Tuesday, April 27, 2010

The Kirk Report

The Kirk Report

Q&A With Herb Greenberg

Posted: 27 Apr 2010 10:03 AM PDT

Herb Greenberg
When I began this Q&A series five years ago, I sat down and made a list of people who I really wanted to interview someday. One of those people was Herb Greenberg.

Mr. Greenberg has worked as a financial journalist for more than 30 years. Most recently, he has served as co-president of Greenberg Meritz Research & Analytics and has returned to CNBC after a two-year absence. He is also the former weekend investor columnist for The Wall Street Journal and a former senior columnist for MartketWatch. Prior to that, Greenberg worked for a number of media outlets including TheStreet.com, San Francisco Chronicle, Fortune, Chicago Tribune, Crain's Chicago Business and the St. Paul Pioneer Press.

The main reason behind my interest to interview Mr. Greenberg is that through both his columns and media interviews, he consistently provided unique and helpful perspectives about the financial landscape. As many others would also attest, Mr. Greenberg has frequently helped investors cut through typical media hype and noise in order to focus on things that many market participants overlooked. By doing so he often highlighted issues and situations that made those who took time to read his columns (including me) vast sums of money.

After leaving journalism two years ago to start a research firm, Mr. Greenberg has recently decided to return to CNBC. In doing so, he agreed with my plea for this Q&A. As he will tell you, I've been working on this interview for many years so it is with true excitement that I'm finally able to share this with you today!

We hope you enjoy and find this Q&A helpful.

Q&A with Herb Greenberg

Kirk:  Hi Herb. First off, thank you so much for giving me the green light on this Q&A. It is nice to have you here!

Herb Greenberg:  My pleasure. I love your persistence, Charles.

Kirk:  Please tell us a bit about yourself.

Herb Greenberg:  Born and raised in Miami. Father sold furniture and later was an operations guy in a small department store. Mother was a social worker. I have two kids: One in college (aspiring fiction writer), one out (an aspiring kids' furniture designer.) I've been married for 30 years to a stay at home mom whose focus on the family allowed me to focus on my work. My brother is the publisher of the South Florida Sun Sentinel and the Orlando Sentinel. I have a sister living in NY. I have lived in Nashville, St. Paul, Minneapolis, Chicago, New York (twice), San Francisco and now live in San Diego, but moving to the East Coast (again!).

Kirk:  What do you like to do in your free time Herb?

Herb Greenberg:  In my spare time - my wife would say I work. Family is the top passion. Exercise and health are right below that. I don't golf or play tennis, which always made me wonder what I was doing in San Diego. Actually - I love San Diego. With or without golf or tennis I will miss it tremendously.

Kirk:  Prior to your career as a financial journalist, did you have any interest in the stock market and investing?

Herb Greenberg:  Zero interest or knowledge other than the Dow Chemical stock I inherited from my grandfather, who was a dentist.

Kirk:  How did those early experiences shape your own investment approach?

Herb Greenberg:  I don't have an investing approach, other than to be ridiculously too conservative and have way too much of my IRA in cash. (I talk my book!)

Kirk:  In the early days, what attracted you to financial journalism as a career?

Herb Greenberg:  Supply/demand. I was working at the Boca Raton News. The Sunday business-desk assignment was rotated every week. This was in the Woodward/Bernstein era. NOBODY wanted to do the business beat. I enjoyed it! The best business decision of my career.

Kirk:  What would you say was one of, if not the major highlights of your career?

Herb Greenberg:  Seeing the former CEO and CFO of Media Vision go to jail. (I had written extensively on the company while in San Francisco.)

Kirk:  What was a major low point and why?

Herb Greenberg:  I haven't really had one beyond the obvious: The downfall of traditional journalism as we knew it. Those were definitely the days. But I also think there are tremendous opportunities ahead, which is why I am shifting to CNBC.

Kirk:  For good or for ill, how do you see financial journalism evolving with the use of blogs and other social media?

Herb Greenberg:  The good: Leveling the playing field with an enormous amount of information. Bad: Zero accountability. Beyond traditional journalists, anybody can say anything under any name - real or assumed - and in the end those same people can disappear.

Kirk:  How do you use social media in your own research? Any tricks of the trade to share?

Herb Greenberg:  Every now and then I'll Twitter in an effort put out an all-points call to find sources in a specific industry. And I search Linkedin to find possible industry sources and ex-employees. Have had more luck with Linkedin than Twitter. I thought about using Facebook, as well, but I have decided (for the time being) to keep that private.

