The Number Quotes

“The Netscape offering changed that equation. Originally, Netscape planned to sell 3.5 million shares to the public at $14 each, a price that valued the company at about $500 million. Given that Netscape had posted only $17 million in sales—sales, not profits—during the previous six months, a half-billion-dollar valuation seemed highly optimistic. But not to investors looking for the next you-know-what. Netscape’s roadshows were mobbed; tech geeks who had never before bought a stock wanted to own the Navigator. One technology stock analyst said getting a session with Netscape’s management before the offering “was like getting a one-on-one with God.”3 With demand overwhelming, Netscape and Morgan Stanley, its underwriter, increased both the size and price of the offering, eventually selling 5 million shares at $28. Still, demand far outstripped supply; investors placed orders for 100 million shares, and Morgan Stanley had to decide which clients to favor with the limited number of shares it had available. “They don’t get any hotter than this,” the Journal reported the morning that Netscape opened for trading. With so much unmet demand, it was obvious that Netscape would begin trading far above the $28 offering. After struggling for hours to set a price, the Nasdaq’s market makers finally opened Netscape at $71 per share. It rose as high as $75 before settling back to end the day at $58.25. At that price the company was valued at more than $2 billion—one hundred times its trailing sales.”
― Alex Berenson, The Number

“Then there’s southern California. Maybe the shadow of Hollywood tints truth and fiction beyond recognition. Maybe crooked executives believe they can do what they please since a continent separates them from Wall Street. Maybe the sunshine triggers a criminal giddiness. Or maybe it’s just coincidence. But a disproportionate number of the financial scandals of the last generation have blossomed in the land of the lotus eaters. The collapse of Lincoln Savings & Loan, Charles Keating’s bank, cost taxpayers $3.4 billion; other California S&L failures cost tens of billions more. Barry Minkow came from the San Fernando Valley to fleece bankers and investors of several million dollars while he was still a teenager. And movie accounting is notoriously corrupt.”
― Alex Berenson, The Number

“The Enterprise Fund skidded 25 percent in 1969, and Fred Carr resigned.19 Other go-go funds also went down down. (Tsai landed on his feet, though, selling his fund company to CNA Financial of Chicago for about $30 million. In the 1980s, he would repeat the pattern, twice more making deals that worked out better for him than his shareholders. “With Gerry, you don’t bet the horse, you bet the jockey,” one person who knew him said. “You invest when Gerry invests, and get out when he does.”)20”
― Alex Berenson, The Number

“By then the conglomerate boom had just about peaked. The problems with merger accounting were obvious, and many investors had realized that conglomerate profits were inflated. The end came in 1969, when the market plunged, making it hard for conglomerates to issue the debt or stocks they needed for new acquisitions. A conglomerateur who runs out of acquisitions is a very unhappy conglomerateur. He’s stuck managing the companies he has already bought, which are all too often third-rate companies in slow-growth industries. Winners buy; losers manage. Worse, the skills that make a successful conglomerateur—salesmanship, impatience with details, and a huge ego—are more or less the opposite of the skills needed to successfully manage a company.”
― Alex Berenson, The Number

“But having just lived through the bubble and bust, Graham believed that investors put too much weight on short-term earnings trends, especially if they were strongly positive. “We cannot be sure that a trend of profits shown in the past will continue in the future,” Graham wrote. “The law of diminishing returns and of increasing competition . . . must finally flatten out any sharply upward curve of growth. There is also the flow and ebb of the business cycle, from which the particular danger arises that the earnings curve will look most impressive on the very eve of a serious setback.”18 Further, Graham warned, “There is no method of establishing a logical relationship between trend and price. This means that the value placed upon a satisfactory trend must be wholly arbitrary, and hence speculative, and hence inevitably subject to exaggeration and later collapse.”
― Alex Berenson, The Number

“Simultaneously, in a stroke of what can only be called genius, accountants have managed to define those responsibilities so narrowly that they are basically meaningless. Throughout the first decades of the twentieth century, accounting trade groups argued that accounting was an art, not a science, and that they needed flexibility to make the best judgments for different situations. “Accountancy never was or could be an exact science, and every profit or loss . . . is in very substantial measure an expression of opinion,” the Journal of Accountancy wrote in 1912. More than pride underlay this dogma. If accounting was merely a matter of working through a step-by-step checklist, then companies might replace accountants with lower-paid clerks, as had happened in the railroad industry after the Interstate Commerce Commission required uniform reporting procedures.”
― Alex Berenson, The Number

“As ever, the chicanery was justified by its practitioners with the excuse that mere financial statements could not capture the brilliance of their enterprises. Talking to a Swedish diplomat, the Match King spoke for con men everywhere: We’ve chosen some new high priests and called them accountants. They too have a holy day—the 31st of December—on which we’re supposed to confess. In olden times, the princes and everyone would go to confession because it was the thing to do, whether they believed or not. Today the world demands balance sheets, profit-and-loss statements once a year. But if you’re really working on great ideas, you can’t supply those on schedule. . . . The December ceremony isn’t really a law of the gods—it’s just something we’ve invented. All right, let’s conform, but don’t let’s do it in a way that will spoil our plans. And someday people will realize that every balance sheet is wrong because it doesn’t contain anything but figures. The real strengths and weaknesses of an enterprise lie in the plans. The banks and investors who”
― Alex Berenson, The Number