Book Review: Full of Bull, by Stephen McClellan

The past couple of weeks have been busy for the McClellan clan, with Scott and his What Happened and Steve, a former Wall Street analyst, releasing an expose' of sorts on the Wall Street analyst, Full of Bull.

McClellan extends the work of David Dreman from the 1980s again debunking the myth of the value added of analysts to individual investors. He doesn't mince words in reminding individuals that they are an afterthought, the bottom feeders on the information food chain.

Chapters:

• Decoding Wall Street's Well-Kept Secrets
• Understand Wall Street's Misleading Practices
• Strategies in Quest of the Ideal Investment
• Evaluating Companies as Investment Candidates
• Executive Traits Are a Revealing Investment Gauge
• How Street Analysts Really Operate
• Reform Research to Level the Playing Field
• Afterword

Rubber Meets the Road: Can Full of Bull help us make money? I'd answer yes, particularly with respect to McClellan's analysis of what companies offer longer-term. He has a clear bias in favor of investment (greater than one year) versus trading and strong opinions about the latter.

Insights: (off the top of my head)

• Reiterates the Peter Lynch opinion about identifying whether management is in it for themselves or for you (corporate opulence)
• Emphasizes the importance of investing in market leaders (echoes William O'Neil)
• Growth (revenue) at reasonable price
  
• Believes dividends will become MORE important going forward
• He appears to value price to earnings ratios (more than other ratios, e.g. price to sales)
• Analyze whether sastisfactory long-term revenue growth is possible
• Analyze profit margin trending
• Wants overall low debt to equity, debt to capitalization structure
  
• Wants real cash flow to reflect healthy business
• Know companies customer base
  
• Doesn't believe in financial engineering (mentions IBM as a company with little organic growth but stock buybacks and acquisitions)
• Notes importance of independent thinking
• Strongly resents (after the fact) dependence on customer base (e.g. hedge funds, mutual funds) that demand positive ratings
• He has no use for technical analysis (that's a strike against him) or traders (my sense)
  

McClellan's book offers some insights into the conflicts and challenges facing financial analysts. He acknowledges that individual investors have more flexibility than managers, and his take home message is that individuals, with available data, can outperform some Wall Street professionals. I would infer that his keys include:

• Capital preservation
  
• Compounding (works hand in hand with capital preservation)
• Growth at reasonable price
  
• Identifying secular themes
  

How we can use this book? Here's a list of companies that McClellan might like based on growth, revenue, and debt characteristics, sorted from highest price. You can quickly see some of the themes involved.
___________________________________________________________ But here's the same list sorted by price-to-earnings ratios (again from Worden)...I don't know how McClellan would react to their longer-term (sustainable growth, competitive edge-margins)...and he does very little 'hard' analysis of companies (that is...FOR EXAMPLE) in the book. Maybe that's his next book.

Unquestionably, the same hubris that McClellan decries in CEOs afflicts his judgments concerning his industry and his peers. Surely part of that contempt has good foundations. Full of Bull has a place in your investment library, as a cautionary tale about the siren song of Wall Street.

If I had to go to a desert island and could only choose five investment books, what would they be?

• Reminiscences of a Stock Operator (Lefevre)
• The Hedge Fund Edge (Boucher)
• Intermarket Technical Analysis (Murphy)
• What Works on Wall Street (O'Shaughnessy)
• Option Volatility and Pricing (Natenberg)