Equity Funding

"“There are a lot of geniuses after the fact,” Tisch said. “But there’s no way to adjust for massive fraud in analyzing a stock. There’s just no answer to it. Either you believe the whole system of investing is based on fraud or you do business on the basis of audits, insurance regular tion, and other safeguards. The idea of massive fraud never entered our minds.” Perhaps it would have, were it not for an investment strategy that put so much emphasis on identifying stock-market buying opportuni- ties by screening for low price/earnings ratios. The assumption is that if an investor can’t identify a fundamental business reason—as op- posed to something having to do with stock market dynamics—for a company’s low stock price, then the stock is artificially depressed and is bound to recover to a more appropriate level. The Equity Funding case was a perfect example of what this strat- egy fails to detect: that the sellers pounding a stock know something a value investor like Tisch doesn’t know—something that doesn’t amount to insider information. Indeed, it was rare that the market the vast majority of investors not privy to inside information—knew 0 something about a company he didn’t know. Were Tisch more open to that possibility, he might not have gotten burned."

"Tisch would be criticized from time to time for being too cautious about the stock market, but his conservative nature wouldn’t permit him to risk getting out too late to avoid a downdraft. “Everybody thinks they’re going to get out in time,” he said. The comment was as true about the market in general as it was about an individual com- pany’s stock like Equity Funding. Despite that misstep, Tisch was still cash rich, and the economy was about to create lots of stock market bargains."