Kirk:  From your point of view, what are the primary strengths and weaknesses of social media?

Herb Greenberg:  Strength: Great way to connect, find sources. Weakness: No accountability.

Kirk:  Investors are seemingly now more informed than ever before yet when faced with real-time information 24/7 many are not seeing improvement in their overall returns. In fact, many have confessed to me privately that the more they pay attention to the financial media, the worst their performance becomes. What are your thoughts, if any, about this phenomenon?

Herb Greenberg:  Depends how you define and/or use media. Media, in general, should be A source of information for investors, not the only source. If they're using media for ideas, they should use it as a jumping off point to do additional research. The trick with the media is finding people who you believe are credible. If you are relying exclusively on media for your trading/investing ideas, perhaps you shouldn't be trading/investing.

Kirk:  It was apparent from reading your columns that you benefited tremendously by tips provided by others (often short-sellers) who would also most likely profit from your columns once you highlighted a major fundamental issue. When you received a tip, what steps would you take to verify its veracity?

Herb Greenberg:  All business journalists talk to market participants. I had a stocks column. I talked to people who were short AND long stocks. I received more ideas than I could possibly handle. Most were based on publicly available data, which was easily verifiable. My question to anybody with an idea: "Where is it in the documents?" After receiving any idea, I had to do the work - not just to verify the information but determine whether it was a story. That's where instincts/experience come in. I'd like to think I had a very good knack at knowing a good story and being able to tell it in a short amount of space. That's the beauty of numbers/public documents: They're all subject to interpretation. That's what makes markets. More often than not I would put an idea from someone new on a pile, never spend a moment on it, and watch how it played out. That would always help create credibility and get me to pay closer attention next time. I expect to do that going forward, as well.

Kirk:  Clearly, not all of the tips provided to you were good or actionable. Do you think short-sellers are guilty of the same hype as those who attempt to push stocks higher?

Herb Greenberg:  Everybody talks their book, and there are creeps and crooks on both sides of the market. However, I spent a year working at an arbitrage firm and it taught me a valuable lesson: We knew more about the stocks we owned than the reporters writing about them. There was often a frustration when we would see them miss or ignore a story. When that happened, we would call them. It wasn't hyping, it was informing - or an effort to inform. I always looked for that frustration when I would hear a new idea. Often my best ideas came from a line I would toss in at the end of any phone call: "So, what else do you know?"

Kirk:  In your experience, do you think those with short-sell focus are the so-called "smart money?"

Herb Greenberg:  There is smart money on both sides. But because shorts generally go against the herd, I have found they often have to be that much smarter on the facts and fundamentals. But truth be told: They're often early!

Kirk:  Why do you think the financial media focuses so much on the bullish-long side versus uncovering fraud other shenanigans?

Herb Greenberg:  It's human nature to be bullish. When you talk "financial media" you need to distinguish between market participants who are commentators versus journalists. Most journalists I know tend to be born skeptics.

Kirk:  As an insider do you think the financial media is unfairly influenced by corporate interests as so many of us outsiders perceive?

Herb Greenberg:  No.

Kirk:  In your final column for the Wall Street Journal and MarketWatch, you boiled everything you learned as a financial columnist to five things. They are:

  1. THE NUMBERS DON'T LIE. They can be stir-fried, oven-fried or convection baked, but in the end they always hold the keys to the kingdom.

  2. QUALITY, NOT QUANTITY. Ignore the "beat the Street" headlines on earnings. It's what goes into the earnings that counts.

  3. GAAP ISN'T THE SAME AS THE GOOD HOUSEKEEPING SEAL. Generally Accepted Accounting Principles, according to which all financial statements are supposed to be prepared, include plenty of gray areas that give management enough rope to hang itself.

  4. DON'T CONFUSE STOCKS AND COMPANIES. They sometimes go in opposite directions. The numbers may not lie, but stocks sometimes do.

  5. RISK ISN'T A FOUR-LETTER WORD. A good rule of thumb is that before you buy, instead of asking how much you can make, first ask how much you can lose. That is what the smart guys do.

This is a great list Herb. But, I have a few questions about them for further clarification. For example, let's talk about the first lesson - i.e. numbers don't lie. What are some things that you look for that indicate a fundamental problem at the company you are researching?

Herb Greenberg:  For me, it's what makes a good story. And that varies by company and situation. There is no one shoe fits all.

Kirk:  Are there any financial ratios that you specifically monitor more than others in your research?

