Tag Archives: Enron

Enron Case Study Analysis. Ask Why? Why?


Case-Study-So-What-is-It-Worth    Prior Post where students discussed the case.

Turn up the VOLUME: Don’t believe the …..?

Enron-Case-Study-So-What-is-It-Worth  My walk-through. I go straight to the balance sheet then calculate the returns on total capital in the business. These financial statements were easy to discard because of the size of the business and the poor returns. My estimate of $5 to $7 per share worth or 90% less than the current share price, was wrong. The company was worth $0.  This is more a case of institutional imperative and incentive-based bias. Wall Street was feeding at the financial trough to keep raising money for Enron (to keep the bad businesses afloat) so guess what the financial analysts (CFAs and MBAs) suggested? Buy!   I guess the market is not ALWAYS efficient.

Forget accounting scandals, this was a crappy business based on trading so no way to determine normalized earnings.   When I was in Brazil and saw Enron’s newly-built generating plant sitting idle, I asked why.   A project developer said he got paid by doing deals by their size not profitability, therefore, the bigger the white elephant, the better.  When I called mutual funds who owned Enron as it was trading $77 per share to ask the analyst if he/she was aware of Enron’s declining businesses coupled with absurd price, I was told to shut up. As one analyst (Morgan Stanley?) told me, “I only believe what I want to believe and disregard the rest.”

Enron Annual Report 2000  Ha, ha! and Is Enron Overpriced?

The above august panel never answered why anyone would give capital to Enron?  No one mentions the elephant in the room.  Sad.

What does the above case have to do with net/nets and our course. Everything! Look at the numbers, think for thyself, ignore Wall Street, and be aware of incentives.   Buying bad businesses at premium prices is a guarantee of financial death.

This is an aside, but based on the above Enron example, does value investing serve a SOCIAL purpose or benefit? Prof. Greenblatt doesn’t think so–you are just trading pieces of paper, but what do YOU think?

See these two venture capitalists explain the social purpose of their business:

Chanos Testimony on Enron, Slide into Tyranny? Federal Reserve Theft?

“First They Came for the Jews” By Pastor Niemoller

First they came for the Jews and I did not speak out because I was not a Jew.

Then they came for the Communists and I did not speak out because I was not a Communist.

Then they came for the trade unionists and I did not speak out because I was not a trade unionist.

Then they came for me and there was no one left to speak out for me.

America’s Slide into Tyranny

Or the “Patriot” Act’s stomping on the 4th, 5th and 6th Amendments to the US Constitution. Who has ever heard of the Bill of Rights? http://www.archives.gov/exhibits/charters/bill_of_rights_transcript.html

When I read this, I puked on new suede shoes. http://lewrockwell.com/goyette/goyette22.1.htmlay

Pay close attention. This is how it happens…

President Obama found a moment of reduced visibility, in an unwatched hour on New Year’s Eve, to sign the latest assault on the Fifth Amendment. In signing the National Defense Authorization Act of 2012 on New Year’s Eve, Obama knew the nation’s attention would be elsewhere, diverted by revelry, football, New Year’s Day, and a Monday national holiday.

In case you haven’t heard, the National Defense Authorization Act allows the government to detain people indefinitely – yes, it includes American citizens who can be taken even on our native soil and imprisoned – merely on the basis of accusations.

The measure is “so radical,” says Human Rights Watch, “that it would have been considered crazy had it been pushed by the Bush administration.” And although Obama appended a signing statement as he put his name to the act, solemnly assuring the nation that the power he insisted on having won’t be used recklessly, it is a political gesture that has no more force of a law than attaching a little yellow sticky note to the bill. If the clear language of the Constitution itself cannot bind the governing classes, it is hard to imagine a post-it note having much effect on the current or future presidents now that the indefinite detention of Americans without trial has been legislatively countenanced.

There you have it in a nutshell, the new American way: Guilty until proven innocent. This is how once-free people slip into state tyranny and slide into martial law.

I ask if any here feel safer?

So Where Does the Federal Reserve Earn the Money?


The Federal Reserve turned $76.9 billion over to the U.S. Treasury last year, close to the record amount transferred to the government’s coffers in 2010, amid a strong profit generated from its expanding portfolio of securities.

Preliminary unaudited results released by the central bank Tuesday showed the Fed had net income of $78.9 billion in 2011 mainly thanks to higher earnings on securities it bought to counter the recession and promote recovery….the Fed’s crisis-lending programs have produced profits. The increase in 2011 income was primarily a result of $83.6 billion in interest earnings from holdings of U.S. Treasurys, federal agency debt and securities held by government-run mortgage finance firms Fannie Mae and Freddie Mac, the Fed said.

