{"id":192,"date":"2007-01-09T12:57:00","date_gmt":"2007-01-09T18:57:00","guid":{"rendered":"http:\/\/adrianmonck.com\/?p=192"},"modified":"2007-01-09T12:57:00","modified_gmt":"2007-01-09T18:57:00","slug":"enron-and-the-curse-of-contrarianism","status":"publish","type":"post","link":"https:\/\/adrianmonck.com\/about\/2007\/01\/enron-and-the-curse-of-contrarianism\/","title":{"rendered":"Enron and the curse of contrarianism"},"content":{"rendered":"

NOCERA on GLADWELL<\/span>: To be sure, his central point is largely correct, though hardly the contrarian revelation he makes it out to be: Wall Street\u2019s corps of analysts, hedge fund operators, ratings agencies and all the rest should really have paid more attention to Enron<\/span>\u2019s public disclosures.<\/span>N<\/span>ice piece from the NYT<\/span>‘s Joe Nocera<\/span><\/a> unpicking Malcolm Gladwell<\/span><\/a>‘s ‘semi-defense of Enron’<\/a> in the New Yorker<\/span>. I turned to Gladwell<\/span>‘s essay on the advice of the generally reliable John Naughton<\/a>. Alas, in a piece that seems to incorporate something half-written on WW2 intelligence, Gladwell<\/span> pursues a tedious semantic distinction between a puzzle and a mystery, and then yokes it to a pretty disappointing attempt to argue – ‘contrarian stylee’<\/span> – that Enron<\/span> was<\/span> open about its finances, but investors failed to pay careful attention.<\/p>\n

This is how Gladwell<\/span> ends his piece: <\/p>\n

In the spring of 1998 … a group of six students at Cornell University\u2019s business school decided to do their term project on Enron … the group reviewed Enron\u2019s accounting practices as best they could. They analyzed each of Enron\u2019s businesses, in succession…<\/p>\n

The students\u2019 conclusions were straightforward. Enron was pursuing a far riskier strategy than its competitors. There were clear signs that \u201cEnron may be manipulating its earnings.\u201d The stock was then at forty-eight dollars\u2014at its peak, two years later, it was almost double that\u2014but the students found it over-valued. The report was posted on the Web site of the Cornell University business school, where it has been, ever since, for anyone who cared to read twenty-three pages of analysis. The students\u2019 recommendation was on the first page, in boldfaced type: \u201cSell.\u201d<\/p><\/blockquote>\n

Describing that finale as Gladwell<\/span>‘s coup de gr\u00e2ce<\/span>, Nocera<\/span> concludes his column thus:<\/p>\n

Out of curiosity, I looked up the students\u2019 work on the Internet. Their research report does indeed have a sell recommendation. But it\u2019s not really because the students thought Enron had deep problems. Indeed, the report praises much about Enron and its business. The main issue was a \u201clack of upside potential in the near term.\u201d Over the long term, the students had a neutral rating on the stock. The students put a price target of $42 \u2014 not exactly something you\u2019d do if you suspected fraud.<\/p>\n

As for that line about manipulating earnings, that\u2019s in the report, too, but it is also not quite as Mr. Gladwell makes it out to be. The students used a complex statistical tool called the Beneish model, which helps investors detect whether there might be some earnings manipulation. Sure enough, that is what the model suggested. But then the students went on: \u201cFurther analysis of these indicators showed no cause for concern.\u201d<\/p>\n

Mr. Gladwell notwithstanding, my guess is that the students \u2014 and the rest of the world \u2014 would have come to a different conclusion if Enron had only disclosed what it should have. That it didn\u2019t has a lot to do with why Mr. Skilling is behind bars.<\/p><\/blockquote>\n

Nice to see online literary fencing conducted with the \u00e9p\u00e9e<\/span> rather than the meat cleaver! But let Gladwell<\/span> have the last word from his blog<\/a>: <\/p>\n

On Wall Street, seeing truth gets you a million dollar bonus. At a newspaper, it gets you a slap on the back.<\/p>\n

We\u2019ve spent a lot of time, post-Enron, criticizing the flaws in the investment community\u2019s gatekeeping activities. But I think we should also recognize what the Enron case tells us about the value of newspaper journalism. Maybe, in other words, we have underestimated the value of impartial, professionally- motivated, under-paid and overworked generalists in tackling the kind of information-rich, analysis-dependent \u201cmysteries\u201d that the modern world throws at us.<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"

NOCERA on GLADWELL: To be sure, his central point is largely correct, though hardly the contrarian revelation he makes it out to be: Wall Street\u2019s corps of analysts, hedge fund operators, ratings agencies and all the rest should really have paid more attention to Enron\u2019s public disclosures.Nice piece from the NYT‘s Joe Nocera unpicking Malcolm […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","footnotes":""},"categories":[7,50,81,5],"tags":[120],"class_list":["post-192","post","type-post","status-publish","format-standard","hentry","category-journalism","category-journalists","category-media","category-news","tag-us-journalism"],"_links":{"self":[{"href":"https:\/\/adrianmonck.com\/about\/wp-json\/wp\/v2\/posts\/192","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/adrianmonck.com\/about\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/adrianmonck.com\/about\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/adrianmonck.com\/about\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/adrianmonck.com\/about\/wp-json\/wp\/v2\/comments?post=192"}],"version-history":[{"count":0,"href":"https:\/\/adrianmonck.com\/about\/wp-json\/wp\/v2\/posts\/192\/revisions"}],"wp:attachment":[{"href":"https:\/\/adrianmonck.com\/about\/wp-json\/wp\/v2\/media?parent=192"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/adrianmonck.com\/about\/wp-json\/wp\/v2\/categories?post=192"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/adrianmonck.com\/about\/wp-json\/wp\/v2\/tags?post=192"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}