Sunday, June 26, 2011

The Paulson Sino Forest loss

Much has been made of the John Paulson's Sino Forest loss. Many snide remarks have been made parsing John Paulson's letter.

I am more sympathetic than the non-practitioners though I think Paulson's excuses sound lame.

Here is my sympathetic view:

There are two approaches to running a funds management firm. One approach is to have analyst teams covering every sector and to have depth of coverage. The other approach is a small and more flexible team.  Each of these approaches has its problems.

I got a good idea of the problems of the broad coverage approach when PMI (the mortgage insurance company) double-booked an investor relations meeting. I sat in on a meeting between PMI and the Fidelity analyst who covered the sector and watched the incredibly nuanced discussion the Fidelity guy had about mortgage insurance. The Fidelity guy could make detailed distinctions between mortgage insurers and could tell you which ones he would prefer owning.

This was 2005.

Of course the right investment decision for mortgage insurers in 2005 was to own none of them. A year later the right answer was to short all of them.

But because Fidelity had a guy who knew lots about mortgage insurers they owned mortgage insurers (probably at near market weighting) and they duly lost money.

A small team would either decide hey - they want to be part of this high growth mortgage market and own them - or decide the did not want to be part and not own them. If they were aggressive they might short them. There was a reasonable chance that the small team was going to do better than the big team because it was not the nuances between mortgage insurers that determined the outcome.

Generally I think the small-team works better. I came from a shop with a great record and eighteen investment staff. Most the good ideas came from nine of those staff. They were better than large teams - and every time we increased the size of the team we diluted those staff. The main reason for increasing the size of the team was that the new staff - whilst they did not contribute much - were being trained. And after a four or five years one in say five of them might join the anointed ones.  And as we had a good name the others might find worthwhile jobs elsewhere...

But there are problems with the small teams. First small teams have blind spots. The world is a big place (too big to paint anyway) and there is no way that the senior fund manager can cover everything. There are large specialized stock areas about which I know nothing (eg most German industrial companies, US Health Care, South American resource companies). Things just pass me by. A really good nine person team has less blind spots than Bronte (three people) but blind spots are a part of life.

Secondly we use shortcuts. In the pre-internet days I used to "know" for instance that monopoly town newspapers earned 35 percent EBIT margins and trade at 3.5-4 times sales. The dominant competitive newspaper in a duopoly town earned 20 percent EBIT margins and traded at 2-2.5 times sales. When someone came to me with a newspaper stock (a sector about which I knew plenty) I used to ask about the competitive position of the papers (which towns were monopolies, which duopolies etc) and the margins, do the sums quickly in my head and decide whether it was good value. Beyond aggregate numbers I probably did not open the accounts. A portfolio manager with a diversified portfolio makes a lot of decisions and they take shortcuts. The shortcuts are a necessary part of life - and they are how you apportion and guard your time.

I am an expert on fraud - but it is entirely possible that I would miss a well executed fraud at a newspaper company because my starting assumption was that I could take the numbers as gospel.

The shortcuts we use as portfolio managers (and these are often sophisticated shortcuts born from some deep understanding of the industry) can make even the best portfolio manager susceptible to fraud.

Moreover a portfolio manager needs to work out how to ration their time. They can't do in-depth analysis of every stock in a 20 stock portfolio. (Well they can - but most the in-depth analysis you do are of stocks not in the portfolio as you need to decide what to invest in rather than becoming more expert on the things you own.) So you tend to spend your time on things that you perceive pose the most risk or the best returns.

Timberland is famously low risk. There is a German charitable trust that has been around since the 16th Century living off a 500 year old bequest. It owns timberland. Timberland - along with unlevered land below large buildings in major cities - is one of the few assets that seems to hold its value and earn returns for centuries. (Gold may hold value but earns no returns.)

I can understand how a deeply bearish investor (and Paulson was a deeply bearish investor) got suckered into Sino Forest. They saw it as timberland. They did not do the due diligence that was required to spot the fraud. It had a respectable board and reputable auditors and a long history. It did not feel like a fraud.

Chinese stocks present massive fraud risk but trees are low risk.

