A Lesson from Poseidon Concepts: It’s a Jungle Out There

So I’ve talked to a several people now who were burned bad by Poseidon Concepts (symbol: PSN).

Check out the chart:

Ouch

I used to own shares in this company, as part of a sub-portfolio of above-average dividend-paying stocks. I sold them September last year, because I anticipated a serious lack of growth from their competition being too intense. The dividend just wasn’t interesting enough to care.

When shares started tanking in November, a concerned friend asked me, “Do you still own PSN?”

“No,” I said.

“That’s good!” he told me, then he showed me the chart. I laughed. I made some small gains and got a dividend out of that. I got out at the right time based mostly on intuition.

And that was before the big reveal — Poseidon had to to write-down $100 million of non-existent revenue from 2012. Trading was halted on Feb 15 and the stock price is $0.27.

I have spoken with some sources close to this fiasco. The most interesting thing I heard was that their Controller was really some sort of “fitness model,” as if that was the source of the problem. This seems like a random frivolous remark. But then again, her Facebook page lends a bit of credence to the idea. And it seems weirdly credible when you consider what happened. I mean, really: $96-$102 million in revenue should not have been recorded as revenue? Out of $148 million… over three quarters? How the heck does that even happen? In any case, somewhere along the way their former CFO Matt MacKenzie committed an epic fail. Someone was either dishonest or incompetent.

Overall, whether it is due to incompetence or fraud, this is a huge scandal. There is now a $700 million lawsuit against National Bank for its sloppy underwriting. Lawyers are lining up to investigate possible fraud. What is the lesson to be learned? Picking stocks is hard and you will often lose. Most people will mostly lose. Forget about the art of financial modeling and valuing companies. Most people have no idea what is really going on at any given company. There might be idiots in charge. There might even be fraud. Think Bre-X. Think Enron. Think PFG.

Think Poseidon.

If even the analysts and even the bank underwriting the company’s stock are clueless, how can you trust anyone?

The answer is: Don’t trust anyone. I like to speculate in high risk stocks, and I have a golden rule: “I am financially and psychologically prepared for any stock I own to fall to $0.” I sleep well at night.