tag:blogger.com,1999:blog-4815867514277794362.post7388336223292127436..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: The scuttlebutt method of stock researchJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger36125tag:blogger.com,1999:blog-4815867514277794362.post-7741443560527455272011-07-19T00:38:47.323+10:002011-07-19T00:38:47.323+10:00The company in question wouldn't happen to be ...The company in question wouldn't happen to be Medicis although even if it isn't the legal problems the current ceo of Medicis is having make are starting to make it an interesting short candidate.<br /><br />http://www.bloomberg.com/news/2011-07-14/medicis-tumbles-most-in-two-months-after-woman-is-found-dead-in-ceo-s-home.htmlTimhttps://www.blogger.com/profile/03894651289037073128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-73359939864042357122011-05-30T19:43:24.600+10:002011-05-30T19:43:24.600+10:00The unforwarded sample is your clue. Ask for anot...The unforwarded sample is your clue. Ask for another under a different bona fide and if you still don't get it, short.<br /><br />I don't think personal life info (son, girlfriend, girlfriend's daughter, new exotic home) gleaned from a chance encounter at an airport lounge counts as "insider", but could be wrong, ask a lawyer?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-45844093917547973342011-05-26T02:54:24.590+10:002011-05-26T02:54:24.590+10:001) The analysis of the firm is certainly not flatt...1) The analysis of the firm is certainly not flattering but it's also not damning, meaning no discernable catalyst appears to be in place so I'd move on and keep an eye out for key developments, if any, happen to emerge. In terms of an investment decision, I'd place this in the "too hard" box to revist at a later date, but intellectually, it's fun to think about.<br />2) Mosaic theory is an obvious defense but not the best--I'd consult a reputable insider trading/securities lawyer to understand the boundaries of the legal concept and to test the legality of one's methods and document them to protect yourself against potential future allegations of insider trading. And document any material information that may emerge in your investigation, too, in order to have a verifiable chronology of events. <br />3A) Reliability of signals--personally, I feel that character cannot be turned on & off like a light switch so observations drawn from private life will most likely lead to reasonable inferences on the individual and how he may run the corporation. As a counter-example to other posters, Phil Fisher led a relatively humble life but I think he did OK for himself financially.<br />3B) While the father is fair game, I feel that watching the kid is out of line on the basis of the following role reversal: if a paid informant (spy? professional observer?) watched my (hypothetical) kid, I'd take issue with it even if I had nothing to hide. Of course, I'd want to understand the why behind it and ask nicely for them to stop but also prepare to press legal action if the pattern continued because the child has no direct material impact on management decisions at the firm.<br />5) Personally, I'd be most intrigued to chat with the former manufacturing CEO to understand why he left his former job to work at this co, why he left and the nature of his working relationship with the founder while there.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-42582968024246830782011-05-15T18:18:23.466+10:002011-05-15T18:18:23.466+10:00Either they had spare capacity from ambitious init...Either they had spare capacity from ambitious initial investment OR they have a slick OEM arrangement with another cloud provider, which would result in variable cost increases in parallel to the surge in revenue. <br /><br />However, I would agree this case and the industry as a whole is at a strange Enron-style era of hype. Nobody is going to publish a true P&L for cloud infrastructure as under-subscription is a global reality thus far. <br /><br />And there are a lot of wing-nuts willing to criticize your use of storage terminology, but how many of them know what fixed costs are?Johnhttp://www.technologyisdead.comnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-53605402095455527772011-05-07T17:10:57.865+10:002011-05-07T17:10:57.865+10:00Your method seems legal unless your spy went overb...Your method seems legal unless your spy went overboard to get information. <br /><br />However the inference is difficult to pin-point. Sometimes as you accumulate information you get to a point where an alarm goes off in your mind "something is not right". It is not exactly about the parking lot thats empty at 5pm, nor about extravagant lifestyle of the CEO or his son/daughter/wife/mistress. <br /><br />Also due allowance must be made for cultural differences and personal biases. In some cultures it is ok to be "loud" or pompous in others it is not. Infidelity, naturally, is inexcusable. But being a judge is difficult. You must apply the right scale to the fellow.<br /><br />Taken in isolation each of the incidents may not raise a flag, however if it does then I guess you must heed it.Rahul Deodharhttps://www.blogger.com/profile/13354874480198485819noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-20857673319506429382011-05-04T14:59:37.952+10:002011-05-04T14:59:37.952+10:00These methods remind me of a talk by Avner Mandelm...These methods remind me of a talk by Avner Mandelman at the Ben Graham centre for value investing in Ontario - http://www.bengrahaminvesting.ca/Teaching_Applications/Guest_Speakers/2007_speakers.htm<br /><br />I recall cringing a little at some of the methods he described (eg buying the county court secretary coffee and discussing legal cases, the Judge's mood etc). But some of it makes good sense - analysts shouldn't always rely on what the filings state - getting a feel for the character of a prospective business partner is always important.<br /><br />This particular situation might warrant more investigation, but it could just be one of the many legal, but not very good business operations out there.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-87609900943317186102011-05-04T09:34:15.522+10:002011-05-04T09:34:15.522+10:00Phil Fisher wrote Common Stock Uncommon Profits, n...Phil Fisher wrote Common Stock Uncommon Profits, not his son Ken.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-69075172309066466332011-05-03T23:32:13.561+10:002011-05-03T23:32:13.561+10:00Ben
I could not disagree more.
