Warren Buffett’s famous two rules are:
- Rule number one, never lose money
- Rule number two, never forget rule number one
I’ve broken these rules a few times. When you lose X%, it takes more than X% to recover the loss. As an example, if you lose 20%, from $100 to $80, you need to make 25%, from $80 to $100, to recover the loss. If you lose 50%, you need to make 100% to recover. If you lose 100%, you can never recover.
I’ve lost 100% on more than one stock. This is because I was a victim of dishonesty. But I was largely to blame, because I fell for the dishonesty when I should not have. I invested in NIVS, which was a Chinese company purporting to be growing fast. This was verified by a relatively unknown auditor in China, which supposedly was a branch of an U.S. firm. The company’s website was of poor quality, which should have been a warning. Then the news of the fraud was reported. Stock was de-listed. Lawsuits were filed against the auditor, but there was no way to indict the company or its executives.
There were three warnings which I ignored:
- Unknown auditor
- Poor website
- Little to no deterrence to lie, because the company executives are immune to penalty
- There was no way for me to verify that this company exists, let alone that it is growing
I fell for their fraudulent growth story.
On another stock, I lost 100% when the company went bankrupt. This was harder to detect the dishonesty. In retrospect, I can see how the CEO did not tell us all of the bad news and the likelihood of bankruptcy.
If you can improve your skill to detect dishonesty, you will avoid losing money and be a much more successful investor.
The investing world is rife with dishonesty. Warren Buffett and Charlie Munger have complained about this for decades. There is a huge motivation to be dishonest: money. The dishonesty comes in many forms:
- Lie by omission
One of the common ways to deceive is with EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). Buffett and Munger have complained about this. By not deducting depreciation and amortization, companies show higher earnings. The motivation to do this is to boost the share price. Since 50-90% of a CEO’s compensation is from stock or stock options, there is a significant motivation to boost share price. However, the effect from this is short term. No company can honestly avoid depreciation and amortization forever. These are valid expenses and should be included every year. To explain why, let us pretend that you own a lemonade stand and it costs you $100 to buy the table. The table will last 10 years, after which it will need to be replaced. Since the table is providing value to the business for 10 years, you are effectively spending $10 per year to put your lemonade on a table. This is depreciation. Let us suppose that your lemonade stand makes $20 profit per year, after deducting $10 depreciation per year for the table and cost of the lemonade from the revenue. You can boost your profit to $30 if you use EBITDA. On every quarterly report, executives push their EBITDA number to mislead investors.
Another common way to mislead is by excluding stock option (used to attract talent) as an expense. Again, this deception gives the impression that the company is making more profit than it really is.
Below is how I rank the sources of information, from least dishonest to most dishonest :
- Audited financial statements from a reputable auditor (though this is not perfect, as Enron and Worldcom were able to defraud their reputable auditors)
- Audited financial statements from a non-reputable auditor
- Articles from news outlets such as CNBC, Forbes, Reuters, Bloomberg, Motley Fool
- Analysts who disclose their conflicts of interest
- Articles from Yahoo Finance, Zacks, SeekingAlpha
- CEOs, CFOs
- Articles from sources that you have never heard of before (This is not to say that their information is wrong. But you should try to verify it with another source. Minimally, this information is not audited like financial statements are.)
- Commenters on discussion forums
- Political articles from most sources. They lie, exaggerate, spin or twist incessantly. They are out of control.
Most of the above people have a motivation to promote or demote a stock, which is to MAKE MONEY. They own the stock and they want you and others to buy it as well, to boost the price. Or, they are short sellers who want the price to go down.
Not all promoters and demoters of stocks are dishonest. Many will tell you honest reasons why a company and its stock will grow. But CEOs, as promoters, are usually dishonest because they never give you both sides of the story. They never tell you the negatives of their company, especially if they are going bankrupt. If you believe them, you can watch your stock go to zero, as I have. Short sellers are usually the most honest. However, some can be dishonest as well to make a quick buck. They will write dishonest reports to attack a company and then make money in the following few weeks or months before the truth comes out. If you fall for these and sell your stock after it has dropped, you will lose money.
The mother of all liars are the media in regards to politics.
Noam Chomsky wrote “Manufacturing Consent” in 1988, which explained that the media lie to manufacture consent. Chomsky explained that the media lied about Gulf of Tonkin to manufacture consent for the Vietnam war.
In 2002-2003, the media lied about Saddam Hussein to manufacture consent for the Iraq invasion. They lied so much that 70% of Americans were brainwashed into believing that Saddam was involved in 9/11.
Since 2008, the media have been manufacturing consent for Obama, Hillary and Biden. When they failed to manufacture a victory for Hillary, they have been manufacturing a defeat of Trump.
The media promoted lies from both sides of the political aisle: Republicans’ lies and then Democrats’ lies. One consistency is that the media lied for warmongers: Bush, Obama, Hillary and Biden. Obama/Biden dropped more bombs than Bush. Obama funded AQI, which exacerbated the Syrian war, which killed 500,000 and displaced 6 million. Later, AQI morphed into ISIS. Obama and Hillary helped kill 40,000 in Libya. Hillary’s campaign promise to stop Russia planes in Syrian air space increased the possibility of conflict with Russia. This common theme equates to war, which increases revenue for the media. Wars are huge revenue boosters for the media. Again, there is a motivation to lie: money.
In 2003, my friend laughed at me for saying the media lies. He was talking to me from a sports bar on March 20th, 2003, where many people gathered to watch the Iraq invasion. It was like a Super Bowl event, which as you know, is highly lucrative for the media.
