Mastering

Episode 2: Meredith Whitney

 TABLE OF
CONTENTS

1
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MEET MEREDITH
15
THE WIDE WORLD OF
The oracular analyst embodies the WHISTLEBLOWERS
power of research and storytelling 4 individuals who called out
corporate malfeasance

5
HOW TO SPEAK INVESTOR 17
Put your mouth where your money is
CASE STUDY:
THE TRAGEDY OF COMMONS

9
A BRIEF HISTORY OF
Meredith’s market-shaking foresight
did not end with the financial crisis

MODERN MARKETS
A century of peaks and troughs,
plus a few instructor milestones
19
ASSIGNMENT

11
CLOSING BELL QUIZ
Find out how much of Meredith’s
episode you’ve absorbed
TOP DOWN, BOTTOM UP

20
Investors can think big or go granular;
Meredith does both

13
MEET STEVE EISMAN
MEREDITH’S READING LIST
9 books (and one magazine) from the
instructor’s shelves

A Wall Street hell-raiser who shook

things up a decade before Meredith

MasterClass is not a registered investment, legal, or tax adviser or a broker/dealer. Nothing contained in this class or
related materials is intended to be investment or financial advice. Please consult a financial professional before
making any investments. In addition, no instructors in this class have been paid to promote any securities or service in
this class, and nothing in this class is an offer or solicitation to buy or sell any securities.

2
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MEREDITH
WHITNEY
Founder and CEO, Meredith Whitney Advisory Group

Years before her research shook the very foundations of Wall Street, Meredith
was a history major—not the most obvious background for someone who makes
a career of plowing through financial records. As an analyst at Oppenheimer &
Co., an American multinational brokerage and investment bank, she focused on
“getting to the bottom of things” through tireless work and clear storytelling.
In 2007, she dug deep to understand what was really happening at Citigroup,
one of the largest banks in the world.
She asked the tough questions. She did the complicated math. And through
dogged analysis that others had shirked, Meredith streamlined and simplified
Citigroup’s seemingly intentionally tangled financials and deduced the problem:
The company was vastly over-leveraged versus its peers and would no longer be
able to pay its dividend. (Leverage: debt that allows the holder to invest more
aggressively.) She published a report on October 31, 2007. Days later, Citigroup’s
CEO resigned; within a month, the company raised capital and cut its dividend.
Meredith is widely credited with predicting the 2008 global financial crisis:
the deepest economic decline since the Great Depression. In 2009, she founded
the Meredith Whitney Advisory Group, offering market insights to clients rang-
ing from individuals to governments.

Education
Brown University
Providence, Rhode Island; Bachelor of Arts

Risk and Reward

Meredith’s Citigroup analysis illuminates the sometimes explosive relationship
between risk and reward. Citigroup used leverage to supercharge its returns.
That worked well—until it didn’t.

Alias
After Meredith’s prescient Citigroup analysis, she came to be known as the
Oracle of Wall Street.

In Her Words
“The role of being an analyst is to empower investors—to know how
to invest and why to invest. And that’s all about storytelling.”

