January 21, 2008

Book Review: The Smartest Guys in the Room

I have just finished a book called the Smartest Guys in the Room; a story about the Enron collapse. Although the subject is not timely, but the take aways from the book will make you a better investor. I highly recommend reading the book.

The book, at least for me, is not about Enron and corruption, it is about investment analysis. The take aways were about being a better investor, a more diligent one, and think for yourself mentality.

The book highlight the story of Enron, its players, rise to the pinnacle of Wall Street and its speedy fall. It documents the transactions and the accounting schemes to boost earnings and cash flows.

As investor there are several takeaways from the book:
  1. Thinking for oneself is a critical trait for success. All of Wall Street fell head over heals for Enron and its "new age" business model. However clues for the shortcomings of Enron were plenty in their financial statements. Crowds just followed the lead of the few into Enron and kept being fed its story.
  2. Do not invest in what you do not understand. Until now some of Enron own analysts did not understand how the company operated but they were mesmerized by its coolness.
  3. Cash is king. if cash flow from operations do not grow along side earnings be very skeptical of the company.
  4. Read the notes to the financial statements along with proxy statements carefully as a lot of Enron's illusion could have been detected, but no one cared in a bull market to do so.
  5. Leverage can unwind a company very quickly.
  6. Accounting manipulations and earning management occur more than you think in main stream corporate America, although it may at a varying degrees.
  7. The potential of investment banking fees is what determines an analyst recommendation, not the quality of company earnings or its economics.
  8. Equities and investing is less transparent than you think.
  9. You will hear the story of Enron again.
I highly recommend the investment of time in reading this book. It is not really important to know the accounting tricks as it is to understand the lessons of the fall. I highlight it some above and I am sure when I reread it other will be come apparent.

No comments: