Free PDF Dead Companies Walking: How A Hedge Fund Manager Finds Opportunity in Unexpected Places, by Scott Fearon Jesse Powell
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Dead Companies Walking: How A Hedge Fund Manager Finds Opportunity in Unexpected Places, by Scott Fearon Jesse Powell
Free PDF Dead Companies Walking: How A Hedge Fund Manager Finds Opportunity in Unexpected Places, by Scott Fearon Jesse Powell
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Unlike most investors, who live in fear of failure, Scott Fearon actively seeks it out. He has earned millions of dollars for his hedge fund over the last thirty years shorting the stocks of businesses he believed were on their way to bankruptcy. In Dead Companies Walking, Fearon describes his methods for spotting these doomed businesses, and how they can be extremely profitable investments. In his experience, corporate managers routinely commit six common mistakes that can derail even the most promising companies: they learn from only the recent past; they rely too heavily on a formula for success; they misunderstand their target customers; they fall victim to the magical storytelling of a mania; they fail to adapt to tectonic shifts in their industry; and they are physically or emotionally removed from their companies' operations.
Fearon has interviewed thousands of executives across America, many of whom, unknowingly, were headed toward bankruptcy – from the Texas oil barons of the 80s to the tech wunderkinds of the late 90s to the flush real estate developers of the mid-2000s. Here, he explores recent examples like JC Penney, Herbalife and Blockbuster Entertainment to help investors better predict the next booms and busts―and come out on top.
Product details
Hardcover: 256 pages
Publisher: St. Martin's Press (January 6, 2015)
Language: English
ISBN-10: 1137279648
ISBN-13: 978-1137279644
Product Dimensions:
6.4 x 0.9 x 9.7 inches
Shipping Weight: 15.5 ounces (View shipping rates and policies)
Average Customer Review:
4.3 out of 5 stars
87 customer reviews
Amazon Best Sellers Rank:
#191,582 in Books (See Top 100 in Books)
Republished from the February issue of my newsletter Mayer's Special Situations:“Failure is one business trend that never goes out of style.†— Scott FearonScott Fearon is an investor who built the foundation of his success on the bedrock of failure. “Things go wrong more often than they go right,†he writes. He calls this insight “the single most important lesson about business and life.â€On the plane rides to and from Switzerland, I read his book Dead Companies Walking: How a Hedge Fund Manager Finds Opportunity in Unexpected Places. It is a fun read as he takes you through how he figured out what companies would fail well before the market did.“My specialty,†Fearon writes, “is identifying what I call ‘dead companies walking’ — businesses on their way to bankruptcy and a zeroed-out share price.â€He’s good at it, too. His fund has delivered 11.4% annual returns since inception in 1991 — way ahead of the market overall. As a hedge fund manager, he shorted over 200 companies that eventually went bankrupt. (A short seller makes money when stocks go down.) Even if you never short a stock in your life, you’ll still enjoy this book — if only to help you avoid such disasters.An important point in this book is that failure due to fraud or the passing of some fad is relatively rare. Far more common are just plain-old failures,a naturally occurring phenomenon, born of mistakes people make.Failure, Fearon writes, “happens every day to some of the smartest people in the world.†Fearon has also had his share of failure, as he cheerfully admits, and not just in his fund. He’s opened two restaurants, one that failed.He shares six common mistakes he finds these failures 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.Fearon takes us through a number of fascinating examples of each of these.As to No. 1, people do learn from the past, he says — but only the recent past. He tells a story about meeting with the CFO of Global Marine, an owner of offshore drilling rigs. This CFO is unworried by the drop in rig utilization rates. He shows Fearon a chart that shows how every time the rig utilization rate hits 70%, it rallies and recovers.This chart covered just over two decades. In the grand scheme of things, that’s really not a lot of time. And Fearon points out that just because a trend has continued for a really long time doesn’t mean it will always be that way. Needless to say, Global Marine’s rates went well below 70%, and the stock went bust.It seems simple, but it’s amazing how many times smart people suffer from historical myopia. “Failure terrifies people,†Fearon writes. He goes on to note:They’ll do whatever they have to do to downplay it, wish it away and just plain pretend it doesn’t exist. Most of the time, they’ll go on living in denial long after the truth of their predicament becomes obvious.I think this is certainly true. I think it is especially true of corporate executives. Fearon writes that he’s had over 1,400 meetings with executives and declares they almost always err on the side of optimism.As for No. 2, he has a great personal example of how he didn’t invest in Starbucks in the early 1990s. If he had invested, he’d have a 100-plus-bagger just 22 years later. But he missed it because he was too much a slave to his own formula.He used a growth-at-a-reasonable price formula to picking stocks. Starbucks didn’t meet his formula and he passed on it even knowing it was a special company. So he missed a once-in-a-lifetime opportunity that was sitting right in front him.He also talks about businesses commit No. 2 by thinking they have a winning formula and then being unable to see its faults. They roll it out too quickly and the whole enterprise goes belly up. Restaurants and retail chains that seek to double their number of stores in a year is an example.In the course of these case studies, Fearon works in a number of other tidbits of investor wisdom. Take the example Value Merchants. It is a discount retailer that seeks to double the number of stores it has in a year. The CEO is a super-competitive guy. Wakes up at 4 a.m. Runs marathons. Impresses everybody he meets.Fearon hears from other investors about how you don’t want to bet against a guy like that. But in Fearon’s view, being extremely competitive is one of the worst traits you can have in markets.