4
HOW TO SPEAK INVESTOR
Alpha
Generally refers to an asset or port-
folio’s return (profit) above and
beyond what you’d get by investing
in the market. If Standard & Poor’s
500 index—a.k.a. the S&P 500—
provides an annual return of 10
percent and your portfolio hauls in
15 percent, that 5 percent spread is
your alpha. In the context of Ray’s
“holy grail” strategy (discussed
further in Ray’s episode), alpha
refers to an individual stock, as
opposed to an index.
Bears and bulls
A pair of investing archetypes
reflecting the health of and perspec-
tives on markets. Bears think prices
will go down; bulls think they’ll go
up. Likewise, a “bull market” is an
optimistic period of growth and a
“bear market” is a glum period of
falling prices. If the stock market
keeps running up? A bull run.
Beta
A measure of price volatility.
Specifically, it looks at how much
the price of a stock goes up or down
in relation to the market. If a stock
goes up 3 percent whenever the S&P
500 goes up 1 percent, that has a
higher beta than a stock that goes up
2 percent when the S&P goes up
1 percent. Back to Ray’s holy grail:
Here, beta refers to indexes such as
the National Association of Securities
Dealers Automated Quotations
(a.k.a. the Nasdaq) or the S&P 500.
Buy and hold
An investing style with no particular
“sell date” in mind. The goal here is
to buy a strong stock or asset you
5
believe in and hold it for years,
knowing there will be bumps along
the way. American mega-investor
Warren Buffett is known for his
buy-and-hold method of investing.
Capital
A squishy word that can mean differ-
ent things in different financial areas;
in an investing context, capital refers
to assets that can be deployed to get
more assets, as opposed to cash for
day-to-day operations. Any shares
of stock you own are capital. If you
have a 401(k) plan, that’s capital.
Cash in a savings account you plan
to spend on stocks: capital. The cash
in your checking account that’s used
for rent and groceries: not capital.
Capital gains
If you sold a share of stock for more
than you paid for it, that’s a capital
gain. (Selling for less is a capital
loss.) If you’ve held the stock for a
year or more, this is considered a
long-term capital gain and is taxed at
a special rate—0 percent, 15 percent,
or 20 percent, depending upon your
income level, which for many inves-
tors is a lower rate than their normal
tax bracket. This is one reason that
wealthy individuals often pay a lower
effective tax rate than you might
expect: Much of their income comes
from capital gains.
Cash flow
All kinds of accounting trickery
(such as the arcane minutiae of how
assets are depreciated) can make the
reported “profits” of a company
open to interpretation and debate,
but at the end of the day, the actual
cash that a company receives and
spends is a cold, hard truth. So by
analyzing a company’s cash flow
over time, you can get a better sense
of its true value.
Commodities
Raw materials such as corn, wheat,
and crude oil. Typically investors
use financial instruments like
“futures contracts” (the agreement
to buy an asset in the future at a set
price) to gain exposure to a com-
modity without having to actually
store bushels of corn in their garage.
Commodities are an additional way
to diversify a portfolio.
Compound returns and interest
The happy state of earning interest
income on existing interest income.
Let’s say your “rate of return” is 10
percent, meaning that each year your
portfolio grows by 10 percent. (If you
own a bond that pays you 10 percent
interest, it works the same way.) After
one year, $100 becomes $110. And
after two years it becomes $121 ($100
initial + $10 year one interest + $11
year two interest), as you’re also
earning interest on the $10 gains
from year one. At 40 years, that hum-
ble $100 is worth $4,525.93. This is
why many financial advisors stress
the importance of saving for retire-
ment as early as possible.
Concentrated portfolio
A portfolio whose assets reside
mostly or entirely in one industry or
niche. This can be riskier than a
diversified portfolio (see: Diversifi-
cation), as a single setback for the
industry—like a plunge in oil prices,
if you’re invested in that industry—
will dent the entire bunch.
Day-trading
The act of buying and selling stocks
with the intention of holding them
for an extremely short duration,
sometimes minutes or seconds. Also
called “scalping.”
Diversification
The concept of reducing risk by
investing in a wide range of assets. A
portfolio that has a mix of stocks,
bonds, and real estate would be more
diversified than a portfolio with a
single stock or multiple stocks repre-
senting the same industry (see: Con-
centrated portfolio).
Dividends
Cash payments that companies
make to the shareholders. Not all
companies pay dividends: Larger
and more established companies are
more likely to do so; companies in
“growth mode” often do not.
Increases in a company’s dividend
payouts are often seen as a sign of
financial health.
Discount rate
This term has two meanings. In the
context of banking, it refers to the
interest rate that the U.S. Federal
Reserve charges commercial banks
for short-term loans. So whenever
you see in the news that the Fed will
“raise the rates” or “lower the rates”
(usually to combat inflation or stim-
ulate economic growth, respec-
tively), that refers to the discount
rate. But in the context of investing
analysis, the discount rate refers to
how much a future amount of money
should be “discounted” to translate
it into today’s dollars. Imagine some-
one saying they will give you $1,000
today or $1,100 one year from now,
and you are fine with either option.
This implies a discount rate of
roughly 10 percent—it translates
future value to present value.
EBITA / Earnings
An awkward acronym that stands for
Earnings Before Interest, Taxes, and
Amortization, and a measure of a
company’s profits. The idea is that the
“ITA” chunk of this term is less relevant
than the cash a company generates
from its operation, so this is a way to
filter out the accounting noise and
focus on the essence of the business.
Edge
An advantage that you have over
other market participants. If you
have a PhD in quantum physics and
understand a company’s tech prod-
ucts better than Wall Street, this
could be your edge.
Efficient market hypothesis
The idea that financial markets have
already absorbed, or “priced in,” all
relevant trends and data. If you
suspect a company will have a ban-
ner year, the odds are that many oth-
ers believe this, too, and the compa-
ny’s stock price already reflects your
optimism; therefore it is very difficult
to “beat the market,” as the market
knows what you know (and then
some). Some value investors argue
that this theory does not reflect real-
life market performance, which can
be influenced by irrational choices.
Equity
On a technical level, equity refers to
how much of a company’s assets
would be returned to shareholders in
the event of liquidation. Conversa-
tionally, equity is often used as a
shorthand for stocks. (As in, “my
portfolio is half bonds, half equity.”)
Exchange traded fund (ETF)
These funds allow you to invest in
indexes such as the S&P 500 and the
Nasdaq 100 Index; there are also
ETFs for specific industries and
geographies. ETFs can be a way to
add diversification to your portfolio
without having to buy dozens of
individual stocks.
Fixed-income asset
Generally any kind of asset that
pays you a predetermined amount
of interest or dividend. A government
bond or corporate bond is a fixed-
income asset.
Fundamental analysis
A way of analyzing stocks or other
assets by researching the “funda-
mentals” of the company, such as its
products and profit margins. This is
distinct from technical analysis (see:
Technical analysis), which takes
into account only the chart patterns
of prices.
Hedging / Hedge fund
The practice of reducing risk by bal-
ancing one asset class against another:
If you take a position in one asset
(such as buying a stock) that offsets
the risk of another asset (such as short
selling a stock), then you have just
hedged (see: Short selling). The
term has broadened to include funds
that are actively managed by financial
experts and designed for wealthy
investors.
Index fund
A financial instrument that aims to
perfectly track the overall perfor-
mance of a market or industry. The
most famous index fund is the S&P
500, a collection of 500 stocks
representing the largest companies
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in the United States. Buying shares
of an index fund like the S&P 500
is generally considered to be less
risky than buying shares of just one
stock, as the risk is spread across
the entire market.
Initial public offering (IPO)
The first appearance of a company’s
publicly traded shares on an
exchange such as the New York
Stock Exchange or the National
Association of Securities Dealers
Automated Quotations (a.k.a. the
Nasdaq).
Intrinsic value
What an asset is actually worth,
even if no one is willing to buy it. A
speculative asset like Bitcoin might
have no intrinsic value (outside of
transactions, you can’t do much with
it), but a snowmobile company has
the intrinsic value of the snowmobiles
themselves, plus any future earnings
from renting them out.
Investment thesis
The underlying theory for why
you want to invest in an asset. If
you believe semiconductor compa-
nies are a smart play because the
growth of artificial intelligence will
require the world to have more
computing horsepower, you have
an investment thesis.
Leverage
A way of borrowing capital to invest
more; you could amplify potential
returns—but also potential risk.
Think of a home loan: A house
costs $300,000 and you pay $60,000
cash as a down payment, meaning
the bank loans you $240,000 for the
balance. Then the neighborhood
becomes more desirable and the
7
value of your house rises to $360,000.
This is a 20 percent increase on the
home, but a 100 percent increase of
your cash investment ($60,000)—
and that’s the power of leverage.
Of course, if the home plunges in
value to $200,000 and you are
forced to sell, you’d be on the dark
side of leverage.
Macro environment
The broader state of the economy
or an industry, as opposed to the
“micro environment” of a specific
entity. Rising inflation concerns the
macro environment; a company
struggling to ship orders does not.
Margin
The profit margin, or gross margin,
is a straightforward measure of
how much money a company is
making after subtracting costs.
This term can also refer to invest-
ing “on margin,” meaning you
effectively borrow money to buy an
asset. This can both supersize
returns and add risk.
Margin call
If you go on margin to increase
your investment size, the brokerage
will generally require that you have
a certain amount of collateral in
the account to back up the loan. If
that balance dips too low, you
might get a margin call from the
broker warning you to increase
your collateral—or your investment
might be liquidated.
Margin of safety
The concept of paying less than what
a stock (or any asset) is truly worth,
giving you a buffer in case your cal-
culations are a bit off. Also the title of
Seth Klarman’s 1991 book.
Market capitalization
(or market cap)
The value of a company as defined
by its worth on the open market. It’s
easy to calculate: Take the total
number of stock shares and multiply
it by the price of each share. So the
market cap of a company with 10
million shares, each valued at $10, is
$100 million.
Market correction
If a market (such as the S&P 500)
loses between 10 percent and
20 percent of its value, it is said to
be a “correction.” If the decline is
more than 20 percent, the ensuing
period is known as a bear market.
Net present value (NPV)
A crucial concept in finance and
investing, the NPV takes all the
expected cash flows in the future—
both inflows and outflows—and
then “discounts” them back to the
present, using a discount rate. The
upshot? The NPV reflects that $100
today is worth more than $100
tomorrow, so it effectively “trans-
lates” all future streams of income
(or costs) to their present-day value,
which is useful for making invest-
ment decisions.
P/E ratio
The price (P) of a given company’s
stock divided by its earnings (E)
a.k.a. its profits. The P/E ratio is
commonly used as a quick gauge of
how “expensive” a stock is.
Retail investor
Most likely: you. “Retail” refers
to nonprofessional individual
investors, as opposed to big firms
like hedge funds.
Return
A shorthand for profit, usually repre-
sented as a percentage. If you invest
$1,000 and the next year it’s worth
$1,200, you just fetched a return of
20 percent. Nicely done.
Secular
In this context, secular has nothing
to do with religion; it refers to trends
that hold true for a long period of
time. The growth of e-commerce as
a result of technological advances is
an example of a secular trend.
Securities
A capacious term encompassing
virtually any financial instrument
that can hold value. Stocks and
bonds are securities; cash deposits
and most pension funds are not.
Short selling
“Going short” means borrowing
shares or other assets from a broker-
age firm so that you can sell them at
today’s price (say, $1), ideally buy
them back at a later date at a lower
price (say, 50 cents), and net the dif-
ference, less any brokerage fees.
When you go short, you’re taking the
bet that the price of a stock will go
down versus up.
Small cap, mid cap, and large cap
“Cap” as in market capitalization.
Small-cap stocks have a market capi-
talization between $250 million and
$2 billion; mid cap between $2 billion
and $10 billion; large cap more than
$10 billion. One way to diversify a
portfolio is to have a mix of small-cap,
mid-cap, and large-cap companies.
Stock split
When the price of a stock gets so
high that it becomes prohibitive for
smaller investors to purchase—such
as the U.S. multinational retail behe-
moth Amazon reaching $2,785 per
share in June 2022—it often splits
into smaller shares (20 to 1, in
Amazon’s case) to become more
affordable. Crucially, no value is
gained or lost in a split to current
shareholders; think of it as cutting a
pizza into thinner slices, or someone
taking your $5 bill and giving you
five $1 bills in return.
Swing trading
Buying and selling stocks with the
intention of holding them for a
period of days or weeks or months;
swing trading stands in contrast to
day-trading and long-term “buy and
hold” investing.
Technical analysis
Analyzing an asset’s prices based
purely on its metrics (what it looks
like on a chart) while ignoring its
“fundamentals,” such as the stability
of the underlying entity (see: Funda-
mental analysis). Some investors
use technical analysis, some use fun-
damental analysis, and some use a
combination of both.
Time value
The overarching concept that money
is more valuable today than in the
future. Terms such as discount rate,
net present value, and compound
interest are all in service of this larger
theme—translating the future value
of assets into present-day estimates.
(This term also refers to a component
of options trading.)
Timing the market
Let’s say you want to invest $1,000.
One of the oldest (and most
debated) questions in investing is
whether you should try and “time
it” perfectly so that you buy at a
period of relatively low prices. This
is tricky: Prices can look expensive,
but then they might keep going up.
(If you thought that the S&P 500
looked too expensive in 2012, for
example, and hoped to “time the
market” to buy when prices dipped,
you would have missed a decade-
long bull run.) Hence the old saying:
“Time in the market beats timing
the market.”
Valuation
What a company or any asset is
actually worth. There are many
ways to determine valuation (and
this is often the subject of debate),
such as analyzing predicted cash
flows, comparing the company or
asset to similar ones, or calculating
the market value of the company’s
stock price.
Value investing
A financial philosophy, conceived in
the early-20th century, by which
investors seek out companies whose
true value is potentially higher than
the value reflected in the price of
their shares. Instructors Joel Green-
blatt and Seth Klarman are value
investors.
Zero-sum game
The theory that for every “winner”
in a financial transaction, there is a
“loser” on the other end, so ulti-
mately the sum of total profits across
the entire game is zero. Hedge fund
legend (and MasterClass instructor)
Ray Dalio sees investment in individ-
ual stocks as a zero-sum game—he
also calls it a “talent war”—and
index investing as an endeavor that
can benefit everyone involved.
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 24,000

