DGI Adventure – 03-18-16 Market Musings – Accounting Irregularities

About a month ago, I was feeling sorry for myself because some of my investments were down. Everyone’s investments were down. I got over it though. Plus the market came back up. It will go back down again, and then probably come back up. And so on and so forth. A couple thousand bucks feels like a lot of loot to me. But it’s all pretty small beer in the grand scheme of things.

I can’t say for sure, but I’m guessing that Bill Ackman feels worse today than I did last month… 

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If you haven’t been following along at home, Valeant Pharmaceuticals (VRX) has had a bad week. Mr. Bill has a lot of money tied up in VRX. I trust Matt Levine’s math, and he figures Ackman’s sunk about $4.1B into it and is looking at an ~89% paper loss at this point.

No matter how bad I feel, I can always remind myself…I haven’t lost four billion dollars.

On a related note, I don’t really think Jim Cramer is an idiot, but the innerwebs might argue otherwise. The reason I don’t think he’s an idiot is because he’s so damn successful. Cramer catches a lot of criticism from the church of buy and hold because his character embodies the knee-jerk reactionary, short-term horizon investor mentality. But I think it’s just an act. He’s not really an idiot, he just plays one on TV. For most people watching CNBC, that resonates with them.

He’s pretty fun to make fun of though. Plus he’s wrong a lot. I mean, he’s probably not wrong any more often than the average monkey with a set of darts and the WSJ, but he’s on television, and he gives his opinion EVERY DAY, so even when he’s right, it’s highly possible he was wrong not too long ago when he spouted off the opposite opinion for whatever reason. Here’s a fun example.

Cramer has a rule, which I’ll paraphrase here:

Accounting Irregularities = Automatic Sell

He claims this is a “cardinal rule” that he’s had for decades. I can’t speak for decades, but I’ll give him some credit here. I first heard this rule of his in 2014 because I was an ARCP shareholder and they were in the news for accounting irregularities. Sure enough Cramer immediately touted his cardinal rule to sell first and ask questions later when accounting irregularities are involved. Here’s an article as proof.

Tuesday’s shit-show for VRX further vindicated this wisdom. Just ask him.

Things have been fishy at Valeant for a while, and this rule of his, if followed, would have saved you money. But just leave it at that. Don’t try to push it….damn it, Jim.

Even back when Valeant was a beloved stock, I had always been uncomfortable with their business model of rolling up drug company after drug company, slashing research and development and then raising prices,

Wait a minute? Really? Let’s do a quick google search on that one and…oh wait.

If you don’t feel like clicking the link, the title of the article from February 24, 2015 is “Jim Cramer on Valeant: This Is an Amazing Pharmaceutical Firm

To quote the article, which was supposedly written by Jim Cramer. I guess he writes his headlines in the third person?

Second, the company is an amazing acquirer. In their deck you can see some amazing numbers from its Bausch & Lomb acquisition in 2013. Its consumer business in the U.S. is up 13%. Its prescription business has zoomed 13% and it’s going incredibly well with generics.

The top 20 global brands are doing amazingly well. They just get so much more out of their brands than other companies.

I’m calling two thirds bull shit. On one hand, yes, had an investor sold the stock back in October, as soon as Citron publicly accused the company of accounting irregularities, that investor would have saved themselves a lot of headache. But give me a break…on the other hands 1) you weren’t “skeptical of the business model” and 2) you said yourself the Citron research was “unorthodox and inflammatory”. I’m not sure where the line is drawn, but obviously the cardinal rule assumes the accounting irregularities are verified by a credible source. Any crackpot can make accusations. Now that the stock tanked 50% in a day, you’re comfortable saying that the Citron “allegations were well documented”? WTF is that supposed to mean anyway?

In conclusion, Bill Ackman has lost a lot of imaginary cost basis bucks with other people’s money and Jim Cramer really does have a rule to automatically sell a stock that’s having accounting irregularities.

At first blush, it would appear that one of them was very right and one of them was very wrong. But then, things are never what they seem. I think they’re both pretty wrong, but one is probably a lot more depressed about it than the other one. Cheer up Mr. Bill…

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