SunEdison, Valeant And Apple – Enron's Lessons & RationalizationsVW Staff
Whitney Tilson in his email discusses Fastow’s lessons & rationalizations Re. Enron; SunEdison, Apple, Valeant Why we think we’re better investors than we are; My comments on Berkshire and the Airlines; man up, Allergan shareholders (tax inversions); an open letter to a NC State legislator; Opioids and Polk Awards.
Whitney Tilson: SunEdison – Fastow’s Lessons & Rationalizations
1) I went to an event yesterday afternoon at which Andy Fastow spoke for two hours. You may recall that he was the CFO of Enron and served six years in prison for his crimes – and he’s now out on the speaking circuit. I agreed with most of what he said. He acknowledged that he was the primary cause of Enron’s demise and apologized for all of the harm this caused. He said he knowingly engaged in numerous transactions that were designed to mislead investors by hiding debt in special purpose entities, etc. He also noted, however, that every single one of them was approved by Enron’s board, auditors, etc. – and, most alarmingly, gave numerous examples of many major companies today are doing similar things, just not (for most companies anyway) to the same degree. For example, he showed this picture and asked if anyone could name the major company whose global headquarters this was:
The answer is Apple – this is the company’s global headquarters in Ireland, as you can see from the full picture:
His point – an entirely correct one – is that the world’s largest company today is engaged in tax dodging behavior that, while perhaps technically legal, is clearly designed to increase profits and inflate the stock by misleading and confusing regulators (and perhaps investors) via a massively complex web of entities – exactly what he did at Enron! And this is 100% routine, common behavior among most large U.S. companies. In summary, he argued, what sunk Enron wasn’t any one deal – it was that he (and Skilling and Lay) used techniques that others were also using, taking advantage of gray areas in accounting rules to pretty things up for investors, but took it to such an extreme degree that they blew up the company.
So why does this crap keep happening? (And it does – just look at SunEdison and Valeant.) Fastow talked off of this slide, explaining how he rationalized doing things that he knew were wrong:
Some very good lessons here…
Whitney Tilson: Why we think we’re better investors than we are
2) A very insightful op ed by Gary Belsky, the author of a classic (and very quick, easy to read) book on behavior finance, Why Smart People Make Big Money Mistakes and How to Correct Them:
Ask a random player in a law firm’s basketball league whether he or she could compete with LeBron James, and the most common response will be laughter. Yet many of those lawyers would willingly compete with the billionaire investor Warren E. Buffett.
Despite the spectacular growth of index funds — passive investment vehicles that track market averages and minimize transaction costs — millions of amateur investors continue to actively buy and sell securities regularly. This despite overwhelming evidence that even professional investors are no more likely to beat the market than monkeys throwing darts at securities listings.
Money managers, at least, are paid to make investment bets. But why do amateurs believe they can outperform the professionals — or even identify those pros who will outperform? (Performance of individual mutual funds cannot be predicted with any greater degree of accuracy than individual stocks or bonds.) Many biases and cognitive errors contribute to this costly behavior, but a few deserve mention.
Whitney Tilson: Comments on Berkshire and the Airlines
3) I did a video interview with Yahoo Finance on Monday and discussed Berkshire Hathaway and the airlines. Here are the links:
- Berkshire: http://finance.yahoo.com/news/berkshire-hathaway-upside-whitney-tilson-book-value-intrinsic-value-buyback-floor-174045742.html# (4:40) (my latest BRK slides are always posted at: www.tilsonfunds.com/BRK.pdf)
Shares of Berkshire Hathaway (BRK-A) fell about 12% in 2015, a year when the S&P 500 was flat. It was the worst annual decline since 2008. However, it’s not all bad news. In his annual letter to Berkshire shareholders, CEO Warren Buffett emphasized the company’s strong 6.4% gain in book value, which far outpaced the S&P.
In an interview with Yahoo Finance, long-time Berkshire investor Whitney Tilson, founder and managing partner of Kase Capital, says he sees significant upside in shares.
According to Tilson’s analysis, Berkshire has a current intrinsic value of $283,000, which represents a significant upside to its recent price of $215,740. In 12 months, 6% annual growth of intrinsic value and an $8,000/share cashbuild could send Berkshire’s price to $308,000.
Tilson said he believes that continued earnings growth along with the likelihood of meaningful acquisitions, new stock investments, and additional cash build all support the upside story.
As for last year’s underperformance? Tilson said he viewed it as a buying opportunity.
“There were a couple little pockets of weakness but overall the company is doing great,” he said.
Airlines: http://finance.yahoo.com/news/tilson-says-airline-oligopoly-155817749.html# (5:43) (by the way, I mis-spoke: the top four airlines have 80%, not 86%, of the US market)
Whitney Tilson: Man up, Allergan shareholders (tax inversions)
4) I couldn’t agree more with Doug Kass. These tax inversion deals are a disgrace and I couldn’t be happier that the Obama administration is doing everything it can to nix them:
Man Up, Allergan Shareholders
APR 6, 2016 | 9:35 AM EDT
Stock quotes in this artiWhitney Tilson: Polk Awards
6) The 67th annual Polk Awards in Journalism were announced last month and there are some extraordinary articles – a few of which I’d read and the rest of which I’m in the process of reading. (The press release below has links to all of the winners.)
The article that had the biggest impact on me, and which I think will have the biggest impact on this country, is entitled: Dying To Be Free: There’s A Treatment For Heroin Addiction That Actually Works. Why Aren’t We Using It? You can read it here: http://projects.huffingtonpost.com/dying-to-be-free-heroin-treatment and here’s an accompanying 13-minute video, focusing on a doctor in rural Kentucky trying to deal with this epidemic: https://player.vimeo.com/video/153245952