Had I found that ...Ben<br /><br />I could not disagree more.<br /><br />Had I found that the carpark was filled at 9pm. When you took staff or customers for a beer you heard the story about (a) how enthused everyone was (b) how you would hope your kids work there and (c) how the founder is an inspiration for young tech whizzes...<br /><br />Then I would have purchased the stock on Phil Fisher grounds.<br /><br />I just found stuff that was different.<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-22562391748135755652011-05-03T22:59:57.101+10:002011-05-03T22:59:57.101+10:00Phillip Fischer was more concerned about talking t...Phillip Fischer was more concerned about talking to customers and suppliers and not doing background checks on management teams. His process was to find the companies with the best management teams creating the most innovative products though talking to suppliers, customers, competitors, etc. This seems more like a short seller's suspicion that a management team is lying. Both are good due diligence, but the comparison I think is off base.Bennoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-51342596402713593512011-05-03T16:27:10.944+10:002011-05-03T16:27:10.944+10:00One framework fraud investigators use to find situ...One framework fraud investigators use to find situations ripe for fraud is the Fraud Triangle. The legs of the triangle are Incentive/Pressure, Attitude/Rationalization and Opportunity. These are circumstantial markers that might lead an investigator to probe more deeply in a given area. “Incentive/Pressure” covers things like personal bonuses overly tied to a particular metric or an impending do-or-die liquidity event. “Opportunity” involves things like unchecked access to some asset or CEOs with chummy, inattentive boards. The “Attitude/Rationalization” leg covers flashy or unusually egotistical behavior (Kozlowski, Scrushy) or playing fast and loose with the truth. Obviously, just because these conditions exist, doesn’t mean there is a fire; but it does help investigators in determining where to look for smoke.<br /><br />For me, it sure smells smoky on this one. The CEO seems to be lying to shareholders (but not random airport strangers) about where he spends most of his time. His attitude toward the truth sounds “flexible. You don’t mention the CEO as directly exhibiting flashy behavior, aside from his exotic adopted hometown. However, we might hypothesize that he at least revels in providing a flashy lifestyle to his son and would-be stepdaughter (Pressure or Attiutude). Is the board a bunch of his sleepy buddies? That might give him the freedom he needs for shifty goings-on.<br /><br />I would definitely dip a toe in on the short side of this. However, I think to go whole hog I would need to be more convinced about the underlying technology. The rest of this stuff is nice smoke, but most of these issues can simply smolder forever. They would *definitely* spur me to keep looking. The stock doesn’t burn to the ground until something or someone grabs the market by the scruff of its neck and holds its face in the steaming pile on the rug that is the company’s (allegedly) fake technology. On the off chance the tech is not rubbish, I’d keep things small until building more confidence about its failure.<br /><br />With regard to your methods, I think you are nowhere near inappropriate. Nowhere in your story did anyone come close to violating a duty to the company. To my understanding, most of the problem with the expert networks occurred when the experts were disclosing secrets about their own employers (material non-public information - the kinds of things their employers would eventually be expected to issue press releases about). In your example, the CEO’s choice of hometown is not a newsworthy piece of information on its own. What is news is perhaps that he has misled investors as to his day-to-day involvement in the business. But that’s just him getting caught in a lie, not him selectively disclosing earnings or a big impending contract win.<br /><br />My recollection (several years old) of Phil Fisher is that your work would be quite in line with his definition of scuttlebutt. I’m a little hazy, but perhaps he focused more on industry trends and the actual operations (as opposed to the management team). To my mind though, when you think of buying stocks as an ownership stake in a business, few things are as basic as knowing whether or not you are partnering with a dirtbag. Same goes on the short side. Except there, of course, dirtbags are desirable.cdudkonoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-55816983965472482712011-05-03T10:57:08.636+10:002011-05-03T10:57:08.636+10:001) the 5pm thing is a red herring. I would expect...1) the 5pm thing is a red herring. I would expect the lifestyle in Kansas to be far different from Silicon Valley. Even in Silicon Valley, mature companies have most parking lots half empty at 6pm.