20,000
A MINI-HISTORY OF
Billions of Chained 2012 Dollars

16,000
MODERN
12,000 MARKETS
Explore a century of financial
peaks and troughs, plus a few career
8,000 milestones from the instructors

4,000

0
1929 1975
Year

1929: A stock market crash triggers
the Great Depression, a decade-long
economic rut that sees nearly one
in four Americans unemployed.
The era’s ravages would influence
a century of economic policy, such
as the Federal Reserve working to
raise or lower interest rates.
1941: The U.S. enters World War II,
jump-starting the economy and end-
ing the Depression.
1949: The Intelligent Investor, a book
by English American economist and
investor Benjamin Graham, is pub-
lished. It will come to be viewed as
the bible of value investing—a
method by which investors identify
undervalued entities through
exhaustive research.
1949: Australian American investor
Alfred Winslow Jones launches the
world’s first hedge fund, using a
range of investing strategies in order
to “hedge” his bets.
1965: American investor Warren
Buffett, a student of Graham’s, takes
control of a struggling textile manu-
facturer called Berkshire Hathaway.
Under Buffett, it becomes one of the
largest holding companies in the
world. (In 2022 its estimated net
worth was just shy of $1 trillion.)
1973: Due to a total oil embargo
imposed on the U.S., the Netherlands,
and Denmark during the 1973 Arab–
Israeli War, both unemployment and
inflation skyrocket—a phenomenon
dubbed “stagflation.”
1975: American upstart Ray Dalio
launches the hedge fund Bridgewater
Associates, where he creates
market-beating portfolios using the
power of diversification.
1982: Seth Klarman, a New York City–
born investor in his mid-20s, joins a
hedge fund called Baupost Group.
(Continued on the next page)

Graph represents real gross domestic product; source: U.S. Bureau of Economic Analysis
9

