancer to the growing of food that would be hardier and more nutritious because it had been genetically modified. In its cover story “Biotech Comes of Age” in January 1984, Business Week put its imprimatur on the boom. “The fundamental question – Is the technology real? – has been settled,” the magazine reported. The biotech revolution was likened to that of the computer. The magazine reported that gene-splicing progress “has out-distanced the most optimistic forecasts” and projected dramatic increases in the sales of biotechnology products.

Such optimism was also reflected in the prices of biotech company stocks. Genentech, the most substantial company in the industry, came to market en 1980. During the first twenty minutes of trading, the stock almost tripled in value, as investors anticipated that they were purchasing the next IBM at its initial public offering. Other new issues of biotech companies were eagerly gobbled up by hungry investors who saw a chance to get into a multi-billion-dollar new industry on the ground floor. The key product that drove the first wave of the biotech frenzy was Interferon, a cancer-fighting drug. Analysis predicted that sales of Interferon would exceed $1 billion by 1982. (In reality, sales of this successful product were barely $200 million in 1980, but there was no holding back the dreams of castles in the air.) Analysts continuously predicted an explosion of earnings two years out for the biotech companies. Analysts were continuously disappointed. But the technological revolution was real and hope springs eternal. Even weak companies benefited under the umbrella of the technology potential.

Concepts Conquer Again: The Biotechnology Stocks Bubble. Photo by Elena

Valuation levels of biotechnology stocks reached levels previously unknown to investors even during the most pathological phase of the growth-stock boom of the 1960s. Speculative growth stocks might have sold at 50 times earnings in the 1960s. In the 1980s, some biotech stocks actually sold at 50 times sales. Students of valuation techniques were fascinated to read the rationalizations of security analysts for such excessive valuation levels. Since biotech companies typically had no current earnings (and realistically no positive earnings expected for several years) and little sales, new valuation methods had to be devised. My favorite was the “product asset valuation” method recommended by one of Wall Street’s leading securities houses. Basically, the method involved the estimation of the value of all the products in the “pipeline” of each biotech company. Even if the planned product involved nothing more than the drawings of a genetic engineer, a potential sales volume and a profit margin were estimated for each product that was even a glint in some scientist’s eye. Sales could be estimated by taking the “expected clinical indications” for the future drug, predicting the potential number of patient users, and assuming a generous price tag. The total value of the “product pipeline” would then give the analyst a fair idea of the price at which the company’s stock should sell.

None of the potential problems seemed real to the optimists. Perhaps FDA approval would be delayed. (Interferon was delayed for several years.) Would the market bear the fancy drug price tags that were projected? Would patent protection be possible since virtually every product in the biotechnology pipeline was being developed simultaneously by several companies, or were patent clashes inevitable? Would much of the potential profit from a successful drug be siphoned off by the marketing partner of the biotech company, usually these potential problems seemed real. Indeed, the biotech stocks were regarded by one analyst as less risky than standard drug companies because there were “no old products which need to be offset because of their declining revenues.” We had come full circle – having positive sales and earnings was actually considered a drawback because those profits might decline in the future.

From the mid-1980s to the late 1980s most biotechnology stocks lost three quarters of their market value. To be sure, the crash of 1987 didn’t help. But biotech stocks generally continued heading south even as the market recovered in 1988. Market sentiment had changed from acceptance of an exciting story and multiples in the stratosphere to a desire to stay closer to earth with low-multiple stocks that actually pay dividends. A good example is Cetus Corporation, which soared from 14 to 40 during 1986 as the company launched a successful public relations campaign to hype its stock. Cover stories were run in both Fortune and Newsweek indicating that Cetus had achieved a breakthrough with its anti-cancer drug. Interleukin-2 (IL-2). But when the product had not yet been approved by the FDA in 1988 and when IL-2 was also successfully patented by a Japanese company, the stock retraced its steps and closed the year around 10. Investors eventually decided that publicity was no substitute for products.

Biogen, founded by Nobel laureate Walter Gilbert, went public in 1983 at $23 per share. Excitement abounded about its alpha-interferon product, its international flavor (it was based in both Geneva, Switzerland, and Cambridge, Massachusetts), and the brilliance of its founder. Disillusionment set in when a bitter patent fight with Genentech and Gilbert’s penchant for running the company like a Harvard-sponsored research project disillusioned investors (Gilbert later resigned). The stock sold at less than $5 a share in early 1988 before recovering in 1989 on hopes that the company might develop an AIDS drug.

