ItsAValueTrap

Well you could look into the history of Chinese reverse mergers. All accounting firms failed to detect fraud and fraud was rampant among Chinese reverse mergers.

Another way of looking at it. Berkshire gets $205M in premiums. It invests that at a 8.246% return. In 20 years, that $205M will grow into a billion dollars which is the maximum possible loss on the contract. Berkshire is almost guaranteed to make money on the derivative contract.

There's an excellent lecture about derivatives and Buffett's use of derivatives here: http://video.mit.edu/watch/doug-dachille-analysis-of-buffetts-love-hate-relationship-with-derivatives-3802/ I think that the journalist who wrote the bloomberg article is mistaken. The derivative deals are a good deal for Berkshire. You get float upfront. You can invest that float and make a return on it. In 20 years, it is unlikely that the derivative contract will pay off. These indexes are of publicly-traded companies that are all trying to make money. Over time, those companies will probably make lots of money. Their share price will likely be much higher than today even if there is a market crash. And then you have the float, which should make more money than what you'd lose on the derivative contract if it happens to be a loser. If there is worldwide inflation, then the contract is less likely to pay off. If one index goes to hell because of a Germany-style hyperinflation, the derivative contract won't pay. There's no counterparty risk for Berkshire AFAIK.

newegg has pretty good margins. they decide to pull their IPO though but you can read their registration statement.

Their shares are probably overvalued. Nobody has a huge edge in operating ships. The shipping industry is largely about timing the cycles in pricing. The market for newbuilds and old ships is somewhat liquid; I don't think that anybody really gets a really good deal on ships. The assets aren't that difficult to value for those working in the industry.

They're definitely a red flag. A secondary offering is a very expensive way of raising money. - The shares will be sold at below market price. Shareholders suffer significant dilution. - The underwriters will take their pound of flesh. The commissions are usually 5-8%. - On top of that, the underwriters also (effectively) get a bunch of call options on the stock for "over-allotments". - There are legal, professional, and other fees that usually run six figures. - It takes up management's time - Management will likely spent time and money promotion the stock ahead of a secondary offering This usually leads to adverse selection. Most management teams won't do a secondary offering unless the stock is expensive. Whenever insiders are compensated with options, they have an incentive to avoid secondary offerings unless the shares are overvalued.

Thank god I covered my GMCR short. (I happened to make a profit.)

Yes naked short selling is a problem but it largely doesn't have much to do with bear raiding. Suppose naked short selling was completely wiped out. Would abusive bear raiding still be a problem? Yep. If you think that bear raiding is this massive evil, then you should address bear raiding. 2- I have a feeling those university professors caught doing naked short selling didn't care whether their stocks went up or down. They were probably fully hedged and making easy arbitrage money.

There's: 1- Naked shorting so you can make easy money arbitraging the cost of borrowing stocks to short. You essentially get to collect the borrow (10-100% interest???) without having to pay the borrow. 2- Bear raiding. This has very little to do with naked shorting. 3- Driving the price of a stock down by selling the shares without mercy. In at least one case, the SEC found that somebody engaged in naked shorting to do this. The selling party benefited from a lower share price. Largely the SEC has found people guilty of #1. Some people would like you to believe that naked shorting always involves the evils of bear raiding.

With the pipeline companies it's a little complex. Many (though not all) of the underlying pipelines basically arbitrage the different prices between two locations. The shale boom is causing dislocations in the natural gas market. A lot of infrastructure was setup to receive gas from the Gulf of Mexico... but lower gas prices and deepwater horizon-related costs are reasons for lower GoM production. A lot of infrastructure was setup to import natural gas into the US via LNG shipments. That pipeline volume is presumably down a lot. Everybody is converting their LNG import terminals into export terminals. It's a crazy reversal. On the other hand, there is opportunity for pipeline companies. Shale assets produce "rich" natural gas as opposed to dry natural gas. Weirdly enough, rich natural gas burns too hot for most customers because it contains too much ethane. The gas has to be sent to cyrogenic plants to remove the ethane (which turns into a liquid, which can be trucked away or sent somewhere else via pipeline). Refrigeration plants also remove ethane but they don't remove enough; some 10-Ks for shale companies say that they are writing down their investments in refrigeration plants. So... the US will need to built the pipelines and the cyrogenic plants and more pipelines to move ethane and natural gas liquids to other markets. Because most shale companies are moving to natural gas liquids plays, they will produce a lot of rich natural gas and a lot of NGLs. In the Utica shale, they can't drill more wells (or have to lower production on new wells) until new infrastructure comes online. There is way too much rich gas. There's the CoBaF thread on KMI warrants: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/kmi-5yr-warrants/

