Egregious accounting fraud in retail

I’ve been thinking a lot about how somebody could commit fraud in retail.  In my opinion, accounting fraud in retail is a bad idea.  Fraudsters cannot both (A) avoid jail and (B) inflate earnings by a meaningful amount or otherwise significantly mislead investors.  Smart fraudsters gravitate towards mining, oil & gas, pharma, etc.

While fraud is a bad idea in retail, some fraudsters are crazy enough to commit fraud even if there is significant risk of jail time.  I think some people are biologically wired to steal and cheat even if it doesn’t make sense.

For investors, detecting accounting fraud in a retailer may be extremely difficult.  I have not figured out reliable methods of independently verifying a retailer’s numbers.

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My approach to shorting oil and gas

When oil and gas companies sell assets to each other in private transactions, they will often open a data room where the acquirer’s team of engineers can look at the data and perform their due diligence.  I find it strange that supposedly sophisticated institutional investors are comfortable with oil and gas stocks without being able to perform this level of due diligence.

Maybe I’m crazy but I think that institutional investors are making huge mistakes in the oil and gas sector.
Either they’re wrong or I’m wrong.  Time will tell.

I believe that there are currently very high levels of deceptive stock promotion and many opportunities for short selling.  The nice thing about the current situation is that institutional investors are involved and are lending out their shares.

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Oil trap or value trap?

The website “Oil On My Shoes” contains a short and excellent introduction to petroleum geology.  In particular, it explains how economic oil and gas reservoirs are often found in either structural or stratigraphic traps.  What I took away from the website is that petroleum geology is quite complex.  There are many factors that affect the exploration potential for a piece of land and therefore how much that land is worth.  Just because two parcels of land are close to each other (what I would call “closeology”) doesn’t necessarily mean that wells drilled on both parcels will have similar economics.

Many publicly traded companies avoid disclosing information about geology and would like investors to focus on closeology.  They want to trick investors into valuing acreage on the sale price of nearby land rather than the geologic potential of the land (or lack thereof).  Without knowing the geological details, it’s hard to say if closeology is a reasonable shortcut in valuing acreage. At the end of the day, I think that it is a red flag whenever an oil/gas company tries to steer investors towards closeology.  Usually it is an attempt to mislead.