Entrepreneurial Opportunity Cost

I am wondering out loud here: when people attempt to do some kind of modeling of the various opportunity costs of having government provide X, versus having “the market” provide X, do they factor in the opportunity cost of lost entrepreneurial progress inherent in bureaucratic provisioning?

For example, if someone was arguing that the government should control automobile production, is there any calculus attempted that examines the present value of foregone future improvements in automobile production and design that will inherently be included in bureaucratic provisioning?

A further example– the roads and highways we drive on, which have been provisioned by government for decades, haven’t changed all that much. But cars have made huge technological leaps in terms of how they’re designed and built. Cars have entrepreneurs behind them, roads and highways have bureaucrats behind them.

I’m not sure I am articulating my inquiry as coherently as I might like to but there it is nonetheless!

Another Battle In The Long War: The Solitron Shareholders Meeting

Something that has been impressed upon me over the years as I learn more about business and investing has been the invaluable role that bullshit-detection plays in money dealings. The jungle is everywhere and while man may have found a way to tame his baser desires and impulses enough to enjoy a broad civilization, individual men will always tease the edges of appropriateness by attempting force by other means, namely deceit, misdirection, opacity, feigned confusion, intentional blundering, etc. If you can’t smell bullshit and if you have no means to fight back against a bullshit-peddler, he will run you over and probably try to take you for all you’re worth along the way.

Some people say, “That’s just business!” but that’s been invalidated by numerous contrary, personal experiences where no bullshit occurred and business occurred nonetheless, and more efficiently and for more wealth for both parties, overall. Bullshit is just a grey-area form of aggression, a remnant of the jungle from which we can never fully emerge.

My attendance at the first annual Solitron Devices shareholders’ meeting in nearly 20 years was a descent into that jungle. Here I and several other shareholders came face-to-face with Shevach Saraf, President, Chairman of the Board, CEO, CFO and, among many other titles and distinguishments I should say, a highly intelligent, sophisticated bullshitter.

My personal predisposition is to assume a person is trustworthy until they demonstrate they clearly are not. This is a little different than treating a person as trustworthy– I maintain skepticism and try to be alert at all times, but I don’t start a person at 0 and then work up to 100 on a “trustworthiness” scale, but rather the opposite. As a result, in dealing with Saraf and other representatives of the company in the past, I tried to explain various indiscretions, unkindness and general belligerency displayed by these parties in terms of misjudgments, misperceptions and a potentially historical apprehensiveness, rather than some kind of malintent.

At this point, the veil has been lifted for me and I believe I can confidently state that the bullshit is a calculated tactic and it is laid on, thick, with due purpose.

In the particular case of the shareholders’ meeting, the bullshit started with the “rules for the meeting”, which restricted each participant to a maximum of two questions no longer than one minute in length, with a twenty minute maximum duration. As with most bullshit, this was done in the name of “giving everyone a chance to speak”, but was really a rather naked attempt to intimidate shareholders and prevent them from stating their minds and engaging in significant follow-up questioning. No shareholder present (all 9 of us!) ever demonstrated any concern about domination of the Q&A period by any other shareholder. At the end of the Q&A, Saraf attempted to enforce the twenty minute maximum but was ultimately stymied by a shareholder who requested a longer, informal, follow-up Q&A period, which after 5 minutes of deliberation outside the room with counsel, was ultimately granted.

The second strand of bullshit is woven through the scandalous insinuations that Saraf made of his shareholder base. He deemed it fit to specially remind the gathered investors that he had no plans to do anything illegal and so he would not offer any insider info during the meeting. This is a strawman Saraf seems to trot out often– ask the man anything about the company at all, no matter how innocent and legally-sanctioned it may be, and he proceeds to launch into accusations of villainy aimed at getting an illegal upper hand while putting himself and the company in legal jeopardy. He also made a warning about supposed shadowy elements that were spreading false rumors and lies about the company on the internet, but he did not think to mention who was doing this or what specific claims were made which he could clarify as to their falsity. The impression one is left with is that there are no false rumors or lies being spread and this is yet another attempt to intimidate via bullshit.

