Looking at the ability to spot scams is one way to figure out which money managers are skilled or unskilled. Warren Buffett has invested in surprisingly few scams. I believe this is because he looks for integrity and invests in businesses that he understands. His ability to avoid scams is especially interesting because he does not perform traditional due diligence when buying private businesses. He does not hire accountants to comb over the books of businesses that he buys. Nor does he have a team of analysts to perform due diligence.
On the other side of the coin, unskilled managers tend to get burned by scams on the long side and to miss out on opportunities in shorting scams.
In my opinion the reputations of some famous money managers are overrated:
- If you read my posts on Yukon-Nevada/Veris Gold (currently bankrupt), Barkerville, and RX Gold you can figure out what I think about a famous Canadian money manager who used to be long precious metals, short investment banks, and short an ETF that carried his name.
- On this blog I have written about Fairfax Financial and one of its holdings (Kennedy-Wilson). While I’ve never written about Sandridge Energy (a major Fairfax holding), I have written about aggressive b factors and dmin values in reserve estimation. Sandridge discloses its b factor assumptions in its investor presentations. I have shorted Sandridge in the past (for a very small profit).
Both of these famous Canadian money managers have a lot of fans among other money managers. I do not believe that these managers and their fans are investing superstars. This is likely a highly contrarian viewpoint because many people think highly of these managers and/or attend Fairfax’s annual general meeting. But this is not an area where I will seek comfort by following the herd.
Value Investors Club
In aggregate, VIC is really bad at spotting scams among resource stocks. Refer to my previous posts on the subject:
- Shorting VIC (ValueInvestorsClub.com)
- Beating Wall Street in oil and gas
- Short selling update July 2014 and Energy stock rankings. Note that most of the resource names I was shorting back in July and May have been mentioned on VIC as longs or potential longs.
Selection bias due to the VIC approval process likely explains why the resource writeups tend to advocate long positions in stocks that subsequently perform poorly. To be fair, there are some good short sellers on VIC (e.g. kerrcap / Kerrisdale spotted a lot of Chinese frauds). It’s just that these short sellers don’t seem to do writeups on resource stocks.
Jim Rogers was bamboozled by Fab Universal despite being on their board and constantly talking about his visits to China.
Rating short sellers
Some people short stocks but admit that they are not able to find many (or any) frauds. To me, this is a sign that they aren’t in the same tier as the best short sellers in the world. Skilled short sellers are able to spot frauds.
Here are some short sellers who are among the best in the world when it comes to spotting frauds:
- John Hempton
- Carson Block / Muddy Waters
- Jon Carnes / Alfred Little
- Gotham City Research
- Jim Chanos
*Disclosure: Short Veris Gold. No position in Barkerville, RX Gold, Sandridge, stocks/ETFs that bear the name of a certain Canadian money manager, Fairfax, or KW.