Paulson didn't see China for the trees.

And guess what - it happens to all of us. Fraud is pervasive in financial markets - its just that nobody talks about it. When they are had they are more-than-likely going to blame it on bad investment decisions than fraud. Moreover it is embarrasing - even business threatening - for professional investors to admit they were victims of fraud - so they don't talk about it even when they know they were had.

Fraudsters themselves are rarely prosecuted because it is hard to distinguish business misadventure from fraud. Sure the business failed. Sure the CEO sold $20 million worth of stock before it failed - but the business failed for honest reasons - or so he tells the jury. It doesn't matter that the business involved mass fraud - unless the fraud is huge the CEO is going to get away with it. And even if it is huge he will probably get away with it. (In the crisis it is hard to tell the deluded promoter of bad paper from the fraudulent promoter of bad paper. In my view most were deluded, not fraudulent, but fraud was still common enough.)

Paulson's mistake on Sino Forest then wasn't "amateur hour". Rather it was a mistake a competent fund manager might make because he is blindsided. Because he uses his shortcuts (trees are safe for instance) rather than does detailed analysis of every stock.

Every fund manager makes mistakes. Its part of the game. I try to minimize them - but I have made some real beauties. I purchased Washington Mutual preference shares for instance - and I blogged about it.

Paulson's excuses

Whilst I am sympathetic to Paulson's mistake I am more concerned about his excuses.

The first Pauslon excuse is the one I have most sympathy for - which is that he estimates the loss based on the cost base of the position rather than its valuation before Muddy Waters comes along. We have a few positions like that.

Take our well-publicized position long the preference shares of Freddie Mac. I blogged about them in a ten part series (see here for Part 1). The preference shares are highly speculative - the money owed to the government needs to be repaid before the preference shares will realize anything. But they were trading at below two cents in the dollar and I thought there was a reasonable chance they would pay and hence were worth a bet.

I think there is an improved chance they will repay now (note falling delinquency for example). They are trading about 10c in the dollar. They are still however a wildly speculative bet which I think is worth making.

If they were to go to zero how much have we lost? Is it the original amount or the high water mark? Should I trim the position just because it it has appreciated? Does it matter that the position is being diluted by new clients anyway? Do the losses feel worse for a new client (who is implicitly buying in at 10c in the dollar rather than 2c in the dollar)?

I do not have a consistent answer to these questions. I am somewhat sympathetic to Paulson's answer because I do not think there is a consistently good answer anyway.

Where I am less sympathetic is to Paulson's statements that staff went to see the operations (and hence they judged they were real) and also to the line that they did a thorough review of the financial statements.

If you go see Sino Forest's operations you will see what Sino Forest wants to show you. They will show you trees. You can't tell whether that is 5 thousand hectares or 500 thousand hectares. Seeing trees does not answer the question. There is no point looking at things that are not going to tell you anything anyway - and so Paulson's staff member wasted his time looking. That is an amateur-hour mistake.

If you are going to look at the operations (and it is often worthwhile) then do the work properly and look through the eyes of a competitor or a customer or a supplier. And find them yourself rather than talk to sympathetic ones supplied by the management.

When management say good things about themselves that provides no actionable investment information. When management say good things about a competitor that is golden. When suppliers you have found yourself say good things about a company that is useful. When management say bad things about their business that is useful.

Speaking to management and hearing good things about them said by them does not help in investment and hence does not constitute actionable analysis. Using that sort of analysis as an excuse is pathetic and Paulson (a man who made his fortune betting against the conventional wisdom) knows that perfectly well.

As for analysis of the accounts - the Sino Forest accounts contain enough red-flags to make any eagle-eyed observer cautious. I am sympathetic to making an investment without looking at the accounts at all because limited time and shortcuts often make that an efficient way of behaving. What for instance would I learn about Microsoft by looking at the accounts that I do not already know? Microsoft will be a fabulous investment if it maintains its strong position for the next decade. It won't be otherwise. The answer is not in the accounts (but it might be in understanding the technology and the way people interact with the technology).

