The Long Term Investor

"What are some of the fundamental, long-term traits you look for when selecting a company for your portfolio? P/E ratio under 15? Certain debt to equity ratios? Current ratios? You may have shared this in a previous comment but I have only read the last few pages."

OK..........here (below) is the best description I have run across for my long term investing success. I DO NOT care for mechanical, semi-technical STUFF. PE ratio, debt to equity, ratios.........who cares. I am not buying a bunch of statistics.....I am buying a business. I take a much more business oriented look at a company. Products, marketing, leadership, management, and ESPECIALLY.........LONG TERM MOMENTUM........which is derived from product DOMINANCE world wide. This is what makes me buy a company. It is that simple. I am a BIG PICTURE person

AFTER I have decided to buy a BUSINESS, I look at the financials for five years up to current financials. BUT....that is a last step for me and at that point I am looking at how the various financials are evolving from year to year. I am also looking for anything that stands out to me as ODD. I dont have certain expectations of what I am going to see or find. I look from the standpoint of ANYTHING that seems odd. For example if debt suddenly skyrockets....I will look for anything online that discusses the issue and the what and why of the issue. Looking at the financials.......for me.....is the FINAL STEP........NOT the first step. AFTER I have identified a company and decided that I am probably going to buy that stock...........it is a final double check before going ahead with the purchase. I DO NOT have to be a FINANCIAL ANALYST.......I can get that all day long on the internet.

Here is a good description in the ARTICLE BELOW of what I mean.........with a historical lesson thrown in. I guess I would call myself in the terminology of this article more of a GROWTH investor.........OR........a sort of NEW value investor that is NOT focused on price versus mechanical business values as established by accounting concepts. Although I have been doing this "NEW" style of value/growth investing for many decades. Another example I use that is descriptive of how I invest is.........I am SOMEWHAT of a Peter Lynch type of investor. https://www.investopedia.com/articles/stocks/06/peterlynch.asp

http://www.fortune.com/longform/value-investing-warren-buffett-tech-stocks/


"At this year’s annual Berkshire Hathaway meeting in Omaha, Warren Buffett, the high priest of value investing, uttered words that would have been grounds for excommunication if they had come from anyone but him.

Buffett began his career nearly 70 years ago by investing in drab, beaten-up companies trading for less than the liquidation value of their assets—that’s how he came to own Berkshire Hathaway, a rundown New England textile mill that became the platform for his investment empire. Buffett later shifted his focus to branded companies that could earn good returns and also to insurance companies, which were boring but generated lots of cash he could reinvest. Consumer products giants like Coca-Cola, insurers like Geico—reliable, knowable, and familiar—that’s what Buffett has favored for decades, and that’s what for decades his followers have too.

Now, in front of roughly 40,000 shareholders and fans, he was intimating that we should become familiar with a new reality: The world was changing, and the tech companies that value investors used to haughtily dismiss were here to stay—and were immensely valuable.

“The four largest companies today by market value do not need any net tangible assets,” he said. “They are not like AT&T, GM, or Exxon Mobil, requiring lots of capital to produce earnings. We have become an asset-light economy.” Buffett went on to say that Berkshire had erred by not buying Alphabet, parent of Google. He also discussed his position in Apple, which he began buying in early 2016. At roughly $50 billion, that Apple stake represents Buffett’s single largest holding—by a factor of two.

At the cocktail parties afterward, however, all the talk I heard was about insurance companies—traditional value plays, and the very kind of mature, capital-intensive businesses that Buffett had just said were receding in the rearview mirror. As a professional money manager and a Berkshire shareholder myself, it struck me: Had anyone heard their guru suggesting that they look forward rather than behind?

There is a deep and important debate going on in the investment community, one with profound repercussions for both professional money managers and their clients. Some believe that Buffett is right—that we have become an asset-light economy and that value investors need to adapt to accommodate such changes. Noted value managers like Tom Gayner of Markel Corp. and Bill Nygren of Oakmark Funds, for instance, count companies like Amazon and Alphabet among their top holdings. The fact that these stocks often trade at above-market valuations—a factor that once scared away orthodox value investors—hasn’t deterred them, because the companies’ futures are so bright that they’re worth it.

