Predators and Profits: 100+ Ways for Investors to Protect Their Nest Eggs

Table of contents

1. Copyright
   1. Dedication
2. Praise for Predators and Profits
3. About the Author
4. Foreword: What Went Wrong with Capitalism?
   1. Scraping the Barrel
   2. Perception vs. Reality
   3. Moral and Ethical Standards
   4. Character Counts
5. Introduction: Raw Greed and Red Flags
   1. How to Use This Book
   2. Far from an Exact Science
   3. How Many Bad Apples? A Handful, a Barrel, or an Orchard?
   4. No More Heroes Anymore: Twisted and Conflicted Ties
6. Acknowledgments
7. 1. Sages and Charlatans: Avoiding the Fads, the Buzz, the Rip-Offs, and the Merely Dumb
   1. Red Flag 1: If You Can’t Understand, Don’t Invest
   2. Red Flag 2: Friends and Family Don’t Like a Company’s Products
   3. Red Flag 3: A Product or Company Is Hyped by Wall Street, the Media, and Others
   4. Red Flag 4: On Wall Street, the Game Is Usually Rigged Against the Small Investor
   5. Red Flag 5: The Motivation of an Adviser Making a Recommendation Is Suspect
   6. Red Flag 6: Price Means Everything: A Great Company’s Stock May Be Too Expensive
   7. Red Flag 7: Don’t Get Caught Out by the Latest Fad; It Probably Won’t Last
   8. Red Flag 8: If You See Major Funds Are Shunning a Stock, There’s Usually Good Reason
   9. Red Flag 9: Avoid Companies That Are Too Reliant on One or Two of Anything
   10. Red Flag 10: Diversify or Bust: Too Much Money in One Stock May Ruin You
       1. Ejecting at the 11th Hour
   11. Red Flag 11: A Company Files for Chapter 11 Bankruptcy Protection
   12. Red Flag 12: The SEC Launches a Full-Scale Probe into Possible Securities Fraud
   13. Red Flag 13: The CEO or Another Top Company Official Is Arrested
   14. Red Flag 14: A Company’s Shares Are Delisted by a Stock Market Such As the NYSE
   15. Red Flag 15: A Company Does a Reverse Stock Split to Remain Listed
   16. Red Flag 16: A Company Is Facing a Large Number of Class-Action Lawsuits
   17. Red Flag 17: A Prominent Short Seller Has a Company in His or Her Sights
8. 2. Pipedreams and Big Lies
   1. Red Flag 1: When You Find the Big Lie, Everything Else Crumbles Around It
   2. Red Flag 2: A Whiz-Bang Device Is Loved by Tech-Geeks, but the Masses Are Unenthusiastic
   3. Red Flag 3: The Technology Is Great, but Its Price Is Too High for the Mainstream
   4. Red Flag 4: If a Technology Is Said to Transform the World, It Is Being Over-Hyped
   5. Red Flag 5: Journalists Are Often Wrong in Predicting the Success of a Deal or Product
   6. Red Flag 6: When Money Is Easy to Raise, Be Alert for Companies Doomed to Fail
   7. Red Flag 7: A Product Is Only Set to Reach a Niche, but Hopes Are Ramped Higher
   8. Red Flag 8: First Company to Market May Not Be the One to Succeed with a Product
   9. Red Flag 9: Technology Becomes Obsolete and Companies Can Easily Burn Up
   10. Red Flag 10: Be Wary of Chasing the Prices of IPOs Soon After They Start Trading
9. 3. The Superstar CEO: Celebrities, Showmen, and Destroyers
   1. Red Flag 1: The Quitter: When a CEO Leaves without an Explanation
   2. Red Flag 2: When There Is Family Control, the Rights of Others May Be Trampled On
   3. Red Flag 3: Beware the Worst Combo of All: An Aggressive CEO and a Compliant CFO
   4. Red Flag 4: The CEO Bullies Everyone
   5. Red Flag 5: The CEO Hypes a Company’s Performance and Prospects
   6. Red Flag 6: A CEO Is Caught Making Misleading Statements
   7. Red Flag 7: When a CEO Is Abusive, It May Be a Sign of Major Problems
   8. Red Flag 8: A CEO Is Built Up As the New Star Who Is Going to Fix Everything
   9. Red Flag 9: When Senior Management Includes the Company’s Former Auditors
   10. Red Flag 10: When the CEO Is Known Best for Destroying Jobs and Slashing Costs
   11. Red Flag 11: A CEO Known Best As a Serial Acquirer Rather Than a Builder
   12. Red Flag 12: A CEO Who Blames Others for a Company’s Ills
   13. Red Flag 13: An Executive with a Dubious History: Beware Repeat Offenders
   14. Red Flag 14: When Executives Buy Homes in Bankruptcy Havens Such As Florida