I would be sympathetic to a statement that Paulson did not even look at the accounts for Sino Forest beyond a cursory look because he may have had detailed short-cuts in his head for a forestry company. But if some analyst really did a detailed look at the accounts and did not spot the red-flags then they are incompetent. For that I have no sympathy at all.

For comment





John

PS. I will add one thing though. Sino-Forest accounts have become more plausible over time so the job of detecting problems is harder with (say) the 2009 accounts than the 1997 accounts.

In 1997 accounts the company was outright strange. It claims to have shipped 1.165 million bone dry metric tonnes of wood chips including exporting to Japan. (It did not claim to sell standing forest until many years later.)

However timber sales were only $23 million. This is not very much per tonne. You can find real prices at this link.

Sino Forest claims 603 thousand hectares of forest which it was phasing in (of which quite large numbers were in operation and quite a lot more was being planted).

But the balance sheet was thin. There was $9.3 million in machinery and equipment that was not being depreciated because it was "under construction". The only equipment being depreciated was $211 thousand in vehicles.

You can't move a million tonnes of woodchips with $211 thousand in vehicles.

Indeed Sino Forest had no equipment of any kind being depreciated except vehicles. This was a logging company with no chainsaws!

Those accounts were silly. The later ones are full of red-flags - but they are not so obviously silly.

I am more sympathetic to Paulson buying the stock in 2009 than I am to anyone who purchased the stock in 1999.

The person that purchased in 1999 probably sold some and made money. Indeed if they sold today they are probably still up fairly well.

Which reminds me of the saying among professional investors: "I would rather be lucky than smart". Someone who purchased Sino Forest in 1999 was not smart. But they sure were lucky.


J

32 comments:

Alexander said...

Great post, very well balanced review of real issues faced by anyone managing money

Anonymous said...

Firstly, I am sympathetic to Paulson. Moreover, I consider it an interesting asymmetry that his reputation would be far better had he only made half as much money on his famous bet as he actually did and not lost on SinoForest than if he made twice as much money on his bet and lost half as much as he ended up losing on SinoForest. Tough crowd :)

A few comments, though:

1. "it is entirely possible that I would miss a well executed fraud at a newspaper company because my starting assumption was that I could take the numbers as gospel.[...] most the in-depth analysis you do are of stocks not in the portfolio as you need to decide what to invest in rather than becoming more expert on the things you own.)"

This seems a little circular--before you take a position (lol--"assume the position"), you would do an in-depth analysis because the stock is not yet in the portfolio. In Sino Forest's case, you should have discovered a very dubious set of numbers. Now, maybe you wouldn't if you were investing 5% of a $100k portfolio, but once you are investing hundreds of millions, the overhead for investigating declines substantially as a percentage of $ you stand to lose. Perhaps if Sino becomes questionable AFTER you've bought it, you have an excuse, but that doesn't appear to be the case here.

2. Fidelity analyst: I see this type of situation everywhere, and it never ceases to startle me. The basic rule I've derived is that you can generally buy work, but that you can only very rarely buy sound thinking or good judgement. I do not believe that knowing the nuances of the market precludes one from realizing that market valuations are crazy--in fact, it should help someone reach that conclusion.

Presumably, for example, your deep understanding of the newspaper industry didn't prevent you from understanding that the internet was going to really hurt that industry for a long time, correct? What's the difference when it comes to Fidelity being long a slightly nicer pile crap (as distinguished from the puddle of what they didn't touch)

I believe Chanos' method is actually preferable--Chanos comes up with his ideas and expects his underlings to analyse them thoroughly (and, presumably, to keep analyzing them after he's taken a position). They get $hit for not doing solid analysis, but never get berated for not coming up with an original idea. Again, though, this stems from my view that it is virtually impossible to find (let alone buy) good thinking and judgement, but it is fairly easy to buy work output.

Anonymous said...

A couple of other comments:

1> "But there are problems with the small teams. First small teams have blind spots. The world is a big place (too big to paint anyway) and there is no way that the senior fund manager can cover everything."

