tag:blogger.com,1999:blog-4815867514277794362.post5586504353722715287..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: The Paulson Sino Forest lossJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger32125tag:blogger.com,1999:blog-4815867514277794362.post-65926352120518033442011-07-30T04:27:52.155+10:002011-07-30T04:27:52.155+10:00@"Unknown": "The market as a whole ...@"Unknown": <i>"The market as a whole was stupid and naive."</i><br /><br />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.<br /><br />Sigh.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-44811165886142726742011-07-19T10:59:57.039+10:002011-07-19T10:59:57.039+10:00This is not an area for debate. The market as a w...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. RyanUnknownhttps://www.blogger.com/profile/14101240704155727324noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-38946816077261976172011-07-06T16:18:09.551+10:002011-07-06T16:18:09.551+10:00Paulson invested C107M and this was worth around C...Paulson invested C107M and this was worth around C470m by end of 2010.<br />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.<br />Not much honour amongst thieves though.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-35906868086596572792011-07-06T16:13:45.756+10:002011-07-06T16:13:45.756+10:00Paulson started buying C107M worth of shares in 20...Paulson started buying C107M worth of shares in 2007<br />By May 2011 those shares were worth C468M, about the same as they were worth in at the close of 2010.<br />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. <br />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 fruadstersAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-78343008117112057662011-07-01T07:11:51.170+10:002011-07-01T07:11:51.170+10:00Thought this was a great post and thoughtful on mu...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...Adrian Melinoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-64357747441040073532011-06-29T10:38:54.458+10:002011-06-29T10:38:54.458+10:00It had a respectable board and reputable auditors
...<i>It had a respectable board and reputable auditors</i><br /><br />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.<br />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. <br />As fraud detectors they're both about as useful as a fortune teller.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-59490026179166641512011-06-28T19:54:36.528+10:002011-06-28T19:54:36.528+10:00@John Short - after adding Paulson to your list of...@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.<br /><br />@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! :)<br /><br />IkeAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-30217395756332555762011-06-28T05:42:23.835+10:002011-06-28T05:42:23.835+10:00I'm not sure how you came to that conclusion b...<i>I'm not sure how you came to that conclusion based on John Hempton's post.</i><br /><br /><br />Then, I will spoon-fed you :)<br /><br />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.<br /><br />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. <br /><br />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). <br /><br />So how come has he not been a victim of fraud more often? No thorough research? Simple shortcuts based on ROA or ROC?<br /><br />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". <br /><br />Mr. Hempton,<br />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.<br /><br />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!Boy Plungerhttp://www.BoyPlunger.comnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-90583626251635085602011-06-28T02:10:39.850+10:002011-06-28T02:10:39.850+10:00John,
One of your very best posts out of many goo...John,<br /><br />One of your very best posts out of many good ones!<br /><br />A few questions re the selection of analysts:<br /><br />1) What do you think makes a good analyst versus someone who was outstanding, i.e. who made the upper group of 9?<br /><br />2) How do you balance between "deep expertise" v more generalized skills among your analysts? <br /><br />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.<br /><br />4) How should you incent an analyst?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-29831079853658576572011-06-28T02:01:57.776+10:002011-06-28T02:01:57.776+10:00I spent a very enjoyable year in China. This was n...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.<br /><br />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.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-76086927426236720252011-06-27T23:20:38.880+10:002011-06-27T23:20:38.880+10:00I suspect Paulson did not look at the accounts - b...I suspect Paulson did not look at the accounts - but he said they did and I have to take him at his word.<br /><br />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).<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-84351097627216590802011-06-27T22:48:37.094+10:002011-06-27T22:48:37.094+10:00Another great post John.
Just a thought though - ...Another great post John.<br /><br />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.<br /><br />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.<br /><br />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)<br /><br />Cheers,<br />LTAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-57002644291410806902011-06-27T15:47:44.567+10:002011-06-27T15:47:44.567+10:00I agree with SinoForest Analyst.