10. 4. Jets, Parachutes, and Stealth Wealth: Pay for Performance or Pay for Plundering
    1. Red Flag 1: CEO Compensation Is Not Linked Closely with Performance
    2. Red Flag 2: When Stock Options Are Handed to Executives Like There’s No Tomorrow
    3. Red Flag 3: When Top Executives Own Very Little of Their Company’s Stock
    4. Red Flag 4: If a Company Rewards Failure by Re-Pricing Stock Options
    5. Red Flag 5: If a Company Rewards Failure by Lowering Compensation-Linked Targets
    6. Red Flag 6: Executives Making Money for Themselves from Company Business
    7. Red Flag 7: When a Company Forgives Large Loans Made to Senior Executives
    8. Red Flag 8: Big Payments Are Made to Executives for Their Work on a Takeover
    9. Red Flag 9: When Boards Hand Out Massive Severance Packages to Failed Executives
    10. Red Flag 10: Executives Retire with Huge Packages, Including Costly Perks
    11. Red Flag 11: Companies with Golden Parachutes for Any Kind of Takeover
    12. Red Flag 12: If a CEO Is Protected by a Contract Even if Convicted of a Crime
    13. Red Flag 13: When a CEO’s Perks Are Excessive and Costly
    14. Red Flag 14: When a Company Pays for Private Jet Travel, Clubs, and Agents’ Fees
    15. Red Flag 15: If an Executive Is a Philanthropist with Shareholders’ Money
    16. Red Flag 16: When Executives Bail Out of Their Company’s Stock
11. 5. Caffeine Badly Needed: Sleepy, Inept, and Tainted Boards
    1. Red Flag 1: Sudden Unexplained Resignation of a Director from a Board
    2. Red Flag 2: When the Board Rarely Meets
    3. Red Flag 3: When “Independent Board” Means the CEO’s Grocer Is a Director
    4. Red Flag 4: Boards Lacking Outside Directors Who Are Respected Business Figures
    5. Red Flag 5: Companies in Which the Chairman and the CEO Are the Same Person
    6. Red Flag 6: Professional Directors Who Are Keener on Collecting Fees Than Aiding Shareholders
    7. Red Flag 7: Boards That Have a Large Number of Long-Serving and Elderly Directors
    8. Red Flag 8: Too Many Academics and Ex-Politicians May Lead to an Uncritical Board
    9. Red Flag 9: A Compensation Committee in the CEO’s Pocket Lacks Independence
    10. Red Flag 10: Cross-Board Memberships Can Lead to Conflicts of Interest
    11. Red Flag 11: Directors Who Don’t Own Much of Their Company’s Stock
    12. Red Flag 12: When a Company Hits Low Points in Corporate Governance Rankings
    13. Red Flag 13: Audit Committees That Don’t Take Responsibility for Policing Auditors
12. 6. Growing Mushrooms: The Art of the Opaque, Sneaky, and Buried
    1. Red Flag 1: A Press Release That Buries the Net Earnings Figure
    2. Red Flag 2: A Press Release Begins with a Questionable Measurement of Profit
    3. Red Flag 3: When the Earnings Table Is Produced in a Creative or Confusing Manner
    4. Red Flag 4: If the Press Release Omits a Cash-Flow Statement or Balance Sheet
    5. Red Flag 5: When the Company Treats One-Time Charges As if They Aren’t Real Money
    6. Red Flag 6: The Upbeat Tone of a CEO’s Comments Is Not Matched by Performance
    7. Red Flag 7: If a Company Has Had a History of Over-Optimistic Forecasts
    8. Red Flag 8: A Company Doesn’t Include Accounting Policy Details in Its Press Release
    9. Red Flag 9: Stock Options Accounting Policy and Its Impact Are Not Fully Explained
    10. Red Flag 10: Too Much of the Wrong Kind of Disclosure Can Bury Vital Information
    11. Red Flag 11: When a Company Says it Has Changed Its Revenue Recognition Policies
    12. Red Flag 12: Hidden Announcements of a Probe by the Government or a Regulator
    13. Red Flag 13: Disclosure of Major Litigation Problems or Reserves for a Settlement
    14. Red Flag 14: When a Board or CEO Treats an Annual Meeting with Contempt
    15. Red Flag 15: When a Company Tries to Bury Bad News on or Just before a Holiday
    16. Red Flag 16: When a Company Doesn’t Hold Conference Calls
    17. Red Flag 17: If a Call Is So Controlled That Probing Questions Are Not Addressed
    18. Red Flag 18: When the Press Is Barred from an Annual Meeting
