Workshop 2: Detecting Frauds Ahead of the Investing Curve
Frauds. Warren Buffett commented in the recent Berkshire Hathaway AGM 2013 that when he’s reading through financial statements, he’d find companies he was virtually certain are frauds. In response to a shareholder’s question on what did he find that made him so certain, both Buffett and Munger replied that “there isn’t a 40-point checklist” and that value investors need to understand the interaction between the underlying business model dynamics and the people running the enterprise when examining the numbers.
In Asia, with outbreaks of accounting frauds and corporate governance lapse erupting on a systematic basis at the firm level, how does a value investor go about generating sustainable outsized returns? To paraphrase Sherlock Holmes, to murder (to engage in earnings management) is easy, but to dispose the murdered body (to expropriate or tunnel out the cash and assets out of the company) is harder as it is detectable by the serious institutional investor with his or her keen observation of the various information signals and clues.
It would be premature to speak of “fundamental” analysis using possibly rigged accounting numbers due to propping and tunneling to fashion elaborate but “garbage-in-garbage-out” quant valuation models. Even “technical” analysis can be misleading given prices and volumes are often manipulated by the “insiders” (庄家) who establish the stock inventory (老鼠仓), luring investors in and then offloading in a pump-and-dump cycle. Such exploits by insiders is made easy as most stocks in Asia are still relatively small-cap and illiquid, given that the median market cap of the listed universe of 23,000 stocks in Asia is around $80 million and over 80% are under a billion dollar in market cap.
Thus, the use of “fundamental” or “technical” analysis, or its combination – without a Mungerian I-O accounting framework using the Bamboo Innovator way – can lead to a false sense of confidence that clever insiders exploit at your expense.
– Mr Kee Koon Boon, one of the few Asian fund managers being invited to speak at a number of top banking & finance conferences around the world alongside with renowned speakers such asPraveen Kadle, Chief Executive Officer of Tata Capital & Lauren Templeton, President of Lauren Templeton Capital Management
– Learn from an experienced & qualified instructor who has also taught in local Universities
Program Outline and Key Learning Points:
- UNDERSTAND the importance of the Mungerian I-O (Incentive-Opportunity) accounting framework to adapt value investing principles in Asia.
- LEARN the three accounting steps that “set-up” companies commonly use to expropriate assets and the ORECTA and other information signals that sophisticated institutional investors use in their cutting-edge empirical research tool-bag.
- DEVELOP the ability to scan through thick annual reports and financial statements for the Seven Accounting Sins.
- DEMYSTIFY the various techniques in “earnings management”, “revenue recognition management”, “real activity management” and “income smoothing” and differentiate between opportunistic bookkeeping mischief and discretionary signaling of private information of leading indicators of firm performance by management to investors.
- ATTAIN the application tools used by sophisticated institutional investors in the accounting of words, that is, textual analysis of disclosures which are an important source of information with value relevance about the firm.
- DISSECT actual cases of capex-related fraud in prominent Asian listed companies that are invested by reputable fund management institutions who are also caught flat-footed when things unravel.
- RE-EXAMINE accounting fundamentals that universities impart without the relevant context of value investing, including the use and abuse of the accruals anomaly (AA) in investing strategies adopted by sophisticated institutional investors in various forms.
- UNIFY at the end of the day all the previously disparate loose-hanging concepts, “descriptive” facts and “checklists” you have learnt from various sources into the practical Bamboo Innovator mental model when it comes to real investment decision-making.
Understand more about the Instructor’s investment approach with the following published articles:
About the Instructor:
Koon Boon is the founder and managing director of the Singapore-based Bamboo Innovator Institute to establish the thought leadership of resilient value creators around the world. KB has been rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets. He was a fund manager and head of research/analyst at a Singapore-based investment management organization dedicated to the craft of value investing in Asia. He had been with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus flagship Asian fund. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. He received his Masters in Finance (magna cum laude) and double degree in Accountancy and Business Management (both summa cum laude) from the Singapore Management University (SMU). He had taught accounting at his alma mater in SMU and at SIM University. He had published research in the Special Issue of Istanbul Stock Exchange 25th Year Anniversary of the Boğaziçi Journal, Review of Social and Economic Studies, as well as wrote articles about value investing and corporate governance in the media. He had also presented in top banking and finance conferences in Sydney, Cape Town, HK, Beijing and in the recent Emerging Value Summit 2013. He had trained CEOs, entrepreneurs, CFOs, management executives in business strategy, macroeconomic and industry trends in Singapore, HK and China.