Then we had to wade through Saraf’s numerous self-contradictions and general evasiveness in answering questions, most of which began with the expression, “Let me put it this way…”, which in my experience has always preceded a barely-obscured threat, as in, “Let me put it this way, if you don’t do what I am asking you to do, someone might get hurt.” The infamous EPA liabilities which have left the company hamstrung to do anything with the company’s excess capital and which according to regulatory filings earlier in the year seemed to have been extinguished, or due to be extinguished completely, by or around March or April of 2013, were suddenly at one point 30, another point 60 and another time some 72 days away from being resolved.

More bullshit: Solitron has a “sunset technology”, but there’s also the possibility they spend $5M+ of the company’s cash stockpile retooling their factory for new silicon wafer standards; the sequestration has been bad for business, but the company has also gobbled up marketshare from competitors who have gone out of business; the company is at 50% of plant utilization, but wars in Syria and elsewhere are good for business because it means equipment will need to be replaced that Solitron services; the company has struggled with rising inputs costs, but they build everything on spec and have a guaranteed profit-margin built in by the Pentagon; shareholders are now “welcome to contact any board member and ask them questions about the company” but in the past “PLEASE KEEP IN MIND THAT ALL INVESTOR COMMUNICATIONS SHOULD BE DIRECTED TO THE CHAIRMAN OF THE BOARD OF SOLITRON DEVICES, INC.”; Chinese and COTS parts have created huge price competition for the firm, but the firm’s buyers actually require specially-tested, high quality parts only Solitron can produce, and new DNA-marking of chips prevents the use/substitution of foreign knockoff parts, etc. etc.

I could go on and on. The point is it’s just a bunch of bullshit.

And Saraf isn’t the only one peddling it. His vaunted board showed their own knack. Saraf was asked, as a large shareholder, if he was concerned about the price of the company in the open market hovering around cash value. Not only did he evade the question and not answer it, but his new appointee, Mr. Kopperl, piped in with the pithy “Does anyone really know what moves stock prices?” When asked how he makes his investment decisions, Mr. Kopperl said, “Sometimes I buy value, sometimes growth.” But if no one really know whats moves stock prices and you’re philosophically agnostic as to what kind of decisions a company could make that would be good or bad from a valuation standpoint, how could you even invest?

And how would this bolster the company’s claim that the current composition of the board represents people capable of maximizing shareholder value?

It was suggested to Saraf that more disclosures from the company about its business would help the market better understand the company and its prospects and arrive at a fairer valuation. Saraf did not acknowledge whether this transparency would be beneficial to shareholders interested in seeing the marketplace better assess the company’s prospects, but he did say that he wasn’t interested in putting out a press release every time the company got a new certification or secured a contract. Bullshit!

The most puzzling event of the day was the withholding of votes for Schlig and Davis (and their subsequent dismissal with no replacement nominees named), and the approval-by-vote of the two new directors, Gerrity and Kopperl. These guys are black boxes as far as I am concerned. They sound like country club buddies and there was no explanation as to why they were qualified to represent SHAREHOLDER interests though, Saraf was quite clear, their industry experience made them qualified in his mind to represent company interests, which essentially means Saraf’s interests as things have been run so far.

Large shareholders seem to be more confident. They’re convinced Saraf is more cooperative than he seems and that he will do the right thing when it’s the right time to do so. I think the laws of the SEC are a legal cover for bullshitmongers. From where I stand, it’s an almost impenetrable fog. But maybe when you own 5% or more, you have other methods of cutting through the bullshit.

It is indeed going to be a Long War without them.

If you want more, here’s Nate Tobik’s take at OddballStocks.com.

Video – Toby Carlisle, Q&A Notes at UC Davis Talk on Quantitative Value

Click here to watch the video (wear earphones and bring a magnifying glass)

UC Davis/Farnam Street Investments presents Toby Carlisle, founder and managing partner of Eyquem Investment Management and author of Quantitative Value, with Wes Gray.

Normally I’d embed a video but I can’t seem to do that with the UC Davis feed. Also, these are PARAPHRASED notes to the Q&A portion of Toby’s talk only. I ignored the “lecture” portion which preceded because I already think I get the gist of it from the book. I was mostly interested in covering his responses to the Q&A section.

The video is extremely poor quality, which is a shame because this is a great talk on a not-so-widely publicized idea. I wish there was a copy on YouTube with better audio and zoom, but no one put such a thing up, if it exists. I hope Toby does more interviews and talks in the future… hell, I’d help him put something together if it resulted in a better recording!