Other value managers like David Einhorn at Greenlight Capital and Bruce Berkowitz at Fairholme are betting on the very same old-economy companies that Buffett long favored. Berkowitz, Morningstar’s domestic equities Manager of the Decade from 2000–10, has seen his performance suffer this decade, thanks to positions in AT&T and, most notably, Sears Holdings, which declared bankruptcy earlier this fall. Einhorn’s performance has also suffered; his largest position is GM, and he says he has been short what he calls a “bubble basket” that includes Tesla, Netflix, and Amazon.

All value investors continue to agree that price is an important component of value—that’s why we’re called value investors. What’s happening now is a debate about what the drivers of value are—of what constitutes value in the 21st-century economy—and what will drive both the economy and the market forward over the next generation.

Value investors are just that—we hunt for value, and our focus on price in relation to a business’s value makes us easily distinguishable from other investors. Momentum investors, for example, care about price only insofar as they can sell whatever they’ve bought to someone else at a higher one—the so-called greater-fool approach. Then there’s growth investing, in which price takes a distant second place to a business’s prospects for rapid expansion. Because weighing price vs. value is paramount in value investing, those in this school have a reputation of being long-term-oriented, self-denying cheapskates.

The father of value investing was Ben Graham, who gave birth to it roughly 100 years ago, when 100% of the components of the Dow Jones industrial average were just that—industrials. Hard assets were what drove companies like Anaconda Copper and National Lead. Consumer marketing was in its infancy; in 1915, the closest thing the Dow had to a consumer products company was General Motors (or maybe American Beet Sugar).

The year before, Graham had graduated second in his class from Columbia University with such a gifted intellect that he was offered teaching positions in three departments: philosophy, mathematics, and English. Acquainted with poverty at an early age, however, Graham chose a career in finance. The market of his day was dominated by tipsters, schemers, and speculators; stock operators trying to corner the market in United Copper had caused the Panic of 1907, which wiped out Graham’s widowed mother’s savings. Graham loathed such speculations, but he was attracted to the upside of equities. He saw them for what they were: a fractional ownership of a company’s business.

Driven by both his academic temperament and practical necessity, Graham set about trying to figure out a predictable, systematic way to make money in stocks. For an answer, he turned to corporate financial statements and the tangible assets represented therein. Graham saw that while equities went up and down in the short run according to the whims of the market, a company’s tangible assets—its forges and its foundries and the inventory they produced—had a solid, knowable value. Graham began to calculate that value in a precise, mathematical way. He asked himself: What would a company be worth if it were to liquidate its assets and pay off its liabilities? Sometimes the liquidation would actually occur; other times it would be a theoretical exercise that gave Graham what he termed a “margin of safety” when buying a security.

By quantifying value and then juxtaposing it with price, Graham found he could make sense of markets. Thus was born security analysis and, with it, value investing.

From the beginning, value investing focused on the quantitative and tangible aspects of a business. Graham was an intellectual who lived in abstractions; he didn’t want to know about the products the companies made. Irving Kahn, one of Graham’s assistants, told Buffett biographer Roger Lowenstein that if someone began to describe to Graham what a company actually did, he would get bored and look out the window. With his focus on liquidation value, Graham tended to buy boring, beaten-down businesses—cigar butts, they came to be known, good for only a few extra puffs. Walter Schloss, a Graham analyst who later became a legendary value investor in his own right, once pitched Graham on Haloid, which owned the rights to a promising technology that would one day become the Xerox machine. While there is no record as to whether Graham looked out the window, he nevertheless said no.

“Walter,” he said, “it’s just not cheap enough.”

One of Graham’s acolytes was a young man from Omaha who was born into the Depression but came of age during America’s large, optimistic postwar expansion. As a teenager, Warren Buffett tried to understand the stock market by studying charts and other technical indicators; when he came upon Graham’s writings, he said that he felt “like Paul on the road to Damascus.” Buffett came East for business school to study under Graham, who by then was teaching at Columbia, and he briefly worked for Graham after graduation. The classic middle-American boy, however, Buffett soon quit New York for his beloved hometown.

