by Charles Mizrahi
Imagine if I told you 30 years ago that by the turn of the millennium General Motors (GM) would be fighting for its corporate existence. I'm sure you would have had me committed to a nice hospital room with padded walls. But here we are in 2006 and just a short while ago General Motors reported another batch of disappointing results and a restatement of it earnings. Just a few days ago, Moody's cut its rating on GM for the third time since August 2005 to six steps below investment grade. GM now has a smaller market share than at anytime during the past 50 years.
What happened and what can we learn from it? One of the first lessons that come to mind is that bigness does not guarantee survival. John Kay, in an excellent article in Financial Times on March 22, 2005 gave some reasons as to why a company the size of General Motors and AT&T can go the way of the dodo bird. (NOTE: On November 18, 2005 SBC Communications Inc. closed its acquisition of AT&T. It marked the end of AT&T, which was founded in 1875 by Alexander Graham Bell and was one of the US 's best-known companies.)
Kay says, "The failures at GM and AT&T did not happen because these companies were big. GM ran into difficulties because it did not make the cars its customers wanted, because the company was slow to see how preferences were changing and because its production systems could not match the cost levels and reliability achieved by its Asian and European competitors."
When I read his reason for the failure of GM and AT&T, what struck me was arrogance. How could you not listen to your customers? How could a company not continue to innovate and learn from its competitors? How could you think you could stay in business when your quality started to fall and you did not stay in touch with your customers?
It's not in the numbers
I am very confident that if you looked at the financial statements of GM or AT&T several decades ago, you would have come to the conclusion that they were as solid as Fort Knox. If you went out and bought shares based on only that information, you would not be a happy camper today.
Investing is part art and part science. The science part is easy; all you need to do is look at the numbers. Review the company's balance sheet, income statement and cash flow and you are only halfway there. If successful investing were all about the numbers, accountants would be the richest people on earth. Such is not always the case.
The art part comes into play when I read a company's annual report and the letter to shareholders. I try to see what type of tone it takes. How does it plan on expanding its business? What challenges does it see in the future? Is it hungry?
You can never get those things just from the numbers. A good investor has to also be an investigative reporter. When I look at a company to recommend or invest in, I try to find out as much as I can about the product or service. I read the company's annual report and 10k's as well as those of their competitors. I want to have as much information about the company as I can before making a decision to invest.
Financial statements can only tell you where a company has been. Keeping a sharp eye out and listening hard will tell you were a company is going.
Charles Mizrahi is editor and publisher of Hidden Values Alert newsletter, which focuses on finding stocks trading significantly lower than their underlying business value. He has over 23 years experience in the financial world as a money manager and investor. Email: [email protected], Webpage: www.HiddenValuesAlert.com