But so what? That's like McDonald's lamenting that the sheer size and variety of nutrition in the world precludes it from monopolizing the entire food chain. It does just fine within its niche, the guys who run it make a decent amount of cash without a lot of stress, and that's more than enough to make them happy (or at least it should be). Moreover, every time they go into whatever idiotic fad their consultants (or whoever) dream up, they spend lots of time to simply lose money. The lesson here should be sort of obvious...

2> "I am an expert on fraud - but it is entirely possible that I would miss a well executed fraud at a newspaper company because my starting assumption was that I could take the numbers as gospel."

Firstly, I find your expertise both fascinating--I wish I had the same insights in analysing financial institutions as you seem to, for example. Secondly, I often wondered if Buffett's shortcuts (looking solely at past earnings as a gauge of future growth) would've led him to very bad decisions such as buying privately-owned Levi's Jeans if he were offered it right before sales and market share fell off a cliff. I suspect that it would have. If I'm correct, then fraud--which is at least detectable if you look for it--isn't even the biggest of your problems.

Your German timberland example, btw, is great--I didn't ever realize that timberland was such a nice investment

Anonymous said...

John,

You can't have your prime brokers come up with some ideas with your inputs? That could help trawl a lot more.

John Short said...

We can add Paulson to the China list

Carlyle group - China forestry
Heckman - China water and drinks
Starr - china mediaexpress
Paulson - Sino Forest

In the future? I think the two following

Abax group - harbin electric
morgan stanley - yongye international

Michael R said...

Coincidence?

"Sino-Forest, auditors facing class-action lawsuits"
http://www.reuters.com/article/2011/06/21/us-china-accounting-lawsuits-idUSTRE75K6XN20110621

"China tells firms to favour govt-designated accounting firms"
http://www.reuters.com/article/2011/06/24/china-economy-accounting-idUSB9E7GG00N20110624

Anonymous said...

RE: your comments about relying on shortcuts.

relying on short cuts is fine when buying <5% of a company's outstanding float.

but when your shareholding cross the 5% threshold, shouldn't your due diliegnce/analysis be more vigorous.

I agree that it'd difficult to corroborate a forestry firm's acreage independently and that Sino Forest's accounrs has been geting less fishy through the years, but I thought one thing that jumped out when reading the annual report is the use of 'authorised intermediaries'.

Anonymous said...

Bronte are you serious?

Of course Sino-Forest doesn't own equipment. They farm out logging operations. Same thing that Exxon does when it drills for oil. It doesn't own the drill.

With statements like this it is amazing you have even $1 under management.

John Hempton said...

To the person who said they farm out forestry operations...

(a) in the 1997 report - the one I was talking about - there is no evidence of that

(b) if you have ever driven along a mountain road into a forest you will know that trees falling over the road is common enough. These are low traffic roads. Just the management vehicles would require chain saws. That is part of the business.

(c) I like the flattering comments like that from people who are pig-ignorant. Its sort of reinforcing. Shouldn't be - but it still makes me happy.


John

Jon Martin said...

@Anonymous
"Bronte are you serious?

Of course Sino-Forest doesn't own equipment. They farm out logging operations. Same thing that Exxon does when it drills for oil. It doesn't own the drill.

With statements like this it is amazing you have even $1 under management."

To address your equipment concerns, I believe Mr. Hempton was referring to Sino's accounts in 1997, when in their private placement filing they claimed to process and export "hardwood chips to pulp producers in Japan, Taiwan and Korea." (See his previous post "Sino Forest: some ancient history.") Processing requires equipment, and he merely pointed out the inconsistency between what Sino claimed to do, and their "outright strange" financial statements that suggested otherwise.

Jon Martin said...

@John Hempton

I was going to say the exact same thing about the 1997 financial statements, but my internet went out and you beat me to the punch.

The only thing I dislike about your blog is that you do not post more often... Keep up the great work!

Anonymous said...

Planted vs. Purchase hectare records from "Annual Information Forms" show odd counter-correlated variation. Planted acreage is essential flat, SNFO is not adding any net property. The purchase-hold-sell acreage is enormously variable. Why is there no sale in the plantation acreage to track the standing timber speculation? It may be the plantations are real, and the "purchased" timber rights are vaporous and false.

