Tuesday, April 12, 2011

Notable and Quotable from Alex Berenson's "The Number"

I just finished The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America. What a fantastic read. Alex Berenson is a captivating writer who masterfully wove together many different narratives - accounting, government regulatory, and stock market history as well as the stories of corporate misdoings by Computer Associates, Enron, Tyco, and Worldcom. It was a great read.

As I've written before, I like to underline as I go along. Here are some of my favorite passages, which will give you an idea of how good a writer Berenson is. All of the points are attributable to him unless otherwise specified.
  • "It is difficult to get a man to understand something when his salary depends on his not understanding it." -Upton Sinclair
  • On Wall Street, not all numbers are created equal.
  • Earnings per share is the ultimate benchmark of a company's success or failure.
  • Earnings per share is the number for which all the other numbers are sacrificed. It is the distilled truth of a company's health. Earnings per share is the number that counts.
  • But the trouble with bubbles...the trouble with bubbles is they don't last.
  • Accountants are the plumbers of capitalism, unappreciated but vital to the system.
  • Bear markets have villains. Bull markets have heroes.
  • A conglomerateur who runs out of acquisitions is a very unhappy conglomerateur. He's stuck managing the companies he has already bought, which are all too often third-rate companies in slow-growth industries. Winners buy; losers manage. Worse, the skills that make a successful conglomerateur-salesmanship, impatience with details, and a huge ego-are more or less the opposite of the skills needed to successfully manage a company.
  • Diversification is no protection against loss if that diversification consists of owning a diverse group of second-rate stocks.
  • If Wall Street's history proves anything, it is that investors of all sizes examine financial statements much less closely when stocks are rising.
  • In Wall Street's version of heaven, the strip clubs don't have covers and every month is January. In hell, on the other hand, the calendar always reads October.
  • "You start as an analyst, but you end as an ambassador."
  • Bill Barnhart of the Chicago Tribune: "When you boil down the entirety of a corporate enterprise to a few pennies, the chances for error, misunderstanding and mischief are immense."
  • [Stock] options are worth something even when they're not worth anything. They are as close as Wall Street comes to believing in an afterlife.
  • Roger Lowenstein on executive compensation, specifically the abuse of stock options: "By turns, a system designed to motivate became one to simply enrich."
  • The clash between longs and shorts is about more than money; it is the eternal battle of hope and realism.
  • Short-sellers are the little voice in the middle of the night, the voice a CEO cannot allow himself to hear: Your numbers are crap. Your new product is way behind schedule. You're booking sales for which you'll never get paid. You're burning cash. The competition is ruinous. You don't have a chance. That $200 million you raised last year, it's gone. What now? To executives, that voice is death, so the shorts are killers.
  • During the worst panics, the market does not make even a halfhearted attempt to rally. It closes at the day's lows, and one has the sense that if not for the 4 P.M. bell, prices would fall until the Dow and the S&P 500 and every stock in them all hit zero, and even then traders would try to sell short. The very concept of a bottom is laughable. Only a night's rest can bring sanity back to the world...But the worst crashes do not last just one day.
  • After the first day of a crash, no one can know where it will end. It is a force of nature as much as any hurricane or earthquake.
  • Michael Lewis on the 1990s: "A boom without crooks is like a dog without fleas...A healthy free-market economy must tempt a certain number of people to behave corruptly."
  • It's time for all of us, investors and executive and managers and employees, to admit what we already know: Just because a company hits its earnings targets doesn't mean it is flourishing; just because it misses for a quarter or two doesn't mean that it is failing. Just because a company has grown 15 percent a year for a couple of years in a row doesn't mean it can grow 15 percent a year forever. Only a handful of companies has earnings that can be smoothly plotted more than a few months in advance. Business doesn't work that way. Life doesn't work that way. [Emphasis my own] Planes run late; meetings go badly; contracts don't get signed when they're supposed to. Hire good people is hard; making good acquisitions is harder. Even well-run companies have a tough time keeping decent financial controls, figuring out where to invest research dollars, and satisfying investors and the media. And not ever investment pays off in three months. Sometimes smaller profits now can mean a better business and bigger profits later.
  • The number is a lie. We need it; we can't avoid it. But it's still a lie.
Hush thee, my babe, Granny's bought some new shares,
Daddy's gone out to play with the bulls and the bears,
Mommy's buying on tips, and she simply can't lose,
And baby shall have some expensive new shoes!
-September 1929 in the Saturday Evening Post