TORONTO (CP) - As most investment experts will tell you, dealing in securities is a fine balance between fear and greed and getting it wrong can cost plenty.
An inability to spot the warning signs emitted by companies in trouble is a major problem many investors face in getting it right - a situation that the authors of "The Forewarned Investor: Don't Get Fooled Again by Corporate Fraud" (Career Press) aim to put right.
The book offers a checklist of the eight most important items to keep in mind when buying shares, illustrated with stories involving some of the biggest white-collar rogues of the 20th and early 21st centuries, including Charles Ponzi, father of the pyramid scheme that still bears his name, Dennis Kozlowski of Tyco Inc., Bernie Ebbers of WorldCom fame and our very own David Walsh from the Bre-X mining swindle.
Co-author Steven Sugarman said in an interview that he and colleague Brett Messing had two goals in writing the book.
"One is to help people get a grasp of the history of these frauds because each of the frauds, each of the rogues, is using the same playbook and they're repeating themselves," said Sugarman. "Second, is that the key to being a good investor is avoiding the big losers."
The book's eight chapters outline the danger signs associated with fraud, with much owed to the axiom that something that seems too good to be true probably is.
"One of the things that really surprised me when I was doing the research was how colourful and fascinating all of these corporate rogues were and the lives they lived," said Sugarman.
"And part of the reason people could look at something that is clearly too good to be true and ignore that, they get a little bit distracted by the colourful personalities in the great story spinning."
In the case of modern-day example WorldCom, the authors detail several warning signs that should have caught investor attention.
"They regularly reported dramatically better margins than all their competitors," noted Sugarman.
"It was clear from everyone that no one could match WorldCom and today it's clear why - because they were cooking the books."
Other danger signs include:
-Companies run by family and friends. Sugarman points out that when you have a CFO who is related to the CEO, that's not a good thing - same if the chairman is related to the CEO: "an investor should really start to wonder why, and wonder who is watching the henhouse."
-Companies that go on a buying binges, because if they're doing so great in core businesses, why make acquisitions in other areas?
-Look at Byzantine business structures. As Sugarman says, "if you can't figure out what the heck is going on, and why they need to set something up with such a concentrated fashion, you should assume that there is something that they're trying to hide."
-Listen to skeptics. This chapter features our infamous made-in-Canada mining scandal surrounding Bre-X, the company that in the early 1990s claimed it had discovered a huge gold find in Indonesia. However, the results were fabricated.
But even as doubts spread about the veracity of Bre-X's claim, there was still plenty of time for investors to get out with most of their money.
"We try and make the point that often there's an incredible amount of time after the fraud is discovered that an investor can still get out and still sell if not all, most of their investment," said Sugarman, "and when investors start thinking things can't get worse, it's important to remind them that it can."
Sugarman is quick to point out that not everyone with a complicated business structure is a fraud.
"But it's a sign," he said, and "if you get three or four of these signs, it's like clouds in the sky: when they start to accumulate, there's a good chance of rain."
And "eliminating the fraud not only is good for the heart but good for the pocketbook."