To add to what h...I agree with SinoForest Analyst.<br /><br />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. <br /><br />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. <br /><br />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?Hesternoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-32111333778834081882011-06-27T13:24:55.526+10:002011-06-27T13:24:55.526+10:00Warren Buffetts returns in his early partnership d...Warren Buffetts returns in his early partnership days were more than 10 percentage points higher than his Berkshire average.<br /><br />He WAS a better fund manager then. Not because he was better but because he was smaller.<br /><br />(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...)John Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-25115807464615216472011-06-27T12:20:37.556+10:002011-06-27T12:20:37.556+10:00John:
"I suspect with small size that might ...John:<br /><br />"I suspect with small size that might not have happened."<br /><br />"Its ironic he got suckered by some BS himself ..."<br /><br />I have an alternative take on the two stmts I quote above:<br /><br />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. <br /><br />Specifically:<br /><br />(1) Paulson & co. was much smaller than they are now (around 10 investment employees) in Q1 2007.<br /><br />(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. <br /><br />(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...<br /><br />(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.<br /><br />So perhaps what happened is that Sino Forest slept through the cracks as:<br /><br />(1) They started caring less about their other positions as their famous trade was beginning to pay off,<br /><br />(2) They started hiring like wild fire but hired more of the same ilk (ibanking analyst/mgmt consultant) rather than say fraud specialists. <br /><br />(3) Macro/Big gross profit ideas mattered more than deep diving, as exponential AUM growth necessitated it. Hence gold, BofA, etc. <br /><br />(3) Managing people now became a bigger job even while some core members left (Paolo)..<br /><br />(3) Meanwhile Sino Forest TRE's stock price fared pretty well which unfortunately contributes to confirmation bias.<br /><br /><br />In short comfort/success led to complacency.sinoforestanalystnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-49208488531818549202011-06-27T12:18:48.979+10:002011-06-27T12:18:48.979+10:00So in your book... Buffett must be a one senile, l...<i> So in your book... Buffett must be a one senile, lost billionaire?<br /></i><br /><br />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<br /><br />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.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-35515113713415020282011-06-27T12:06:16.636+10:002011-06-27T12:06:16.636+10:00one of my favorite financial blogs. - bobbyjone of my favorite financial blogs. - bobbyjRobert Kanehttps://www.blogger.com/profile/17954096212159810128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-50019079246315274552011-06-27T11:47:35.281+10:002011-06-27T11:47:35.281+10:00I can't find the reference now, but I remember...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.<br /><br />So in your book... Buffett must be a one senile, lost billionaire?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-44590340083881652622011-06-27T10:51:35.336+10:002011-06-27T10:51:35.336+10:00I am more understanding than nit-picking. These ar...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.<br /><br />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.<br /><br />Bronte has 2 and a half staff and somewhat more than 2 million dollars - and our (tiny) size is an advantage not a disadvantage.<br /><br />We are continuously amazed how much more comfortable people are buying into mega-funds like Paulson than into small funds.<br /><br />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 ...<br /><br />I suspect with small size that might not have happened.<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-78584497646073730512011-06-27T10:46:26.412+10:002011-06-27T10:46:26.412+10:00Way back in 1994, Mr. Paulson founded his own hedg...Way back in 1994, Mr. Paulson founded his own hedge fund with $2 million and two employees.<br /><br />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. <br /><br />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.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-79077907307536388892011-06-27T09:08:23.920+10:002011-06-27T09:08:23.920+10:00Planted vs. Purchase hectare records from "An...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.<br /><br />Planted hectares are property where SNFO has taken a lease and planted eucalyptus for a 5 year rotation on chip production.<br /><br />Purchased hectares are standing timber where SNFO has bought timber rights to cut.<br /><br />Jiangxi is the south central province which was the center of SNFO activity in early years.<br /><br /> Jiangxi <br />Year Planted Purchased<br />2005 7000 108,000 <br />2006 8000 99,000 <br />2007 7000 - <br />2008 7000 - <br />2009 6600 30,500 <br />2010 6600 108,700 <br /><br />Guangxi is the southern province on the border with Vietnam. SNFO says it moved south and inland to avoid unprofitable prices on the coast. <br /> Guangxi <br />Year Planted Purchased<br />2005 11,000 51,000 <br />2006 13,000 75,000 <br />2007 11,000 141,000 <br />2008 11,000 139,000 <br />2009 12,600 138,500 <br />2010 13,000 90,700 <br /> <br />Guangdong is the province surrounding Hong Kong where SNFO started and built a 40 acre mill site. <br /> Guangdong <br />Year Planted Purchased<br />2005 25,000 115,000 <br />2006 38,000 49,000 <br />2007 35,000 11,000 <br />2008 39,000 9,000 <br />2009 39,100 9,400 <br />2010 38,900 9,200Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-47020505306901087362011-06-27T05:30:02.903+10:002011-06-27T05:30:02.903+10:00@John Hempton
I was going to say the exact same t...@John Hempton<br /><br />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.<br /><br />The only thing I dislike about your blog is that you do not post more often... Keep up the great work!Jon Martinnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-69144943640164434822011-06-27T05:27:43.160+10:002011-06-27T05:27:43.160+10:00@Anonymous
"Bronte are you serious?
Of cour...@Anonymous<br />"Bronte are you serious? <br /><br />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.<br /><br />With statements like this it is amazing you have even $1 under management."<br /><br />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 Martinnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-32834465141629380192011-06-27T05:17:43.495+10:002011-06-27T05:17:43.495+10:00To the person who said they farm out forestry oper...To the person who said they farm out forestry operations...<br /><br />(a) in the 1997 report - the one I was talking about - there is no evidence of that<br /><br />(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.<br /><br />(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.<br /><br /><br />JohnJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-11547704237908768082011-06-27T00:23:34.901+10:002011-06-27T00:23:34.901+10:00Bronte are you serious?
Of course Sino-Forest d...Bronte are you serious? <br /><br />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.<br /><br />With statements like this it is amazing you have even $1 under management.Anonymousnoreply@blogger.com