Surveying the economy of the mid-1950s with his own partnership, Buffett saw that it was vastly different from the one Graham had encountered as a young man. While the Dow Jones industrial average was still dominated by industrials, it also contained Procter & Gamble, Sears Roebuck, and General Foods. These companies were fundamentally different from an industrial company: The primary driver of their business value had little to do with hard assets. Rather, the value had to do with the company’s brands—with the loyalty and familiarity that customers felt for Ivory Soap and Jell-O gelatin. These emotional ties, encouraged and cemented by mass marketing, allowed businesses to charge high prices for relatively mundane goods.

The great enabler of such businesses was the rise of national television, which both emanated from and reinforced a culture of homogeneity. Market-leading brands used scale in a very different but no less effective way than manufacturing companies. A beer, shampoo, or cola brand with dominant share could flood the three major TV networks with more advertising than their competition, yet still spend less than the competition as a percentage of absolute sales dollars. This set up a virtuous circle for dominant brands and a vicious circle for those less fortunate. Brands like Budweiser went from strength to strength; strong regional brands like Narragansett beer, once the No. 1 seller in New England, slowly but surely withered away.

Value 3.0 Rules of the Road
Even in an economy transformed by technology, many of Warren Buffett’s principles of value investing apply. Here, some dos and dont’s.

Dos
■ Always look for a business with a clear-cut competitive advantage. If you can’t explain to your spouse what makes a company special as a long-term moneymaker, it probably isn’t. Amazon has a stranglehold on e-commerce; Google owns search; Sherwin-Williams, in which my fund owns a stake, dominates brick-and-mortar paint stores. What makes a company able to earn outsize profits over the next generation?

■ Try to find companies with a small market share, a huge addressable market, and a large competitive advantage. This was Warren Buffett’s recipe for success with Geico, a once-tiny auto insurer that sold directly to consumers rather than pay agents’ commissions. These traits may be present in GrubHub (pictured above), the first mover in the food-delivery market, which my fund also owns. It has an industry-leading market share yet still has less than a 1% share of all American restaurant meals consumed each year. Still TBD: whether consumers will continue to migrate away from in-restaurant dining, and whether Uber and Amazon will try to eat GrubHub’s lunch.

Don’ts
■ As Buffett has said, never confuse a growing industry with a profitable one. One cautionary tale from the 2000s: Vonage, a pioneer in routing phone calls over the Internet. Business exploded over the past decade, but so did competition. Profits for everyone imploded, and the big winner (as is so often the case) has been the consumer. Vonage’s stock has never gotten back to its $17/share IPO price.

■ Avoid businesses whose best days are behind them. This is true even if you’re paying a cheap price relative to current earnings or book value because, in the long run, underlying business quality trumps price. Exhibit A: Sears Holdings looked cheap all the way down until it declared bankruptcy earlier this fall. You can still buy a fractional interest in Sears’s future today for a very cheap price, by the way—36¢ a share, as of this writing.



With the help of his partner Charlie Munger, Buffett studied and came to deeply understand this ecosystem—for that’s what it was, an ecosystem, even though there was no such term at the time. Over the next several decades, he and Munger engaged in a series of lucrative investments in branded companies and the television networks and advertising agencies that enabled them. While Graham’s cigar-butt investing remained a staple of his trade, Buffett understood that the big money lay elsewhere. As he wrote in 1967, “Although I consider myself to be primarily in the quantitative school, the really sensational ideas I have had over the years have been heavily weighted toward the qualitative side, where I have had a ‘high-probability insight.’ This is what causes the cash register to really sing.”

Thus was born what Chris Begg, CEO of Essex, Mass., money manager East Coast Asset Management, calls Value 2.0: finding a superior business and paying a reasonable price for it. The margin of safety lies not in the tangible assets but rather in the sustainability of the business itself. Key to this was the “high-probability insight”—that the company was so dominant, its future so stable, that the multiple one paid in terms of current earnings would not only hold but perhaps also expand. Revolutionary though the insight was at the time, to Buffett this was just math: The more assured the profits in the future, the higher the price you could pay today.

This explains why for decades Buffett avoided technology stocks. There was growth in tech, for sure, but there was little certainty. Things changed too quickly; every boom was accompanied by a bust. In the midst of such flux, who could find a high-probability insight? “I know as much about semiconductors or integrated circuits as I do of the mating habits of the chrzaszcz,” Buffett wrote in 1967, referring to an obscure Polish beetle. Thirty years later, writing to a friend who recommended that he look at Microsoft, Buffett said that while it appeared the company had a long runway of protected growth, “to calibrate whether my certainty is 80% or 55% … for a 20-year run would be folly.”

