Avoid My Mistake

At the first whiff of accounting problems, sell the stock--don't wait, as I did with Cendant

We have a rule at the hedge fund that I run: sell a stock at the first whiff of accounting irregularities. This rule has kept us from losing fortunes, including those we had made in Oxford Health, Sunbeam and Waste Management, to name three recent situations where the stench of overcooked books, and a dramatic decline in stock price, followed closely behind that early whiff. When a stock gets hit because of a product glitch, or a short-term execution problem, I will consider holding on, or even buying more.

But when a company gets caught misstating its financial performance, I try...

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