Book Review: Dead Companies Walking

The Book ‘Dead Companies Walking’ is written by hedge fund manager Scott Fearon

The author has made his career betting against or shorting the scrips of such companies. He narrates his experiences in the Book and it makes for a riveting and entertaining read.

As per the author, investors lose money in companies that are either frauds, fads or failures. Frauds and fads form a small percentage of such companies. The bulk of the businesses fail due more prosaic reasons such as the economic cycle, competition, lousy products, high cost structures etc

He has a very simple criteria for screening such companies – ‘Rising debt and falling sales’

In his opinion, most businesses fail because of one or some of six common mistakes:

–They learned only from the recent past i.e. the past one or two cycles and not beyond that

( True for NBFCs in India )

–They relied too heavily on a formula for success

(True for Crony Capitalists who gamed the Indian Banking System)

–They misread or alienated their customers

(True for Micro Finance Companies in India before the AP crisis)

–They fell victim to a mania

(True for the Infra/Power Sector in India)

–They failed to adapt to tectonic shifts in their industries

(True for PSU Banking Sector in India)

–They were physically/emotionally removed from the Companies’ operations (Wondering if it will be true for Siddharth Lal of Eicher Motors who has relocated to London)

One great takeaway from the Book for me was the importance of meeting managements. This was the first lesson the author learnt from his Boss:

“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 the numbers were easy to fudge or misread. You had to study the people behind the numbers to get the full story. You had to go see them where they lived and worked- their own offices”

One interesting aspect of meeting managements that the author highlights is as follows:

“People in management positions, even very senior management positions, are often completely wrong about the fortunes of their own companies. More important, in making these misjudgements, they almost always err on the side of excessive optimism”

Reading this Book makes one wish that there was an easier way to short companies in the India other than the ones in the F&O list.

I dare say it would be easier to make money shorting the thousands of such ‘dead companies’ in India than paying nose bleed valuations for quality cos !

I would strongly recommend this Book to anyone interested in the markets

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