Herb Greenberg:  Funny you ask that. In the research biz we use Cap IQ and I love their "ratios" page. Answer to your question: Again, no one size fits all.

Kirk:  What have you found to be the most significant fundamental signal that a company's stock price is at high risk?

Herb Greenberg:  I do NOT make valuation calls. I'm a journalist. From an observer's standpoint: I've seen more people steam rolled trying to bet based on valuation and traditionally normal metrics than anything.

Kirk:  I agree with that!

Is there any way to go about acertaining a company's earnings quality? Do you have a quick trick to share in this regard?

Herb Greenberg:  Hate to sound like a broken record: Varies by company and situation. My bias, however - and my business partner Debbie Meritz drilled this into me: Beware of anything that can be a discretionary lever to drive quarterly results. Reversals of reserves and a lowering of the allowance for doubtful accounts immediately comes to mind.

Kirk:  In the third lesson you say that there is a "lot of gray areas" that give management enough rope to hang themselves. What are some common gray areas you've found that tend to be more problematic than others?

Herb Greenberg:  GAAP is a big gray area. Virtually everything is subject to interpretation. I've learned that some managements are more conservative than others. Best thing is to compare the way companies and their peers in the same industries treat the same kind of accounts. Beware of companies that have no true public peers. They can account for anything any way they want and there was no way to tell whether they are being conservative or aggressive. And beware of companies that always seem to be changing the way they report certain metrics, especially if they have no apples-to-apples peers. Can't wait until International accounting standards take effect. They will make GAAP look stringent.

Kirk:  As you say in your fourth lesson, a good stock doesn't necessary make a good company. When looking for stocks that are on questionable fundamental footing and which still have rewarded shareholders handsomely, what are some early red flags you tend to notice in a stock that is vulnerable?

Herb Greenberg:  The point of that was that people often confuse a stock with a company (or the market with the economy.) As I said earlier: No one-size-fits-all.

Kirk:  The fifth lesson is probably the most important in my view - i.e. first ask how much you can lose. As you've heard by know, the market and stocks for that matter can remain irrational longer than you can remain solvent. Speaking of this, when you find a company that has problematic fundamentals but a strong stock, at what point do you know when the right time is to short or sell the stock? Although I know you don't trade your own research, in this business, timing is everything, so how what have you learned about the actually timing of your research ideas? Is there anything you like to watch for that verifies that your research is correct and actionable?

Herb Greenberg:  Actionable is in the eye of the beholder. One person's short is another person's reason to do more research on something they already own - or another person's value stock. And one person's value stock is another person's activist stock. In my former businesses, we didn't issue buys and sells. Our research was often a jumping off point for our subscribers, if they found the idea worthwhile.

Kirk:  As you know, after spotting a company that appears to be a good short-sell, timing is always the difficult part. Although I know you don't trade or invest on your own, do you think this is where technical analysis could be helpful? Why or why not?

Herb Greenberg:  So many people use technical analysis today that, in my opinion, it would be foolhardy to discount it as another tool in trying to pick direction. But remember, technical analysts tend to know symbols, not companies. In the end, it's about the companies.

Kirk:  You don't have to answer this if you don't want to but I'm sure people would be interested to know why you ditched your very successful financial journalism career to start your own research firm and then a couple of years return back again.

Herb Greenberg:  The convergence of a variety of factors, including changes in journalism, just made the timing seemed right. Debbie Meritz, my partner, had mentioned the idea several times over the years. This time I thought, "Why not?" You do, after all, only live once.

Kirk:  Did you learn anything of importance while working at your research firm that will make you an even better journalist now?

Herb Greenberg:  A ton, but don't ask me to be specific. I never stop learning.

Kirk:  In the FAQ page of your firm's research website, you say that "In general, our ideas come from our own proprietary financial screens." Without giving away your secrets, what are some general things your stock screens tend to look for?

Herb Greenberg:  It's an art and Debbie was the artist of our outfit.

Kirk:  You also say that you pay special attention to the business model. Can you explain what you mean by this? For example, what would be a faulty or problematic business model in your view?

Herb Greenberg:  Across the lot. Rollups that can no longer rollup are one example. Companies that have relied on legacy products whose markets have matured are another.

Kirk:  It is generally well-known that there is a historical tendency between the rise of questionable accounting practices and a difficult economy. In other words, when times get tough, companies get more "creative" to keep their shareholders happy and their jobs and bonuses secure. So, have you seen a rise in questionable accounting practices?