“Competitive types think they can will their way to success,†he writes, “no matter what. But no amount of will can counter a doomed formula — like doubling your number of stores every year.â€It can take time for these dead companies to play out. And the enthusiasm of know-nothing investors can carry a weak stock for years. “Time after time,†Fear writes, “I would study a company’s financial statements and be mystified that its share price was anywhere over a penny. And yet people would still be buying the stock.â€Turning to No. 3, look no further than Ron Johnson and his debacle at J.C. Penney. He tried to change the store into a hip place that wealthier, upper-class people would shop at. He cut out coupons, got rid of plus sizes and Spanish advertisements. He alienated much of the customer base. We know how this ended — with JCP almost brought to its knees and Johnson’s firing. But this is not an isolated example, and Fearon gives us some entertaining case studies on the theme.On No. 4, there are several funny stories on companies caught up in different manias. One of my favorites is his meeting with the CEO of Women.com, named Marleen:“If I buy 100,000 shares of your stock tomorrow morning, and a year from now it’s lost half of its value, why would that have happened?â€â€œYou mean what could go wrong?†Marleen asked.“Yes.â€â€œQuite frankly, Mr. Fearon,†she said, “nothing. We’ve looked at all the data, and we’ve discussed this very issue at the board level, and we all agree: There’s just no way we can lose.â€My goodness. At the time of the meeting, Women.com was $15. Ten months later, it was 70 cents, and within a year,it ceased to exist. No way to lose, indeed. But this is what happens in manias. Stubborn optimism rubs out facts. People forget to do simple things like arithmetic. And downside risk becomes inconceivable.“At their cores,†Fearon writes, “manias are about storytelling. People become enchanted with a story, and they convince themselves — and each other — that it just has to be true no matter what.â€We saw it in the tech boom. We saw it in the housing boom. We saw it in the commodity boom that drove oil and other commodities. People begin to craft a narrative that defies common sense and history. There was a “New Economy.†Housing prices never go down. And “Peak Oil†meant the end of cheap oil. People who believe these kinds of things get clobbered. “Manias happen all the time,†Fearon writes.I’m not going to recount all six mistakes. I’ll just recommend that you read the book. It’s an easy read and entertaining as well. It peters out with a preachy last chapter, but otherwise, I enjoyed it.A running theme in the book is what makes a good investor. One of these traits is being a good quitter. The best investors are the best quitters, Fearon maintains. They don’t get sucked up in their own ideas. When things go badly or differently than they expected, they bail. The investors who get tangled up in their own harpoon lines as they obsessively chase their own white whale are the ones who eventually drown.Fearon cites Peter Lynch’s line about how the best you can hope for is to get six out of 10 ideas right when it comes to picking winning stocks. “Think about that for a second,†Fearon writes. “The man most people credit as being one of the greatest, if not the greatest, investor we’ve ever seen readily admitted that he was wrong almost as much as he was right!â€Therefore, quit early and quit often, Fearon says. No matter what, you are going to get to know failure really well if you invest in stocks. It’s inevitable. It’s natural. And so you better get comfortable with failure, and plenty of it.Success, as Fearon shows, depends on it!
Before reading this book I had very little knowledge of short selling and failing companies. This book took me inside the business analyst meetings and thought process of a short selling fund manager. I really enjoyed this book because it was easy to read, I first starting reading a few chapters a day and then decided to read the entire 2/3 rest of the book as soon as I could because I loved the insight it was giving me. The book was bought as an education venture to strengthen my knowledge of different stock market opportunities and unlike many other stock market books it spoke to me in a less mathematical way than other investing books. In order to evaluate a company, you must look past the pure numbers and look at management and the actual people running the company to actually know what the company is. This book helped bring me to realize this. It was a great read and I plan to use Fearon's experiences to my benefit to help me identify good companies and "dead companies walking" on their way to a near or flat 0. The last chapter of the book I feel was more of a personal venting from Fearon about how he feels about the market and how corrupt it is. I don't blame him for letting off steam but it wasn't really what I bought the book for. That being said, I honestly did enjoy the book very much and am glad I bought it.
I really liked the book because it had good lessons.Here are the most important lessons when investing/ shorting that I have learned from Fearon.1. Be wary of management who relies on the past. Yup, there are those who say since we had nice growth past ten years, it will be the same. This is as much dangerous that claim that the new big thing will change everything.2. Not adapting to change. Industry are in a constant flux. With globalization and technological advancement, it is really hard to predict the future. And management really has to be focused. Well, they can't be chasing the latest fads, they should at least know what is going on. If the manager seems non-adaptive or not willing to change from 10-K or conference calls, be wary.3. Managers that play, play, and play. There is a reason that we have activists that go after lazy managers because they do exist and are not just handful! If the firm's managers do. You can read some examples from Einhorn or other activists' letters.4. LEVERAGE! Yes, overleverage will kill anything. Remember 2008 and recent oil industry destruction. When in doubt avoid highly levered firms.I highly suggest that every investor reads the book. It is an easy read and the lessons will help your investment.Just remember that Fearon's strategy requires substantial homework. Well, any investor should do good due diligence.
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