The Position Makers

malcolm gladwell has a great post about the difference between a “mystery” and a “puzzle” and the financial collapse of [has-been] juggernaut enron. (i found this by hopping from A VC to UnionSquareVentures, both excellent sites).

reading gladwell’s account of enron’s unraveling was extremely telling of the value of understanding financial statements and the subsequent financial gain available to those w/ that understanding. even James Chanos didn’t understand everything he read about enron at first, but he could identify the important parts to follow up on, which was more than enough.

as a note, i’ve been reading a lot of buffett’s speeches as well as the writings of his mentor, benjamin graham.

Important Take Aways:

1. listen to tips but follow up on them w/ actual research [of your own]
2. don’t always assume everything is rosy, even in “highly respected” firms
3. cash flow rules

and one last goodie:

…[Jonathan] Weil spoke to Thomas Linsmeier, then an accounting professor at Michigan State, and they talked about how some finance companies in the nineteen-nineties had used mark-to-market accounting on subprime loans—that is, loans made to higher-credit-risk consumers—and when the economy declined and consumers defaulted or paid off their loans more quickly than expected, the lenders suddenly realized that their estimates of how much money they were going to make were far too generous. Weil spoke to someone at the Financial Accounting Standards Board, to an analyst at the Moody’s investment-rating agency, and to a dozen or so others. Then he went back to Enron’s financial statements. His conclusions were sobering. In the second quarter of 2000, $747 million of the money Enron said it had made was “unrealized”—that is, it was money that executives thought they were going to make at some point in the future. If you took that imaginary money away, Enron had shown a significant loss in the second quarter. This was one of the most admired companies in the United States, a firm that was then valued by the stock market as the seventh-largest corporation in the country, and there was practically no cash coming into its coffers.

eek!

technical traders beware…