Money managers and their ability to spot scams

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:

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

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.

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10 thoughts on “Money managers and their ability to spot scams

  1. It used to be that longs got the highest ratings on VIC; now it seems shorts do so.
    Spin-off postings seem a rarity these days. Also, I feel that some VICers are trying to
    demonstrate how smart they are, analytically. These guys miss the forest for the trees
    at times because they aren`t focusing on the 2 or 3 drivers that matter to a company`s
    stock performance. Corner of Berkshire is better in this regard, on the whole.

  2. I wonder what Greenblatt thinks — the evolution of the ideas on his site has surely moved away from his original intentions. Really good investors like Charlie 479, Olivia, and Nish
    only stayed for a while. MIchael Burry too.

    • Well with Michael Burry, Greenblatt invested money with him. Later on their relationship deteriorated badly… so that explains that.

      And to be honest I was never able to find many clearcut catalysts. CMED/Y/Q was one; unfortunately that did not work out for many shorts due to the squeeze. Selwyn Resources was another. PRXI had a clear catalyst (the auction) which did not work out for the longs.

  3. Really loving your blog Glenn, I seriously think a hedge fund should hire you right now.

    Have you looked at SOPW and SCOK as potential Chinese promotional company shorts? SOPW is essentially a PR promo and SCOK is hired a sketchy IR firm.

    • Thanks. SOPW has no borrow and SCOK has a very expensive borrow (30% or something on IB). I try not to short stuff where the borrow is more than 10%. SCOK was on my radar several months ago but I did not short it due to the borrow situation. IIRC my limit order didn’t fill because there wasn’t a borrow.

      • Yea you are right SOPW has no borrows on IB. I think shorting SCOK would have only worked a few months ago as a quick swing trade but I presume you don’t do that.

        What are your thoughts on these recent going private transactions for Chinese companies under short seller attack. I lost a significant amount on MONT puts similar to how you lost out on YONG puts. Learned a lesson the hard way. To this day I still do not know if the short sellers were wrong or the Chinese are just that corrupt.

      • I think it’s the fraudsters scamming the Chinese government, PE shops, and others in these going private deals.

        I think I said in a comment on this blog that I wouldn’t be shorting MONT even though I’m a fan of Gravity Research’s work on the name.

        In a few years from now we might see how the going private deals play out.

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