Know that the media outlet does not have to do the lying. There can be people on two opposing sides, but the media will broadcast people from one side only. Phil Donahue questioned the Iraq invasion. MSNBC cancelled his show. Dr. Drew questioned Hillary’s health. CNN cancelled his show.
In 2016, the media published opinions from only one side, who told us that if Trump is elected, there would be an immediate crash of the economy and stock market. This included business news outlets, such as CNBC, Reuters, Marketwatch, Business Insider, Citigroup, Bloomberg, former chief economist of the IMF, Wedbush, Bridgewater, Macroeconomic Advisers and The Economist. Links to these are listed below. So, it’s not only the highly politicized mainstream media that lie about politics, but so do business media outlets and Wall Street.
If you believed the media, you would have missed out on a huge rally. In the past 4 years, from November 3rd, 2016 (Election Day) to November 8th, 2020 (Election Day), the S&P 500 went up 57%. The business news outlets are supposed to help their readers make money. Instead, they helped readers lose money. They didn’t care, as long as they can manipulate and brainwash voters.
The media have lied so much against Trump and to protect/boost Hillary and Biden, that it would take a book to show the examples. In fact, there are books about this, such as The True Story of Fake News. It is not surprising that the only time that the media praised Trump was when he shot missiles into Syria.
Even CNBC and 60 Minutes lie about politics. I have watched them for over 1-2 decades, but when it comes to politics, they lie. They referred to Hunter Biden’s hard disk as “unverified” multiple times. But it was verified by Hunter’s associates and Hunter’s lawyer. When the media pushed the Russia-Trump conspiracy theory for three years, which turned out to be one of the biggest lies in our lives, they never referred to this as “unverified”.
To detect dishonesty, you need to be willing to read information that goes against your bias. After your stock has made a lot of gains, you develop a bias for it. You can even get emotional and fall in love with that stock. When bad news comes out about it, you are averse to reading it, because it goes against your narrative and might show that you made a mistake and will lose money. You do not want something that will make you feel bad, so you do not read it. This is a big mistake, because you are not getting the full truth about the company unless you read both sides of the argument.
This proclivity to fall for one-sided, dishonest reporting is especially pronounced and prevalent in politics. Once you develop a bias, you seek out confirmation of your bias (“confirmation bias”) and are repulsed by information that goes against your bias. So you avoid it. Consequently, liberals are in one silo and conservatives are in another, as liberals consume CNN, MSNBC, New York Times, Washington Post, etc., but will not consume Fox, Newsmax, OAN, Breitbart, etc., and vice versa for conservatives (but less so). (Most of the media are liberal or leftist.) In Canada, liberals consume CBC and CTV and conservatives consume National Post and Rebel News. In my opinion, CBC is the most dishonest in Canada. As Matt Taibbi explained in his book “Hate Inc.: Why Today’s Media Makes Us Despise One Another”, there are major news stories that are reported from only one side of the media. So, if you consume news from only one side, you are not getting the truth.
If you were willing to consume news from the other side, you would have seen investors disputing the prediction that the stock market would crash if Trump won in 2016.
In 2002-2003, the media were promoting Republican lies. In 2003, I had to seek out a news outlet from the other side, to get the truth about Iraq. From 2008 until today, the media are promoting Democrats’ lies. If you want to know the truth, you need to seek out news outlets from the other side.
It is unlikely that you will detect all dishonesty. It is likely that I will fall victim again in the future. But the more dishonesty that you can detect, the more successful you will be in investing.
Media in 2016: Economy and Stock Market will Crash if Trump is Elected
All of the following people were wrong or lying.
New York Times:
- “The Economic Fallout”
- “If the question is when markets will recover, a first-pass answer is never.”
- “Under any circumstances, putting an irresponsible, ignorant man who takes his advice from all the wrong people in charge of the nation with the world’s most important economy would be very bad news.”
- “So we are very probably looking at a global recession, with no end in sight. I suppose we could get lucky somehow. But on economics, as on everything else, a terrible thing has just happened.”
- “What Happens to the Markets if Donald Trump Wins?”
- “likely cause the stock market to crash and plunge the world into recession.”
- “Trump is being handed a great economy. What happens when it goes south?”
- “A President Trump could destroy the world economy”
NewsWeek’s senior editor:
“In preparation for a completely unpredictable Trump presidency, I sold all stocks in my kids’ education accounts today. I urge u to do same.”
CNBC and MSNBC:
- Commentator on CNBC: stocks will crash by 50%
- Mark Cuban on CNBC: stocks “would definitely fall”
- MSNBC: “If Trump wins, you will see a crash of historic proportions”
- Richard Branson on MSNBC: stocks will crash
- Mark Cuban on MSNBC: If Trump wins, market tanks
- “100% risk of a 50% stock crash if Donald Trump wins nomination” [100%? Wow. That’s a guarantee. That’s an absolute certainty. Nobody has ever given a guarantee on the stock market before.]
- “Donald Trump’s first gift to the world will be another financial crisis.” Headline in the U.K. Independent.
- “I have no stocks. I advise people not to invest in the stock market, not now. Way too dangerous.” Film maker Michael Moore
- “Citigroup: A Trump Victory in November Could Cause a Global Recession”, Bloomberg Financial News headline, August 2016.
- “economic consequences of Mr Trump’s presidency could be enormous, and costly.”
- “Yet even if Mr Trump does not land America and the world in a serious new conflict or a global depression, his effect on the trajectory of global growth and development could be substantial and terrible.”