Perhaps the worst horror story was that of Genex. Genex appeared far less risky than the typical biotech company, which chased the glamorous drug business. Instead, Genex devoted its efforts to a more prosaic end. It bet the store on the development of specialty chemicals for the low-calorie artificial sweetener market. It gambled everything on the development of an intermediate chemical for NutraSweet – and lost. The stock fell from over $20 a share to under $1.

Even Genentech, the industry leader – the company described as the Tiffany of the industry – was caught up in the boom and bust in biotechnology stocks. Genentech is the most substantial company in the industry. It has delivered the goods. Of the thirty drugs in the United States with sales of $100 million or more during 1988, Genentech had contributed three – all genetically engineered. Moreover, it had a self-proclaimed “blockbuster” product, t-PA, which it said could save lives by quickly dissolving blood clots that cause heart attacks. Genentech management was even more successful, however, on the publicity front. Indeed, critics have argued that t-PA really stood for “tremendous publicity assault.”

Genentech began its publicity assault for t-PA with full-page ads in medical journals even before the product gained FDA approval. Company personnel celebrated approval of the drug by donning “Clot-Buster” T-shirts and putting on such an elaborate fireworks display over San Francisco Bay that air traffic had to be halted for ten minutes. Co-founder and chief executive officer Robert Swanson loved a party. (He regularly presided over Friday afternoon beer bashes at the company called ho-hos. These parties were enlivened with pie-throwing and water-pistole fights and sometimes culminated with Swanson putting on a grass skirt and performing the hula).

Swanson, a venture capitalist by training, also mesmerized Wall Street and the business press. Projections of billion-dollar sales and $5 a share earnings for t-PA were happily encouraged. Everything having to do with Genentech bred excitement. How well the company was actually being managed was more questionable. As one competitor put it, “When you start believing your own bullshit- that’s lethal.”

It certainly proved so for Genentech’s stockholders, who may have needed t-PA themselves at the end pf the eighties. The shared sol at $65 in 1987. In 1989, the stock sold at $18. What investors forgot was that even if all Genenech’s claims came true and Genentech came to be known as a successful pharmaceutical company, the stock would sell at the typical multiple applicable for drug companies. P/E multiples of 100 or more would not be sustained. But, in fact, the projected blockbuster sales and earnings never were achieved. Even t-PA proved disappointing as the product was hurt by competition from a similar and much cheaper drug. Being in the right industry at the right time is no guarantee of investment success when it’s tulip time in the stock market

Some Bubbles of the 1980s

Some Bubbles of the 1980s

The late 1980s also had its share of spectacular booms and busts in more prosaic companies, whose concepts caught the fancy of Wall Street. Whereas many investors lost 75 percent of their initial purchase price in the biotech boom, others saw well over 90 per cent of their investment dollars disappear while chasing these other concepts.

Alfin Fragrancies

Alfin Fragrancias, a cosmetic company jumped into the spotlight in late 1985 when it announced a new face cream. Glycel, which could slow the aging process and reverse skin damage. Glycel’s believability was enhanced by the news that it contained “ingredients developed in Switzerland by Christian Barnard,” the doctor who pioneered the first successful heart transplant. The image was perfect. Barnard, sixty-three years old at the tine, presented himself as a modern-day Ponce de Leon. He was always seen in the presence of his lovely twenty-two-year-old “girlfriend.” Even in the hyperbolic world of the cosmetics industry, Barnard’s claims that Glycel could penetrate the skin and reverse the aging process seemed excessive. But for a while both the public and Wall Street were convinced. Introductory %195 kits of the product sold out at Neiman-Marcus and other fine department stores. Extraordinary growth seemed assured and the stock price tripled within a month after the announcement of Glycel. Even the prestigious firm of Morgan Stanley joined the bandwagon, “justifying” the stratospheric price-earning multiple for the stock, and indicating that “the stock will head even higher.”

But, unfortunately, Alfin’s beauty was only skin deep. Alfin’s claim that Glycel penetrated skin cells to “bring back the memory of the cell” wrinkled a lot of scientific brows. One dermatologist claimed, “It would be like giving someone a blood transfusion by rubbing blood into the skin.” The product received a fatal blow from the FDA, which insisted that any product intended to alter a normal bodily function such as aging was a drug, not a cosmetic, and that the agency would require proof of efficacy. Rather than subjecting its product to that kind of scrutiny, Alfin withdrew Glycel from distribution. The stock, which sold near $40 in early 1986, fell to near $2 in 1989. Investors with dreams of castles in the air usually suffer rude awakenings.