Now, however, Apple is Buffett’s largest investment. Indeed, it’s more than double the value of his No. 2 holding, old-economy stalwart Bank of America.

Why? Not because Buffett has changed. The world has.

And quite suddenly: Ten years ago, the top four companies in the world by market capitalization were Exxon Mobil, PetroChina, General Electric, and Gazprom—three energy companies and an industrial conglomerate. Now they are all “tech”—Apple, Amazon, Microsoft, and Alphabet—but not in the same way that semiconductors and integrated circuits are tech. These businesses, in fact, have much more in common with the durable, dominant consumer franchises of the postwar period. Their products and services are woven into the everyday fabric of the lives of billions of people. Thanks to daily usage and good, old-fashioned human habit, this interweaving will only deepen with the passage of time.

Explaining his Apple investment to CNBC, Buffett recalled making such a connection while taking his great-grandchildren and their friends to Dairy Queen; they were so immersed in their iPhones that it was difficult to find out what kind of ice cream they wanted.

“I didn’t go into Apple because it was a tech stock in the least,” Buffett said at this year’s annual meeting. “I went into Apple because … of the value of their ecosystem and how permanent that ecosystem could be.”

If the postwar era was about consumer brands operating at scale, the early 21st century is about what we might call digital platforms. Like the branded enterprises before them, they have the permanence and probability that make for a good long-term value investment. Innovation scholar Carlota Perez has written about how at least five times in Western civilization, new technologies have erupted, gone through a speculative frenzy, and then busted, only to settle down after a shakeout into a long, protracted period of stability. We’ve had the high-tech eruption, we’ve had the frenzy of the dotcom boom, and we’ve had the bust. Now we are in what Jonathan Haskel and Stian Westlake, authors of Capitalism Without Capital, call the “bedding-in” phase.

Unlike branded companies, digital businesses often benefit from network effects: the tendency of consumers to standardize on a single platform, which reinforces both consumer preference and the platform’s value. Because of this, the market shares of these platform companies dwarf those of the consumer products giants; software businesses like these are often characterized by a “winner take all” or “winner take most” dynamic. Combine this with the fact that they require little to no capital to grow, and you have Value 3.0—business models that are both radically new and enormously valuable.

“In the past you would’ve needed a tremendous amount of capital to achieve global scale,” says Oakmark’s Nygren, whose top position in his Oakmark Fund is Alphabet, “but these companies have done it just by writing code and pressing ‘send.’ ”

Like their branded predecessors, the platform companies are wisely reinvesting their vast profit streams into not only their core business but entirely new platforms as well. Take Alphabet, which my fund also owns: It began with search, a classic two-sided market in which consumers looking for goods and services are paired with advertisers who want to reach them. Google gained an early edge thanks to a superior search algorithm; with the word “google” now routinely used as a verb, it commands 95% of all mobile search. Google tweaks its algorithm twice a day to maintain its search superiority; meanwhile, the cash flow from this asset-less platform is so abundant that the parent can afford to spend $20 billion a year on research and development. That’s more than the annual earnings of Coca-Cola and American Express combined. It’s going into not only the core franchise but also nascent platforms like YouTube (user-generated video content), Android (smartphone operating systems), and Waymo (driverless cars). None of these businesses earns much now, but they may soon do so, and they are funded entirely by Google’s search platform. Little wonder that Amazon founder Jeff Bezos once told a colleague, “Treat Google like a mountain. You can climb the mountain, but you can’t move it.”

Meanwhile, Bezos has built a mountain or two of his own. As the first big mover in e-commerce, he created a network of warehouses and logistics capabilities that now allows him to deliver packages to more than 100 million Prime customers in two days or less. He too has chosen to reinvest Amazon’s profits back into the business in various forms: lower prices for customers, ancillary services like Prime Video, and entirely new industries like Amazon Web Services, which provides outsourced, essential computational “plumbing” for the next generation of digital startups. In its core retail business, Amazon still has only a roughly 5% share of U.S. retail commerce despite being at it for more than 20 years. Amazon’s stock may be overvalued today—but with its dual moats of immense customer loyalty and low-cost provider status, there is no argument that it is very valuable.

