Bad Blood: Secrets and Lies in a Silicon Valley Startup – Book review

Last week I made a quick stop at the library after picking up my kid from school to pick up a few books and while I was there, I checked out the personal finance/business section to see what books they had around that seemed interesting. I stumbled upon “Bad Blood: Secrets and Lies in a Silicon Valley Startup” and thought “Aha! this might be a quick interesting read”.

For those of you that may not know, this is a book about Theranos, a health technology company founded in 2003 by Stanford-dropout Elizabeth Holmes, that made tall claims about being able to perform several blood tests using a small amount of blood (from a finger prick) in an automated fashion using machines developed in-house. The claims also stated that the machines would be small enough such that the consumers could have these setup at their homes, and have their lab tests done and ready within a few hours instead of relying on a doctor and/or third-party labs and wait for days to have their test results. As one could imagine, this was such a big deal because it would revolutionize lab testing and the associated industries.

There was one tiny problem though: Theranos’s technology simply did not work and their claims were based on a mountain of lies. This is probably the largest scandal after the infamous Enron scandal that saw the downfall of one of the largest companies in the US. At the time of writing this, Elizabeth Holmes is being charged with wire fraud and the jury is deliberating on this case.

For what it is worth, I had already seen some documentaries on this topic and therefore knew a lot of the story beforehand. That said, I wanted to read the book by John Carreyrou, as he was the journalist that broke out the story on Wall street journal that marked the beginning of the end for Theranos. I have now finished this book and it did not disappoint one bit.

I chose to write about it here. Why? Not because I wanted to restate the same story over here. But rather I wanted to talk about interesting learnings from this book, as several investors were duped investing their capital in this business. While this is not one of those classical books on investing, there are important takeaways that are worth pondering over.

And they were all fooled…

So on the face of it, Theranos’s claims had a lot of appeal. Even a lay person, who does not necessarily have a background in lab-testing technology, could see the potential of how such a business could be profitable, if they had a solution that actually worked. What else did Theranos have going for it? It had a star-studded panel board of directors, ranging from former US Secretary of States (Henry Kissinger, George Schultz), to top defense lawyers (David Boies), to a retired 4-star marine (Jim Mattis). On top of that, it had political connections (association with Clintons) and backing from other high-profile investors (Rupert Murdoch, Larry Ellison etc.).

Furthermore, Theranos struck deals with Walgreens and Safeway allowing them to open up “wellness centers” within these stores and have patients sign up for a variety of lab tests at cheaper rates.

To top this off, Elizabeth Holmes was being covered heavily on the media, her face was everywhere, and this whole narrative of the “next Steve Jobs” was being drummed up.

Surely, the board of directors and these high-profile investors were not dumb enough that they could not have seen through the lies. Did they not do their due diligence? Or was it a case of the bandwagon effect or herd mentality i.e. Everyone is buying this stock, therefore it must be a good business. To me it seems more like the latter. None of these investors were savvy in the field of medical sciences, and they had not seen the technology demonstrated or understood it well enough. They simply believed that since some other big names had invested their capital, this business must have some merit.

What about Walgreens (ticker: WBA), a name that is quite popular in the dividend investing community? They have been around in the retail pharmacy business for such a long time. Surely, they would have seen through Theranos’s BS. This is their area of expertise after all, right? Well they didn’t. A lot of this probably points to a highly inept management at the helm when this deal was struck. But then there is also the possibility of being blind-sided by the question: “What if we do not invest in this opportunity and CVS did and this took off?”.

Takeaways

Here in lies my three biggest take-aways from this book:

  • High-profile investors also make mistakes: To think otherwise would defy logic. This is where investing in a business simply because popular investors like Warren Buffett have invested in it, would be dangerous. There are several reasons for this.
    • The average retail investor does NOT have the same information available to him/her as Warren Buffett does, to tell if this investment choice makes sense to their specific situation and portfolio.
    • The amount of downside may be different. If this investment turns out to be a loss, this might mean different things to you or me as it would do to Warren Buffett.
    • Warren Buffett could be wrong. Yes, the Oracle of Omaha, like all of us, had also made investing mistakes.
  • FOMO is not restricted to the average retail investor: It is equally applicable to big corporations and other high-profile investors as well. IMO, this well and truly affected Walgreens in particular.
  • Do not overlook the quality of the management running the company: Far too often, we investors are so hyper focused on the quantitative aspects of the business and use that to value it. Yes, this is important, but this is not all there is to valuing a business. It is also important to know that companies can do all kinds of “engineering” in their financial statements to portray a rosy picture. IMHO, the qualitative aspects are just as equally important in valuing/understanding a business. One of the qualitative aspects is the management that is leading the company. Neither one of Elizabeth Holmes or Sunny Balwani, the former president and COO of Theranos, had a background in medical science or lab testing technology. To top it off, they simply could not tolerate being challenged or questioned on the merits of their technology. This made the working environment at Theranos very caustic and unhealthy. As a result, Theranos saw a very high attrition rate with people being fired left and right if they would even raise a question about the technology or bring-up any concern whatsoever. These were massive red flags and unfortunately they were simply ignored by the board of directors and the other investors.

Summary

Overall, I really enjoyed reading the book. I think John did a pretty good job of not missing any important details of the entire story. The writing was engaging and very gripping and I kept coming back to read some more. I would like to share one of the stories from the book that I found particularly hilarious. As I had stated earlier, the working environment at Theranos was far from ideal with strict surveillance, people being fired randomly. In one such incident, an employee had had enough and decided to quit, emailed his resignation, served his notice period, picked up his belongings and was about to leave when he was confronted by Elizabeth and Sunny who stated that he could not leave without signing a non-disclosure agreement. The employee refused stating he had already signed a confidentiality agreement when he was hired, had already served his notice period and was free to leave. As he pulled his car out of the parking lot, Sunny sends over a security guard to stop him, the employee ignores the guard and drives off. Sunny then calls the cops and when an officer finally arrives, Sunny complains about how the employee had quit and departed with company property. When the officer asked what was taken, Sunny responds “He stole property in his mind.” This just goes to show the kind of paranoia that was present in the working environment at Theranos.

The Theranos story is far from over and we will learn more about this as time passes by. It is also worth nothing that such incidents are not isolated. I can see a lot of parallels with the story for another company called Nikola, whose founder is also in the dock for similar securities fraud.

I will end this post by wishing my readers a Merry Christmas and a Very Happy New Year. Here is hoping that y’all have a very happy and prosperous year ahead and make great strides in your personal finance journey.

Until next time…

Portfolio Update – New positions

A few companies have been on my radar/watchlist for a while now and I decided to pull the trigger recently when I saw them approach a reasonable price. I am wary about every new position that I initiate, because I very rarely sell and considering the limited bandwidth available to me to track these companies for several years to follow, I want be extremely careful. I am also mindful about the total number of companies I am invested in for this same reason. Currently, this is at a manageable number.

So, lets get right into the portfolio update and the new positions I have added recently.

  • Whirlpool Corporation (ticker: WHR): WHR falls in the Consumer discretionary sector and the Household appliances industry. The company manufactures and markets home appliances and related products and boasts of several well known brands: Whirlpool, KitchenAid, Maytag, JennAir, Affresh, Bauknecht etc. As a consumer, I have been using Whirlpool appliances around my house for several years. The company shows cyclical behavior and more recently, the stock price has seen a slump due to margin pressures. This after a solid earnings growth during most of 2020 and early 2021. The stock is currently trading at a FWD price to earnings of 8.65 (below its 5-year average of 10.25), EV/EBITDA ratio of 5.78 (5-year average of 7.46). Return on Invested Capital (ROIC) percentage of around 19% (5-year average is around the 10% mark). The five year free-cash-flow (FCF) CAGR is around 19.4%. The stock is currently yielding a dividend of around 2.45%, payout ratio of around 21%, with a 5-year Dividend CAGR of around 7%. They have a history of increasing their quarterly dividends for the last 11 years with the most recent increase being around 12% I am keeping a close eye on the current ratio and the short-term liabilities. Not something that is worrying at the moment though. I am choosing to add WHR into the bond-like category of my portfolio as I am not expecting stellar growth in the coming years, but this will give me some good steady cash flow at a reasonable yield on cost.
  • Intel Corp (ticker: INTC): This has been on my watchlist for a while now and I was mostly staying away because of the previous CEO and management. Thankfully, the old management team has gone away and we have a new CEO, Pat Gelsinger, who was previously at VMWare. My first recollection of Pat was when I read a book he co-authored regarding Programming the 80386. The original Intel 8086 was the one of the first microprocessors I studied back in my undergrad days and, frankly, it propelled me towards the career I have today. So Intel holds a special place in my heart. Anyways, I digress. Pat is exactly what Intel needs at this moment as far as leadership in concerned, after years of incompetent management at the helm. The stock got hammered after the recent earnings call and there is a lot of unwarranted pessimism around this business. As far as I am concerned, the fundamentals of the business look solid to me. This is $200 Billion market cap company with by sheer revenue numbers the largest semiconductor company in the world. The stock is trading at a 9.65 FWD price to earnings ratio (5-year average around 12.05), EV/EBITDA around 6.21, ROIC is around 18%. The stock is currently yielding a dividend of around 2.73%, payout ratio of around 26% and a 5-year Dividend CAGR of around 6%. They have a history of increasing their quarterly dividend for the last 7 years with the most recent increase being around 5%. The only concern here is if they will be able to sustain their dividend growth in the coming few years given that they are expecting some capital expenditures due to a investments in a new foundry business. I am not as much concerned about this, because I think this is what management should be doing to turnaround this business after several years of misses.
  • Snap-on Incorporated (ticker: SNA): The third addition is from the Industrial sector and another one that has been on my watchlist for a while. SNA markets and manufactures a wide category of tools, equipment, PC-based and handheld diagnostic products. They were founded in 1920 and happened to notice some of their products in use when I was checking out my car being serviced at the service station. Surprisingly, companies like this do not get talked about a whole lot in mainstream or social media. Like several of its peers, SNA is also facing supply chain constraints and these headwinds have caused the stock price to drop. The stock is currently trading at a 14.57 FWD price to earnings ratio (about in line with their 5-year average) and a EV/EBITDA of 9.9 (a shade below their 5-year average of 10.03). ROIC is at about 15%. FCF 5-year CAGR is at a stellar 14.9%. SNA is currently yielding a dividend of 2.70% with the 5-year dividend CAGR at an outstanding 15.01%, payout ratio at around 39.37%. They have a history of increasing their quarterly dividend for the last 7 years. I am relatively confident about the growth prospects of SNA given its existing portfolio and have therefore put this in the “Growth” category of my portfolio.

So there you go. Are any of these companies in your portfolio? What do you think about them?

Thanks for reading thus far..

Monthly Income Update – November 2021

We are almost at the doorstep of a new year and I am waking up to the nice fall color hues thanks to the two red oak trees in my backyard. Some nice hot tea after breakfast and counting all the dividend checks I have received this month…what more can I ask for! 🙂

I am very thankful to have a loving and caring family, a stable and well-paying job and a lovely community of friends around me.

Dividend Income Received

Company/ETF (ticker)Amount
1.Apple (AAPL)$2.20
2.AbbVie (ABBV)$18.20
3.Albertsons Companies (ACI)$0.84
4. Caterpillar (CAT)$1.11
5.Clorox (CLX)$38.98
6. Costco (COST)$2.37
7.Procter & Gamble (PG)$7.83
8.AT&T (T)$2.08
9.Texas Instruments (TXN)$8.05
10.Verizon (VZ)$14.63
11.Realty Income (O)$9.83
12.STAG Industrial (STAG)$3.30
Total$109.42

So a grand total of $109.42 for this month from a total of 12 companies. At the same time last year, I had earned a whopping total of $9.37. The YoY growth in monthly dividend income is staggering. The key here is that this was $109.42 that I earned passively by simply choosing to invest in high-quality companies, while I focus on my daily 9-5 job and family responsibilities. This is the power of dividend growth investing and why it is the ideal strategy for my specific situation.

Buys/Sells during this month

As always, there is never a dull moment in the world of finance. During this month, news regarding the Omicron COVID variant broke out and that triggered a mini sell-off. Then there the news regarding President Biden’s move to reappoint Jerome Powell as the Fed chair and then the latter’s bizarre statement regarding his previous stated position on “inflation being transitory” and how he now wanted to retire the word “transitory” when describing inflation. Huh?

While all of this was causing movements in the markets, I was simply keeping an eye on any opportunities to buy. Among the opportunities, I added to my Visa (ticker: V) position. There was a slump in the stock price thanks to Amazon UK’s announcement that they will not be accepting payments made through Visa credit card. Fintech, in general, was getting hammered with similar slumps in stock price for Mastercard (ticker: MA), Paypal (ticker: PYPL) etc.

I also used the opportunity to add to my positions for Johnson and Johnson, 3M and Verizon as they had creeped below my cost basis.

Big Buys: V, JNJ, MMM, VZ

“Staying in the game” purchases: AFL, PG, PEP.

The “staying in the game” purchases are simply dollar-cost averaging into the stocks since the threshold for number of days since the last purchase made had expired (threshold configurable based on the category of the holding in my spreadsheet setup). The tranche size is dependent on the current valuation of the stock in question (i.e. smaller tranche size for an overvalued stock).