Bubbles of the 1980s. Photo by Elena

Home Shopping Networks

This concept combined two of America’s favorite pastimes: watching TV and shopping. All America loves a bargain and Home Shopping Network provided “budget-priced goods” day or night to cable TV call-in customers. You could be sure that your program on Home Shopping Network would never be interrupted by a commercial – the show was one never-ending commercial.

The program resembled a game show with hosts named “Bubblin’ Bobbi” Ray, “Discount Dan” Dennis, “Diamond Jim” Brecher, and “Budget Bob” Carcosta. Even people magazine described most of the items for sale, such as gold-plated jewelry and tableware and baskets of porcelain flowers, as being “tacky”. But as founder “Bud” Paxson said, “If you really want to buy something, it’s not junk to you. It’s beautiful.”

Home Shopping Network stock went public on May 13, 1986, at $18 a share. Its first trade in the after market was at $42 a share. In three months’ time the stock reached a high of $133 a share before splitting three for one. When skeptics asked whether a retailer should sell at 199 times earnings, the answer was that this was an entirely different situation. Home Shopping Networks was not simply a retailer, it was pioneering a “fundamental shift in America’s shopping habits.” The sky was the limit. It was as if America’s thirst for cubic zirconia was unquenchable.

Reality began to hit home in 1987. First there was the boredom factor. Even hardcore customers eventually tired of lovely hostesses making homey conversation with customers, such as “Oh, you’re from New Jersey, that’s just terrific,” followed by the tooting of a bicycle horn. But people also began to question the value of the merchandise they were buying. Forbes, for example, in early 1987 wrote up the story of the woman who had bought an “exquisite emerald-and-diamond” with a retail value of $500 which she “stole” for only $243. Forbes took the ring to a reputable New York jeweler who appraised it as follows: “The diamonds are a joke worth about $15. The emeralds? The best you can say about them is they are green.” Finally, the Home Shopping Network idea was easily copied, and the company soon found itself with considerable competition for the affections of cable TV viewers.

It was not long before investors began to return some of their Home Shoppin Network shares. The skeptical Forbes story alone caused a drop of 25 percent. By the late eighties the stock was selling for less than $5 a share. One is reminded of the comment by the legendary investor John Templeton: “The most dangerous words in the investment business are “this time it’s different.”

ZZZZ Best

One of the favorite booms and busts of the late 1980s is the story of ZZZZ Best. Here was an incredible Horatio Alger story that captivated investors. In the fast-paced world of entrepreneurs who strike it rich before they can shave, Barry Minkow was a genuine legend of the 1980s. Minkow’s career began at age nine. His family could not afford a baby sitter so Barry often went to work at the carpet-cleaning shop managed by his mother. There he began soliciting jobs by phone. By age ten he was actually cleaning carpets. Working evenings and summers, he saved $6,000 within the next four years and by the age of fifteen he bought some steam-cleaning equipment and started his own carpet-cleaning business in the garage of the family home. The company was called ZZZZ Best (and pronounced zeee best). Still in high school and too young to drive, Minkow hired a crew to pick up and clean carpets while he sat in class fretting over each week’s payroll. With Minkow working a punishing schedule (and having friends drive him to appointments), the business flourished. He was proud of the fact that he hired his father and mother to work for the business. By age eighteen, Minkow was a millionaire.

Minkow’s insatiable appetite for work extended to self-promotion. He took on all the tangible trappings of success. He drove a red Ferrari and lived in a $700,000 home with a large pool in which a big black Z was painted on the bottom. He also publicly extolled good old-fashioned American virtues. He wrote a book modestly entitled Making It in America, in which he claimed that teenagers didn’t work hard enough. He gave generously to charities and appeared on anti-drug commercials with the slogan “My act is clean, how’s yours?” By this time, ZZZZ Best had 1,300 employees and locations throughout California as well as in Arizona and Nevada.

Was over 100 times earnings too much to pay for a mundane carpet-cleaning company? Of course not, when the company was run by a genius and a spectacularly successful businessman who could also show his toughness. Minkow’s favorite line to his employees was “My way of the highway.” And he once boasted that he would fire his own mother if she stepped out of line. When Minkow told Wall Street that his company was better run than IBM ad that it was destined to become “the General Motors of carpet cleaning,” investors listened with rapt attention. As one security analyst told at the time, ”This one can’t miss.”