Got that? The Fed printed billions of new dollars and earned a profit after all this nonsense. For the record the money supply (M2) grew in 2011 by nearly $ 850 billion. The total monetary base came in at aprox. $8.5 trillion.

Note: Don’t try this at home. You would get arrested for counterfitting. But do you think you could “earn” a profit of $77 billion, if you printed, over-time, some $8.5 trillion to buy Treasury securities and the like, which means, as part of the circus, you could give the Treasury the money to pay you the interest that you then give back to them and release a press release about your financial acumen?

Quiz: Any guess as to where this money actually comes from? Who loses? 

Enron Case Study Addition

We have discussed Enron in prior posts here:

http://wp.me/p1PgpH-1R Enron so What is it Worth?

http://wp.me/p1PgpH-2U  Analysis of Enron Case Study

http://wp.me/p1PgpH-34 Video of Enron Collapse

An alert reader gave me a heads up to add this to the Enron Case Study:

Full Hearing Testimonies on the Enron Scandal:  http://republicans.energycommerce.house.gov/107/action/107-83.pdf

Chanos Testimony: http://energycommerce.house.gov/107/hearings/02062002Hearing483/Chanos782print.htm

Please stop me before I post again…..but I had to alert you to the above. Most will enjoy reading the Chanos testimony. Note how he FOUND the idea. From our prior study of this case we know that great businesses do not need to layer on complicated debt to grow. Complexity in financial statments is a RED FLAG.

10th Anniversary of Enron’s Collapse: Video

If you studied the prior post on the case study, then you know to do your own work in evaluating a company, ask simple questions, walk away if you are confused or uncertain, and do not blindly follow “expert” opinions.

If you have ever watched CNBC’s market experts (watching for extended periods of time could cause serious brain impairment), do you notice that never do you hear them say, “I don’t have the faintest clue where the economy or market is going.”  Few admit that they know they don’t know (Socrates).  This should leave you thinking, “If the people that know, don’t say, then the people who don’t know have the floor to themselves.”

To reinforce the above principles click below on the Marketwatch video discussing analysts biases in the history of Enron’s failure.


If you still doubt the wisdom of not following analysts’ recommendations, you should go here:  http://www.turtletrader.com/analysts-bias.html

Of course, security analysts who work for underwriters are biased to give buy recommendations, but many investors do not realize that analysts have no clue how to value companies. Instead, these analysts futively attempt to guess next quarter’s earnings which may be meaningless to estimating the intrinsic value of a company.

Another problem with analyst “research” is that too often Wall Street analysts filter down information from the management of the company that they follow. In order to maintain a friendly relationship and stay “tuned in” as a respected source on a company, it is difficult for the analyst to reach negative conclusions that contradict management’s optimism. An industry analyst can ill afford to lose contact with the management of a significant company within an industry the analyst follows.

If you think this writer is a hardened cynic, I beg to differ. Wall Street has always worked this way. Go here: http://www.amazon.com/Where-Are-Customers-Yachts-Investment/dp/0471770892/ref=sr_1_1?ie=UTF8&qid=1317224465&sr=8-1

The book is a humourous take on the lunacy of Wall Street in the 1920s and a great read. Same as it ever was http://www.youtube.com/watch?v=-io-kZKl_BI   (Click on minute 1.40)

To reiterate, if you do your own work then you won’t blindly be making the mistakes of another person, and–most importantly–you can correct your own mistakes. Minimizing errors is more helpful to long-term investment returns than picking winners. Long-term performance is highly correlated with error avoidance.

A valuable source of lessons on how to analyze companies and read annual reports can be found below–sorry, copy and paste into your url:


Also, think of the time you save by not watching CNBC, reading security analysts’ reports and, instead, study Value-Line tear sheets and company annual reports to find investments (We will cover in a future post).  What you do not do is as important as what you do.

Feedback, criticism and complaints are  always welcome.

I want to take a moment to thank the one person reading this blog. Thanks Mom!



Answer to Case Study: So What Is It Worth?

If you haven’t tried the case study, go here:


After 20 minutes to complete the case study, go here for my comments and analysis:


The above scribd document has an Appendix on page 20 where you can find other links to more indepth studies of the company. A diligent student can continue to hone their analytical skills.

If you are not willing to read the primary documents like a company’s 10-K to understand the operational and financial characteristics of the company, then be prepared to feel like this (without a parachute) when investing:


Again, this case study should drive home the points of asking simple questions, walking away from the difficult and finally, showing humility. The legions of MBA and CFA analysts who blew up their clients may have more to do with the fact that they have neither competence nor humility rather than pure intelligence.

Update: http://www.marketwatch.com/story/lopsidedly-bullish-consensus-on-apple-2012-09-19?link=MW_story_popular