The Investor's Shelf โ€” one book
Dead Companies Walking

Dead Companies Walking

Scott Fearon, Jesse Powell
2015
T3 256 pages ยท about 4h 16m to read OL21087841Wgoodreads

A short seller on the recurring patterns of managerial self-delusion.

Summary

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.

Key takeaways 7

  1. Management that learned a formula in earlier conditions applies it after those conditions have changed, which is the most common route to failure.
  2. Executives who are physically and emotionally removed from operations stop receiving the information that would let them respond.
  3. Entering a sector because everyone else is doing so is a recurring pattern in companies that subsequently fail.
  4. Meeting management in person supplies information about whether they understand their business that filings cannot convey.
  5. Optimism unsupported by numbers, and reluctance to discuss specifics, are behavioural signals worth acting on.
  6. Companies alienate their existing customers while pursuing new ones, and the existing customers are where the revenue is.
  7. Being right too early on a short position is indistinguishable from being wrong for as long as the position must be financed.

Who should read it

Investors and analysts who want a behavioural catalogue of pre-failure management patterns to complement accounting-based screens.

Where it sits in the reference 2

Styles
Styles

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