Be Wary of a Promised 'Royal Flush'

Editor's note: Some management teams play elaborate games to try to win the public's approval. But according to Joel Litman – founder of our corporate affiliate Altimetry – all the good press can sometimes distract you from what's really going on beneath the surface.

In today's Weekend Edition, we're taking a break from our usual fare to share one of Joel's essays, updated from a May 2023 issue of the free Altimetry Daily Authority e-letter. In it, Joel explains how to look past the false signals – and expose potential red flags...

Only a madman could end the Vietnam War...

By 1969, the U.S. had been involved in Vietnam for nearly a decade and a half. The war was costly, bloody, and vastly unpopular. And when former President Richard Nixon took office that year, he desperately wanted an off-ramp.

Nixon knew he couldn't pull troops out while the war was still raging. There didn't seem to be any end in sight. So he chose the opposite path... and dramatically escalated the fighting.

Under Operation Giant Lance, which launched that October, the U.S. deployed 18 B-52 bomber jets to patrol the polar ice caps. Each jet was armed with nuclear weapons.

The general public didn't know about the launch. But the Soviets – a key ally for Vietnam – could easily see what was going on.

Or so they thought.

What the Soviets didn't realize was that they were focusing on the wrong actions. They were playing directly into the U.S.'s hands.

As I'll explain today, this lesson also applies to investing... because in order to avoid corporate money pits, you have to know exactly how to stay a step ahead of management.

With huge nuclear-armed bombers flying around, the Soviets shifted their approach... and the U.S. was watching.

Nixon and his national security advisor, Henry Kissinger, were utilizing what they called the "madman theory." They made a series of what seemed like irrational, volatile moves. They let the Soviet Union and Vietnam discover their actions on purpose.

Their goal was to convince the enemy that Nixon would stop at nothing to end the war, even nuclear annihilation. They hoped the threat of an unpredictable madman would be enough to bring all sides to the negotiating table.

Moscow and Hanoi already thought Nixon was irrational. So it wasn't hard to convince them that he might push things further than any reasonable leader. And it was made even easier because the two sides were playing entirely different games.

Throughout both the Vietnam War and the Cold War, the Soviets were considered experts at "chess." They read the table and moved their pieces around to gain strategic position. They wanted to win the game in front of them.

U.S. leaders, on the other hand, were playing "poker." They were reading the players across the table rather than playing the cards they were dealt.

The U.S. bluffed to create unforced errors from the Soviets. And it played a risk-averse game when the enemy was more volatile. By playing poker when our opponents were playing chess, we were able to stay one step ahead of the Soviet Union and Vietnam.

This strategy doesn't only apply to war, though... It's also critical to investing.

Some of the most influential investors, like hedge-fund managers Steve Cohen and David Einhorn, are also great poker players.

These folks know better than to take data or management's claims at face value. They also look at the company's actions to gauge whether it's trustworthy. And we aim to follow in their footsteps...

Every quarter, subscribers to our Microcap Confidential advisory receive our "Do Not Buy List." It features the worst of the worst microcaps we can find... companies that have failed multiple tests on our rigorous fundamental forensics checklist.

One warning sign we look for is an overabundance of press releases – with little to show for it. That's something we noticed with Blink Charging (BLNK), an electric-vehicle charging-station company that we first added to the list in January 2021.

In each update, we take it upon ourselves to count the number of press releases Blink posts. It's at 17 so far in 2024... and we're not even halfway through the year. Most of them describe new charging stations and new partnerships.

Blink spends far less time acknowledging that it has been hemorrhaging money for years. It lost $3.21 per share in 2023. And the stock is down 95% since we first said to stay away. All those press releases were a red flag that told us to take another look.

Corporate executives love to make lofty promises. And Blink isn't alone...

Plenty of other companies use a barrage of announcements to distract from "weak cards." That's why the savviest investors know how to read between the lines and call management's bluffs.

When a company announces lots of big – or small – newsworthy events that suggest great prospects, don't buy into it blindly. Take a closer look behind the scenes first. Remember, management teams carefully curate what they say to swing opinions and drive interest.

As investors, we're playing poker... not chess. Spend most of your time looking across the table at the key players. It's the only way to know whether or not they can be trusted.


Joel Litman

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