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Charles Mizrahi
Charles Mizrahi

How The Mighty Have Fallen

March 30, 2006

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: charlesmizrahi@gmail.com, Webpage: www.HiddenValuesAlert.com


Rating: 3.5/5 (2 votes)


Soso809 - 11 years ago    Report SPAM
That is one big reason why I try to stay away from Blue Chip stocks unless they have fallen before I buy. I kind of like to look at blue chips like mountain peaks. They form upwards for many years only to hit their peak and then slowly or sometimes fastly decline after that for many years or even months/days in the case of the stock market. A peak only has one place to go and that is down. And if they do continue to grow it is very little and not even worth the risk. Why even start at the peak when you can start from the ground and hit the peak later when it is much more rewarding. (just my opinion). IMO... I think GM will make it out just fine. They may struggling for quite a while but I don't see them disappearing.
Vooch - 11 years ago    Report SPAM
> I think GM will make it out just fine. They may struggling for quite a

> while but I don't see them disappearing.

I can see GM disappearing. Don't buy a struggling stock.

As Peter Lynch said, "Turnarounds rarely turn around".

If the storm has passed, buy the stock only when the future is brighter than it is today. GM's debt load will most likely ensure they never get out of debt, and if they can't pay off the debts, equity (stockholders) holders lose everything and debt holders get everything.

- Vooch

Soso809 - 11 years ago    Report SPAM
I wouldn't realy buy them now because they aren't at the price I would like. But I would consider it after they go through bankruptcy (if they do). Like you said it is probaly imminent. I for some reason have a thing for bankrupt stocks. They have been doing great for me. And I don't wanna fix something that is not broke. But I try to avoid stocks that are pre bankruptcy. Foamex is currently going through bankruptcy and reported a $4.5 million profit for the first quarter of this year. I am glad I bought when everyone else was selling. Investing styles are as varied as personalities and to each his own.

Vooch - 11 years ago    Report SPAM
> Investing styles are as varied as personalities and to each his own.

Yep. There's many ways to make money in the markets, and your bankruptcy theory is something I've heard in the past that works. Of course, you've gotta really know what you're doing on that kinda stuff because the risks are much higher. If you go after higher risk, you must be compensated by also getting higher returns. If you are not beating the market considerably, then you should re-evaluate and go after lower risk stuff.

- Vooch

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