Useful article highlighting that, Risk to achieving financial goals is not only linked to Capital Markets but also to the Life style changes and changing personal situations.
Balancing asset allocation can help to a certain extent here, by reducing exposure to high risk stocks and/or high risk commodities and/or low rated bonds, as your life situation changes over a period. There should be safeguards for urgent financial needs as well.
Also, staying with your investment process for long 20-30 years is also equally important as per my own experience. Generally, sticking to your Circle of Competence also helps to achieve stability and one can avoid venturing into unknown areas. (e.g. I do not understand F&O much and not inclined to it hence it is not part of my process).
Fooling Some of the People All of the Time by David Einhorn forays into a real life story between Einhorn, (A hedge fund manager) and Allied Capital (A former Business Development Company listed in the USA).
About the Author
David Einhorn is the founder and fund manager of Greenlight Capital, a long-short hedge fund based in the USA. He is quite famous for his short picks, which then included lala tech companies in the 2000s, companies with irregular accounting practices and most famously Allied Capital in 2002-2008 with Lehman Brothers in 2008.
He famously had an altercation with the then CFO of Lehman Brothers on CNBC back in late 2008 citing concerns over Lehman’s over leveraged positions. The CFO obviously defended the company and one month from the altercation, there was no Lehman Brothers.
Business Development Company
Business Development Company is a concept in the USA, where companies like Allied Capital used to raise capital from investors and lend the money to small and medium enterprises. SEC regulations required BDCs to distribute 90% of their cash flows to investors, a structure similar to today’s REITs and InvITs in the Indian markets (the obvious difference being that REITs and InvITs in India invest in real estate and infrastructure assets while BDCs used to lend and invest in SMEs).
BDCs were quite popular back then because of the 3 negative return years of the S&P 500 after the dot com bubble burst because they offered high dividend yield.
In his book, Einhorn specifies how he came across accounting fraud in Allied Capital where his main allegation was that they were failing to write down investments (loans granted) despite adverse conditions of the companies they granted loans to. And when Allied Capital did in fact write down, it was a systematic write down to smooth down earnings.
He also uses advanced statistical methods to statistically prove that the way Allied Capital was writing down investments was not at all through chance but a carefully plotted expense recognition. It’s a great book really.
The spat went on for years. Allied Capital defended their honour, attacked Einhorn, Einhorn’s wife lost her job as a financial journalist, Allied Capital tapped into his phone, Wall Street Analysts defended Allied saying that they had access to management of the company and that they had an information edge, etc etc.
Einhorn also famously pledged that 100% gains he will make from the Allied Short, will be donated to a children’s Cancer hospital.
Alas, Einhorn was proven right and in the mid bleak winter of 2008, Allied Capital ceased to exist.
Why I feel this is important is because of the growing popularity of REITs and InvITs in India currently. High dividend yield does not equal high corporate governance. Accounting frauds can happen despite high yields. (Vedanta - Viceroy, just saying, not alleging)
So the next time you see two REITs that invested in similar properties where only one took a write down with adverse market conditions and the other one continued to carry them at cost, stay away from the “You have got to be kidding me method of accounting” policy followed by the other REIT.
It would be really helpful if people who share articles/videos also include a summary of the content. That way, people can decide whether they want to read the whole piece or not.
Writing a summary can also help our rapidly declining cognitive skills in the era of AI.
At least, consider sharing a few interesting snippets from the article.
It would be much better than simply posting a link.