As these platform companies create billions in value, they are simultaneously undermining the postwar ecosystem that Buffett has understood and profited from. Entire swaths of the economy are now at risk, and investors would do well not only to consider Value 3.0 prospectively but also to give some thought to what might be vulnerable in their Value 2.0 portfolios.

Some of these risks, such as those facing retail, are obvious (RIP, Sears). More important, what might be called the Media-Consumer Products Industrial Complex is slowly but surely withering away. As recently as 20 years ago, big brands could use network television to reach millions of Americans who tuned in simultaneously to watch shows like Friends and Home Improvement. Then came specialized cable networks, which turned broadcasting into narrowcasting. Now Google and Facebook can target advertising to a single individual, which means that in a little more than a generation we have gone from broadcasting to narrowcasting to mono-casting.

As a result, the network effects of the TV ecosystem are largely defunct. This has dangerous implications not only for legacy media companies but also for all the brands that thrived in it. Millennials, now the largest demographic in the U.S., are tuning out both ad-based television and megabrands. Johnson & Johnson’s baby products, for example, including its iconic No More Tears shampoo, have lost more than 10 points of market share in the last five years—an astonishingly sharp shift in a once terrarium-like category. Meanwhile, Amazon and other Internet retailers have introduced price transparency and frictionless choice. Americans are also becoming more health conscious and more locally oriented, trends that favor niche brands. Even Narragansett beer is making a comeback. With volume growth, pricing power, and, above all, the hold these brands once had on us all in doubt, it’s appropriate to ask: What’s the fair price for a consumer “franchise”?

To be sure, some of the digital-disruption rhetoric is overdone. Cryptocurrency replacing the bank system? Not likely. David Einhorn’s bearish calls on Tesla and Netflix may well be right, not because the stocks are expensive but because they face rising competition. And for all the hype about autonomous vehicles, they’re not anywhere close to being here—yet. But a lot can change in half a generation. If you google “Easter Day Parade, New York City 1900” and then “Easter Day Parade, New York City 1913” and look at the pictures that appear, you will see that the former has nearly 100% horse-drawn carriages while the latter has nearly 100% horseless carriages—i.e., automobiles. And when driverless cars do arrive, what happens to the auto industry? What happens to the auto-insurance industry—that cuddly, capital-intensive commodity business that value investors love to talk about at cocktail parties?

Long-term investors need to be thinking about such shifts, and they need to position their portfolios in accordance with them rather than against them. Darwin is often misunderstood, says Markel’s Gayner, who counts both Amazon and Alphabet among his holdings. “It’s not survival of the fittest, but those who are most adaptable to change, that make it through.”

MY COMMENT

To me this is like trying to tell someone how to throw a curve ball. Or describing some other complex task. In the end, the best I can say is......I think like a business owner..........which I was for 22 years........not an accountant.

 

AND.....A55

I see nothing wrong in the slightest profiting from kidney disease or anything else. If a company is legal and public......it is fair game. How many people would die if investors did not support this sort of company and allow them to exist? It never bothered me in the slightest to own Phillip Morris or later MO and Altria.

 

Yeah.......Zukodany. I SHOULD claim to be the worlds greatest market timer. BUT.....in reality......my thesis for buying when I did, has turned out to be correct.......so far. The three events......production data first........earnings next week..........and......the SP500 being dangled in front of investors are doing what I HOPED.

In fact......I looked at my account just before I came here. The BUY of June 23, 2020 is +73.5%. The BUY of July 10 is +27%. My three event theory is paying off nicely. I think I am at the point now where even a HUGE drop would........hopefully.........leave me with a small profit that I could build on for the long term.

Talking about stocks in general.......it is starting to feel to me a little bit like the Dot-Com crash. Back than we ALSO went through a day trading MANIA in the late 90's. As now........the tech companies were BOOMING. Of course...... a good number of those companies were THIN AIR. Back than it took about 3-4 years for it all to fall apart in about 2001/2002.

BUT the overlay of this virus stuff, it's impact on the economy, and the very positive actions of the Fed.........you could argue that this time is NOT the same.

Who Knows.......being very long term it is really not too relevant. Know your risk tolerance. Invest with stocks and funds ONLY long term money..........5-10 years minimum.

