Tag Archives: business

Free Lectures on Austrian Economics; Do Value Investors Add Value? Investing Wisdom for the Young

Austrian Economics

Mises Academy at www.mises.org (click on academy tab) is offering a free lecture on microeconomics. Register and attend the free lecture by Peter Klein. You will get a flavor for the courses. I have taken several and have enjoyed the interaction. Go here: http://academy.mises.org/courses/microeconomics/

The book for the course is an excellent primer on Austrian (real world) economic thinking. I suggest you read this book, Foundations of the Market Price System by Milton Shapiro before you tackle Man, Economy and State by Rothbard or Human Action by Mises.


Lecture on the Austrian Theory of the Business Cycle by Dr. Roger Garrison : ttp://youtu.be/jFqtTj7TeO0

Visual Study of the Austrian Trade Cycle (“ABCT”). Read this before seeing the above lecture to gain more insights into booms and busts.Visual Explanation of the Austrian Trade Cycle By Garrison I would never invest in commodity cyclical businesses unless I understood ABCT.

The Case For Quantitative Value Investment

My favorite investing blog has a white paper on active vs. passive investing.


Investing Wisdom for the Ages



The Secret to Losing Weight

American Prisoner Alan Gross after fours years in Castro’s Gulag

Casualties of War

Learn About Short Selling–Learning Resources

We can all become better investors if we become better sellers and, especially, if we avoid bad businesses, we can reduce our mistakes. Studying short selling will improve your analytical abilities and help you be a more flexible investor.

Forensic accounting can a fun—like solving a puzzle and it provides a moral framework in which to look at public disclosures.

Video of a Short Seller’s Lecture to Accounting Professors

Kathryn Staley at the 2007 CARE Conference (video)
A lecture from the author of “The Art of Short Selling” given in 2007 at Notre Dame.

You want to learn how to sell even if you don’t want to be a short seller.

Staley’s book on short selling: http://www.amazon.com/When-Stocks-Crash-Nicely-Selling/dp/0887304974/ref=lh_ni_t

Short Selling Research Reports from Offwallstreet http://www.offwallstreet.com/research.html   There are examples of good forensic accounting research here where you can also download the financials of the company mentioned so you can understand the analyst’s research. Try downloading a company’s financial report to find the problems BEFORE you read the corresponding research report. Create your own case studies! Hard work, but you will learn to improve your skills.

Blog on Chinese Stock Frauds:http://www.muddywatersresearch.com/

http://brontecapital.blogspot.ca/   (China’s Kleptrocracy)

www.fool.com on shorting stocks: http://www.fool.com/FoolFAQ/FoolFAQ0033.htm

White Collar Fraud: http://whitecollarfraud.blogspot.com/2009/12/overstockcom-and-patrick-byrne-have.html

Recommended reading

Reuters – Special Report: From Hannibal Lecter to Bernie Madoff by Matthew Goldstein

Dag Blog – “Crazy Eddie” Fraudster Sam Antar To Return To Crime – Thanks to Darrell Issa & Anti-Regulation Republicans by William K. Wolfrum

Gary Weiss – Novastar and Overstock in the News

Crowe Horwath – Putting the Freud in Fraud: Focus on the Human Element, Catching a Crook Isn’t Only a Numbers Game By Jonathan T. Marks, CPA/CFF, CFE, CITP

Read more: http://www.businessinsider.com/the-feds-are-drinking-the-same-kool-aid-as-crazy-eddies-former-auditors-2011-5#ixzz1xg7WWMt0


Howard Schilit’s Financial Shenanigans: http://www.amazon.com/Financial-Shenanigans-Accounting-Gimmicks-Reports/dp/0071386262/ref=sr_1_1?s=books&ie=UTF8&qid=1339591819&sr=1-1

Thorton O’Glove’s Quality of Earnings (Joel Greenblatt uses this in his Special Situations class) http://www.amazon.com/Quality-Earnings-Thornton-L-Oglove/dp/0684863758/ref=pd_sim_b_4

Forensic Accounting Book: http://www.amazon.com/The-Financial-Numbers-Game-Accounting/dp/0471770736/ref=pd_sim_b_9

Earnings Magic: http://www.amazon.com/Earnings-Magic-Unbalance-Sheet-Financial/dp/0471768553/ref=sr_1_1?ie=UTF8&qid=1339592203&sr=8-1

