"Fooling Some of the People All of the Time"

[fiefoe]

This seems to be the right time to read about financial shenanigans. David Einhorn and Joel Greenblatt pitch the book at just about the right level for a person who took one semester of Corporate Finance.

• A pair trade matches two companies in the same industry trading at widely disparate valuations... Pair trades attempt to hedge a portfolio's investments by eliminating both market risk and industry risk and capturing the valuation convergence over time.
• It is psychologically challenging to manage a portfolio that outperforms only a falling market. I have no desire to spend my life hoping for a market crash.
• mezzanine loans (senior to equity, but subordinate to senior debt)
• In essence, BDCs are publicly traded private-equity firms that give the public an opportunity to participate in the growth of young companies. BDCs raise capital in equity offerings and act like closed-end mutual funds.
• If Sirrom's management marked the portfolio fairly, then future adjustments should be independent of prior adjustments. No pattern should exist.
• We avoided the damage in the short portfolio by refusing to sell short anything just because its valuation appeared silly. We reasoned that twice a silly valuation is not twice as silly. It is still just silly.
• I believe the Internet bubble made its ultimate top the day the last short-seller could no longer afford to hold his position and was forced to cover. Market extremes occur when it becomes too expensive in the short-term to hold for the long-term. John Maynard Keynes once said that the market can stay irrational longer than you can stay solvent.
• The debt yielded over 20 percent, while the equity traded as if bankruptcy were improbable. We purchased the bonds and sold short the common stock.
• While investment-grade bonds often have skimpy covenant packages, it is standard for high-yield bonds to have exactly these types of covenants and restrictions - that's teeth.
• PIK interest means that the lender accepts additional securities, growing the balance of the loan, rather than cash, as interest.