I had no sells during this month.

Summary

So there you go, another month is in the books and we are all getting ready to bid 2021 adieu and welcome 2022. Hopefully this new year will bring us good news as far as dealing with this pandemic is concerned.

I wish all my readers here a very happy holiday season. Here is wishing you in advance a Merry Christmas and a very Happy New Year!

Stay safe and healthy!

PS: You can now also connect with me on Twitter @LifeWDividends.

Updates on Goals – Year 2021

It is shocking that we are already into the last month of the year 2021. I am so busy with life and work that I am unable to pay attention to everything else that is going on around me. Perhaps it is a sign to take things easy for a change and also not get too bogged down with responsibilities. As I write this, there is news about a new COVID-19 variant called Omicron that is supposedly originating from South Africa. At this point, I have pretty much resigned to the fact that COVID or some other variant of the virus will never go away and we will eventually run out of Greek alphabets trying to identify each variant.

But this post is, thankfully, not going to be discussing about COVID variants. Given that we are heading towards the end of the year and setting sights on 2022, I thought it is good time to look back at my year’s goals, review my progress and set new goals for the coming year.

Goal 1: Write atleast one post per week

Result: Not Achieved.

Maintaining a blog is a lot of work, much more work than one can imagine. Moreover, with a 9-5 job and also a family to take care of, I have very little personal time to do anything else. Why choose blogging then? For one simple reason: I really wanted to get back to writing and penning my thoughts down somewhere. Interestingly, writing helps me in my thought process. It forces me to introspect deeply about the subject. And since I am spending quite a lot of time thinking about retirement, financial independence through dividend growth investing, writing about these subjects would reinforce my own belief system on these subjects.

I kept a very lofty goal of one post per week this year, knowing fully well that I would most likely NOT be able to achieve this given my other responsibilities. But I wanted to try anyway. The pursuit would ensure that I keep writing often.

Although I missed posting every single week, I came pretty close than what I initially though. My average posting frequency was still pretty high for each month.

Goal 2: Div-Net associate membership

Result: Achieved.

My second goal this year was to engage meaningfully with the dividend investing community on the blogosphere and also the world wide web, in general. Through this blog and then, additionally, through Twitter, I have been able to reach out to several like-minded investors. Dividend growth investing can be very challenging. It is very common to sometimes lose focus and wonder if this is really is the right strategy. Talking to like-minded investors, listening and learning from their experiences helps immensely. There are so many alternative approaches within the umbrella of dividend growth investing that it helps to listen to counter viewpoints sometimes.

As far as the blogging community, I wanted to be a part of a network of bloggers who would blog on this subject. I learned about Div-Net by sheer accident, as I saw their badge appears on several blogs that I would regularly follow. I am happy that I was able to satisfy their entry criteria for associate membership.

Goal 3: $1000+ in annual dividend income

Result: Achieved.

Eventually, I decided to share my progress on my dividend portfolio mostly for my own self and I will continue doing so until it makes sense. If it happens to motivate someone in the process, I will consider that as a huge plus for myself.

I am happy to report that I am well past my stated goal of $1000+ for annual dividend income. Part of my goal when I started this blog was to report my monthly progress here. I thought about this pretty long and hard, because there is technically no reason for me to report my passive income on the internet. In fact, the dividend portfolio that I discuss on this blog is only a small portion of my net worth and I do not plan on disclosing the other portions of net worth.

Goals for Year 2022

I have penned down the following goals for the upcoming year:

  • Cover atleast 5 investing book reviews
  • Write alteast one blog post per week
  • Earn $3000+ in annual dividend income

The first goal will force me to read/re-read investing books that I have been on my “to read” list for a while. There is just no substitute to knowledge gained from reading books on investing, or any other subject for that matter. I have kept this to a reasonable number (5) thereby allowing me to read the book and deeply introspect on the subject matter.

The second goal is a repetition from last time. I want to be able to continue writing regularly on this blog and since I was not able to achieve this goal this year, I will try my best to hit this for the coming year. Fingers crossed.

The third goal also looks pretty aggressive. I have no idea what kind of expenses will hit my wallet in my coming year, so I do not know if I will be achieve a $3000+ figure on annual dividend income. Let us see how I do in that pursuit.

What goals do you have in mind for the upcoming year? Were you able to achieve your goals for the current year? Please let me know in the comments below.

Thanks for reading thus far…