A plug for Earnings Magic: I try to read various books on the subject of manipulating or managing earnings to enhance my analytical abilities. Because the GAAP rules give executives certain freedoms, it is valuable to know the true story behind these numbers. I like how this book educates readers on where to look to find clues for earnings management. For me, the chapter on pensions and other postemployment benefits was beneficial. During the current economic crisis, many companies struggle with their defined benefit plans, and this chapter educates readers better how to read through financial notes to gain better understanding of the pension status. – Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market

 Research on Short Sellers

Overall, our evidence suggests that the information short sellers exploit mainly concerns the market’s misperception of these firms’ fundamentals. Research_Shorts Signal Misperception

Capital Allocation and Compounding Machines

Readers’ Questions

Several readers have struggled with understanding the common success factors of the companies discussed in this post: http://wp.me/p1PgpH-Qw

Any company with exceptional returns has been able to generate returns above it cost of capital while being able to redeploy free cash flow at rates above its cost of capital (marginal returns on capital). See one poster child:WMT_50 Year SRC Chart.

Ok, its easy to look back at successful companies and say wow! But what can we know A priori that can help us in our search than just “good”management, “passion for excellence” and all the other corporate consultant buzzwords?   There may be no common theme between Altria, Aflac, or Danaher or Eaton Vance but we do know that all companies successfully generated above average returns for a long time.  Let’s try to think more deeply and test our assumptions.  The first place to start might be management’s allocation of capital because not all of these companies had barriers to entry (Leucadia comes to mind).

Allocating capital and operating the business are the main jobs of management. The two are intertwined.  Does the company retain its excess capital to reinvest in the same business, make acquisitions, pay a dividend and/or buy back stock (at what price?). There are no simple answers or one size fits all approach. And if it were that easy then there probably wouldn’t be as much opportunity for investors who do find good capital allocators.

The linked papers below will go in depth into the issues and problems around corporate capital allocation.  Take the time to read these because the readings should help you think more intelligently about a crucial aspect of investing–how management teams allocate YOUR capital.

Dividend Policy, Strategy and Analysis

High Dividends Research by Tweedy Browne


Corporate Structure and Stock Repurchases

Punishment and Prizes

For those who have not worked hard at understanding corporate finance and the implications of capital allocation while investing then you face a flogging: http://www.youtube.com/watch?v=W1Ipb0WpoGI

For those who feel they are experts at capital allocation then you win first place and a date with Sasha: http://www.youtube.com/watch?v=6a7Kf1e5lEI

Keep learning!

MF Global Accounting Lesson

If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a great defeat. If you know neither the enemy nor yourself, you will succumb in every battle. –Sun Tsz 2,500 years ago

When you come to the market, bring your investment discipline; bring your analytical powers; bring humility.–the Two Cents Philosopher

June 7, 2012 at www.nytimes.com

Accounting Backfired at MF Global

This article illustrates the importance of converting accounting information into economic reality and the pitfalls for both management and investors when ignored. 


Back when I was studying accounting at Columbia University’s business school, the professor had a handy way to determine whether it made sense for a company to recognize revenue: Had it completed the hard task in its business?

GAAP — generally accepted accounting rules — were not so simple, he said, and sometimes let companies record revenue — and post profits — far too early. Companies that took advantage of such rules could well be reporting earnings they would never see.

The hard task varied from business to business, he said. For a farmer, the hard part was done when the crop was harvested. Even if it had not yet been sold, there was a ready market for corn or soybeans or whatever, and money had been earned. For a manufacturer of tourist tchotchkes, making them was the easy part. Persuading someone to buy them was the difficult part, and revenue recognition should be delayed.

Over the years, I’ve seen any number of accounting disasters, ranging from Enron to subprime mortgages, where that simple principle was ignored. Sometimes that accounting was within the limits of GAAP and sometimes it was not. In all cases, it produced profits that vanished before they were actually realized.

Now there is another example at MF Global, the brokerage firm that Jon Corzine ran into the ground.

The accounting maneuver allowed MF Global to buy bonds issued by European countries and book profits the same day. That is the rough equivalent of a farmer’s booking profits as soon as he plants the crop.

To be fair to MF Global, it did disclose what it was doing in a footnote to its financial statements. The accounting appears to have been proper under accounting rules that are now being reconsidered.

In a minute, I’ll explain exactly what the company did and how the accounting rules came to make it possible to report profits that were at best premature and at worst fictional.

But for now, consider the effect such rules had. MF Global, when Mr. Corzine took it over in 2010, was unprofitable. Here was a way to report instant profits and make the financials look better. There is no way to know whether the firm would have taken fewer risks without the foolish accounting, but perhaps it would have. In any case, regulators and investors might have seen a less rosy — and more realistic — picture in the months leading up to the firm’s failure last fall.