I had trouble hearing it and only thought to plug in some earbuds near the end. Prior to that I was contending with airplanes going overhead, refrigerator suddenly cycling into a loud cooling mode as well as my laptop’s maxed out tinny speakers contending with the cooling fans which randomly decided to cycle on and off at often the most critical moments. I often didn’t catch the question being asked, even when it wasn’t muffled, and chose to just focus on Toby’s response, assuming that the question would be obvious from that. That being said, I often conjoined questions and responses when there was overlap or similarity, or when it was easier for me to edit. This is NOT a verbatim transcript.

Finally, Toby recently created a beta forum for his book/website, at the Greenbackd Forum and I realize now in reviewing this talk that a lot of the questions I asked there, were covered here in my notes. I think he’s probably already given up on it, likely due to blockheads like me showing up and spamming him with simpleton questions he’s answered a million times for the Rubed Masses.

Major take-aways from the interview:

Q: Could we be in a “New Era” where the current market level is the “New Mean” and therefore there is nothing to revert to?

A: Well that’s really like saying stocks will revert down, not up. But how could you know? You could only look at historical data and go off of that, we have no way to predict ahead of time whether this “New Mean” is the case. I think this is why value investing continues to work, because at every juncture, people choose to believe that the old rules don’t apply. But the better bet has been that the world changes but the old rules continue to apply.

Q: So because the world is unknowable, do you compensate by fishing in the deep value ponds?

A: I like investing in really cheap stocks because when you get surprises, they’re good surprises. I find Buffett stocks terrifying because they have a big growth component in the valuation and any misstep and they get cut to pieces; whereas these cheap stocks are moribund for the most part so if you buy them and something good happens, they go up a lot.

Q: (muffled)

A: If you look at large cap stocks, the value effect is not as prevalent and the value premia is smaller. That’s because they’re a lot more efficient. There’s still only about 5% of AUM invested in value. But the big value guys portfolios look very similar; the value you have as a small investor is you don’t have to hold those stocks. So you can buy the smaller stuff where the value premia is larger. The institutional imperative is also very real. The idea of I’d like to buy 20 stocks, but I have to hold 45. That pushes you away from the optimal holdings for outperformance.

Q: (muffled)

A: The easiest way to stand out is to not run a lot of money. But no one wants to do that, everyone wants to run a lot of money.

Q: (muffled)

A: The model I follow is a bit more complicated than the Magic Formula. But there are two broad differences. I only buy value stocks, I only buy the cheapest decile and I don’t go outside of it, and then I buy quality within that decile. ROIC will work as a quality metric but only within the cheapest decile. ROIC is something Buffett talks about from a marketing perspective but I think in terms of raw performance it doesn’t make much sense. There’s definitely some persistence in ROIC, companies that have generated high returns on invested capital over long periods of time, tend to continue to do that.  If you have Warren Buffett’s genius and can avoid stepping on landmines, that can work. But if you don’t, you need to come up with another strategy.

Q: (muffled)

A: Intuition is important and it’s important when you’re deciding which strategy to use, but it’s not important when you’re selecting individual stocks. We can be overconfident in our assessment of a stock. I wonder whether all the information investors gather adds to their accuracy or to their confidence about their accuracy.

Q: (muffled)

A: All strategies have those periods when they don’t work. If you imagined you ran 4 different strategies in your portfolio, one is MF, one is cheap stocks, one of them is Buffett growth and one is special situations, and you just put a fixed amount of capital into each one [fixed proportion?] so that when one is performing well, you take the [excess?] capital out of it and put it into the one that is performing poorly, then you always have this natural rebalancing and it works the same way as equal-weighted stocks. And I think it’d lead to outperformance. It makes sense to have different strategies in the fund.

Q: (muffled)

A: QV says you are better off following an indexing strategy, but which market you index to is important. The S&P500 is one index you can follow, and there are simple steps you can follow to randomize the errors and outperform. But if you’re going to take those simple steps why not follow them to their logical conclusion and use value investing, which will allow you to outperform over a long period of time.

Q: (muffled)

A: Not everyone can beat the market. Mutual funds/big investors ARE the market, so their returns will be the market minus their fees. Value guys are 5% of AUM, can 5% outperform? Probably, by employing unusual strategies. Wes Gray has this thought experiment where he says if we return 20% a year, how long before we own the entire market? And it’s not that long. So there are constraints and all the big value investors find that once they get out there they all have the same portfolios so their outperformance isn’t so great. There’s a natural cap on value and it probably gets exceeded right before a bust. After a bust is then fertile ground for investment and that’s why you see all the good returns come right after the bust and then it trickles up for a period of time before there’s another collapse.