1982
1985: Another American value inves-
tor, Joel Greenblatt, launches a hedge
fund called Gotham Capital, using a
framework called “the magic formula”
(explored in his episode) to guide his
investments.
1987: Around the world, markets
crash in response to a tangle of new
financial products, trade deficit pol-
icy changes, and market jitters.
October 19, which would come to be
known as Black Monday, sees the
Dow Jones Industrial Average—one
of three major stock market indexes,
the others being Standard & Poor’s
500, or the S&P 500, and the Nasdaq
Composite index—drop more than
Year
22 percent. (An index is a financial
instrument that can be used to mea-
sure the overall performance of a
market or industry.)
2001: The dot-com bubble bursts.
Buoyed largely by the hype of new
internet companies, the tech-heavy
Nasdaq stock market index rose
drastically from the mid-1990s to
2001—but this frothy market was
short-lived.
2007: American financial analyst
Meredith Whitney publishes a report
on the U.S. multinational bank Citi-
group and its precarious financial
health, warning that a larger financial
24,000
20,000
Billions of Chained 2012 Dollars
16,000
12,000
8,000
4,000
0
2022
crisis could be on the horizon. Days
later, Citigroup’s CEO resigns.
2008: U.S. investment bank Lehman
Brothers files for bankruptcy. This,
preceded by a housing bubble and a
dearth of regulation, triggers the
Great Recession, which lasts some
two years.
2022: In a historically lengthy bull run
(that is, a period of growth and gen-
eral investor optimism), the S&P 500
posts a cumulative return of 800 per-
cent since 2009. For some, this period
becomes a cautionary tale about the
perils of keeping money in cash and
missing out on historic run-ups.
10
 TOP DOWN,
BOTTOM UP
When it comes to building an investment thesis, you can try to
view the big picture or you can zoom in. Meredith does both

Top Down Bottom Line

Also called macro analysis, the top-
down approach takes in broad eco-
nomic trends like gross domestic
product, unemployment levels, and
inflation. If you’re asking, “How is
the construction industry expected
to react to a hike in interest rates?”
you’re wearing your top-down hat.
This could lead to investment in an
entire sector—or the decision to stay
out of the market.
Bottom Up
The micro side of the analysis coin.
Here you drill into the details of a
company and analyze variables like
its balance sheets, cash flow, debt,
inventory levels, leadership team,
products, customer churn, and
growth trends. (Bonus: Much of this
information exists in the public
record.) Bottom-up analysis can sug-
gest hyper-specific investing ideas.
There’s no law that says you have to
stick to one of these two approaches.
Meredith essentially asks, Why not
use both? “I always take a large secu-
lar theme [i.e., a trend that holds true
for a long period of time] that makes
sense within the macro environment
and then drill down,” she says. She
takes stock ideas from the bottom-up
approach, yielding a combination
that has “great data on the top and
really granular data on the bottom.”
“The great
combination
of the two is
that you’ve
got data on
both sides.”
­—MEREDITH

11 
 Top Down

Secular theme
Macro environment
Industry

Meredith researches both “secular

themes” and individual stocks. When
the two approaches begin to overlap,
“you’ve got a really good investment
idea,” she says.

Specific companies
Research/questions
Narrowing down

Bottom Up

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 MEET

STEVE EISMAN
A hell-raising analyst and trader who shook up
Wall Street a decade before Meredith

When working for Oppenheimer Fund; Emrys Partners, LP (which he

as a junior analyst, Meredith had a founded); and the Eisman Group,
brilliant and eccentric boss: Ameri- a subsidiary of private-wealth firm
can analyst and investor Steve Eis- Neuberger Berman.
man. Meredith says Eisman was Even though it’s unlikely you will
“irreverent” and “unorthodox”— be a key player in a trillion-dollar
and a great mentor. (His wife once financial crisis (fingers crossed!), the
described him as “sincerely rude.”) principles and habits of both Eisman
Eisman, who began his career as a and Meredith are useful to any inves-
lawyer, liked to devour documents tor: Ask tough questions, challenge
and hunt down facts. As a stock assumptions, and don’t assume that
analyst, he asked incisive questions complicated equals correct.
and chased down the answers.
According to the 2010 book The Big
Short by American author Michael
Lewis, Eisman once found a set of
financial statements lacking and
told the relevant CEO that it was
“toilet paper.”
Just as Meredith did the math
and wrote a report that exposed the
financial cracks at Citigroup, in 1997
Eisman published a report that
highlighted the shaky accounting
and hidden risk of subprime loans
(in a nutshell, home loans offered to
people with low credit scores). He
cut through the complexity to dis-
cover the deeper truths, heedless of
their feather-ruffling potential.
Following his time at Oppen-
heimer, Eisman stayed in the game,
serving as a portfolio manager at U.S.
firms FrontPoint Financial Services

13 
 “Math has no opinion.”—MEREDITH
What it means: It’s easy to get swept up in hype and euphoria while investing—and
MONEY conventional wisdom can seem, well, conventional. But when Meredith crunched the
TALKS numbers to investigate subprime mortgage packages in 2007, she found that the cold,
hard math (a gap in banks’ balance sheets of $80 billion) ran counter to Wall Street’s
bullish attitude. “I thought surely I was crazy, but the math was the math,” she says.
And math doesn’t care what overzealous investors think.