    19. Red Flag 19: If a Company Delays Publishing Financial Results without Good Explanation
    20. Red Flag 20: If a Normally Talkative Company Official Suddenly Clams Up
    21. Red Flag 21: When Drug Companies Spin and Obfuscate the Results of Drug Trials
13. 7. Culture of Greed: Sports Stadiums, Shooting the Messenger, and Rank and Yank
    1. Red Flag 1: When a Company Abruptly Transforms Its Corporate Strategy
    2. Red Flag 2: If a Company Fires a Whistleblower or Faces a Suit from a Whistleblower
    3. Red Flag 3: A Company Cuts Research and Other Spending for the Future
    4. Red Flag 4: A Company Doesn’t Handle a Crisis Directly or Quickly and Allows It to Fester
    5. Red Flag 5: A Company Hides Behind Anti-Takeover Devices and Ignores Votes to Change
    6. Red Flag 6: When Companies Are Legally Incorporated in Unusual Places
    7. Red Flag 7: A Company That Buys a Stadium, a Sports Team, or Their Naming Rights
    8. Red Flag 8: The Edifice Complex: Lavish HQs Can Signal Waste and Excess
    9. Red Flag 9: Companies That Treat Staff Ruthlessly May Signal a Screwed-Up Culture
    10. Red Flag 10: Companies Confronting Rather Than Talking to Pressure Groups
    11. Red Flag 11: When Unexplained Events Cast Doubt on an Entire Investment Story
14. 8. Earnings Tricks and Games: Manipulating the Numbers and “Creative” Fraud
    1. Red Flag 1: Companies That Always Meet or Beat Earnings Expectations
    2. Red Flag 2: The Use of One-Time Gains from Asset Sales to Reach Earnings Targets
    3. Red Flag 3: When a One-Time Charge Becomes a Permanent Part of Results
    4. Red Flag 4: Companies Dipping In and Out of Cookie Jar Reserves
    5. Red Flag 5: Serial Acquirers Who Disguise Performance with the Next Big Deal
    6. Red Flag 6: Using Aggressive Pension Fund Assumptions to Reach Earnings Targets
    7. Red Flag 7: Companies That Talk of New Paradigm Measurements of Performance
    8. Red Flag 8: Beware of Companies That Use Risky Stock Hedging Strategies
    9. Red Flag 9: When Net Profit Is Rising but Cash Flow Is Declining or Negative
    10. Red Flag 10: Now, a Contradictory Warning—Cash Flow Can Also Be Manipulated
    11. Red Flag 11: A Company Grows Much Faster Than Its Rivals with No Clear Explanation
    12. Red Flag 12: When Earnings Growth Is a Lot Faster Than Sales Growth
15. 9. Goosing, Stuffing, and Faking: Tricks of the Trade to Drive Revenue Up and Costs Down
    1. Red Flag 1: Any Signs That Companies Are Reducing Costs by Capitalizing Them
    2. Red Flag 2: When Companies Depreciate Assets over an Unrealistically Long Time
    3. Red Flag 3: Fabrication Is Possible When a Company’s Top Customers Don’t Check Out
    4. Red Flag 4: If a Company Pumps Out Too Many Goods in a Particular Period
    5. Red Flag 5: When a Company Is Taking Longer to Convert Sales into Cash
    6. Red Flag 6: Companies Bringing Forward Revenue from Longer-Term Contracts
    7. Red Flag 7: Companies That Record Bogus Revenue Achieved through Swaps
    8. Red Flag 8: Beware of Companies That Record the Entire Value of Trades As Their Revenue
    9. Red Flag 9: Companies That Indulge in Barter Deals Should Raise Suspicions
    10. Red Flag 10: When Companies Provide Vendor Financing, It Can Backfire
    11. Red Flag 11: If Companies Use Their Own Assumptions to Assess the Value of Contracts
    12. Red Flag 12: When Plane Makers Use Wrong Assumptions to Spread Project Costs
    13. Red Flag 13: When Construction Companies Include Disputed Cost Overruns in Revenue
16. 10. Beyond Their Means: Balance Sheet Clues That May Stop You from Losing Your Shirt
    1. The Balance Sheet and Those Beloved Footnotes
    2. Red Flag 1: If There Is Any Sign a Company Retains Risks from Off-Balance Sheet Items
    3. Red Flag 2: Avoid Anyone Boasting About Using Financial Engineering to Reduce Debt
    4. Shot by Both Sides: The Credit Rating Agencies
    5. Red Flag 3: Rating Agencies Cut a Company’s Long-Term Debt to Junk Status
    6. Red Flag 4: A Rating Downgrade Triggers Obligations, Such As Debt Repayments