In 1987, Minkow’s bubble burst with shocking suddenness. It turned out that ZZZZ Best was cleaning more than carpets – it was also laundering money for the mob. ZZZZ Best was accused of acting as a front for organized-crime figures who would buy equipment for the company with “dirty” money and replace their investment with “clean cash skimmed from the proceeds of ZZZZ Best’s legitimate carpet-cleaning business. But in fact, the spectacular growth of the company was itself mainly an elaborate fiction produced with fictitious contracts, phony credit card charges, and the like. In addition, Minkow was charged with skimming millions from the company treasury for his own personal use. Minkow, as well as all the investors in ZZZZ Best, were in wall-to-wall trouble.

The final chapter of the story occurred in 1989 when Minkow, then twenty-three, was convicted of fifty-seven counts of fraud and sentenced to twenty-five years in prison and required to make restitution of $26 million he was accused of stealing from the company. The United States district judge, in rejecting pleas for leniency, told Minkow, “You are dangerous because you have this gift of gab, this ability to communicate.” The judge added, “You don’t have a conscience.” As Barron’s Alan Abelson, who actually predicted the collapse long in advance, opined, “ZZZZ Best will likely turn out for investors as ZZZZ worst.” Most investors who lost their entire stake in the company would certainly agree.

The lessons of market history are clear. Styles and fashions in investors’ evaluations of securities can and often do play a critical role in the pricing of securities. The stock market at times conforms well to the castle-in-the-air theory. For this reason, the game of investing can be extremely dangerous.

Another lesson that cries out for attention is that investors should be very wary of purchasing today’s hot “new issue.” The new issues of 1982 and early 1983 performed very poorly. A study by the investment firm of Kidder Peabody examined the performance of over 1,000 initial public offerings (IPO’s) of common stock from 1983 through mid-1988. Their remarkable conclusion was that two-thirds of these IPO’s actually underperformed the Dow Jones industrial average from their issue date through mid-1988. While it is true that smaller stocks tend to outperform larger ones over long periods of time, that finding applies to established companies that trade in the secondary markets – not the IPOs. With only a one in three chances of outperforming the Dow average, investors would be well advised to treat new issues with a healthy dose of skepticism.

Certainly investors in the past have built many castles in the air with IPOs. Remember that the major sellers of the stock of IPOs are the managers of the companies themselves. They try to time their sales to coincide with a peak in the prosperity of their companies or with the height of investor enthusiasm for some current fed. The biotech IPOs that proliferated during the late 1980s are a good example. In such cases, the urge to get on the bandwagon – even in high-growth industries – produced a profitless prosperity for investors.

It is clear that when the market favors some particular characteristic in a stock, such as an association with biotechnology, financial entrepreneurs will invariably find some way of manufacturing it – or at least a close substitute. It seemed during the biotechnology boom that all that was needed was a few scientists with test tubes to produce an exciting IPO. The public inevitably pays dearly for such creativity.

And, without doubt, this creativity is not random. It is fueled, at times, by fraud, hype, and foolishness. Probably more. This review of stock valuations seem inconsistent with the view that the stock market is rational and efficient. Yet, in every case, the market did correct itself. The market eventually corrects any irrationality – but its own slow, inexorable fashion. Anomalies are able to crop up, and often they attract unwary investors. But eventually true value is recognized by the market, and this is the main lesson investors must head

Economics, Finance & Accounting

Economics, Finance & Accounting

When thinking of economics, the words supply and demand spring to many minds. And why would they fail to do so, if these are indeed the forces that control the free market? Most of the world’s markets today are mixed, they are largely free but there is some state involvement. Since the fall of the USSR and opening of the Chinese market, only a few exceptions keep operating as centrally planned economies. All in all, a centrally planned economy proved inefficient economically. However, not all free markets are competitive markets governed by what consumers want to buy, and what producers are willing to sell. For example, a firm that is a perfect monopoly plays by a different set of rules.

Economists have been criticized on many fronts. Apparently, they often disagree with each other and see individuals as more mercenary than they really are. Well, while most economists would certainly agree on mathematical concepts and many theoretical economics constructs, they often do have divergences of opinion on what ought to be done, this is the realm of normative economics.

