Warren Buffett On Exposing Business Frauds And Deception

I get letters all the time and I hear from people who have been taken advantage of in financial transactions and you know it really is it's sad and a lot of it isn't even uh it's not fraud or anything for one thing I mean just the charges involved the frictional costs and the the baloney that is is presented uh is is tough Charlie and I have had very good luck in terms of buying businesses and putting our trust in people uh it's been just overwhelmingly good but we filter out a lot of people and then they say how well how do you filter them out uh I would say and I think Charlie will agree with this people give themselves away fairly often and maybe it does help to been around as long as we have in seeing the various ways they give give themselves away they when somebody comes to me with a business and I probably shouldn't tell this publicly because they'll probably tailor their approach subsequently but when when they come just the very things they talk about uh what they regard as important and not important there are a lot of clues that come as the subsequent Behavior and like I say we've we've really had a a batting Outreach I wouldn't have thought we would have had uh in you in the people that we've joined with but it hasn't been a hundred percent uh it's it's been well above 90. and I I get asked that you know I mean how do you how do you make those judgments and uh I don't know Charlie can you articulate the way we do it well partly we're deeply suspicious when the proposition is too good to be true Warren once introduced me to a gentleman promoter who wanted a bagel us into an insurance program and he said we only write fire Insurance on concrete bridges that are covered by water he says it's like taking candy from babies we are able to filter out propositions like that yeah anybody that any anybody that implicit in their comments or what they kind of laugh about or all kinds of things in terms of the the fact you know it's so easy and it ain't that easy you know and we we get suspicious very quickly uh and and the truth is we we rule out ninety percent of the times and and we may be wrong about a fair number that we're ruling out the important thing is whether the ones we're ruling in were right about and so we don't mind we're looking for the obvious cases of people you can trust I think you really ought to talk about the experience with the Frog what on the fraud claim it you know the Fidelity claim with a guy you know yet he had the very well known insurance company that you don't have to name names but uh well then you know you basically just told them just raise the stakes to make them the game fair this was back in the 1960s do you remember that I don't remember well I do I remember well tell it then ah [Laughter] um Charlie had this tiny little operation which he ran his fund also had a seat down the Pacific Coast Soccer shakes the perm was called wheeler monger it was called wheeler mugger at first later it changed itself to Margaret wheeler and Jack Wheeler said well pretty soon it'll be a bugger and Company but that's okay they Jack Wheeler was a very interesting guy and he had the specialist position in General Motors and a few things and some employee stole like I don't know 12 000 bucks or something like that yeah I remember he had the trading tickets I steal some money and Charlie's firm we learned marker was required to have a Fidelity Bond and all these things that covered dishonest employees and all of that sort so this guy's clearly dishonest he's clearly stolen the money so Charlie puts in a claim for twelve thousand dollars or something like that whatever the loss was and sends it to this very big and prestigious Insurance Company and of course the insurance company denies this claim they say you know the guy really wasn't employed he doesn't exist you don't have a dog you know and I mean the whole thing and Charlie gets this letter back and they're not going to pay the claim and uh so Charlie writes a letter to this very well known big name uh person that runs the insurance company and he said look it he said we have this twelve thousand dollar claim and he said this guy stole the money uh and we thought we had a insurance policy against people's people stole money and he said he said we're in this very interesting position because you've got a bunch of people on the payroll and they're going to get their weekly check or monthly check whatever they do so they just say we're not going to pay and Life Goes On whereas I'm sitting here and I've got my time I've got to work on this thing and it isn't worth the twelve thousand dollars for me to fool around with us claim against the company and they'll appeal it and all these things so he said I know that you would be offended by the thought that you might be using this inequality a bargaining position to avoid playing at the claim that never could be your intention so what I suggest in order to really live up to your code of behavior is why don't we make the twelve thousand dollar claim business we'll just multiply it by 10 and call it 120 000 either way and if you lose you pay me 820 000 if I lose I'll pay you 120 000 now it's worth my while and uh he addresses the letter to the chairman and says that's the guy he gets a twelve thousand dollar check by return mail it's not a bad lesson I don't know we can't identify 100 of the frauds or 90 or 80 but there's certain ones that jump out to you just people give themselves away a lot too I mean in poker they talk about tells and Charlie and I bought a lot of businesses and it's uh it's very important when we buy those businesses that we assess the individuals that we're buying from uh with some degree of accuracy because you know they hand us the stock certificate and we hand them a lot of money and then we count on them to run the business with as much enthusiasm after they have the money uh as they did before and so we are assessing people and we don't think we can assess everyone uh accurately we just have to be right about the ones where we make an affirmative decision and those decisions have not always been perfect but they've been pretty good and I would say they've probably gotten a little bit better even as the years has passed similarly in looking at financial statements uh for example in in the insurance field we've we've seen some frauds and they're you can see things being done with lost reserves occasionally we saw it back in won't name any names unlike Charlie I don't we'll call them call them company A's and B's instead of naming names but you would see companies that when they were offering stock to the public you know a year or two before that the reserves would go down very suspiciously and you know then and uh or or even when they were selling them uh uh to other insurance companies uh uh they were buying in stock they might be building the reserve that but there's there's a there's a million different ways and I don't claim I know all the ways obviously but I have seen enough situations over the years and I've seen how promoters Act uh and you can you can spot certain people who uh you know are are one way or another playing games with the numbers yeah the the proposals we received from the investment world I've got to tell you about one because it it illustrates go on we received a proper position the other day and I'll disguise the numbers a little bit so nobody uh can pick it out but it was a private company and we'll say it was earning 100 million dollars a year but the seller of the business and the investment banker suggested that we should look at the earnings as being a hundred and ten million dollars a year because as a private company they had to pay their top people in cash which was expensed but we could pay them in stock options and things like that which weren't expensed or were explained as not really counting and therefore we would could report 110 million dollars if we gave away something we didn't want to give away but by essentially by why sort of lying about our accounting we could add 10 million dollars in earning and they wanted us to pay them because they couldn't do it and we could do it and therefore at this point they're losing me of course totally but it it's just astounding the the accounting games that are played all the adjustments are why the place should really be we'll be earning more than before it's it's it's a business we also had one that came in from a private Equity Firm and by a mistake we got the email that was sent to the manager from the email from the private Equity firms owned a manager in terms of making projections for it and they told them to add 15 because they said Buffalo discounted by 15 or 20 anyway so just just add 15 to offset his conservatism uh you know it's it's not an elegant business as Charlie will tell you

Channel: The Long-Term Investor

Views: 273,976

Keywords: personal finance, stock market, stock investing, investing, stock picks, value investing, dividend stocks

Id: gTO9fNkDk7Y

Length: 10min 56sec (656 seconds)

Published: Wed Jan 18 2023