 

HERE is my take on Market Timing. A Peter Lynch story. He is probably the greatest investor in history.....but.......rarely mentioned. I doubt anyone has ever beaten the averages over a long period of time like he did with Magellan Fund. I owned the fund while he was manager. I ended up selling it after he left the fund. I think it was somewhere back in that time that I started to invest in fidelity contra fund which I still have as one of my funds today. Here is the story......

https://www.investopedia.com/articles/stocks/06/peterlynch.asp

".....In fact, Lynch once conducted a study to determine whether market timing was an effective strategy. According to the results of the study, if an investor had invested $1,000 a year on the absolute high day of the year for 30 years from 1965-1995, that investor would have earned a compounded return of 10.6% for the 30-year period. If another investor also invests $1,000 a year every year for the same period on the lowest day of the year, this investor would earn an 11.7% compounded return over the 30-year period.

Therefore, after 30 years of the worst possible market timing, the first investor only trailed in his returns by 1.1% per year. As a result, Lynch believes that trying to predict the short-term fluctuations of the market just isn't worth the effort. If the company is strong, it will earn more and the stock will appreciate in value. By keeping it simple, Lynch allowed his focus to go to the most important task – finding great companies."

MY COMMENT

I could not say it any better........

"Trying to predict the short-term fluctuations of the market just isn't worth the effort. If the company is strong, it will earn more and the stock will appreciate in value. By keeping it simple, Lynch allowed his focus to go to the most important task – finding great companies."

 

Looks like some NEEDED profit taking in the NASDAQ today. Lets get real....the short sellers deserve a day once in a while.

Just joking......I imagine the action today was profit takers getting nervous about the HUGE run up we have seen lately. Totally reasonable.

 

SAME HERE. Went from UP big time.........to.....close in the RED. What a pitiful day. The Robinhood guys really let me down today.

ALL I can say is I did manage to beat the SP500 by .17%.

 

"BTW, it's great to have you around. I enjoy following your blog."

Same here.....Tom. I read all your posts in your investing thread.

 

YES......it is EXTREMELY erratic and volatile. TOTALLY driven by the day trading MANIA that we are seeing right now. This trading behavior has gone MAINSTREAM.......which.....means we are probably going to see some sort of a peak and collapse of this sort of behavior some time over the next 6-12 months. It is ADDICTIVE.......exactly the same as GAMBLING.

The ALTERNATIVE scenario......which might also happen.......is that this sort of "STUFF" becomes the investing NORM. In which case......it will make the short to medium term markets TOTALLY UNRELIABLE. MASSIVE HERD MENTALITY. Platforms like Robinhood are VERY, VERY, intelligent when it comes to manipulating human addictive behavior. The one thing that WILL stop this stuff will be.....People running out of money as they are VICTIMIZED by their OWN behavior.

HERE is ANOTHER danger to long term investors. The CELEBRITY, EGO DRIVEN, GLAD HANDING, HOLLYWOOD TYPE, ELITE, CEO. About 10-20 years ago there were MANY of these sorts in the business world. How I DESPISED them and the MEDIA that LIONIZED and enabled them. When one of these types gets control of a company that I am invested in........I RUN for the hills. I was a long time GE shareholder during the Jack W era. I bailed shortly after this IDIOT (my personal opinion) took over. AND....eventually....in my opinion..........and obviously as shown by history......the company was destroyed. These CELEBRITY CEO's move around from one company to another over time. Someone always hires them.......and......sooner or later pays the price. They SUCK OFF a huge amount of annual profit for themselves and their perks. The poor company always ends up being their personal piggy bank. It is the same every time.......shareholders be damned........."they" treat the company as their own little sole proprietorship.

How a power-hungry CEO drained the light out of General Electric

https://nypost.com/2020/07/11/how-a-power-hungry-ceo-drained-the-light-out-of-general-electric/

(BOLD is my personal opinion) (I will say that ALL the info below is "ALLEGED")

"Jeff Bornstein could not control his emotions.

“I love this company,” began the tough-talking, hard-driving chief financial officer of one of the world’s most storied corporations.

Then he broke down in tears.

It was August 2017, less than a month after John Flannery, the brand-new CEO of General Electric, had taken the reins. Flannery and Bornstein had both devoted their entire careers to GE, like most of those present for this moment at the annual summer meeting for top executives in Crotonville, NY, a leafy campus where the company’s professionals spend months being indoctrinated in the corporation’s proud culture.