Manhattan One Plaza. Photo by Elena

Also, most economists do recognize that although the ultimate goal of a business is to earn a profit, many other incentives are relevant and even more so at the personal level.

Around 2006, the profession Financial Consultant was one of the better remunerated and most sought after occupation in the United States of America. Although with the advent of the 2008 financial crisis, the industry may have lost some of its prestige (and a lot of persons in and out of the industry have been laid off), finance, as a field, is still important and may even hold the key to future economic prosperity.

In today’s day and age, accounting professionals are some of the people for whom it is easiest to find employment. Senior accountants working as Chief Financial Officers, Vice Presidents of Finance, Controllers and Treasurers, are also well paid. However, as most appealing prospects, the getting there can be quite tough. Some of the requirements are outlined in this part of the website.

Working in Finance or Economics

Finance is a branch of economics destined to study investing and financing operations of business firms. Economics, in turn is a social science focusing on attempting to satisfy an unlimited number of human wants with a finite amount of resources. Economics is subdivided into several disciplines, including macroeconomics, microeconomics, financial econometrics and finance.

Corporate finance is one of the branches of finance and deals with investing and financing activities of operating a business. Most businesses, regardless of their size need a healthy cash flow to survive and prosper. Indeed, firms are in business to make money, that is the reason why they entered the business world in the first place.

A squirrel posting with a business profit. Image: Elena

Costs can and have to be controlled in order for a business to ultimately record profits. Microeconomic theory focuses on costs. Thus, according to microeconomic theory cost can be variable, fixed or mixed. Naturally, mixed costs include elements of both fixed and variable costs.

Charity: For Goodness Sake

Charity: For Goodness Sake

There’s no shortage of good causes. These do the most with your dollars.

In days of yore, the clang of a coin or the drop of a dollar satisfied the conscience of most donors. Signing a check meant helping the have-nots. But charitable giving isn’t as straightforward anymore. A new provision of the tax law requires that donors have written acknowledgment for every gift over a determined sum if they intend to claim a deduction on their income tax form. Furthermore, you can’t be sure that your dollars are being put to good use – or, at least, the use that you intended. In recent years, numerous press and government reports exposing the scandalous practice of a few charities’ top dogs have left some almsgivers disillusioned.

The philanthropic fabric of the county remains strong, but knee-jerk donations are a thing of the past. Wary donors are demanding more information before pulling out their checkbooks. To make sure that your donations don’t end up lining the pockets of your favorite charity’s board of directors, you’ll need to do a little homework.

A good way to check up on the effectiveness of a charity is to zero in on how they are handling your funds. Managerial and fund-raising expenses invariably guzzle a god portion of charitable dollars. To feel confident that your offering is not consumed by high overhead costs, look to see if at least 60 percent of the revenues goes to programs. Although this yardstick may vary with the charity’s services, generally the higher the percentage of funds going to programs, the more efficient the charity and the more likely your offering reaches the intended recipients.

Yellow flower (iris), close up. Photo by Elena

Unfortunately, deciphering a charity’s financial documents can be painfully tedious (if you can even get a hold of them).

And if you do take the time to examine an annual report or IR form, neither one is likely to reveal potential skullduggery. Fortunately, there are watchdog groups out there evaluating the performance of charities for you.

Charity Begins With Your Budget

Put Your Money Where the Need Is

Each year, The NonProfit Times, a leading publication for nonprofit management, conducts an in-depth study of America’s leading charities to help people avoid giving in a willy-nilly manner. They are ranked according to how much of funding received is dedicated to programs. A look at a few stellar charities:

Human Services: Association for retarded citizen; American Red Cross; Salvation Army; Goodwill Industries Intl; Catholic Charities, USA.

Relief and Development (occurrence of natural disasters and world crises): Intl. Rescue Committee; Habitat for Humanity Intl; Christian Children’s Fund; Compassion International; Save the Children.

Conservation: National Wildlife Federation; Ducks Unlimited; The Nature Conservancy, World Wildlife Fund; National Audubon Society.

Health: United Cerebral Palsy Association; City of Hope; Muscular Dystrophy Association; National Easter Seal Society; American Heart Association.

Religion (support for organizations dedicated to transmitting spiritual values): Wycliffe Bible Translators; The Navigators; Campus Crusade for Christ; Focus on the Family; Billy Graham Evangelistic Association.