I was talking about Continental Resources, Inc. (NYSE:CLR)

I think you're confusing CLR with CRM. Here are CRM's numbers:

As I understand it: A- They have to test the company's internal controls. B- They have to do some basic stuff like checking if the cash is there, sampling some of the paper trail and verifying it, etc. (I believe that they don't have to verify everything, because that would get a little ridiculous.) C- They have to check if accounting rules and GAAP are being applied appropriately. Some of these rules are subjective... an auditor might let the company get away with stuff depending on the relationship. Sometimes they will screw up one or more of the items above. On top of that, some auditors will provide other services to the company such as consulting services and tax services. This can lead to potential conflicts of interest. --- GregS: Nice posts! ChinaAccountingBlog.com is a very good blog that explains a lot of accounting issues. (Personally I find accounting boring.) I found that particular argument to be incredibly weak. Increasing the useful life slightly makes their accounting *slightly* more aggressive. But the useful life is still very reasonable. A lot of companies out there are far more aggressive in depreciating their software and hardware over a longer period of time. Take CLR for example: http://glennchan.files.wordpress.com/2013/12/clr-aggressive-accounting1.png Software that has a useful life of 25 years... imagine that.

There's a good amount of fraud in developed countries... frauds where insiders had an intent to deceive from day one. For example, there are still a lot of pump and dump penny stocks going on in the US.

Look at the number of inventory turns and compare that to a real business in the same industry. If they are reporting fake inventory, the inventory turns will likely get worse and worse. No.... Historically, auditors have rarely caught fraud. (To be fair sometimes they do. But it's rare.) Let me be clear: their job is NOT to catch fraud. Their duty to catch fraud is limited. YOU should take responsibility for what you invest in. If you don't understand it (and I don't understand a lot of the stuff out there), then I would stay away. If you don't trust management's integrity, I would definitely stay away. Outside of the stock market, it wouldn't make sense to invest with shady people... so why do it when it comes to the stock market? Auditors aren't going to protect you. Regulators aren't going to protect you. I'd recommend you do your own due diligence.

The cash flow negative operating mines probably won't end up in a ridiculous short squeeze. Of course, any stock can turn into the next Volkswagen. The independent oil and gas stocks tend not to see incredible price action. I'm talking about the ones that are producing, not the development-stage ones with no production. 2- Yes the price action can be ridiculous. Keep your position sizes really tiny lol... 3- Did I mention that any stock can turn into the next Volkswagen? 4- Of course there is the put option game. Unfortunately very few of the small caps have liquid options markets. I did buy ATPG puts once though... But yes I largely agree with you.

These are the industries I would short: - Junior mining. The easiest companies to analyze are the companies that continue to operate their mine despite negative cash flow. Those guys are charlatans. - Independent oil and gas. - Pharma. Look for companies that spend more on G&A than research. Those industries are magnets for fraud because you can lie to investors about the future economics of what you're doing without any consequences. In junior mining, there are a lot of overly inflated technical reports. In oil and gas, you have your ATPGs of the world with very high SEC PV-10 numbers (go read the ATPG thread here). Nobody understands pharma. 2- I would not short MLM or companies like Herbalife. They are extremely profitable. For-profit education may be insanely profitable in the future. Pay day loans can be extremely profitable. 3- Reverse mergers and SPACs (special purpose acquisition companies) tend to have very high levels of fraud. With reverse mergers, it's kind of obvious why there are high levels of fraud. Shady promoters who do pump and dumps will end up with lots of companies that go to 0. Then they take these shell companies and sell them to people they know. This explains why there is adverse selection. With SPACs I have no idea. But the level of fraud there is above average. 4- Another magnet for fraud is foreign companies. Sometimes international law means that shareholders in certain ownership structures have no recourse against fraud. So be careful about Chinese companies. Legally foreigners aren't even allowed to own Chinese companies.

