In 2011, the hottest stock on the markets was a company called Valeant Pharmaceutical International. The stock price was rising, the President was on his way to becoming a billionaire, and all was well. Then it fell apart, and since 2011 the stock is down by 90%, charges have been laid against some executives; new management has come in and the debt still remains high and now trades at about $24 for it still holds a sizable portfolio. When companies decline from being a high flyer to still existing, we can learn lessons and Ian McGugan offers 3 lessons:

1. Do not assume smart money is really all that smart.

Two of the biggest stock holders of Valeant were Bill Ackman of Pershing Square Capital and Ruane, Cunniff & Goldfarm who run the Sequoia Fund (one of the investors is Bill Gates and likely more Microsoft people). The investment managers were seduced by the idea Valeant could supercharge the standard drug maker business by buying innovation rather than doing R&D. The company bought other drug companies cut the R&D and increased prices to the insurance companies and federal government.

2. Be very suspicious of companies that use aggressive acquisition strategies to generate growth far in excess of their underlying industry.

Profitable growth usually comes from inventing a fundamentally better product or service, not through financial engineering or simply buying other companies.

3. Realize that the adjusted accounting figures produced by many companies are designed to present the best possible picture of reality.

Treat them accordingly and focus on standard figures.

Linking to dividend paying stocks, it was very hard to ignore Valeant as it share price went from the 20’s to 200 and change, most mutual funds and index funds had a piece of it. However, the signs were there and people try to raise them concerning their above average growth rates; their increasing debt (was up to $ 20 billion) and the strategy to pay for the next company the stock price has to go higher, but it was not making much money. There are warning signs, that are easier to see after the affect (similarly parking in a no parking zone and not seeing the sign). Rules of thumbs or comparison to other companies helps bring up the question why? and when to get out.

There are more questions than answers, till the next time – to raising questions.