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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: James Clarke who wrote (16698)	3/29/2003 11:20:09 AM
From: Bob Rudd	Read Replies (2) \| Respond to of 78625

HRC: I suspect many of the potential red flags seen in the statements were 'splained away' in the MDA & footnotes with explanations that sounded plausible, though perhaps convoluted. There are probably other companies with similar potential red flags that will never blow up like HRC. Unlike Enron, I haven't seen much in the way of 'Shoulda, coulda, woulda...seen the troubles, if only you'd...' type articles indicating how investors could have foreseen this blow up. No 'Jim Chanos' type guys were offering short analysis before the bomb dropped as they were with Enron. A key element of not being burned by this sort of thing is not only to go thru the statements carefully, which I confess I didn't do until after the fact...but also to 'raise the bar' of sensitivity to these red flags. For contrarian, deep-value, 'I want to buy it cheap' folks like most of us, that's tough to do. To get the low price, we have to look at negative issues and accept some of them...The ones that appear to be temporary, unconfirmed, unlikely or overblown, and buy despite those negative issues. We're looking for troubles that are more than discounted in the price. So increasing sensitivity to red flags, assuming a whiff of smoke means 'FIRE!' kinda goes against the grain and filters out many winners as well as losers. Further complicating the issue: this is a moving target. We're going from a very permissive environment to a very sensitive, risk averse one. Where previously corporate miscreants could get away with some pretty outrageous stuff, now regulators, investors, financial journalists & credit raters don't let stuff slide. Auditors see Arthur Anderson as a warning not to stray. HRC got caught when they tried to hide past sins in a bigger charge for a reimbursement change...to get the books back in line with reality. Many companies and auditors are facing similar, if not as dire, circumstances. How to transition to cleaner books without getting crushed or convicted. So we've past the time when one could safely ignore impropriety's and red flags - the bubble years, and up ahead will be a period where transgressions will be far more rare - where smoke doesn't imply FIRE! because the scrutiny and penalties will be more certain. But during this dangerous transition period, where sins of the past have not fully come to light, heightened sensitivity to red flags seems to be in order.