Scott Fearon

Read The Bull

The 14th episode of Read the Bull is an unfiltered discussion with Scott Fearon, author of "Dead Companies Walking: How a Hedge Fund Manager Finds Opportunity in Unexpected Places," published by Palgrave Macmillan in 2015. If you want to know how a veteran long/short hedge fund manager approaches investing, this is the interview for you.
Scott started Crown Advisors Management, a long/short equity hedge fund, in 1990. He manages around $180 million and invests in small and mid-size public companies that have around a $200 - $300 million market cap. He invests on the long side in companies he finds that are undervalued, and also shorts companies that he believes are headed for zero.
Before Scott started his firm, he worked at Texas Commerce Bank in the 1980s. It's there he learned the value of face-to-face meetings, and he tells Stefan that he's visited and met with the management of every company he invests in on the long side. At the time of the book's publication, he had visited 1,400 companies. Now, almost 10 years later, that number is well north of 2,000 companies.
When he started to write "Dead Companies Walking," Scott looked back at the 200 companies he'd shorted and gone bankrupt and found they all made the same strategic mistakes. Scott distilled those mistakes into six themes for why a company fails - Historical Myopia, Getting too Attached to Formulas, Disregarding or Overlooking Your Customers, Madness and Manias, Failing to Recognize Tectonic Shifts, and Not Accepting Blame or Incorrectly Assigning Blame to External Forces.
Some of the stories are well known - Blockbuster's failure to recognize the shift to digital streaming or JC Penney's CEO Ron Johnson ignoring its customers by shifting to a no-sale strategy and bringing in more fashionable merchandise. Others are not as well known - Quokka Sports - a company that wanted to bring immersive viewing to Yacht Racing or First Team Sports, a company that went all in on inline skating. Scott also discusses some of his recent company visits and reveals a couple that he believes will ultimately go to zero. He also talks about why short selling is good for markets and notes that highlights three categories - fads, frauds and failures.
Scott's not immune to failure himself, and he walks Stefan through mistakes his made, including what led to the demise of his first restaurant.
Scott is not your typical hedge fund manager, or at least not the one you typically read about in the Wall Street Journal or see on CNBC. He stopped taking outside capital years ago and focuses solely on finding companies to invest in or to bet against. That means he doesn't have to market his fund or raise new capital to grow assets like many hedge funds out there. It also means he can also speak truth to power and pull the curtain back on some of the things that are wrong with the industry. For example, he criticizes hedge fund managers who chase assets, as well as the allocators who cheer them on.
Scott's book is timeless and there are lessons here for everyone - whether you own a business, work for one or are investing in them.
Go to ReadTheBull.com for more information.