Dead Companies Walking

Fearon has run a fund that both buys stocks and sells them short for decades, and wrote this from the short side of his book. He estimates that he has visited hundreds of companies that subsequently went bankrupt.

The organising content is his catalogue of the errors that precede failure. Management learns from the past but not from the present, applying a formula that worked in earlier conditions to conditions that have changed. Management relies too heavily on a formula, meaning a single approach applied everywhere regardless of fit. Management misreads or alienates its customers. Management falls victim to a mania, entering a sector or a technology because everyone else is. Management fails to adapt to shifts in the industry. Management is physically or emotionally removed from the company's operations, which he treats as literal: he pays attention to where executives are, how they travel and whether they are present.

His method is company visits. Fearon argues that meeting management in person supplies information that filings do not, particularly about whether executives understand their own business and whether they are hearing bad news. He looks for optimism unsupported by numbers, for reluctance to discuss specifics, and for offices and behaviour disproportionate to the business.

He is also direct about the difficulty of short selling: the losses are unbounded, being right too early is indistinguishable from being wrong, and the position grows as it moves against you.

The book is anecdotal and Fearon does not present his record in verifiable form. The catalogue of management errors is useful precisely because it is behavioural rather than financial, and it complements the accounting-based approaches in Staley and Mulford, both of which are in this reference.