Q: (muffled)

A: I think the market is not going to generate great returns in the US, and I am not sure how value will do within that. That’s why my strategy is global. There are cheaper markets in other parts of the world. The US is actually one of the most expensive markets. The cheapest market in the developed world is Greece.

Q: Did you guys ever try to add a timing component to the formula? That might help you decide how to weight cash?

A: Yes, it doesn’t work. Well, we couldn’t get it to work. However, if you look at the yield, the yield of the strategy is always really fat, especially compared to the other instruments you could invest the cash in, so logically, you’d want to capture that yield and be fully invested. I think you should be close to fully invested.

Q: What about position sizing?

A: I equal weight. An argument can be made for sizing your cheaper positions bigger. I run 50 positions in the portfolio. In the backtest I found that was the best risk-adjusted risk-reward. That’s using Sortino and Sharpe ratios, which I don’t really believe in, but what else are you going to use? If you sized to 10 positions, you get better performance but it’s not better risk-adjusted performance. If you sized to 20 positions, you get slightly worse performance but better risk-adjusted performance. So you could make an argument for making a portfolio where your 5 best ideas were slightly bigger than your next 10 best, and so on, but I think it’s a nightmare for rebalancing. The stocks I look at act a little bit like options. They’re dead money until something happens and then they pop; so I want as much exposure to those as I can. I invest globally so the accounting regimes locally are a nightmare. IFRS, GAAP to me is foreign. You have to adjust the inputs to your screen for each country as a result of different accounting standards.

Q: digression

A: Japan is an interesting market. Everyone looks at Japan and sees the slump and says it’s terrifying investing in Japan but if you look at value in Japan, value has been performing really well for a really long time. So, if the US is in this position where it’s got a lot of govt debt and it’s going to follow a similar trajectory, you could look at Japan as a proxy and feel pretty good about value.

Q: (muffled)

A: I’ll take hot money, I am not in a position to turn down anyone right now. It’s a hard strategy [QV] to sell.

Q: (muffled)

A: Special situation investing is often a situation where you can’t find it in a screen, something is being spun out, you have to read a 10-K or 10-Q and understand what’s going to happen and then take a position that you wouldn’t be able to figure out from following a simple price ratio. It’s a good place to start out because it’s something you can understand and you can get an advantage by doing more work than everyone else. It’s not really correlated to the market. I don’t know whether it outperforms over a full cycle, but people don’t care because it performs well in a bad market like this.

Q: What kind of data do you use for your backtests?

A: Compustat, CRISP (Center for Research Into Securities Prices), Excel spreadsheets. You need expensive databases that have adjusted for when earnings announcements are made, that include adjustments that are made, that include companies that went bankrupt. Those kinds are expensive. They’re all filled with errors, that’s the toughest thing.

The Long War: Changing Ownership, Management Incentives & Reporting Practices

Ian Cassel, founder of MicroCapClub.com, made a comment on Twitter today which grabbed my attention:

If a company is over $25m market cap they should have to have earnings conference calls w/ Q/A. Coalition Against Private Public Companies.

Shortly thereafter, he was asked by Jeff Moore of the Ragnar Is A Pirate blog:

How about if they have more than 100 shareholders?

To which Ian replied:

yes another good idea

At this point, I asked:

so you guys are for imprisoning and fining people because they won’t give you info you want?

Ian considered it and responded:

do I think every public company should, Yes. Force probably not, but cld be part of a tiered listing standard

I think this whole idea is worth a comment so I’m now going to give it one.

The first angle with which to approach Ian’s compulsory conference call proposal is the moral one and concerns the question, “Should managers of public companies, whatever their size, be compelled by force of law (ie, threat of fines or imprisonment for non-compliance) to provide the investing public conference calls regarding their earnings releases?”

The answer to such a question would hinge on whether or not, by refusing to hold such calls, these managers were committing an act of violent aggression against the investing public, such as theft, assault or fraud. If refusing to hold an earnings call is an act of theft, assault or fraud, clearly there is justification for compelling such behavior in order to remedy this affront to the rights of the individual members of the public and the answer would be “Yes”; similarly, if refusing to hold an earnings call does not represent the initiation of the use of force against members of the public, the answer to this question is clearly “No”.

