Learning - Dead Companies Walking

Dead Companies Walking: How A Hedge Fund Manager Finds Opportunity in unexpected places by  Jesse Powell and Scott Fearon is a book which will explain you:

1. Shorting and what factors are considered for shorting

2. Importance of Management i.e. bet on the Jockey not the horse

3. Importance of earnings and perils of Debt

4. What not to do in Investing.

Key takeaways from the book is reproduced below:

Six Common Mistakes leaders make

·        They learned from only the recent past.

·        They relied too heavily on a formula for success.

·        They misread or alienated their customers.

·        They fell victim to a mania.

·        They failed to adapt to tectonic shifts in their industries.

·        They were physically or emotionally removed from their companies’ operations.

How to know promoters?

More than anything—more than projections and book values and price-toearnings ratios—Geoff believed human-to-human contact was the best way to gauge a company’s future performance. He valued numbers and raw data, but he knew that numbers were easy to fudge or misread. You had to study the people behind the numbers to get the full story. And reading secondhand profiles about a company’s executives didn’t count. Neither did pressing their flesh an swapping a few jokes with them at an investor conference. You had to go see them where they lived and worked—their own offices.

Best Investment Strategy

Over the years, I’ve found that doing nothing is often the soundest investment strategy.

Mistakes of following top investors

Like a zombie in an old monster movie, Idearc emerged from bankruptcy and came back from the dead in early 2010 as a newly reorganized company called Supermedia (stock symbol: SPMD). Thanks to people’s blind faith in formulas, SPMD was actually one of the hottest stocks on Wall Street for a brief period of time. You read that correctly. In 2010, a company that derived almost all of its revenues from Yellow Pages—Yellow Pages!—was one of the hottest stocks on Wall Street. I’ve still got a list of the firms that owned big interests in Supermedia. It reads like a who’s who of the investment game: Goldman Sachs, Merrill Lynch, RBS, J.P. Morgan, Fidelity, GE, Babson, Vanguard—they all owned it. Why? Because if you just looked at the numbers and ignored the minor fact that the company produced a completely outmoded product, then Supermedia was a winner.

On stock trader asking CEO

Bill gates - “People get confused because the stock price doesn’t reflect your financial performance,” he told Fortune magazine after the company’s IPO. “And to have a stock trader call up the chief executive and ask him questions is uneconomic— the ball bearings shouldn’t be asking the driver about the grease.”

Trouble with growth through acquisitions

Growth through acquisitions can be a successful strategy if it is carefully conducted. Airlines, for example, have fairly stable administrative costs, so gaining new routes by buying up competing firms often boosts revenues without adding much more overhead. In many cases, though, growth through acquisitions can be just as dangerous as the kind of expansion-on-steroids that killed off Silk Greenhouse or Value Merchants. While building out and opening a number of new facilities in a short period of time is risky, at least it’s an internally managed endeavor. A business’s existing employees can, in theory, oversee the process and ensure that it’s running smoothly. But integrating a separate business into your own is, by its nature, an outside-in process. For that reason, it’s bound to be a crapshoot. No matter how many lawyers and auditors an acquiring company hires, no matter how much due diligence it performs beforehand, the seller almost always gets a better deal than the buyer. Sellers know where the bodies are buried in their businesses, and there’s usually a good reason why they’re willing to give up ownership.

Mergers and acquisitions are definitely risky methods for growth, but one party always makes a profit on them: the banks who facilitate the deals.

What Central Bank does when rate is cut?

First came the massive injections of taxpayer cash into the financial sector. A lot has been written about that boondoggle, so I won’t go into too much detail on it other than to say that it was the largest and most brazen upward redistribution of wealth in the history of capitalism—and it was only the beginning. Next, the Fed yanked interest rates down to virtually zero. They’re still there as I write this. This move hasn’t gotten the press that the Wall Street bailouts did, but it might have been even more destructive. It punished the prudent to help the profligate. People who had done the right thing and put money into their savings lost out so that poorly managed corporations could refinance what should have been fatal debt loads. Doomed businesses were able to replace high-interest, fast-maturing bond issues with longer-term paper yielding a fraction of what they would have owed otherwise. Congress even sweetened the deal by giving some companies additional five-year tax “look-backs,” which allowed them to recalculate previous returns and claim giant retroactive refunds. It all added up to one big nationwide, taxpayer-subsidized cooking of the corporate books.

About business schools and corporates

Every year I go back to Evanston, Illinois, and give a talk to the students of Northwestern’s Kellogg School of Management, my graduate school alma mater. During a meet-and-greet event there in 2011, I found myself standing next to the new dean of the school and decided it was a perfect opportunity to bring up an idea I’d had on the plane ride out from California. Just a few weeks earlier, Citibank had agreed to pay almost $300 million for knowingly selling its clients toxic subprime mortgage bonds. The year before, Goldman Sachs had paid the largest fine in history, $550 million, for engineering similar deals. “Why don’t you ban Citi and Goldman from recruiting at Kellogg for three years?” I suggested to the new dean. She nearly spit up her drink. “Excuse me?” she asked with a nervous smile. “They blatantly scammed their own clients,” I went on. “They shouldn’t have access to your students.” After a very awkward moment of silence, the dean patted me on the shoulder and stepped away into the crowd. “Nice talking to you, Scott,” she said as she passed me by.

In retrospect, it was probably unfair of me to put the dean on the spot like that. She’d only taken the job a few months earlier. Even if she had liked my idea, I’m sure she wasn’t anxious to take such a radical step so early in her tenure. But the fact remains that Wall Street essentially owns business education now, and it continues to buy off academics and universities by hiring graduates, awarding professors lucrative consulting jobs, and sponsoring seminars. As if to hammer this point home, when I flew back to the Bay Area the day after chatting with the new dean at Kellogg, the top letter on the stack of mail waiting for me in my office was an invitation to “The First Annual Goldman Sachs Global Education Conference” down at Stanford, my undergraduate alma mater.

Book is worth reading for those operating in Stock.