Planted hectares are property where SNFO has taken a lease and planted eucalyptus for a 5 year rotation on chip production.

Purchased hectares are standing timber where SNFO has bought timber rights to cut.

Jiangxi is the south central province which was the center of SNFO activity in early years.

Jiangxi
Year Planted Purchased
2005 7000 108,000
2006 8000 99,000
2007 7000 -
2008 7000 -
2009 6600 30,500
2010 6600 108,700

Guangxi is the southern province on the border with Vietnam. SNFO says it moved south and inland to avoid unprofitable prices on the coast.
Guangxi
Year Planted Purchased
2005 11,000 51,000
2006 13,000 75,000
2007 11,000 141,000
2008 11,000 139,000
2009 12,600 138,500
2010 13,000 90,700

Guangdong is the province surrounding Hong Kong where SNFO started and built a 40 acre mill site.
Guangdong
Year Planted Purchased
2005 25,000 115,000
2006 38,000 49,000
2007 35,000 11,000
2008 39,000 9,000
2009 39,100 9,400
2010 38,900 9,200

Anonymous said...

Way back in 1994, Mr. Paulson founded his own hedge fund with $2 million and two employees.

If we discount the 5 billion John personally earned in 2011, as well as the 35 BILLION currently under mgmt, most everyone else focusing on Sino, and in the business of managing other people's money sure sound a bit the nitty picker.

Go on everyone. Focus the magnifying glass on one teeny tiny microscopic piece of a massive portfolio. Spin the wheels as much as one likes.

John Hempton said...

I am more understanding than nit-picking. These are however real issues faced by fund managers on how they allocate their time and intellectual capital.

But I will hazard a guess. Paulson was a better manager when he had two staff and 2 million than he is now with 50 plus staff and 35 billion dollars.

Bronte has 2 and a half staff and somewhat more than 2 million dollars - and our (tiny) size is an advantage not a disadvantage.

We are continuously amazed how much more comfortable people are buying into mega-funds like Paulson than into small funds.

Paulson had the best trade in history - one he got through seeing right through the BS in the market. Its ironic he got suckered by some BS himself ...

I suspect with small size that might not have happened.

J

Anonymous said...

I can't find the reference now, but I remember Warren Buffett telling an audience that his investment decision on ISCAR was based solely on the letter he received from the owners of the company where they described their basic operations, philosophy of business and such. Buffett purportedly wrote a 4 billion dollar check without ever visiting the factory.

So in your book... Buffett must be a one senile, lost billionaire?

Robert Kane said...

one of my favorite financial blogs. - bobbyj

Anonymous said...

So in your book... Buffett must be a one senile, lost billionaire?


I'm not sure how you came to that conclusion based on John Hempton's post. Actually, the post seems to imply the opposite--that the more familiar you are with the markets, the more short cuts you will take

And again, I'll point out that Buffett's shortcuts would likely have led to him losing money on Levi's Jeans were he offered the chance to buy into the firm before they cratered sometime in the mid-90s.

sinoforestanalyst said...

John:

"I suspect with small size that might not have happened."

"Its ironic he got suckered by some BS himself ..."

I have an alternative take on the two stmts I quote above:

I don't think size would have mattered. Also I don't find it too ironic given their subprime short wasn't shorting fraud, something they did not specialize in.

Specifically:

(1) Paulson & co. was much smaller than they are now (around 10 investment employees) in Q1 2007.

(2) Paulson initiated a position in Sino Forest back in Q1 2007 when they were largely a event-driven/merger arb shop. They thought Sino Forest might be bought out or re/dual-listed in HK..a reasonable thesis given sino was courted and these were the days when private equity was always there to save the day.

(3) More importantly...they were plenty distracted w/ their to be famous trade. Recall that Q4 2006/Q1 2007 was the first time the ABX index moved dramatically...

(4) I believe they spend 1-3 weeks of time evaluating an idea on average. That is not the approach that short sellers who specialize in fraud take (more 1-3 months!). They had no reason to suspect fraud..and frankly they were and are outmatched against these specialist short sellers.