Herb Greenberg:  Not yet, but I firmly believe that human nature is human nature and as it becomes harder to beat the numbers, especially with stock prices and expectations so high, human nature will once again rear its head. Speaking of which, I can't BELIEVE people still play the beat-the-street game. That's SO pre-market crash.

Kirk:  A number of sophisticated investors have shared their concerns over how difficult it is to evaluate companies in the financial industry. Has this been your experience as well? Why or why not?

Herb Greenberg:  So easy to hide things because it is way too complicated for all but those who really know where to look. It's a true specialty. I mean - look at all of the geniuses who didn't really know what was really going on in the world of collateralized finance. How many people really dig into the financial documents of each collateralized security, even though most are filed publicly? (Hint: Few. Reason: Too damn complicated.) For that reason we avoided it at the research firm.

Kirk:  Are there sectors of the market that you have found to be more problem-ridden and difficult to research than others?

Herb Greenberg:  Keeping in mind that there are exceptions to every rule, I'd say Biotech, which is another area we tended to avoid. I've seen too many smart people fooled by biotech since the first biotech bonanza in the early 1990s. Too much can happen between concept and Phase 3. We'll leave that to biotech specialists.

Kirk:  In all of the research you've done, what are the names of some of the companies you think are managed well and you also think deserve shareholder praise?

Herb Greenberg:  Good question. Apple is an obvious. So is Starbucks, despite its problems. But there are plenty. You know who I really like? The guys who run P.F. Chang's. For years, when I would write critical commentary, they would take my calls and answer my questions. They never took it personally. They were very non-promotional. They understood that the restaurant business is the restaurant business, which means success is not guaranteed. Regardless of the stock price, Dick Federico and Bert Vivian are great operators.

Kirk:  Likewise, are there any companies out there you don't like for one reason or the other?

Herb Greenberg:  Any company that attacks its critics.

Kirk:  As someone who always keeps their ears close to the ground, are there any investment themes that you think have the potential to captivate the interest of the markets later this year?

Herb Greenberg:  You're giving me too much credit. Answer: No other than the reality that not every company will grow into its valuation. Not every company was well-managed going into this mess and not every company will be well-managed coming out. Just don't ask me which ones!

Kirk:  What is your thought regarding financial reform right now? Do you think anything has changed for the better?

Herb Greenberg:  Wall Street is and always will be Wall Street. Beyond that, if I've learned nothing else from my years in media: Avoid getting political.

Kirk:  Is it realistic to suggest that individual investors have what it takes to do the type of homework you and other professionals do?

Herb Greenberg:  Some do, some don't.

Kirk:  What do you think individual investors must do in order to profit from the market as much as the professionals?

Herb Greenberg:  Know what they're buying and why they're buying it.

Kirk:  Overall, is it your view that most investors would benefit from being an active investor or would a passive low-cost index-focused approach be better?

Herb Greenberg:  Depends on the person's tolerance and knowledge.

Kirk:  How do you think stocks should fit into a person's overall wealth plan?

Herb Greenberg:  I'm not an adviser or planner but, again: Depends on tolerance and knowledge.

Kirk:  Are there any books or other resources (websites, etc.) you'd recommend for those who wish to learn more about how to undertake forensic financial analysis and investing in general?

Herb Greenberg:  Anything by Charles Mulford, the Georgia Tech accounting prof. Ted O'Glove's classic, "Quality of Earnings." And keep an eye out for Howard Schilit's latest revision of his "Financial Shenanigans" book. I've reviewed it; it's very good.

Kirk:  Can you share one or two things that you believe have made the biggest difference in developing your own skills?

Herb Greenberg:  Each mistake is a learning experience. And just when you think you've got it figured out, you get blind sided. It's a continuous process.

Kirk:  In your opinion, what is the single most important lesson you've learned so far?

Herb Greenberg:  Learn to trust your instincts.

Kirk:  Who are the people in this business that you admire the most and why?

Herb Greenberg:  The authors of the above three books -- for starters. There are simply SO many smart people in and around Wall Street and corporate America that it's hard to name them all.

Kirk:  What do you think may be the key ingredient to their success?

Herb Greenberg:  Passion.

Kirk:  Finally, if you had one piece of advice to share with all investors what would it be?

Herb Greenberg:  Old cliche but it has never been more relevant: Don't confuse brains with a bull market - and vice-versa.

Kirk:  Thank you so much for the interview Herb. We wish you continued success in all that you do!

Herb Greenberg:  Same to you.