The transactions were laid out this week in reports from two trustees trying to unravel the MF Global mess and return as much money as possible to customers.

The fact that there are two trustees, one appointed by the Securities Investor Protection Corporation, which provides reimbursement for brokerage customers under some circumstances, and the other by the bankruptcy court judge, only begins to address the complexities of the mess made by Mr. Corzine. There are also “special administrators” in London, since many of the trades were carried out through a British subsidiary. The three sets of trustees and administrators have spent a lot of time fighting one another.

“Among the lines of business that Mr. Corzine built up to attempt to improve profitability at MF Global was the trading of a portfolio of European debt securities,” states the report by the SIPC trustee, James W. Giddens. “These trades provided paper profits booked at the time of the trades, but presented substantial liquidity risks including significant margin demands that put further stress on MF Global’s daily cash needs.”

How, you might wonder, could MF Global report profits immediately? Shouldn’t it wait for interest to be paid on the bonds, or at least for the market value of the bonds to rise?

To my old professor, the answer to that would have been yes. But that is not what the rules said.

To explain how that worked, we must venture into the world of repos. But don’t let your eyes glaze over. A repo in reality is usually just a loan. The lender gets an agreed rate of interest, and it gets possession of the collateral while the loan is outstanding. That way, if there is a default by the borrower, the lender can sell the collateral and not have to wait to be paid.

MF Global having bought a Spanish government bond, for example, would then repo it, meaning it would turn over the bond in return for a loan. MF Global would get the cash, but it retained all the rewards and risks of owning the actual security. If the bond defaulted, MF Global would suffer the loss.

Most repos are accounted for as loans. But sometimes they are accounted for as sales. One such case involves what are called “repos to maturity,” or R.T.M.’s, in which the repo does not expire until the security matures. MF Global called these transactions R.T.M.’s even though they expired two days before maturity. That was because a London clearinghouse, which was on the other side of the trades, was not willing to lend the money for that long. It wanted to be repaid before the bond reached maturity, so as to be protected from loss if the bond went into default at maturity.

Under the rule, MF Global could say it had sold the bond, not just lent it out. And with a sale, it could post a profit based on the fact that it borrowed more than it paid for the bond. Theoretically, it should have also taken a reserve for the fair value of the default risk it was taking. The details are not clear, but it appears that reserve was not very large, leaving MF Global with a profit to report.

Just now, that seems truly absurd. But the Financial Accounting Standards Board says that until MF Global failed, no one had complained about the rule. Since then, the chief accountant’s office at the Securities and Exchange Commission has voiced concern, and the board hopes to propose a new rule later this year.

I wondered how that rule came to exist. The answer, as in many cases of abused accounting rules, seems to be that FASB was trying to stop a different abuse.

That abuse came years ago, when United States Treasury securities were trading at large discounts to face value.

That was because interest rates had risen, not because anyone doubted the bonds would be repaid. Under the accounting rules, owners did not have to take losses on the bonds so long as they held onto them, no matter how low the market price was. But if they sold them, they had to take the loss.

Enter the clever strategy. The owners would do repos on the bonds, and treat them as loans. The repos would not expire until the bonds matured.

For all practical purposes the owner had sold the bonds at a loss, been paid for them and moved on to other investments, but no loss showed up on his financial statements.

The FASB ruled that a “repo to maturity” was really a sale. In the above case the owner of the bond would have to report a sale, not a borrowing, and report the loss.

The accounting board provided guidance indicating that if the repo ended very close to maturity, that amounted to the same thing. That made sense if you ignored default risks, and in those days repos were usually of very high-quality bonds with little or no chance of default.

That is the rule that MF Global was able to use, except that rather than avoiding a real loss, as in the previous case, this time it was reporting a profit that would arrive only if the countries were able to pay their debts.

As everyone knows now, people grew nervous about sovereign credit over the last couple of years. Regulators worried about the risky nature of the sovereign debt forced MF Global to maintain higher capital levels, which the report by the bankruptcy trustee indicates the firm tried to evade by shifting some of the positions to an unregulated subsidiary.

But the firm still needed more and more cash to meet margin calls as the market value of the bonds fell. In the end, it ran out of cash, and — intentionally or otherwise — seems to have misappropriated hundreds of millions of dollars from customer accounts.

It would be wrong to say bad accounting caused MF Global to fail. But it did both encourage and obscure risk-taking that ended in collapse and scandal.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

How Do I Get A Job on Wall Street?

Job Search Strategy

Some may find the links below helpful.

