This is one of those times where all the hype around a books is true. And even though the book’s popularity might have come ten years after the book was written. “The Number” is very detailed in its analysis of how companies feel like it’s within their right to fill their pockets while emptying the pockets of its shareholders.
The books goes into detail about CEOs pay out options to enrich themselves, accounting companies were happy to look away, Internet stocks become the latest get rich scheme, how the SEC just didn’t have the budget to even come close to monitoring Wall Street, and how the earnings per share number has become something companies just can’t resist manipulating each quarter.
Here’s an nice quote from the book pulled by Demand Equilibrium that sums up this so called number each quarter that companies have to report:
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. 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.
What’s great about the book though is how Berenson comes at this story not as an outside but someone who wrote about Wall Street for the New York Times and The Street – he live in that world on a day to day basis during the rise of Internet stocks and the collapse of Enron. Yes, he wrote for Jim Cramer’s website just when The Street was starting out.
Another interesting thing about the book is how dividends used to be more of a standard measuring tool for stocks. It was important to know how much companies paid out to shareholders on a regular and consistent basis. That’s not as important these days, it’s more about the PE ratio or what such and such company can do in the future – which is so unknown.
I only wish Alex Berenson would write another book about the last four or five years in the stock market, the Great Recession, the housing collapse, the failure of Lehman Brothers, and so on. What do you say Mr. Berenson, are you bored with Wall Street getting away with the same old tricks or do you have another book about the stock market in you?
But what the book does that’s needed for any investor is make sure you don’t forget the past, and see that while there are many good companies to invest in, there are those that have no problem cheating you out of your hard earned money.