SilverCorp: What Should You Do?
September 17, 2011 Leave a comment
FULL DISCLOSURE: I have no stake in SVM, nor have an opinion on SVM. I do, however, have a knack for fraud detection and have been fairly successful with identifying fraud. I may at some point do more serious work, which may or may not lead to a long or short position.
OVERALL RECOMMENDATION- I believe that you should not own or hold SVM unless you have proof (or at least very compelling, detailed set of evidence) that falsify the critics’ concerns, or at least renders them immaterial. Otherwise, stay away.
(1) My Personal Take – I’ve read the critical reports regarding SVM; I don’t understand the claims well enough, nor have enough conviction at this juncture, to long or short the stock at this point. Bear in mind, in the past I’ve reviewed similar types of claims and had more conviction to short;
(2) Muddy Waters/Alfred Little Track Record – Those who are short the stock – Muddy Waters and Alfred Little – have been the best of breed when it comes to identifying fraudulent concerns; do not trust me, go examine the facts. Do not be satisfied simply with what others have to say; rather examine the claims, counterclaims, and check against facts. You’ll likely to come to agree with me.
(3) Ad Hominem Attacks – going after the messenger, the superficial – does not help arrive at the truth. Anonymity of the accuser does not add or subtract to the claims he/she make. I would not recommend using anonymity, accreditation (or lack thereof) as arguments to undermine the claims of the messenger. I’ve seen dozens (conservatively 30-40 companies just within this year), like Sino Forest, CCME, LFT, to name a few, who do the same exact thing; they attack the messenger, rather than the message. Don’t be fooled by attempts to distract from the core concerns.
(4) China/Fraud Expertise – If you do not understand business practices in China, do not, as a knee jerk reaction, criticize those who are. Also, if you do not understand fraud, do not as a knee jerk reaction, criticize those who are experts on fraud. Examine the facts and claims. Don’t take the CEO or anonymous short seller’s word for Gospel. Look underneath the surface and see what validity their claims have.
(5) What Fraud is – Fraud is such a scary word, but ultimately, at heart, it simply means ‘misrepresentation’. Sorry to break it to you, but that’s the real world; people exaggerate, lie, cheat, and steal. The question then is not whether there is fraud (as there usually is in life), but to what degree; what you really should care about is: is this fraud material enough to move the needle? It’s one thing for management to lie (as they usually do); it’s another for those lies to be so egregious that the stock is worth a fraction of what it’s trading for.
(6) Truth About Short Sellers – Contrary to popular belief, a short seller does not want other short sellers to pile on; they want owners of the stock to sell. Please get this straight before you immediately assume there’s some kind of short seller conspiracy; it’s not in their economic incentive to do so, as more shorts only worsens risk of short squeezes and makes borrowing shares more difficult, and more costly.
7) Certain Behavior has Predictive Power – In my experience (and experience of those with with much more experience than I have) whenever a CEO/mgmt team attacks the messenger and does not address the claims in detail, it’s a huge red flag. I’m not saying it proves fraud, but the narrative is generally not favorable to those long the stock (on a non trading basis).
(8) How to Approach Fraud Accusations as a Long – If you’re long the stock, you have it all wrong if your approach is: I won’t sell unless fraud is proven. Proving fraud, I assure you, is tricky. By the time fraud is proven, the stock has generally already lost 80-99% of its value. Markets after all, anticipate. Your approach should rather be: I won’t buy/hold, unless I can prove there is no material fraud, or at least have a sufficient set of facts that makes me comfortable. Don’t be married to positions or opinions. Do not underestimate the intelligence of fraudsters.
(9) Just say no to Coat-tail Investing – Don’t buy or hold simply because so and so owns and/or is buying. You’d be surprised how incompetent, careless, and ignorant billionaires and funds can be…or you’d be surprised how clever fraudsters can be. Not to mention, we all make mistakes.
(10) Audits/Auditors – If you place your trust in audits/auditors, study frauds of the recent and older frauds (the famous ones as well as less known ones). After doing so, you’ll probably come to the same truth that I have: audits/auditors are not designed to detect fraud. As such, relying on them to prove no fraud…let’s just say there are scores of folk who have lost fortunes with that logic.
(11) Don’t trust anything or anyone, when fraud is of concern. Only verify and confirm.