Weekly Bookmarks –
123rd Edition – June 13, 2021
If you want to increase your success rate, double your failure rate.Thomas J. Watson
5 Big Ideas from Dead Companies Walking by Scott Fearon
1. Three Types of Businesses That Falter
One of the best investing books I’ve read in years is by a hedge fund manager who has shorted hundreds of public companies to increase his wealth and the investors he serves.
The author of Dead Companies Walking quotes another fund manager stating that businesses fail for one of three reasons: frauds, fads, and failures.
The first two are rare. The third type, failures, eventually lead to bankruptcies. Why?
2. Six Reasons Businesses Fail
According to Scott Fearon, he sees six common mistakes of the leaders of businesses he has shorted over the years:
- They learned from only the recent past
- They relied too heavily on a formula for success
- They missed or alienated customers
- They fell victim to a mania
- They failed to adapt to tectonic shifts in their industries
- They were physically or emotionally removed from their companies operations
3. GARP and Heavy Reliance on a Success Formula
Many of us either do or have worked for businesses following the growth-is-always-good formula. Think restaurants, hotels, specialty retailers and certain service-based businesses that can easily scale.
Krispy Kreme Doughnuts once heavily relied on this success formula. Unlike McDonald’s, they did not require franchisees to prove themselves with one unit before opening a new store.
Developers who expanded too fast not only were forced to buy expensive equipment from the franchisor, but they saturated their territories with too many locations. Many went bankrupt.
Fearon refers to GARP as growth at a reasonable price. But in this context when growth is the over-arching objective, GARP should be short for growth at a reasonable pace.
4. Excel Crazy
The author learned from a famed fund manager that managements matter.
Too many investors, he explained, get so lost in the weeds of a company’s financial results—recent earnings, projections, extrapolations, and other purely mathematical data—that they forget to study the thing that makes any company great (or terrible): the people running it. He called this fixation on evaluating numbers instead of flesh-and-blood managers going “Excel crazy.”
Fearon’s former boss once told him, “Get up and go outside. You’ll learn more in five minutes of talking to someone at a company than you will in a week of crunching numbers.”
Yet, the emphasis in accounting and finance classes is numbers, not people.
5. On Investing Wisely
During the two decades that the author ran his hedge fund, 2009 was the only year he lost money. In the prior 18 years, his fund produced a compound annual growth rate of 13 percent.
Are you an expert investor like Scott, average at best, or a novice? I appreciate his candid advice even if we’ve gotten lucky in our eTrade accounts:
I think the stocks of most companies are efficiently priced. That’s why I believe average investors should only put their money into index funds–period. full stop.Scott Fearon
Deep in the Archives – Bookmarks 30 – Cameron Mitchell Restaurants, The One Thing, The Best Biz Books of 2019, The 2R Manager, and Donald Miller on Running a Company.
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