Ways to lose your money


BY KHOO KHENG-HOR

SOME people have described Martin Howell's book Predators and Profits (Prentice-Hall) as “remarkable.” I think it is unique and courageous – from the moment I started reading, I was unable to put it down. 

The book offers an investor more than 170 ways of telling whether he could lose his hard-earned money from investing in the likes of future Enrons and WorldComs.  

After years in the business and having talked to more than 50 leading investors, short sellers, former regulators, independent analysts, shareholder rights activists and leading financial figures, Reuters financial journalist Martin Howell has identified those crucial warning signs that could point to problems ahead.  

The book could be regarded as a road map for investors to watch out against those top executives who are more interested in their personal compensation than corporate management and thus would destroy the value of their nest eggs. 

He doesn’t mince words as he hits out at the CEOs who cheat and deceive, the Wall Street bankers who promote investments they know are bad, boards who have been bought off, the see-no-evil accountants, and his peers in the media who seem to be in on everything but may know nothing.  

Though Howell sounds like an angry man on a crusade, he is justified as his book is filled with stories of top executives who had unscrupulously looted their companies as well as those who had lost their money on account of these predators. 

Comprising 15 chapters, with most chapters carrying an introductory essay on the particular topic being discussed, e.g. The Superstar CEO: Celebrities, Showmen, and Destroyers, every chapter also includes a second section that details the relevant signs to watch out for. Each of these signs is based on a system of red flags signalling the degree of risk. 

An example of one red flag – indicating moderate risk – is found in the alert about the particular behaviour of professional directors who are keener on collecting fees than aiding shareholders.  

Howell explains that some professional directors take on so many directorships that they can’t possibly give each one adequate attention, especially now that the pressures are increasing for much closer scrutiny. 

Two red flags, as in the case of a company that is taking longer to convert sales into cash, represent strong risk. Howell cites the case of telecom equipment maker Lucent Technologies that needed about 40% longer time in 1999 to convert an average sale into cash than in 1997 – 93 days versus 68 days.  

With both inventories and receivables climbing faster than sales at the time, Lucent struggled from the end of 1999 as cutbacks forced it to slash jobs and post billions of dollars in losses, and watch its market value collapse. 

Three red flags, as in the case of a company headed by an aggressive CEO and a compliant chief financial officer, signal the highest risk.  

According to Howell, such a combination is the worst in an executive suite because when an overbearing, bullying CEO makes it clear that the figures must meet or beat expectations, a fawning CFO, fearing that he or she may lose his or her job, may bend the accounting rules to make his or her master happy. 

These are but only three examples out of about 175 alerts. As he lashes out, Howell’s language could be vividly descriptive; for example, he writes that at publicly traded companies in recent years, “the desperate and greedy not only cook the books but dice and stir fry them, too.” 

He could also be harsh, like when he advises, “When dealing with your money and Wall Street, be suspicious and trust nobody”, which means checking out the backgrounds of brokers and advisers through regulators.  

After all, he has gathered accounts from many reliable sources who believe Wall Street is “the ultimate home of mercenaries” and that “the days are long gone when analysts and brokers on Wall Street had only their clients’ interest at heart.” 

Although the language in some parts may cause some indigestion, Predators and Profits is nonetheless fun to read.  

After all, it has the incentive of being a possibly worthwhile investment before one sets out to go try one's luck in Wall Street or any other financial markets. 

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