So perhaps what happened is that Sino Forest slept through the cracks as:

(1) They started caring less about their other positions as their famous trade was beginning to pay off,

(2) They started hiring like wild fire but hired more of the same ilk (ibanking analyst/mgmt consultant) rather than say fraud specialists.

(3) Macro/Big gross profit ideas mattered more than deep diving, as exponential AUM growth necessitated it. Hence gold, BofA, etc.

(3) Managing people now became a bigger job even while some core members left (Paolo)..

(3) Meanwhile Sino Forest TRE's stock price fared pretty well which unfortunately contributes to confirmation bias.


In short comfort/success led to complacency.

John Hempton said...

Warren Buffetts returns in his early partnership days were more than 10 percentage points higher than his Berkshire average.

He WAS a better fund manager then. Not because he was better but because he was smaller.

(Our returns now are pretty good - but they are not quite as good as Early Warren Buffett... they are better than later Warren Buffett... he is better than us - no question - but he is also larger than us - much larger than us - and size is a drag on his returns. Its a drag we do not have now...)

Hester said...

I agree with SinoForest Analyst.

To add to what he said, the Chinese reverse merger fraud implosion that has been the story of the last year or so, was just a glimmer in Carson Block's eye in 2007.

If the Paulson team did their original research in 2010 or 2011, their guard would probably be at least a little bit higher than it was in 2007 just due to the fact that Sino is a Chicom reverse merger.

If the internet didn't exist today and newspapers were still viable, and Bronte was brought a dominant newspaper company as an idea, but it happened to be a Chicom reverse merger, would your guard up even with the shortcuts?

Anonymous said...

Another great post John.

Just a thought though - did you consider the possibility that Paulson did in fact take a short cut and not look at the accounts, as per your sympathetic view, but does not want to admit that fact publicly for PR reasons. The uninitiated might be slightly less sympathetic to that view, and instead view it as sloppy or even negligent.

Also, on the topic of time management, unless you have reason to suspect fraud in the first instance or are looking for specific short candidates, is it really realistic to expect fund managers to be doing the type of scuttlebut/independent verification you suggest on every stock in their portfolio? I would imagine it simply isn't feasible for most fund managers.

Of course, that doesn't excuse failing to pick up on obvious warning signs in the accounts, but it is at least partly understandable how most fund managers have (until now at least) taken audited accounts largely on faith...fraud has still been very much the exception not the rule in public markets to date, and fraud risk probably wasn't on a lot of investors' radars (again, that's likely changing now)

Cheers,
LT

John Hempton said...

I suspect Paulson did not look at the accounts - but he said they did and I have to take him at his word.

But yes - I think that NOT looking at the accounts is perfectly excusable... though I almost always do (except in tech stocks where it really is about the technology and how people relate to it).

J

Anonymous said...

I spent a very enjoyable year in China. This was not enough to make me an expert, but it did give me a passionate interest in the country. I also have friends who have told me stories of doing business in China.

I recommend that anyone contemplating investing in China read Tim Clissold's 2006 book "Mr. China." It's very funny -- unintentionally so -- and it's also a great cautionary memoir of failure, as well as a virtual handbook of what can go wrong. Chinese culture, especially Chinese business culture, is . . . well, different.

Anonymous said...

John,

One of your very best posts out of many good ones!

A few questions re the selection of analysts:

1) What do you think makes a good analyst versus someone who was outstanding, i.e. who made the upper group of 9?

2) How do you balance between "deep expertise" v more generalized skills among your analysts?

3) Does "deep expertise" in a domain tend towards a long bias? I'm thinking of your mortgage insurance person. Sometimes analysts fall in love with what they're supposed to be dispassionately analyzing.

4) How should you incent an analyst?

Boy Plunger said...

I'm not sure how you came to that conclusion based on John Hempton's post.


Then, I will spoon-fed you :)

Mr. Hempton's post seems to suggest that shortcuts, being part of any experienced fund manager's arsenal, should not prevent the more thorough due diligence that could uncover a bad investment. He then reasoned, Mr. Paulson could have been a victim of his own "shortcut style" as much as not having had done proper DD -real old-school DD- by the person in charge. DD done through a competitor's eyes.