I don’t want to waste anyone’s time going into a lengthy exploration of the facts on hand. I think it’s obvious that refusing to hold an earnings call is not an act of aggressive force and I don’t think Ian provided or attempted to provide any evidence that it was. In fact, he suggested this was not an issue to be handled by the law at all. I elaborated as much as I did, anyway, because there may be people reading this who did not understand the issue in this way and may have been confused prior to reading it. For their benefit, I state plainly now, the answer to the question is “NO”.

The second angle of approach is institutional. As Ian suggested in his final comment, the solution to this perceived problem could be handled at an institutional level (in this case, the voluntarily adopted rules and internal regulations of the listing exchanges) by adopting Ian’s preference for mandatory earnings calls at a certain market cap threshold as an observed “best practice” or condition of doing business on the exchange. If a company doesn’t want to follow it, they have the option of not being listed on the exchange observing such a rule. From a moral standpoint, there is no issue as there is no coercion, and compared to the alternative of creating a top-down, one-size-fits-all-companies-and-exchanges external regulation backed by force of law by government, this solution is indeed preferable because it at least allows for the possibility that some companies would not follow this practice and would find other avenues for listing their shares and allowing for equity exchange.

This leads to the third angle which, for lack of a better term, I’ll simply refer to as the “practical” considerations, of which there are several. For starters, I wonder if this is really an issue? In Ian Cassel’s (and Jeff Moore’s, perhaps?) world, it certainly seems to be. Ian Cassel’s world would be a happier place if all the public companies whose market caps were $25M or greater provided the public (of which he is a member and would stand to benefit) an earnings call upon release of each earnings statement. But embedded in such a proposal seems to be the belief that the world should reflect Ian Cassel’s preferences, and everyone else should bear the cost and expense of preparing and providing this information to Ian Cassel (and others of like mind).

Is this reasonable? If having better earnings communications from small companies is important to Ian, and if dialoging with management is a valuable commodity, Ian already has a course of action available to him to pursue such goals: he can make his own independent effort to email, write, call or visit in person the management of these companies and create a relationship whereby they would provide him answers to some of the questions he has in mind; or, he could acquire a sufficient number of shares of the company such that he is the owner of the company and the management is now fully responsible to him and he can have any and all information about the company that he pleases.

Neither of these actions require anyone being compelled to change their current practices. Both require nothing more than the expenditure of Ian’s own effort, time and wealth. If certain companies prefer not to establish such relationships or provide such information to people like Ian, Ian always has the option of walking away from them. And if he doesn’t have the financial resources to acquire such an ownership stake so as to make them more responsive to his inquiries, that would be a problem for him to solve by finding ways to produce more wealth for himself he could exchange with others for the privilege – it is not the responsibility of the company, its shareholders or anyone else.

Another practical consideration is the arbitrariness of the threshold for compliance. There’s nothing magic about a $25M market cap (nor a 100+ member shareholder base). The first number seems to be an attempt at defining “resourcefulness”, implying that a company with a certain sized market cap “should be able to afford” such accommodations. But market caps are not determined by managements and company resources, they are determined by the passions and dispositions of the investing public. It’s entirely conceivable that a company of truly inadequate resources (say, a book value of $50,000, just to harshly illustrate the point) could be bid up to a market cap of $25M in some bizarre turn of events. The fact that it has been so valued doesn’t make it more able to provide additional clarity about its business– and even if it did, it still doesn’t have an obligation to provide anyone anything like this. The shareholder base threshold is simple populism and the democratic principle– 99 of the shareholders could own one share at a penny a piece, with the remaining shareholder holding substantial control of the rest of the shares, making them truly insignificant in the ownership structure. But by creating arbitrary rules like this these individuals would create for the company sudden obligations simply by their existence.

Another practical concern is why a person, operating in the microcap space where an edge is often gained specifically because of the lack of consistent, clear information about these companies, would want to see measures taken which would serve to increase the “efficiency” of the market and thereby eliminate a lot of these mispricings and the opportunity to cheaply invest along with them. Sure, once you’ve put your money in you might have a self-interested reason to see everyone else suddenly figure out what a great company you’ve invested in because they have these wonderfully translucent earnings calls, but before that point you’d want to see opacity. Such a rule (compulsory earnings calls) would work to eliminate those opportunities before one could make their initial investment, not just after. As microcap investors, what we’re getting “paid to do”, essentially, is to find these opaque opportunities, get in there, agitate for change company-by-company and work to clear the dirt and smudges off the glass, so to speak. We want that to happen AFTER we get involved and BECAUSE we got involved, not before and regardless.