<br />2) Don't confuse your business analysis with personal analysis. What the CEO does with his mistress is completely not pertinent to how he runs the company. As well, it is even less related to the stock price. Think about how many current CEOs had issues with fidelity. I think it's another red herring.<br />3) the kid is also spurious. having a spoiled brat as a child is part and parcel of being rich.<br /><br />My advice is stick with the things that matter.<br /><br />Stick with the issues thatAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-9829385398843230732011-05-03T10:32:02.257+10:002011-05-03T10:32:02.257+10:00Does the CEO draw a large salary/benefits package?...Does the CEO draw a large salary/benefits package? Does he own a significant stake. Is he selling stock?Jonnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-2975963606404107292011-05-03T08:41:59.921+10:002011-05-03T08:41:59.921+10:00congrats great post as usual, "if it looks li...congrats great post as usual, "if it looks like a duck, swims like a duck...." most probably a duck I would say :)Antonio Salgueirohttps://www.blogger.com/profile/10385527699140552451noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-87589496385663776012011-05-03T06:17:08.634+10:002011-05-03T06:17:08.634+10:00Larry Ellison's lifestyle is the epitome of la...Larry Ellison's lifestyle is the epitome of lavish. Shorting the stock over the past year has been extremely unprofitable. Ergo, the focus for thesis building should be much wider than just this.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-23836271222217802922011-05-03T06:15:07.182+10:002011-05-03T06:15:07.182+10:00J, re: your question #2:
+1 mosaic theoryJ, re: your question #2: <br /><br />+1 mosaic theoryAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-61567597220915615542011-05-03T04:08:18.088+10:002011-05-03T04:08:18.088+10:00think lavish parties--Tyco
think lavish lifestyle-...think lavish parties--Tyco<br />think lavish lifestyle--Healthsouth<br /><br />the CEO sets the moral tone. <br />(of course this applies to politicians too.)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-67487304708539658262011-05-03T03:51:52.720+10:002011-05-03T03:51:52.720+10:00A theoretically promising approach with a couple o...A theoretically promising approach with a couple of early results has hit a roadblock. They're trying to work through it but it's taking so long that morale is low and now it's just a job. They may own valuable process-type patents which are being used to attract funding, but they no longer have the drive or ideas to capitalize on them and insiders doubt they ever will. Perhaps not outright fraud, but it's at most a lifestyle/wishful thinking company.<br />The methods are legal.. wish someone should had noticed the accountants for Madoff's billion-dollar company were 2 guys in a strip mall.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-26142988928799793002011-05-03T03:08:03.138+10:002011-05-03T03:08:03.138+10:00Obviously this should preclude anyone from going l...Obviously this should preclude anyone from going long. I'm not sure I would short this one, for monetary not moral reasons.<br /><br />From what you wrote I don't think the CEO or management is technically doing anything illegal. Obviously they have real business, management is just promotional and shady. <br /><br />As long as the company is just putting out optimistic press releases, I don't see any reason for this to stop. There's no fraud, or aggressive accounting, and it's not a house of cards.<br /><br />For the time being the CEO is incentivized to keep this going and keep the stock high to raise equity to fund options and salary.<br /><br />Add in the tail risk that the technology actually works and it doesn't seem like a terrific short.EThttp://westkootenaiinvesting.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-76355234147749276462011-05-03T03:01:59.417+10:002011-05-03T03:01:59.417+10:00Great post, but have your parking lot observer che...Great post, but have your parking lot observer check what time the parking lot fills up in the morning.<br /><br />Years ago, I consulted on a project for a large insurer in the midwest and was struck by the early hours kept by the locals. <br /><br />Many were in the office well before 7:00 am, some routinely arriving by 6:00 am.Robert H. Heathhttps://www.blogger.com/profile/04754539699997933167noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-18550687025725030032011-05-03T02:46:35.608+10:002011-05-03T02:46:35.608+10:00I wouldn't worry about the 5pm thing too much....I wouldn't worry about the 5pm thing too much. It wouldn't surprise me if they were capital-limited on the rate of research (for example, if they have one or two reactors that each take a week to run, and there's not much else to do while it runs).