    7. Red Flag 5: When a Company’s Debt Levels Are Much Higher than Those of Rivals
    8. Red Flag 6: When a Company Has Large “Contingent” Liabilities
    9. Red Flag 7: When Insurance Against Defaults on Bonds Goes through the Roof
    10. Red Flag 8: A Company Whose Return on Capital Is Below Its Costs of Funding
    11. Red Flag 9: When the Interest Coverage Ratio Drops Below One-to-One
    12. Red Flag 10: When a Company Is Rapidly Burning through Its Cash
17. 11. Snakes and Ladders: Spinning, Flipping, and Walking through Wall Street’s Walls
    1. Taming the Beast
    2. Red Flag 1: When an Analyst Doesn’t Kick the Tires or Even Read a Company’s Filings
    3. Red Flag 2: If an Analyst Hypes a Stock or Uses Superlatives to Describe Management
    4. Red Flag 3: When an Analyst’s Estimates and Recommendations Often Don’t Pan Out
    5. Red Flag 4: When a Highly Reputable Analyst Cuts a Rating, It Is Often a Sell Signal
    6. Red Flag 5: When an Analyst Stops Covering a Company without Notice
    7. Red Flag 6: You Are Probably Behind Wall Street’s Top Clients on Research News
    8. Red Flag 7: Buying Hot IPOs After Trading Begins Is an Easy Way to Lose Your Shirt
18. 12. At the Scene of the Crime: Funds Became Part of the Happy Conspiracy
    1. Red Flag 1: Your Mutual or Pension Fund Has Clear Conflicts of Interest
    2. Red Flag 2: Funds That Won’t Tell You How They Are Voting Your Shares at the Time of the Decision
    3. Red Flag 3: Funds That Don’t Issue Shareholding Information Every Month
    4. Red Flag 4: Funds That Play Cloak and Dagger Games with Fund Managers’ Identities
    5. Red Flag 5: When a Fund Manager Quits Suddenly, Especially if No Clear Reason Is Given
    6. Red Flag 6: When a Fund Management Firm Is Dropped by a Big Pension Fund
    7. Red Flag 7: Lowered Ratings from Morningstar or Lipper
    8. Red Flag 8: When a Fund Has a History of Moving Away from Its Advertised Intentions
    9. Red Flag 9: When the Shareholder Letter Is Merely Used As a Sales Tool
    10. Red Flag 10: Managers Who Divert Hot Stocks into One Fund at the Expense of Another
    11. Red Flag 11: High Fees That Suck Up Returns, Especially in a Bear Market
    12. Red Flag 12: Advertising That Boasts of Stellar Returns over a Short Period
19. 13. Where Were the Auditors? Counting Fictitious Beans
    1. Red Flag 1: The Auditor Suddenly Resigns or Is Fired without a Good Explanation
    2. Red Flag 2: The Auditor Questions Whether a Company Can Survive
    3. Red Flag 3: A Company Restates Its Results
    4. Red Flag 4: Companies That Answer Criticism by Stressing Compliance with Accounting Rules
    5. Red Flag 5: When an Auditor’s Record Suggests Lax Practices or Conflicts of Interest
    6. Red Flag 6: If an Audit Committee Hints at Internal Conflicts or Accounting Concerns
    7. Red Flag 7: If Management Doesn’t Seem to Care Much About Internal Controls
    8. Red Flag 8: If a Fraud Is Declared, Expect News to Get Grimmer As More Is Uncovered
    9. Red Flag 9: A Warning from the New Auditor Watchdog
    10. Red Flag 10: Beware of Accountants Who Are Promoters of the Latest Business Fad
20. 14. Media Munchkins and Masters: Separating Puff Piece Writers from Hard Diggers
    1. Red Flag 1: If a Top Publication Exposes Dubious Accounting or Corporate Behavior
    2. Red Flag 2: Magazine Covers and Awards Aren’t an Aid to Smart Investing
    3. Red Flag 3: Journalists Who Fail to Ask the Hard Question
    4. Red Flag 4: Be Aware That Some Media Commentators Also Trade Stocks
    5. Red Flag 5: Take Media Popularity Polls with More Than a Pinch of Salt
    6. Red Flag 6: Speed Requirements Can Leave Reporters Open to Hoaxes
    7. Red Flag 7: News Reports That Only Rely on Analysts Who Provide a Very Narrow View
    8. Red Flag 8: Details of a News Report May Have Leaked Out Before Publication
21. 15. Abstention to Follow Addiction: When Disenchantment with Low Returns Hits Home
22. A. Tips for Handling Your Broker, Financial Adviser, or Financial Planner
23. B. A Glossary for Investor Survival