My final issue is with the cutely-named imaginary organization “Coalition Against Private Public Companies”. The implication is that public companies run like private companies constitute some kind of social ill. But if we look at the facts, it is often the owner-operator/private companies of the world which are most efficiently managed and whose business is best looked after compared to the alternative of entrenched, professional managers and disconnected, alienated and disinterested public shareholders (see this outstanding research piece by Murray Stahl [PDF] for a convincing argument, for instance). Indeed, it is often the public companies which are most dysfunctional– how is it preferable to have a management team obsessed with short-term earnings results, attempts to influence and gain the approval of Wall Street analysts, etc.? It’s perhaps syntactically confusing but what is really worth rebelling against is public private companies, not private public companies.

A public private is a company that SHOULD be private, but is in fact publicly traded and as a result the minority partners in the business, that is, the various outsider shareholders from the investing public, are treated like nuisances or smurfs whose capital is to be dissipated at the insider owners’ discretion. Such managers have no incentive to responsibly steward the outside shareholders’ capital because it doesn’t belong to the insiders and the outsiders are, in most cases, afforded an ambiguous and difficult, if not impossible, legal process to attempt to assert their equal status as capital owners. The most benefit they can receive from the capital is to issue some of it to themselves as generous salary or bonus payments, to use it as a tool for conducting ego-gratifying acquisition strategies or by sitting on it as a kind of future retirement/pension package to ensure they can care for themselves even in old age by remitting it to themselves as needed.

A private public company, on the other hand, is a company whose capital ownership is diversified and constituted by numerous members of the investing public, but which is managed and operated with the efficiency, passion, dedication and noble conservatism such as one would expect from a competent family dynasty or other limited, owner-operator control group or person. This is a company that treats capital as a precious commodity and always seeks to maximize the returns on its use which all members of the investing public so involved stand to benefit because they are treated as equals even though they have minority status. The fact that this company is publicly traded does not influence the decisions of the management and serves only to benefit all shareholders in the instances in which the management can buy back undervalued shares or issue significantly overvalued shares to raise cheap capital.

Truly, there are very few enterprises on all of planet earth that really provide their owners (shareholders) with outstanding additional benefits by virtue of their being publicly owned and exchanged. The more I think about the issue, the more I wonder why most public companies are public in the first place. Almost every IPO seems to represent an opportunity to cash in on delusional hopes and ignorant dreams rather than a genuine opportunity to “share the wealth” in exchange for some long-term capital necessary to fund profitable growth.

If I were to join a group agitating for change, I’d like to imagine it’d be called the “Coalition To Privatize Public Companies.” But honestly, I have no use for imagination, nor for agitation. I don’t seek to have others bear my cross, even as a joke or a day-dream. No, this is in fact a principle (one of several) of my efforts as a private, individual investor in the public market place and I intend to pursue it throughout my career.

It’s part of my long war.

Review – Fooling Some Of The People All Of The Time

Fooling Some Of The People All Of The Time, A Long Short (And Now Complete) Story, Updated with New Epilogue

by David Einhorn, published 2010

So much could be said about Einhorn’s “Fooling Some Of The People All Of The Time” that I’ll necessarily have to ignore much of it to keep this review to the point. And let me say up front that I believe the main point of Einhorn’s book is that frauds may not be transparent, but the people perpetrating and enabling them often are and on that note I believe it’s clear that Einhorn is the hero and the Allied Capital crowd are the villains. If the opposite be true, Einhorn certainly has me “fooled.”

For what amounts to a legal caper (not a crime caper, a legal caper) involving all kinds of humorless characters, including the liars at Allied Capital attempting to perpetrate a fraud, the duplicitous analysts and journalists seemingly working on their behalf to help cover it up and a menagerie of lawyers, government officials and SEC investigators — can you get any more humorless than that group? — “Fooling” is darned entertaining. Funny, too. I found myself chuckling at the outrageous prevarications of the guilty parties on more than one occasion.

It’s not just a good story, though, it’s something of an instructive modern parable, political, financial and even economic in nature.

