Why Did Barron’s Promote a Nonexistent Stock? ($WPO)

Barrons is a startlingly good magazine. The first year I subscribed, they panned Actrade, a stock I liked (it dropped 50% that day, and was bankrupt within the year), and touted M&F Worldwide, which is now five times higher.

So I tend to pay attention to them.

That Actrade story spoiled me, though. There was a lot of conjecture about the company’s fast growth and low cash flow, which I’d heard before. What was new was that company executives had bought their auditor a fancy Rolex; that’s what drove the stock down. Since then, I’ve paid much closer attention to the incentives people have to tell a story that doesn’t quite correspond with reality. And that’s why the recent Barrons article suggesting that the Washington Post Co. is 50% undervalued made me do a double-take.

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Beliefs, Not Companies, are “Too Big to Fail”

What makes a company “too big to fail”? The traditional answer is “size”: if a company as big as Bear Stearns or AIG suddenly needs to liquidate, the market will miss their unique role in clearing transactions or making a market. Then, as they dump their extra-special assets, it will cause widespread panic and needless disruption.

I believe that this is entirely wrong. A company becomes too big to fail when it’s a leveraged bet on a universally agreed-upon belief that happens to be false. Read the rest of this entry »