But what should have been a celebration felt more like a wake.

Days earlier, the two men had met in Schenectady to examine the books at GE Power, the century-old company’s most venerable and profitable division — and had found a dry well where they expected cash.

Power’s “solid profits … were illusory,” write Thomas Gryta and Ted Mann in “Lights Out: Pride, Delusion, and the Fall of General Electric” (Houghton Mifflin), out July 21. “The accounting tricks that looked like profits were actually just borrowing from the company’s future earnings.”

At that earlier meeting, Flannery wheeled on his CFO and tried to tamp down his rising panic.

“Did you f–king know about this?” he demanded.

Founded in 1892 by Thomas Edison, J.P. Morgan and several partners, General Electric’s corporate pedigree had been peerless. The company was a charter member of the Dow Jones Industrial Average, on board at its creation in 1907 and the only one that remained there 110 years later.

GE grew from the nation’s premier power and lighting company into a behemoth. By the turn of the 21st century it was valued at $600 billion, encompassing media, plastics, aerospace, energy, digital, financial services and more.

But in the months after the retirement of Jeffrey Immelt, Flannery’s predecessor, all its apparent wealth began to evaporate.

In Flannery’s first year on the job, more than $140 billion in value vanished from GE’s stock price — bigger by far than the losses incurred by the epic collapses of firms like Enron and Lehman Brothers. GE was unceremoniously booted off the Dow.

It turned out the problems at Power were not unique. For years, GE’s profits had been a mirage built on whirlwind mergers and accounting sleight of hand. The funds that had been doled out to shareholders as fat dividends — and had covered its managers’ lavish perks and pay — had largely been borrowed on the strength of the company’s golden credit.

The book’s authors paint a damning portrait of Immelt’s 16 years at the helm of GE, where a rubber-stamp board of directors allowed him to hemorrhage money almost unchecked.

Immelt was just 45 when he ascended to the top spot in September 2001, succeeding business legend Jack Welch. A charismatic, natural-born salesman, Immelt’s boundless optimism fueled a strategy of continual expansion, as he went fad-surfing after the buzziest new ventures.

At Immelt’s urging, GE’s many arms “overpaid for businesses they didn’t understand and then [were] crushed by the market,” Gryta and Mann write.

On his watch, GE bumbled into the subprime mortgage business shortly before the 2008 crash, leading to deep losses that pushed its stock into single-digit territory. Immelt spent $14 billion on an aggressive expansion of GE’s oil and gas holdings — just as the fracking boom cratered the price of crude oil. The digital division he set up in Silicon Valley and showered with $5 billion of capital never managed to produce the machine-learning platform he touted.

The board didn’t entirely understand how GE worked, and … Immelt was just fine with that.

Meanwhile, GE’s corporate structure placed Immelt at the top of its board of directors, essentially making him his own boss.

“The board didn’t entirely understand how GE worked, and … Immelt was just fine with that,” the authors write. The well-compensated board members were chosen for their willingness to cheer Immelt on — and he readily ejected directors who objected to his plans.

At the same time, GE’s established divisions were expected to meet earnings goals far removed from reality. “Under Immelt, the company believed that the will to hit a target could supersede the math,” Gryta and Mann report.

It was a recipe for a disaster. Up-and-coming middle managers knew that a missed goal could stymie their climb up GE’s ladder; division heads “didn’t necessarily know how his underlings got to the finish line and it didn’t really matter,” the authors write.

Those toxic incentives drove the debacle that Flannery uncovered at GE Power. The division made its money not on the generators and turbines it built, but on the service contracts it sold to maintain the machines.

All a manager had to do was tweak the future cost estimates on those decades-long contracts to jack up profits as needed — and to paper over real losses from unsold inventory and declining demand.

All the while, as the Wall Street Journal reported, Immelt often jet-setted around the world with two corporate aircraft — one that actually carried him, the other flying just behind as a backup “shadow plane” on the off chance that a mechanical problem might delay his busy schedule. His aircraft was rumored to stock both lobster and steak so the boss could choose his midflight meal. Over his last dozen years as GE’s CEO, Immelt raked in an estimated $168 million.