Einhorn’s sojourn into the bowels of the Allied Capital fraud began before the current financial crisis but carried into it. Knowing this, it’s both fascinating to see the struggles of someone who had come upon the margins of the crisis before it had become a crisis as well as frustrating to see that the Allied Capital saga is yet another facet of that crisis and one which, despite Einhorn’s having published a whole book about it, has yet to see much coverage in the mainstream press. Three years into what is becoming a growing pile of frauds and wasted resources, many politicians and interest groups are unabashedly calling for the expansion of the Small Business Administration and its various loan programs, rather than the shutting down of a completely compromised institution.

Financially, “Fooling” tells two tales: one is of a bold, dedicated individual (Einhorn) and his small band of loyal followers (Greenlight Capital staff) and friends (private citizens like Jim Brickman) who, despite the odds and the constant doubting of the hoi polloi nevertheless persevered in their struggle for truth and were ultimately vindicated by the facts and their profitable short position; the other is the story of that same man and his merry band who put an ungodly amount of time and resources into investigating a fraud that ultimately represented only about 8% of their portfolio, begging the question, “How much of this was about ego-gratification versus responsibly representing the interests of Greenlight’s partners?”

Knowing that Einhorn and Greenlight continued to make other successful investments along the way, more than once you find yourself wondering if Allied Capital would prove to be some kind of a Pyrrhic Victory. Certainly it’s reasonable to question whether Greenlight wouldn’t have fallen victim to another fraud they had invested in at Tyco if they had spread their attention and energies more equally amongst their various positions.

In the end, it is the economic parable which reigns supreme, however. The Allied Capital case is one of those seeming empirical confirmations of free market economic tenets. One by one, the various watchdogs and regulators prove either useless, incompetent, disinterested or entirely corrupted, from the federal SBA, SEC and even FBI, to the ratings agencies, to the Wall Street establishment analysts to the sacred Fourth Estate itself. It is only Greenlight Capital, and finally the market place at large, motivated by the profit principle, which has any incentive to actually root out and expose the fraudulent financial activities at Allied.

Einhorn’s triumph demonstrates that it isn’t about people but processes, the fundamental and natural incentives of the two competing and mutually exclusive principles of profit versus welfare.

This book is not perfect but it’s enlightening in more ways than one. “Fooling” does an excellent job of revealing the way modern capital markets work and while Einhorn mostly manages to stay above the vulgarity of his opponents, the Allied feud proves that to win a confidence game it’s helpful to have both the truth, and some talented lawyers and public opinion-setters, on your side.

Interview With David Baran Of Tokyo-Based LBO Fund Symphony

This is worth watching if you’re a value-investor interested in the Japanese equity market.

Description of the video from YouTube:

David Baran, Co-Founder of Symphony Financial Partners, has over 20 years of experience investing in Asia. He has lived in Asia and Japan for nearly 3 decades and is fluent in Japanese.

Baran’s SFP Value Realization Fund was launched in September 2003 when Nikkei was about 9,500. The index has fallen since then, yet his fund is still up 56% after fees.

The secret to achieving returns in Japan is that you’ll have to do more than just long-only investing. The unloved, under-covered nature of the Japanese market creates opportunities that ordinary fund managers are not capable of pursuing because it’s too hard to extract the value. Many Japanese firms, particularly the smaller ones, can boast about 40+% operating profits and 30+% EBITDA margins. They can have net cash positions and trade at 50+% net cash to market cap. Hundreds actually trade at over 100% net cash to market — which means the market is valuing these viable businesses at zero.

“Investors in the U.S. equity markets would be falling over themselves to invest in a company like these – net cash, strong business moat and growth prospects,” says Baran. But being “cheap” isn’t enough — you need catalysts to unlock the value.

M&A activity flourishing in Japan

Corporate activity is such a catalyst. MBOs have an average premium of 50% (!) and sometimes reach triple digit numbers. Many of the large Japanese conglomerates started to buy back listed subsidiaries. Baran also advises on the Sinfonietta Asia Macro hedge fund, one of the best performing Asian hedge funds in 2001.

Hear David speak about:

* The 8 reasons why management buyouts are gaining popularity

* Why you need catalysts to unlock value in Japan equities

* What investors are missing by considering Japan as an “asset class”

* How to avoid “value traps”

* Considering tail risk: Why Baran’s Sinfonietta hedge fund is “geared towards a disorderly market”