<br /><br />Based on what you said about the founder, it sounds like he's probably liquidated much of his holdings and semi-retired. Odds are the active management comes from more of a business school background. This can cause all sorts of havoc, as b-school types tend to have unrealistic ideas of how to manage research. For example, in research there's always a lot of uncertainty about what resources and time will be needed to complete the project, and you don't get those answers until the research is finished. This makes ROI impossible to meaningfully calculate, which never stops people from trying.Jaynoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-91131813144352984652011-05-03T01:01:15.579+10:002011-05-03T01:01:15.579+10:00John,
If the hypothesis is that there is fraud, ...John, <br /><br />If the hypothesis is that there is fraud, then it seems the question is how far does the fraud extend? Perhaps the CEO is the only one who is fraudulent, but he "knows" it's wrong. Perhaps he is a "protector" (fits with description of the mistress relationship), so he rationalizes his behavior/lifestyle on account of the good he thinks he's doing for his loved ones but would never permit those whom he manages to engage in it. It's a plausible explanation. Based upon your post, it doesn't seem like you have established a case for a culture of fraud (whereas you have definitely established that in other successful shorts described on this blog). So how far does he let the fraud go if he is truly fraudulent? <br /><br />I also don't think your methods are illegal (though I'm not a lawyer), so your only issue is whether or not your are comfortable with them given your morals.Chad M.https://www.blogger.com/profile/15004021933684729564noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-62989000029618535572011-05-03T00:54:34.167+10:002011-05-03T00:54:34.167+10:00John, it would seem the question is one of breadth...John, it would seem the question is one of breadth. Perhaps the CEO is the only one who is fraudulent, but he "knows" it's wrong, and doesn't permit those whom he manages to engage in it. Based upon your post, it doesn't seem like you have established a case for a culture of fraud (whereas you have definitely established that in other successful shorts described on this blog). So how far does he let the fraud go if he is truly fraudulent? <br /><br />I also don't think your methods are illegal (though I'm not a lawyer), so your only issue is whether or not your are comfortable with them given your morals.Chad M.https://www.blogger.com/profile/15004021933684729564noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-27027283029821400142011-05-03T00:19:48.651+10:002011-05-03T00:19:48.651+10:00But any hardware can be controlled remotely. So on...But any hardware can be controlled remotely. So only a few people needed to be onsite to run the lab facilities. Any R&D (with or without the smokestacks) that generates data then those can be mined remotely also.<br /><br />Admittedly I am no expert in R&D that involves chemicals...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-64292652751967767382011-05-02T23:49:23.217+10:002011-05-02T23:49:23.217+10:00+1 Mosaic theory. All of this is information that ...+1 Mosaic theory. All of this is information that would be available to any member of the public who did legal and ethical spade work.<br /><br />It becomes insider trading if you get a material piece of information from an insider that is not publicly disseminated.<br /><br />Gets interesting if in the course of doing spade work, you inadvertently encountered info that the CEO expects to be private and/or is supposed to keep secret, ie you see him ducking into a meeting with a potential acquirer.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-62667378141983777002011-05-02T23:41:56.599+10:002011-05-02T23:41:56.599+10:00John,
Love the post, makes you think - I think ba...John,<br /><br />Love the post, makes you think - I think based on your feedback I would.. try to find more information? Without understanding the broad industry tones it's difficult to say whether this strategy can beat the market. The problem is even if it works the ability to replicate the same information flow on a continuing basis.<br /><br />I might take a small short position and do some more digging.<br /><br />I think this information clearly falls within the "mosaic theory" approach.. Wonder what the new rulings from the SEC will come back as?Epicurioushttps://www.blogger.com/profile/16126591165038930794noreply@blogger.com