Regarding Einhorn, it strikes me that his short positions are too big. From what I remember they run to a few or several percent of his portfolio. As his hedge fund gets bigger, IMO he should reduce his leverage and reduce the size of his short positions (as a % of his portfolio). I don't know what Ackman was thinking lol. Too bad I didn't go long Herbalife. I understood that a short squeeze was likely but the shadiness of MLM rubs me the wrong way (despite being highly profitable).

1- Let me clarify. I short common stock. I would encourage others to look into the history of short selling and to be more careful. 2- Be careful about survivorship bias. 3- What Soros does is probably fine (mostly macro, different asset classes, etc.). Einhorn's risk management looks questionable to me. A lot of people blow up even though they're right. He could become one of them.

So what if you had shorted CRM or BBRY way too early? If you had shorted the common stock, you would have been in a world of pain. Look at the history of famous short sellers who decided to short common stock. It's ugly and brutal. Read: Selling America Short by Richard Sauer Wall Street Addict by Jim Cramer and Trading with the enemy (by somebody who worked for Cramer) Read up on: Volkswagen China Medical AAMC - http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/88060 etc. etc. I don't know if you understand but... the history of short selling is littered with corpses and there aren't a lot of rich survivors. This risk management thing is important. *Disclosure: Shorting CRM via puts but I don't think it's a good short. There is a wonderful franchise here that somebody else would pay billions for (or maybe even more than several billion).

Most retail brokers already indirectly skim off the bid/ask spreads. I'm not at all a fan of the "free" model. They will have to make their profits somewhere and they may do it in not-so-transparent ways. I'm a fan of how Interactive Brokers is run.

Let me explain: independent oil and gas is a magnet for fraud because insiders can lie about the economics of the company's resources and face no consequences for it. I don't know of any examples where insiders have been charged with fraud (let alone convicted)... so I would expect fraud to be very high in this sector. If GDP were to go above $18, I would've shorted the stock and then done actual research on the company.

Um... I'd probably short this stock. I think investors will lose a lot of money on these stocks.

On the surface this looks like a good short. -Their long-term track record is very bad in terms of GAAP profits and free cash flow. -33% of the float is short, which probably means that this is a pretty obvious short. -It's oil and gas. This is not a good sector to look for longs. -They recently had a secondary offering. Offering price $25.25. Proceeds to company $24.11375 (before expenses and ignoring share dilution from the call option). I'm surprised that the stock tanked so hard after the secondary. Normally investment banks try to support the share price after a secondary.

In my opinion regulators should regulate the market making industry away. The futures exchanges don't have market makers with special trading advantages. Those markets work fine without market makers and haven't had any flash crashes. What market makers do is valueless. They pay exchanges for special trading advantages. Sometimes they own a piece of the exchange. With these special trading advantages, they skim from investors. Stealing from investors is a broken business model and regulators should rightfully curb the abuses that occur. On the retail side, most retail orders get routed to companies like Knight, ATD, and tens of other companies involved in order internalization. These trades don't occur on an exchange but the same thing happens: market makers skim from investors. The retail brokerage receives higher rebates when they route an order to Knight (or any number of Knight's other competitors). The retail side has also gotten incredibly competitive. I believe the number of competitors has exploded. When a brokerage routes an order that takes liquidity, it polls a huge number of venues looking for the best price/negative rebate. This is not good for Knight. 2- I wouldn't want to own any market maker, but wouldn't you rather own IBKR over Knight? *I'm a Thomas Peterrfy fan. He has some good commentary on the current market structure. Peterffy's career has been about creating value. He was a pioneer in automating market making via computers. And on the brokerage side, he is definitely creating value. Interactive Brokers is clearly more efficient than other retail brokerages. For example, they don't call you with a human being whenever there is a corporate action; everything is done online. And they send you very little mail.