FOOL ON THE HILL
Stu Grimson Investment Management

The surprising thing about the current wave of companies being hammered with accounting problems is that it is a surprise to anyone at all. WorldCom had been under investigation for months prior to its restatement, and many of the other companies that have been taken down in the past gave plenty of warning. Sometimes our best action is to simply not ask questions or wait and see what happens.

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By Bill Mann (TMF Otter)
June 28, 2002

Now, many of you may know that I absolutely adore the game of hockey. No, I'm not going to give you one of those stupid sporting-event-as-life allegories that we seem to get every summer from baseball fans. I like hockey because it's fast, tough, powerful, graceful, physics-defying -- and it has enforcers.

In hockey parlance, a team that has good enforcers is known to have "grit." That's sort of like saying that Mike Tyson "may have some psychological issues." Because hockey is such a fast, emotionally taxing game, played on a surface that essentially defies control, each player has to go to great lengths to take care of himself. Then there are the enforcers, the guys whose job it is to protect the team's star players when they're being pushed around by players from the opposing team.

Stu Grimson, known around the league as the "Grim Reaper," is not being paid to ask questions and figure out who's in the wrong. He's there to make sure that people on the other team realize that actions have consequences, unpleasant ones at that. It may seem like thuggery, but his is a highly specialized and important role -- to make the other team think awfully carefully before they do something, oh, like scoring a goal, making a good pass, breathing the wrong way, or whatever. On Grimson's jersey, it isn't a team number -- it's a license plate.

His job is not to ask questions.

When it seems that a company is playing around with its accounting, it shouldn't be your job to ask questions, either.

Right now, it seems that every single company that has been accused in the past of using aggressive accounting is being shredded. Dirty CEOs are dropping like flies, and in most cases their exits are done not as preventative measures, but as acts of last-gasp desperation by lap dog boards of directors. It's interesting that with few exceptions, the companies that are blowing up now are ones that were among the highest flyers in the 1990s. Maybe the word isn't so much "interesting" as it is "disgusting." Investors are finding out way too late that there are real problems. But if they were paying attention a long time ago, in almost every situation, there have been hints and rumors and questions about accounting. I can think of only a few companies, AOL TimeWarner (NYSE: AOL) and Microsoft (Nasdaq: MSFT) primarily, that were accused of aggressive accounting in the past that have not been completely taken down by scandal. All the rest -- Tyco (NYSE: TYC), WorldCom (Nasdaq: WCOM), Qwest (NYSE: Q), Enron, Global Crossing, Waste Management (NYSE: WMI), Sunbeam Rite Aid (NYSE: RAD), and Computer Associates (NYSE: CA) inclusive, gave some hint at accounting problems well in advance of their eventual kneecappings.

And those are just the hardest hit. Even companies like General Electric (NYSE: GE), IBM (NYSE: IBM), Cisco (Nasdaq: CSCO), and AIG (NYSE: AIG) have taken a tough hit across the nose for their past indiscretions in making sure their companies seemed as pretty as possible.

What we need is a little Grim Reaper attitude when it comes to companies. It's not Stu's job to ask questions. Nor should it be yours. Don't like what you're hearing? Don't understand it?

Sell. Get out.

Plenty of companies have been accused of doing some bad things. Many times, some opportunities arise out of these accusations. But in many events, even years after the fact, companies that have played fast and loose with accounting are seeing things catch up to them. It's the whole cockroach theory. You see one, it's nearly guaranteed there are several more. See one? Send in the Grim Reaper. You can always make things right later by buying back in. There is no reason at all to sit there paralyzed and hope that the accounting situation isn't true. In nearly every single one of these situations, the aggressive accounting of the good times means that the company is penalizing the future to make good on growth targets today.

Lucent (NYSE: LU) was a great example. Here's a company that was jamming as much product into its sales channels in order to make growth targets. I hear that you had to keep your windows rolled up as you drove by Lucent's headquarters or else you'd risk being hit by a financing offer sheet. In such situations, the company can get away with it as long as the economy and their market continue to grow, because pumping up sales in a growth environment means that the hype at least goes along with the flow. But as soon as the market turns bad, or even just slows, the company has built up for itself a series of quarters that make for tough comparisons, due in no small part to the fact that they weren't real.

There's a great story about Stu Grimson getting into a fight with a guy from another team. It was a knock down, drag out fight. Finally, once the two were separated, Stu looked at the guy, said "Nice fight," waved to his wife and kids in the stands, and headed for the penalty box. No hard feelings, Stu was just asserting the interests of his team.

As should you. Just as companies aren't thinking about you or your needs when they make the choice to play loose with the books, nor should you spend too much time feeling angry or put upon by them. Sell, sell early, and don't look back.

Fool on!
Bill Mann TMFOtter on the Fool Discussion Boards

Come by and join the fray on the Fool on the Hill discussion board! or, if you want to talk puck, the Fool has a great Hockey Fans Board as well!

One last thing -- Matt Richey and I are hosting an online seminar on Selling Stocks. It's an important topic, and perhaps the most misunderstood, most difficult component of Foolish portfolio management. We've got some great lessons in helping you take profits on your winners and selling your losers. I hope you'll come and join us!

Bill Mann likes his teeth just where they are, thank you. At time of publishing, he held none of the companies mentioned in this article. The Fool has a disclosure policy.