At age 61, after a 35-year GE career, Immelt announced his retirement. He had long planned to depart at the end of 2017, and the board had been conducting an internal audition process for months. But after a contentious investors conference that May, when Immelt was forced to admit that the oil unit would likely drag down GE’s annual profits, he sped up the timeline.

In August 2017, Flannery took the reins. (His CFO Bornstein, who had apparently been unaware of the fiscal games that divisions like Power had been playing, had also been on the four-man shortlist.)

It took months for Flannery to take a complete inventory. Once he did, he ripped off the bandages with a public reveal at an investors update meeting that November.

“We’ve been paying a dividend in excess of our free cash flow for a number of years now,” Flannery confessed to a crowd of stock analysts and financial reporters in Midtown Manhattan. He revealed that Immelt had spent more than $150 billion on stock buybacks that artificially nudged GE’s per-share earnings higher, burnishing the company’s image on Wall Street — but had actually borrowed to pay out dividends.

GE would miss its annual earnings target by a shocking $5 billion that year, Flannery announced — and would slice its dividend in half. It was a cold splash of reality in the face of a stock market accustomed to Immelt’s breezy promises of boundless gains. Almost all of that year’s losses stemmed from the black hole at the heart of GE Power.

“No more success theater,” Flannery pledged.

The truth hurt — and sent GE’s stock price plummeting. But in the next few months, not even a wholesale housecleaning of the board and the removal of Flannery’s top deputies, including Bornstein’s ouster that October, was enough to turn the ship around.

The new board of directors voted to fire Flannery after just 14 months on the job, replacing him with the first-ever GE CEO to be trained outside its corporate culture.

New honcho Larry Culp promptly shed several divisions, including Immelt’s ruinous oil and gas venture. But GE’s slow bleed continues. In October, Culp froze pension contributions for 20,000 employees. In March, he promised to give up his 2020 salary while announcing a 10 percent layoff in the Aviation division. The company’s shares are still publicly traded on the New York Stock Exchange, but at less than a quarter of their former value.

Since leaving GE, Immelt, now 64, dove into venture capital, working with tech startups in California and chairing the board of a medical software company in Boston.

But he has been named in at least two shareholder lawsuits filed by angry investors who accuse him and other former GE execs of covering up its liabilities.

“GE still weighs on him,” Mann and Gryta report. “He feels misunderstood and unfairly portrayed” — and as he often reminds interviewers, he has held onto his GE shares, hoping against hope for an epic comeback.

Soon after Immelt stepped down, he published a self-congratulatory 6,000-word valediction in the Harvard Business Review titled “How I Remade GE.”

“It will take years for GE to fully reap the benefits of the transformations,” he wrote with his signature sanguine obliviousness. “I’m confident that I’m handing over a company that will flourish in the 21st century.”

MY COMMENT

A total case study in.......(alleged)....... management and corporate board malpractice. Speaking in generalities.......NOT about GE......from here on.

The "EMPEROR HAS NO CLOTHS" syndrome. In hindsight plain as day. BUT.....at the time it is happening.....no one DARES to say or do anything. THIS is why a long term investor should have ZERO emotional attachment to ANY company. I ALWAYS pay rapt attention to a holding when a management change occurs.......AND.....very often sell the stock as a result. Look at GE.....look at Microsoft with Hallman and Balmer.

WE ALL know who these sorts of leaders are......their names are household names. They are CELEBRITIES no matter what company they are at. They give each other awards. The MEDIA FAWNS over them. It is SICK. These people are IDIOTS (my personal opinion).............INVESTOR BEWARE.

 

I agree with your comment......B Russ. BUT.....I dont put much confidence in this forum being an example of what is REALITY right now in the markets. On here........STOCKAHOLICS......WE are a very select group. I dont believe that even the traders on here are anything like what is going on now in the general public right now.

PERSONALLY.......I will NOT buy anything right now and probably through the end of the year. IT IS INSANITY out there in the trading and investing world right now with.......the virus.......the media........the election........the Robinhood day traders.......earnings........and probably many other things I am not thinking of. ACTUALLY.......I can deal with most of that list.....BUT.......add in a CRAZY day trading mania on top of things and it is more than I want to deal with as a long term investor.

AND.....I dont have any money to invest anyway.......it is ALL IN......100%......as usual. I will have some investable funds at the beginning of the new year since my annuities and SS produce more than I spend in a year.