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But if LJM paid a high price for Enron’s assets, would that lower LJM’s potential profits—and Fastow’s personal income? (Clearly.)

On the other hand, if LJM paid a low price, would that raise profits for Fastow and his partnerships, but hurt Enron’s income? (Clearly.)

Should Enron lend Fastow’s partnerships any money to buy assets from Enron that might generate a personal profit for Fastow? (Say what?!)

Doesn’t all this constitute profoundly disturbing conflicts of interest? (No other answer is even possible.)

What does this arrangement say about the judgment of the directors who approved it? (It says you should take your investment dollars elsewhere.)

Two clear lessons emerge from this disaster: Never dig so deep into the numbers that you check your common sense at the door, and always read the proxy statement before (and after) you buy a stock.

What is “proxy material” and why does Graham insist that you read it? In its proxy statement, which it sends to every shareholder, a company announces the agenda for its annual meeting and discloses details about the compensation and stock ownership of managers and directors, along with transactions between insiders and the company. Shareholders are asked to vote on which accounting firm should audit the books and who should serve on the board of directors. If you use your common sense while reading the proxy, this document can be like a canary in a coal mine—an early warning system signaling that something is wrong. (See the Enron sidebar above.)

Yet, on average, between a third and a half of all individual investors cannot be bothered to vote their proxies.6 Do they even read them?

Understanding and voting your proxy is as every bit as fundamental to being an intelligent investor as following the news and voting your conscience is to being a good citizen. It doesn’t matter whether you own 10% of a company or, with your piddling 100 shares, just 1/10.000 of 1%. If you’ve never read the proxy of a stock you own, and the company goes bust, the only person you should blame is yourself. If you do read the proxy and see things that disturb you, then:

vote against every director to let them know you disapprove

attend the annual meeting and speak up for your rights

find an online message board devoted to the stock (like those at http://finance.yahoo.com) and rally other investors to join your cause.

Graham had another idea that could benefit today’s investors:

…there are advantages to be gained through the selection of one or more professional and independent directors. These should be men of wide business experience who can turn a fresh and expert eye on the problems of the enterprise…. They should submit a separateannual report, addressed directly to the stockholders and containing their views on the major question which concerns the owners of the enterprise: “Is the business showing the results for the outside stockholder which could be expected of it under proper management? If not, why—and what should be done about it?7

One can only imagine the consternation that Graham’s proposal would cause among the corporate cronies and golfing buddies who constitute so many of today’s “independent” directors. (Let’s not suggest that it might send a shudder of fear down their spines, since most independent directors do not appear to have a backbone.)

Whose Money Is It, Anyway?

Now let’s look at Graham’s second criterion—whether management acts in the best interests of outside investors. Managers have always told shareholders that they—the managers—know best what to do with the company’s cash. Graham saw right through this managerial malarkey:

A company’s management may run the business well and yet not give the outside stockholders the right results for them, because its efficiency is confined to operations and does not extend to the best use of the capital. The objective of efficient operation is to produce at low cost and to find the most profitable articles to sell. Efficient finance requires that the stockholders’ money be working in forms most suitable to their