How do I get a job on Wall Street? http://www.economicpolicyjournal.com/2012/06/how-do-i-get-job-on-wall-street.html

Beware of the typical advice, “Conditions are bad now so go get an MBA and then come back in two years when things will be better.”   First, “things” may be worse and how does an MBA equate to investing success?

Go where the money is: http://www.economicpolicyjournal.com/2012/06/hottest-area-in-finance.html

Yes, Wall Street is grim since it is over-bankered/brokered after decades of easy money and over leverage. But areas like manufacturing and energy will grow. You don’t have to be on Wall Street to use your skills. Be creative.

Inflation, Price Controls and Rome; Tweedy Browne, TAVF

My last mention of the Roman Empire, http://wp.me/p1PgpH-vM.

The fall of the Roman Empire ushered in the Dark Ages (Wow! Now THAT is a bear market–an age of fear, despair, fiefdoms, and darkness)  http://en.wikipedia.org/wiki/Dark_Ages_(historiography)

If Only Edward Gibbon Could Have Read Mises

By Daniel J. Sanchez at www.mises.org

Monday, June 4th, 2012

Thanks to Ed Smith for pointing out this passage in the Decline of the Rome Wikipedia article:

Historian Michael Rostovtzeff and economist Ludwig von Mises both argued that unsound economic policies played a key role in the impoverishment and decay of the Roman Empire. According to them, by the 2nd century AD, the Roman Empire had developed a complex market economy in which trade was relatively free. Tariffs were low and laws controlling the prices of foodstuffs and other commodities had little impact because they did not fix the prices significantly below their market levels. After the 3rd century, however, debasement of the currency (i.e., the minting of coins with diminishing content of gold, silver, and bronze) led to inflation. The price control laws then resulted in prices that were significantly below their free-market equilibrium levels. It should, however, be noted that Constantine initiated a successful reform of the currency which was completed before the barbarian invasions of the 4th century, and that thereafter the currency remained sound everywhere that remained within the empire until at least the 11th century – at any rate for gold coins. According to Rostovtzeff and Mises, artificially low prices led to the scarcity of foodstuffs, particularly in cities, whose inhabitants depended on trade to obtain them. Despite laws passed to prevent migration from the cities to the countryside, urban areas gradually became depopulated and many Roman citizens abandoned their specialized trades to practice subsistence agriculture. This, coupled with increasingly oppressive and arbitrary taxation, led to a severe net decrease in trade, technical innovation, and the overall wealth of the Empire.[8]

The passage of Human Action in which Mises discusses the decline and fall of Rome was recently featured as a Mises Daily.

Tweedy Browne Annual Report:



Third Avenue Value Funds 2nd Qtr. Report: http://www.thirdave.com/ta/documents/reports/TAF%202Q%202012%20Shareholder%20Letters.pdf

Tutorial on Wall Street and Trading

Because the market is open six and a half hours a day, five days a week , and some stocks are always rising and falling with the news to great fanfare, most new traders think they should have positions open at all times. Experienced traders know to trade only when he has suffiucient kinowledge to make his play an intelligent play. –Edwin Lefevre

Working on Wall Street

Tutorial on working on Wall Street (2.5 minutes) http://www.youtube.com/watch?v=Y2DqFRsPrns

Margin Call: http://www.youtube.com/watch?v=zYQCGgFMrEo&feature=related

The Art of Trading

PLEASE view this video to improve your method of investing. An uplifting lecture on the reality of trading/investing.

A lecture on Market Wizards by Jack Schwager: http://www.youtube.com/watch?v=8SdHlfsA0P4&feature=relmfu This video drives home the importance of why YOU must develop YOUR own method to follow. There are no market gurus for you to mimic.

People are attracted to the markets because they want easy money but all the market wizards share one thing in common: they work obsessively.

Good video from a professional trader Linda Rasche: http://www.youtube.com/watch?v=jodI8XkdyS4&feature=related

Another good interview of a Professional Trader: http://www.youtube.com/watch?v=WM9wMgRPv8U&feature=related

Excellent video on how to properly implement a trade (options): Jack Schwager: http://www.youtube.com/watch?v=OtyexEZ4tYI

Click on the videos by: fooledbyrandomness. Subscribe (button on the top left of the Linda Rasche video) and view his other videos.

