Bethany McLean’s ’92 new book, The Smartest Guys in the Room, about the rise and fall of Enron was recommended by Warren Buffet in his annual shareholder letter. There is an excerpt from the book here.
Buffet is the most successful investor of the last 50 years, so praise from him is high praise indeed.
Besides being an ace fortune reporter, McLean was one of the first to question the apparent success of Enron. She notes:
Enron didn’t stop claiming they were not a trading company. In Enron’s view, its core business, where the company says it made most of its money, is delivering a physical commodity. However, look at Goldman Sachs, one of the best trading outfits in the world — its stock rarely sells for more than 20 times earnings, vs. the 70 or so multiple that Enron shares commanded. Publicly admitting so would have been catastrophic to the stock. Enron’s valuation completely was based on its ability to generate predictable earnings, something not even Goldman Sachs could predict. However, when I went to the 10Ks, I found diminishing cash flows, smooth net income increases and exploding debt levels. Even worse, the return on capital invested was only 7%, lower than their cost of capital.
The whole story is quite interesting. McLean’s career path may have some lessons for current students.
McLean has been feted by cable talk show and late-night television hosts for her work in highlighting those. Her experience with Enron highlights the weaknesses of financial journalism, which tends to be sucked into ‘the gravitational pull of the stock market.” However, she was not a conventional journalist. She graduated from Williams College with a double major in math and English. For three years after graduating from college, she worked for Goldman Sachs’s research division, reviewing the books of companies being offered for sale and writing memorandums describing their virtues and faults. After three years, she joined Fortune’s corps of fact-checkers. Regularly, she corresponds with managers of hedge fund and short-seller companies, which sometimes leads her to investigate more certain companies.
I have no idea what “short-seller companies” are, but I have all sorts of opinions on companies whose bookkeeping is less than wholesome. Alas, the SEC wouldn’t want to see that in EphBlog.