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Posted on 06 Mar 2018 by Steve Johnson

A Big Lesson from the Big Un Debacle

A Big Lesson from the Big Un Debacle


Some of the red flags at Big Un were obvious. Perhaps the biggest was the change in auditor, from PKF to the highly illustrious accounting firm Rothsay Resources. And the business model was sketchy. There were “characters” involved. The stock failed the sniff test.

But much of what has been uncovered by the Australian Financial Review’s excellent expose seems to be intentional misrepresentation. That’s not easy to find as an external investor with limited resources.

Still, there is one lesson we can all take out of the saga: when it comes to investing, there are no fixed rules.

I know, I know. Warren Buffett’s number one rule is never lose money. His number two rule is never forget rule number one. My only rule is that, when logic demands it, you should be prepared to break every single other rule. Even Buffett’s number one*.

The one thing about Big Un that tripped many was the copious growth the company was reporting in its quarterly cashflow statement. The old saying goes “earnings can be faked, but cash flow never lies”. Except that it does. And apparently, in this case, intentionally so. And that’s the problem with all investing rules. While they work in general, it is the exception that brings you unstuck.

Learn the rules. Sometimes apply them. But there is no substitute for independent thought and rigorously applied logic.

*Firstly, I think this is age dependent. If you are in your early twenties and don’t have a lot to lose, be prepared to lose it. The investment will be worthwhile. Secondly, as long as portfolio allocations are managed sensibly, being prepared to lose a little money for the chance to make a lot has been a very successful investment strategy.

A Big Lesson from the Big Un Debacle

5 thoughts on “A Big Lesson from the Big Un Debacle

  1. Thanks for the link Steve. Wow! Feel like I’ve just walked out of a horror movie. The Big Un Truth more like it. Who doesn’t rely on cash flows to verify operating reality? However, it appears there were a few red flags for those prepared to see them e.g. the prolific creation of cheap options and shares. Not a good look. One of Warren’s pet hates too I believe.

    Cautionary tale on the importance of position size.

  2. Thanks Steve. Interesting stuff. Surely manipulating cash flow statements is out and out fraud. It’s not selling blue sky and future profit / cash flow.

  3. Investors in BIG have a right to feel both angry and cheated.
    I’ve always thought that the faster a stock rises, the faster it has the potential to fall.
    Unfortunately, (tic) I’ve never been in the envious position of having one of my shares rise sharply.
    With the events taking place at RFG and BIG, investors must be asking themselves, who can I trust ?
    Over to you Steve !

  4. Completely agree. The very best chess players are the ones that know exactly when the ‘rules’ are meant to be broken. Everyone ‘knows’ an isolated queens pawn is a strategic liability. In one of his most famous games, Bobby Fisher willingly accepted one to everyone’s bemusement. And then he brilliantly used it to force a winning position.

    The rules many people rely on are guidelines which work in most instances, but what really matters is not rules but first principles. In investing, the first principles are the constant need for constant critical & independent thinking. And at the end of the day, it comes down to risk vs. reward – upside vs. downside. Everything else is noise. Even the notion of ‘never lose money, & don’t forget’ is unsound, as it does not derive from first principles.

  5. PS and it is ironic that people say focus on the cash flow statement rather than the P&L, but it was the P&L that put me off Big UN (amongst other things). They were reporting monstrous cash flow, but the gross margins & P&L looked terrible. Often the P&L paints a better picture than the cash flow statement – much more often than many believe. Even in the absence of fraud, cash flow can be distorted by timing differences/accruals. All three financial statements need to be viewed holistically & ought to be telling a unified story. In BIG’s case, the P&L didn’t jibe with the CF statement and flagged something was off.

    I had a tiny position at 20c but sold it all at 60-150c on the way up largely for these reasons. I was also uncomfortable with not only investor exhuberance, but the pace of growth and cash flow which looked & felt a bit too good to be true. It goes to show that experience and a gut instinct counts for a lot in this game.

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