The Other Side of Trading

American Greed on a Hedge Fund Manager: http://www.youtube.com/watch?v=j4mGTkcWV2o&feature=channel&list=UL

Margin call on Hitler: http://www.youtube.com/watch?v=eVB-SSkkLnY

We are traders: http://www.youtube.com/watch?v=MwKYjZ_8EcE&feature=related

Psychology of Trading

Can anyone become a trader (Van Tharp) WORTH VIEWING http://www.youtube.com/watch?v=lOBKHij84oQ&feature=relmfu

Psych M douglas http://www.youtube.com/watch?v=GhKJ9P3agRc

An inept trader: http://www.youtube.com/watch?v=JnQGXEyViBY   Note the absence of rationality.

Day trading ruined my life: http://www.youtube.com/watch?v=goABzyuEfYI&feature=related

Stress in the trading room: http://www.youtube.com/watch?v=RmgcbIyajQA&feature=related

Seven habits of a successful trader: http://www.youtube.com/watch?v=HsOfv_QKl2A&feature=related

Promotion for day trading: http://www.youtube.com/watch?v=7JtCF2i2r2M&feature=related

Why traders fail: http://www.youtube.com/watch?v=lFkXllWe3mY&feature=related


Postscript: What does day trading have to do with value investing or long-term fundamental investing? First, you should realize that successful traders have adopted a style for themselves. Good trading is effortless; the process should be effortless, AFTER a lot of preparation. A low or high is made in a day. You can see the psychology behind price movement.

Welcome to the Bronco Ride!

Money supply growth is falling.  Go here: http://www.federalreserve.gov/econresdata/statisticsdata.htm The latest numbers show 13-week seasonally adjusted M2 annualized money supply growth is down to 5.7%. Non-seasonally adjusted is down to 5.8%. 4-week data averaged over 13 weeks is at 3.8% annualized. This four-week number shows the intensity of the decline in current weeks versus that of the longer term 13 week number.

Jim Grant in his Interest Rate Observer (www.grantspub.com) writes in his June 1, 2012 issue, “To judge by deeds, not words, the Bank of Bernanke is as tight as a tick. Over the past three months, Federal Reserve Bank credit has shrunk at an annual rate of 9.3%. At the peak of QE2 one year ago, Fed credit was billowing at short-term annualized rates of as much as 47%. Waiting for QE3.”

Also of note is Grant’s expectation of a QE3 to reverse the trend. Indeed, that’s the kicker here. The trend in money growth and credit is slowing (credit declining) and that’s negative for the stock market and economy, but a major reversal is likely in the not to distant future.

Welcome to the bronco ride.

Use this opportunity to pick up good companies when they go on sale.

Fear and uncertainty are the friends of value investors. However, the pain may be intense at times.

To understand wwhat a bear market FEELS like go here:http://www.youtube.com/watch?v=0OmkmeOMC6Q&feature=related

We are far from the 2008/2009 situation. Hang in there and Enjoy your weekend.

So What Can You Do With $100?

“And right here let me say one thing:  After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this:  It never was my thinking that made the big money for me.  It always was my sitting.  Got that?  My sitting tight!  It is no trick at all to be right on the market.  You always find lots of early bulls in bull markets and early bears in bear markets.  I’ve known many men who were right at exactly the right time, and began buying and selling stocks when prices were at the very level which should show the greatest profit.  And their experience invariably matched mine – that is, they made no real money out of it.  Men who can both be right and sit tight are uncommon.  I found it one of the hardest things to learn.  But it is only after a stock operator has firmly grasped this that he can make big money.  It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.”  — Jesse Livermore http://www.gold-eagle.com/gold_digest_03/hamilton110303.html

What would you say?

If I said to you RIGHT after the October Stock Market Crash of 1987 when the market fell by more than 500 points in one day: http://wiki.mises.org/wiki/Black_Monday_%281987%29 give me $100 to put into a growing company with a profitable, understandable and focused business, excellent management and prospects, but I will pay 20 times owner earnings for it, would you think about it? But what if I said, “The catch is that you must not sell a single share for 25 years or until 2013. Also, during this time there will be massive stock market booms and busts, a huge credit crisis, wars and uncertainty, There will be periods of 50% to 60% declines in the stock market.  Can you sit tight?

Stay tuned to what happened and is happening….


Volatility at World’s End or the Alchemy of Risk

Volatility at World’s End

Deflation, Hyperinflation and the Alchemy of Risk

Artemis Capital Q12012_Volatility at World’s End

The above 18 page report will help you understand how huge debts can either cause deflation or hyperinflation. A thought-provoking read that I highly recommend.


Earlier I posted on hyperinflation here:http://wp.me/p1PgpH-1h

When NO ONE accepts a fiat currency then the inflation is infinite. No amount of paper currency–even by the ton–will be used as a medium of exchange. ….Back to barter we would go until a new medium of exchange is found or used.

Current Market Situation