Understanding Fraud
Unfortunately, puffery and fraud are on the ascent in the US public debt and equity markets. The more bubble like the valuations get, the more the need for business managers to justify such high valuations.
Given the hyper valuations, and the potential they create for spectacular implosions, it is important that all investors understand the dynamics of aggressive financial reporting and fraud.
There are two high level approaches investors could take when it comes to fraud:
Investors can avoid any company that appears to be participating in fraudulent activities. This is the proper and sane approach for most investors. With the vast investment space available to us, there is little reason to waste one’s energy on the negative dynamics surrounding fraudulent companies. As such, long bets, even from dart throwing, have historically outperformed most other investments.
Investors can evaluate when a company’s fraud is likely to become easily visible to public investors and the potential impact…