Yet, the greatest capital allocator of all times is on record saying he doesn't really devote too much time on DD, never interviews management and seldom goes beyond SEC filings, keeping things as simple as possible.

In Buffett's own words, he mostly tries to assess specific aspects of management and personnel (people you can trust), learning about them in ways other than direct interviews, looks to understand the essence of the business (invest in what you know) and then formulates simple hypothesis that would illustrate its competitive frame (moat).

So how come has he not been a victim of fraud more often? No thorough research? Simple shortcuts based on ROA or ROC?

My point is nothing is written in stone. Deep due dilligence could or may not be the answer. Just as much shortcuts can help or hinder. Buffett has said over and over that he would know a good investment from a bad one within minutes. So narrowing the problem to more in-depth research does not preclude success. There are as many successful styles as managers and the bottom line is that there could be even more things at work that go beyond "straight answers", i.e, personal "genius".

Mr. Hempton,
I am also aware of WB's failures. Some colossal ones. Include here the orginal Berkshire. I am under the impression that his early success and large yearly gains were the result of really concentrated positions, which he later developed into a "takeover" style. Becoming a private equity guy of sorts. So much for being a one-man band, flexible and nimble investor. I don't think so.

Like in any other profession or activity... you are good or you are above and beyond. Maybe Mr. Paulson is not that bright shining star that the media likes to display. But light years ahead of myself, yeah!

Anonymous said...

@John Short - after adding Paulson to your list of PE/large funds to get fooled in China, do you have any reason to believe that Abax group isn't a fraud itself? I have no idea - so not accusing them - but I note: 1) their website is sketchy; 2) no one answers the phones in HK (I tried multiple times on different days) or BJ (I tried once), and 3) the chairman's bio claims he went to a famous business school in Philly but he isn't listed on the school's alumni database.

@John Hempton - I'm glad the absurd naysayers in these comments just serve as fuel for you. We'll start calling you the Kanye West of financial bloggers! :)

Ike

Anonymous said...

It had a respectable board and reputable auditors

I don't see how anyone can consider this a defense for either bad investment decisions or fraud. It's surely not a secret that most board members know less about the companies they 'govern' than your average day trader.
And auditors don't sign off on an audit until they've received the letter from management explicitly stating that the underlying information is management's responsibility and none of the auditors.
As fraud detectors they're both about as useful as a fortune teller.

Adrian Meli said...

Thought this was a great post and thoughtful on multiple topics including team size. There are no right answers to a lot of this as you point out...

Anonymous said...

Paulson started buying C107M worth of shares in 2007
By May 2011 those shares were worth C468M, about the same as they were worth in at the close of 2010.
So between 2007 and end 2010, Paulson's hedge fund would have collected (assuming 2 and 20) about C72M in performance fees related to Sino.
Now its collapsed it might affect his high water mark but he doesnt have to return any of those fees he "earned". His investors have lost almost as much to Paulson as to the Sino fruadsters

Anonymous said...

Paulson invested C107M and this was worth around C470m by end of 2010.
So Paulson's fund collected about (assuing 2 and 20), C72m in performance fees for the rise in Sino Forest share price. At the very least you would think he would offer to repay his investors that much.
Not much honour amongst thieves though.

Unknown said...

This is not an area for debate. The market as a whole was stupid and naive. All one had to do is look at the most recent presentation of Sino Forest. The Cap Ex to Revenues ratio was between 80%-90% for five years or more. This was a no-brainer, and I feel stupid for not spending more time on the financial analysis - all one had to do was give a serious thought to the Cap Ex./ Revs ratio and know that if you broke the market confidence, which would prevent them from raising capital to keep this puppy going, it was going to crash like a ton of bricks. That simple. You just needed a trigger. Muddy Waters had that in his newsletter following. Good for him. Paulson got too much money too quickly and deployed it in a reckless fashion; he deserves this result. Ryan

Anonymous said...

@"Unknown": "The market as a whole was stupid and naive."

Your verb is in the wrong tense: as I write this, Sino-Forest is up 183% over the past month, at $7.55 on the Toronto exchange.

Sigh.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.