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Book Review: Dead Companies Walking: How a Hedge Fund Manager finds Opportunity in Unexpected Places


One of the enduring things about America is that they don’t overly critique failures. Companies that try and fail are better off than companies that never try for fear of failure. During the late 80’s, when America was in the middle of an unprecedented bull market, as many as 60 to 80 thousand companies failed every year. Companies fail, embrace bankruptcy and try to make a comeback.
In India on the other hand, failure is seen as a stigma. It’s not a surprise hence to see that our stock markets dominated by companies which in US would have been destroyed multiple times over. Here, they are the Dead Companies that stay alive without being of benefit to either the owners or the public.
Unlike America, the fact that shorting companies isn’t easy makes it even more difficult to take advantage of such opportunities in companies that have less than Zero chance of every coming back. While the National Stock Exchange delists such companies regularly, you can find them trading on the Bombay Stock Exchange for a few more years till even they have enough and decide to delist them.
We keep hearing about great fund managers all the time. One name you wouldn’t have heard would be Scott Fearson who runs a small hedge fund. The reason you may not have heard about him is because his fund is small – he closed the fund to external investors once it reached 100 Million Dollars.
What he lacks in assets, he has made up in returns. 1991. Since its inception, Fearon’s fund has only had one down year and has averaged an 11.4 percent annual return after all fees—significantly higher than the benchmark S&P 500 index’s total return over the same time period.
While the author runs what is essentially known as a Long / Short fund, this book focuses on aspects that helped him select companies that he shorted.
He categorizes the common mistakes that bankrupted firms into 6 different categories
Only learning from the recent past or what he calls as historical myopia:
“We assume the recent past is the most accurate predictor of the future and that the more distant past is less important or less relevant”. Cyclical companies assume that the current cycle never ends, but one doesn’t need to look too far in the past to know that the sector has passed through ‘n’ number of cycles and this too shall pass.
Relying too heavily on a formula for success:
Scott favors using a formula he calls “Growth at a Reasonable Price” for picking stocks. In the chapter on replying on formula’s coming to one’s grief, he recalls how he was not able to pull the trigger on two of the best investments he could have made because of the strong belief in the formula that said the stocks were over-valued.
Misreading or alienating customers:
Companies frequently believe that they know better than the customer. This thought has been build up by successful companies like Apple whose CEO, Steve Jobs once claimed that customers didn’t know what they wanted till he showed it to them.
Scott uses the example of JC Penny which was nearly brought down by its newly appointed CEO who decided to make wholesale changes in the way JC Penny sold to its customers and in the process lost Billions of Dollars of Sales and Millions of Dollars of Profit. JC Penny reversed course but it never has been the same again.
Falling victim to mania:
Anyone who has lived through the Dot com mania of 2000 or the Housing bubble of 2008 knows how easy its for even educated people to fall prey to mania’s. From Newton during the South Sea Bubble to Stanley Druckenmiller in the Dot com bubble, investors have constantly fallen prey to mania’s that ended in a lot of grief.
Failing to adapt to tectonic industry shifts:
Amazon threw Borders to bankruptcy, Netflix did the same to Blockbuster. In India, Zerodha laid to rest many small brokers who were already tottering. Uber broke the monopoly of taxi operators. Jio turned the tables on telecom providers.
Companies that cling on to their past are the one’s who never see the future pan out. Some companies try and adapt, others perish.
Being physically or emotionally removed from company operations:
When JC Penny hired Johnson, he refused to move to near the company’s headquarters in Texas but stayed back in Silicon Valley. Thanks to a couple of similarities, it reminded me when Sikka was asked to step aside at Infosys. Markets took it as the death of Infy with the stock crashing 15% in 2 days. Its been just more than a year from then and Infy is now up more than 71% from the price of that day. One para literally stands out from the book that can be applied to Sikka and Infosys.
You can’t make major changes in a company with thousands of employees unless you connect with them directly and earn their loyalty. That’s all but impossible when you’re literally looking down on them from thirty thousand feet.
The book has its fair share of biases, especially since the way Scott describes the reason for he to short speaks of Selection bias as also Outcome bias.
Scott takes about a company Cygnus which was trying to innovate a way to measure Glucose in blood without actually taking any blood, it instead tried to use Sweat to measure. The company failed and Scott believes that the company got too wedded to it and put everything into what he calls a lost cause.
The result was all too predictable he says. But how many stories have we heard about companies being one bad news away from Bankruptcy and then pushing itself to greatness.
SpaceX is a good example – all it required was one more failed take off and the NASA order which saved it would have been off the table. If it had failed, wouldn’t it be called “Predictable”. After all, how many private space companies can you really count that have achieved something, let alone greatness like SpaceX.
Scott is amazed that the executives or the founders who run the company or the company cannot see the writing on the wall. Then again, if one cannot believe in the vision of the company, one could always question what was he doing there in the first place.
Not every company prospers and its sure that many executives themselves may have their doubts, but I wonder how many would come out with their fears to a hedge fund fund manager who rather than being the knight in shining armor decides to make his mission to take the company down.
All in all, it’s nice to read the tale of a fund manager especially one who has been there for a long time now. For that alone, I rate this book 3.5 out of 5.
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