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Saturday, May 27, 2017

Book Review- Dead Companies Walking by Scott Fearon

A career in the likes of Private Equity, Venture Capital or Hedge Funds is a dream for many MBAs and students in Finance domain. Not only students, but also professionals look forward to reading books and resources on their domain to learn, understand and improve how they approach the work. Dead Companies Walking: How a Hedge Fund Manager finds Opportunity in Unexpected Places  by Scott Fearon is one such book to look forward to.

About Scott Fearon

Scott Fearon is the president of Capital Crown Management, an investment management / hedge fund firm. With over 39 years of experience in the financial services industry, his key differentiation is to invest in fast-growing companies with little analyst coverage while shorting those in the downward spiral. He writes at his blog, The confessions of a contrarian investor The confessions of a contrarian investor.

About the book

As opposed to the general theme of ‘how to select good stocks’ of books in this genre; Dead Companies Walking is all about how to identify the companies which are going to bust and exit from them tactically. This is basically a memoir of the author rather than principles around the topic. What makes the book attractive is the quantum of real life examples he gives.
Written in close to 250 pages, the book is grouped in six themes to look for to identify companies that are going to bust. These are essentially six key decision-making mistakes by executives that lead to failures. They are
  1. Not keeping track of historical events and mistakes – Often executives try to make decisions out of the recent past.This blinds the mistakes and changes happened in the long past; eventually leading to same mistakes.
  2. Over dependency on success formulas – Often managers tends overly focus on few metric, be EBITA or growth rate to sooth their current performance. This leads to blinding them from changing contexts.
  3. Forgetting customers in the name of hyper growth – This is a common mistake we see in companies going through growth phase. They become overly confident to the extend of alienating customers – be it from quality of offerings or service perspective.
  4. Jumping into a bandwagon that’s a mania – The author takes examples from 2000 dotcom busts like women.com that overly go into fads than facts.
  5. Becoming irrelevant due to industry shifts – This relates to the lack of focus on how the environment is changing. This being a menace to the extent that executives fail to identify the business models becoming obsolete (Example – e-commerce v/s Brick and Motor)
  6. Closeness of executives to companies’ operations – This is something that I couldn’t completely agree especially because of the nature of advancements technology has made. But, this completely makes sense in a ‘physical touchpoint’ based business. Scott starts the chapter with the example how he felt it odd about JC Penney’s CEO being away from his headquarters and managing the business.
Though the book is mainly about shorting stocks; he also talks about taking long positions and mistakes he made around missing stellar opportunities. Finally, a chapter is devoted on the shortcomings of Wall Street analysts. The thoughts in this chapter included why groupthink and mistakes are prevalent in Wall Street community.
Scott concludes his book with a chapter on the importance of embracing failures/mistakes and moving forward.
Overall a light read; more of a memoir. Don’t expect financial theory wisdom in this book.