14
15 
 THE WIDE WORLD OF
WHISTLEBLOWING
Meet 4 individuals who called out corporate malfeasance
It’s easy to look the other way when
you see something that looks fishy.
But when Meredith realized that
Citigroup was in hot water, she did
the hard thing and spoke up, pub-
lishing a report that presaged the
2008 global financial crisis.
People who crunch the numbers,
spot a problem, and then raise the
alarm put their careers and reputa-
tions on the line. Their efforts can
expose extreme risk—and in some
cases fraud—and protect consum-
ers. These so-called whistleblowers
are usually far from the spotlight,
toiling away in their cubicles. Here
are four brave (and complex) souls
who used their smarts and guts to
expose wrongdoing.
A. Ernest Fitzgerald
In 1968, as a cost analyst for the U.S.
Air Force, A . Ernest Fitzgerald
exposed a $2 billion cost overrun by
the American security and aerospace
company Lockheed Martin and testi-
fied before Congress. This saved the
U.S. government more than $270 mil-
lion and eventually led to the Whis-
tleblower Protection Act of 1989. The
real hero here? Arguably, it’s Fitzger-
ald’s wife, Nell. As she said in an
interview with the American maga-
zine People, she urged her husband to
tell the truth no matter how hard it
was: She told him she couldn’t live
with a man she didn’t respect.
Mark Whitacre
A complicated whistleblower. The
Archer-Daniel-Midland Company is a
U.S. multinational outfit that deals in
food commodities like high-fructose
corn syrup, starch, and peanuts. In
1992, executive Mark Whitacre went
undercover (even wearing a wire) and
worked with the FBI to expose a
price-fixing scheme—while embez-
zling $9 million from the firm, a gam-
bit that landed him in jail. You might
recognize Whitacre as American actor
Matt Damon’s character in the 2009
movie The Informant!
Sherron Watkins
In 2001, as a vice president at the
U.S. energy-trading company Enron
(then the nation’s seventh-largest
company), Sherron Watkins looked
closely at the numbers and noticed
some sketchy math that might even
be criminal. She wrote a memo to
CEO Kenneth Lay, spelling out her
concern that these accounting indis-
cretions could tank the company, and
urged him to take action. He did not.
Watkins’s sleuthing triggered
Enron’s bankruptcy and ultimately
sent its top executives to jail.
Cynthia Cooper
As the vice president of internal
audit at WorldCom (one of America’s
largest telephone companies at the
time), Cynthia Cooper led a secret
investigation in 2002 to uncover more
than $3.8 billion in hidden losses.
For their heroics in whistleblowing,
American magazine Time put both
Cooper and Enron’s Watkins on the
cover as Persons of the Year.
16
 CASE STUDY
THE TRAGEDY
OF THE COMMONS
Meredith’s market-shaking foresight did not
end with the financial crisis
When people have free access to a
public resource, it is natural for
them, according to a popular eco-
nomics theory known as the tragedy
of the commons, to act in their own
self-interest and use said resource
liberally. But over time that resource
can be depleted. Example: Overfish-
ing. When too many people eat fish,
each acting in their own self-interest,
the supply of fish dwindles and we
risk extinction.
So what does this have to do with
investing? In 2010, three years after
she exposed the risks to Citigroup,
other banks, and the system at large,
Meredith turned her attention to
another complicated network that
contained more risk than people
realized: the financial health of
America’s states. Weighing in at some
600 pages, the report she named
“The Tragedy of the Commons”
arrived in September of that year.
“Most people don’t appreciate
the fact that there are only two
things that are guaranteed under
states’ tax programs,” Meredith says,
“and that’s pensions and bonds.”
Every other public good that tax
17 
dollars are spent on (roads, bridges,
firefighters, schools) are “discretion-
ary” and are prone to being gutted.
As a state’s critical resources are
depleted, people with means (that is,
those who pay higher taxes) leave that
state and tax revenues dwindle. And
voilà: a tragedy of the commons.
Meredith was highlighting risk
while offering a keen-eyed look at the
macro-economic landscape—both of
which can lead to smart investing. If
people move from some states, that
means upside in other states. “There
were certain areas of the country
that would make for easy growth,
and industries that would have an
easy glide path for growth,” says
Meredith. Picking these precise
industries and stocks isn’t easy. But
understanding the landscape can
help point you in the right direction.
18
 AS SIGNMENT

