Well, Enron was good enough to fool the NAIC Stock Selection Committee -- it was a stock to study, I believe last summer. Those are some pretty sharp individuals; obviously they can be fooled, but if they're fooled, the ordinary investor, even the prudent one, will have some trouble uncovering problems.
An old axiom (I don't know if it's Graham or Buffett
or Lynch that deserves the credit) of fundamental analysis is that you must understand the business model and the
business plan.
All of the above, actually. Buffett is famous for not investing in companies he doesn't understand. Lynch devised the "crayon test": if you can't write with a crayon on a sheet of paper what the company does and how it makes money, don't buy it.
I, too, stayed away from Enron, but in my case not because I didn't understand the model but because I never got around trying -- I had enough other things I was working on that I didn't have the energy to dig into that one. <g>
If I ever get the time, which is unlikely, I may go back to the NAIC article on Enron and ask whether I can figure out why they went so badly wrong. |
