Friday, April 15, 2011

Skinny Dipping?

"It's only when the tide goes out that you learn who's been swimming naked" Warren Buffet

This is a fairly famous quote by Warren Buffet.
He is basically talking about creative accounting or accounting magic.

A lot of times, companies and their accountants find ingenious ways to make it look like they are making a huge profit on paper when in actual fact, they might not. I guess a very good example is what had happened to Enron. I think what they did was they had set up offshore entities in which they used to hide their losses to the company Enron itself looked very profitable. Their collapse then brought down one of the world's biggest accounting firms as well, Arthur Anderson. Just in case you're not sure what happened, their share prices were trading at 90 dollars a share at mid 2000 and dropped to less than a dollar by November 2001 and it filed for Chapter 11 bankruptcy soon after that.

I dont think many people anticipated that such a big blue chip company would pull off such a fraud. I guess people thought the same with Bernie Madoff and his hedge fund. I mean why will the good guy/philanthropist of Wall Street, the chairman of NASDAQ defraud us? Well to get very very very very rich.

I guess with creative accounting, if the real money does not show up, all the enthusiasm and illusion and speculation by stock market traders will fade away. What you get in the end is an empty bank account and a chapter 11 filing or if in Australia, it goes into administration.

So when the tide went out, we all found out that Enron was skinny dipping.

I think what we need to think about is how can we, people learning to be investors or traders learn how to identify companies that are swimming naked before the tide goes out.

So let me know what will you do to maybe try and identify companies that are dodgy or a bit suspicious. What signs and symptoms do you look for and what are your investigations? Sorry, I am a medical student afterall hehe.

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