Book Review: Dead Companies Walking
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Scott Fearon's Dead Companies Walking: How A Hedge Fund Manager Finds Opportunity in Unexpected Places opens with an excellent summarization of his book. He begins, "My specialty is identifying what I call 'dead companies walking' which is what I call businesses on their way to bankruptcy and a zero-out share price." Fearon is no stranger to the task, having been doing this since he started his hedge fund in 1991. Since its founding, the fund has had only one down year.
Going back to his first job at Texas Commerce Bank's investment department, Fearon is a big believer in company visits, along with all the number crunching. His boss there told him, "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." In Dead Companies Walking, Fearon describes some of his company visits as part of his research. His descriptions are graphic, and instructive–a collection of financial stories, and cover a wide range of industries.
Many of the companies on the road to bankruptcy had a common characteristic. Their management didn't see and act on the reality of their situation. One company is described as, "committing itself to a formula when all the evidence was practically screaming at them to change." Losing touch with the customer base is another characteristic. While it avoided the worst, JC Penney is an example. Their new CEO from Apple Stores had an "utter cluelessness when it came to its working class customers." He commuted to company HQ in Texas from his home in Silicon Valley.
Dead Companies Walking is also partly the autobiography of a successful hedge fund manager, who emphasizes short selling. The reader will feel they are right there with him as he makes his decisions. He is straight forward about his successes, failures, and the often emotional investment process. One of his personal characteristics is being a "great quitter - and proud of it." He tries to recognize his mistakes fast, and rarely "gives up large sums of money."
Scott Fearon's book is fascinating, engaging, end educational. While Dead Companies Walking focuses on short selling, the author notes it is now much more difficult. "The number of hedge funds looking for short ideas has exploded," creating intense competition for the "handful of good short ideas." Sarbanes-Oxley reduced the number of companies using aggressive accounting. Currently with the nominal interest rate structure, brokers are charging fees to make up for the interest they used to earn by reinvesting the proceeds of short sales. Business failures is one economic constant. Despite this, successful short selling is something for which few professionals are trained, or exposed to.