Book Review by Shmuel Protter

The Detective and The Investor by Robert G. Hagstrom

investmenttool.com Book Review

Uncovering Investment Techniques from the Legendary Sleuths

December 9, 2002

If ever there was a way to learn more about investing and be entertained, this book is the one. By weaving together some of the most important lessons of investing in a most entertaining way, this book makes learning those important lessons fun.

Robert Hagrstom used to read mystery novels to stay awake during a boring summer job in a hotel. He went through the books like a child through candy and when he entered the investing world, he found the world's greatest fictional detectives had lessons to teach him about investing.

In exciting an entertaining prose, Hagrstom showed how the great detective August Dupin took an impossible murder scene and turned it into a completely explainable event. Then he shows how the same techniques led Jonathan Laing managed to figure out that the Sunbeam miracle was actually the Sunbeam accounting trick.

At one point, everyone in the Wall Street financial community thought that Chainsaw Al Dunlap was leading the revival of the company. What he was actually doing was cooking the books. Expenses were shifted to the 1997, the year before Dunlap's takeover. Marketing expenses were paid in advance. This made 1998's profits look great and the stock rose sharply.

But just like Dupin, Laing investigated, asked questions and figured out what was going on before everyone else. Sunbeam's management was furious when he broke the story that was book cooking on an almost Enron level. It was all good detective work and most of the information was freely available to all investors. It would have been a great short play and anyone could have figured it out. It took Laing using the techniques of Auguste Dupin to break the story.

After the book was published, Al Dunlap made a settlement with the Securities and Exchange Commission. He will never again run an American Corporation.

Probably the greatest detective in most minds is Sherlock Holmes. The book explains how Arthur Conan Doyle went from medicine to mystery writing and describes in a n entertaining way how Holmes went about with extraordinary powers of observation to solve murder cases judged unsolvable by Scotland Yard.

With the same style, he tells the story of Dell Computer. Dell grew quickly after going public in 1988, but ran into server problems in the early 1990's. After a series of financial missteps and a failed attempt to sell computers retail, most analysts were down on Dell.

My 1994, Dell's stock had crashed hard and everyone thought they were going to fade into being a niche player. They mistook the problems for a fundamental flaw in how Dell did business. With their cut out the middleman and cutthroat style, they were able to get computers into the hands of millions at half the cost rivals Compaq and IBM.

All the clues were available to every investor. A simple look at the balance sheet showed that Dell was growing rapidly and beginning to generate lots and lots of cash. Their nimble style had them ending the 1990's with total growth of 25,000% versus 2,600% for Microsoft. Even subtracting a two year crash and Dell is still up over 12,000% since 1990.

The clues were all there for investor-detectors like Robert Hagstrom.

I didn't have the chance to read about Father Brown, his third detective. I have to say that even with this review behind me, I'm going to read on.

Hagstrom breaks down the detective style to easy to follow bullet point summaries that any investor who isn't lazy. The summaries aren't easy and require a lot of research to be a detective investor.

My recommendation is that you buy the book read it from cover to cover and follow its instructions. Pick a company, pick an industry do your homework. If the clues say its in trouble like the United Airlines in January of 2001, then make a short bet. If the clues say a company is vastly undervalued, invest. With good homework, you will be right, more often then you are wrong.

The best place to start is with this book. It is an invaluable tool.