Most of the time nobody will explain the game to you

In many areas of life, the sharpest people in a given field often won’t explain the tricks of the trade to the general public.  Sometimes it’s the case that the publicly-available information on a subject is second-rate.  Take Warren Buffett for example.  His derivatives deals are brilliant because he is getting paid to borrow money.  Of course, he does not fully explain his deals because he doesn’t want others copying his trades. In shareholder letters, he does not explain how his counterparties were inappropriately modeling equity-equity correlations.  He only discussed the trades on a superficial level because GAAP accounting of the derivatives were causing people to misunderstand Berkshire’s intrinsic value.  Buffett likely avoids explaining Berkshire’s credit default contracts for similar reasons.

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CACC Part 2: The fundamentals of subprime auto financing

Originally, there was a segment of subprime auto financing that was a fairly low-risk for dealers extending credit to their customers.  If the downpayment is equal to what the dealer paid for a car, then risk management is much simpler and underwriting skill doesn’t matter much.  The dealer could lend money to even the riskiest customers.  Dealers could break even on the initial sale and hope to profit from the financing of the car.

Why redo a technical report?

Suppose that a junior and senior mining company have entered into a joint venture for a project.  Suppose that the junior has access to feasibility studies prepared for the senior miner.  NI 43-101 obligates the junior miner to file technical reports.  Management at the junior should be disclosing material information to shareholders anyways so they should be issuing technical reports even without 43-101.

The easiest and cheapest way for the junior to meet its obligations under 43-101 is to re-purpose the technical reports prepared for the senior miner.  However, many technical report authors hired by juniors choose to heavily modify the work given to them.  The technical report prepared for the junior will change the underlying assumptions.  In my opinion, the simplest and best explanation for this behaviour is that the junior is trying to inflate the technical report.  They are likely pressuring the technical report author into manufacturing higher numbers.

This is one of the reasons why I dislike the junior mining world.  Juniors are generally dishonest and extremely difficult to perform due diligence on.

Unusual payments to suppliers

Most stock promoters will have a disclaimer stating how much they were paid and how they were paid.  Typically, they are paid with one or a combination of the following:

• Cash
• Stock
• Stock options, warrants

Normally, the 10-K of the promoted company will mention the phrase “investor relations” or “investor awareness”.  In some cases however, neither of the two phrases will appear.  Instead, the 10-K will mention “consultants” that were paid in stock or stock options.  This is a red flag.  While it is possible that legitimate consultants to a company are willing to take payment in stock or stock options, such a practice is fairly unusual in the business world.

The worst of the worst

Lately, I’ve been generating too many short ideas.  On the short side, I have somewhere around 100-400+ ideas.  Because of this, I need to prioritize and focus on only the best short ideas.

Chinese companies with poorly executed websites

For whatever reason, some Chinese companies listed on foreign exchanges have bad websites.

For example, Yongye links to a press release put out by ambulance-chasing lawyers targeting Yongye.

Insider ownership is overrated

I’ve seen some people argue that management’s incentives must be aligned with shareholders because insider ownership is high.  I think that this is a dangerous idea.  Insider ownership tends to be fairly high in fraudulent stocks and stocks with bad management teams.  Scams and frauds involving the sale of shares at inflated prices often begin with the perpetrators owning almost all of the stock.