CLOSING BELL QUIZ

How much of Meredith’s episode (and this guide) have you absorbed?
Try this quiz and find the answers on the back page

1.  , a discipline typically associated with the humanities, is a

crucial skill for analysts, according to Meredith.

2. Y
 ou could say that Meredith’s degree in helped her in
this regard.

3. C
 itigroup’s problems in 2007 were largely to do with , meaning
debt that allows the holder to invest more aggressively.

4. W
 hen you’re developing an investing thesis, a theme is one
that concerns long-term trends unfolding at the macro level.

5. D
 uring the Great Depression, some in Americans
were unemployed.

6. O
 ctober 19, 1987, a.k.a. Black Monday, saw the Dow Jones Industrial
average drop percent.

7. I n , firebrand analyst Steve Eisman published a report on

the threats posed by subprime mortgages.

8. I n her 2007 report, Meredith predicted that Citigroup would no longer

be able to pay its .

9. In 2001, an executive named Sherron Watkins discovered suspicious

accounting at her employer ; the following year, Cynthia Cooper
led a secret investigation of , where she was a vice president.

10. According to Meredith, just two things are guaranteed under U.S. states’ tax
programs: and .

19 
MEREDITH’S READING LIST
1

Showdown at Gucci Gulch:

Lawmakers, Lobbyists, and the
Unlikely Triumph of Tax Reform
by Jeffrey H. Birnbaum and
Alan S. Murray

Once in Golconda: A True Drama of

Wall Street 1920–1938
by John Brooks

The House of Morgan: An American

Banking Dynasty and the Rise of
Modern Finance and Titan: The Life 1 2
of John D. Rockefeller, Sr.
by Ron Chernow

Capitalism and Freedom

by Milton Friedman

Our Brave New World

by Anatole Kaletsky, Charles Gave,
and Louis-Vincent Gave

A Random Walk Down Wall Street

by Burton G. Malkiel

The Wealth of Nations

by Adam Smith

3 4
The Prize: The Epic Quest
for Oil, Money & Power
by Daniel Yergin

The Economist  Meredith is not a character in the 2015 movie The Big Short,
(British magazine) but she looms large in the bestselling book that it’s based on.
Michael Lewis, an American financial journalist and the book’s
author, featured her in the opening chapter. He describes an
analyst who commanded attention with the force of her find-
MOVIE ings—who exhorted her colleagues to consider the dubious
MOGULS quality of a brokerage or bank’s assets, the funds they’d used
to buy those assets, and the value those assets might hold if
the bottom fell out.

20
 CREDITS
Cover of The Little Book That Beats the Market
Title: The Little Book That Beats the Market
Author: Joel Greenblatt
Date: 2005. Publisher: John Wiley & Sons Limited

Images of Benjamin Graham and David L. Dodd

University Archives, Rare Book & Manuscript Library
Columbia University Libraries

Images from the film The Big Short

Everett Collection

Headline from The New York Times

The New York Times © 2014
All rights reserved. Used under license

Image of Alfred W. Jones

Photography by Fabian Bachrach ©

Stock footage
Periscope Film, A/V Geeks, Prelinger Archives, and Pond5

Various images
Getty Images and Alamy

The Closing Bell Quiz answers

1. Storytelling 2. History 3. Leverage 4. Secular 5. One in four 6. 22
7. 1997 8. Dividend 9. Enron; WorldCom 10. Pensions; bonds

21