Dead Companies Walking: How a Hedge Fund Manager Finds Opportunity in Unexpected Places
By Scott Fearon with Jesse Powell
Quick Summary
A contrarian investing memoir and guide by short-seller Scott Fearon, who has profited for decades by identifying companies headed for failure. Fearon documents six recurring patterns that cause businesses to fail -- historical myopia, the fallacy of formulas, ignoring customers, manias and bubbles, resisting change, and poor management -- and argues that failure is a natural, healthy, and profitable element of capitalism. The book draws on his experience surviving the 1980s Texas oil bust and twenty-five years of short-selling to provide a framework for identifying companies that are "dead" but don't know it yet.
Categories
- Investing
- Short Selling
- Risk Management
Detailed Summary
"Dead Companies Walking: How a Hedge Fund Manager Finds Opportunity in Unexpected Places" (St. Martin's Press, 2015) by Scott Fearon with Jesse Powell is a 267-page combination of investment memoir, short-selling methodology, and contrarian business philosophy. Fearon, who has managed a long-short hedge fund since 1991, uses his career story as a vehicle for teaching readers to identify failing companies.
Introduction: Forged in Failure establishes Fearon's origin story. Fresh out of Northwestern business school in 1983, he joined Texas Commerce Bancshares, Houston's largest bank, just before the Texas oil economy imploded. When oil crashed below $10/barrel in 1986, the bank and most of the Texas economy went bust. Fearon describes how the bank's CFO gave an optimistic Joe DiMaggio analogy about bouncing back, while the reality was far grimmer -- Texas Commerce was soon acquired. This formative experience taught Fearon that "things go wrong more often than they go right" and that excessive optimism is a more dangerous trait in business than excessive pessimism.
Chapter 1: Historical Myopia identifies the first death pattern: companies and investors that fail to learn from history. Fearon shows how businesses assume current conditions will persist indefinitely, ignoring cyclical patterns and precedent.
Chapter 2: The Fallacy of Formulas addresses companies that become slaves to their business models, continuing to apply formulas that once worked even after market conditions have changed. Success breeds rigidity, and rigidity precedes failure.
Chapter 3: A Minor Oversight -- Your Customers covers companies that lose touch with their customer base, whether through arrogance, bureaucratic insularity, or simple inattention. Fearon describes meeting management teams who cannot articulate why customers buy their products.
Chapter 4: Madness and Manias examines how speculative bubbles create companies built on nothing but hot air, and how the mania mindset makes smart people do foolish things. Fearon connects historical manias to modern examples he has shorted.
Chapter 5: Deck Chairs on a Sinking Ship describes companies in structural decline that rearrange their business models rather than confronting the fundamental problem. Management often confuses activity with progress and cost-cutting with strategy.
Chapter 6: The Buck Stops... There covers the role of management failure, including self-dealing, empire building, and the refusal to acknowledge bad news. Fearon finds that the CEOs of failing companies share remarkably similar psychological profiles: overconfidence, denial, and a tendency to blame external factors.
Chapter 7: Short to Long -- Rescuing Failing Companies shows that Fearon is not purely destructive -- he also discusses situations where he has identified turnaround opportunities and invested on the long side.
Chapter 8: Losing Money Without Even Trying critiques Wall Street's structural conflicts of interest, including sell-side research bias, investment banking conflicts, and the fee-extraction mechanisms that transfer wealth from investors to intermediaries.
Conclusion: Learning to Love Failure All Over Again argues that America's greatest economic strength is its cultural tolerance for failure -- through bankruptcy laws that allow fresh starts and a culture that admires comeback stories. Fearon connects this to the broader argument that short sellers perform a valuable market function by identifying capital misallocation and accelerating the redeployment of resources to more productive uses.
