Bad research – Whitney Tilson edition (Netflix, US Banks)

Yesterday I linked to an Interview with Whitney Tilson, which in my eyes disqualified Tilson as a really great investor.

The first issue was Netflix.

He was saying the following regarding his experience with Netflix:

The only good thing about that experience on the short side, other than a good lesson for other shorts in the future, is that we got to know the company super, super well.

So does that mean he didn’t know Netflix at all when he entered the short ? In my opinion, a full time profesional investor should know his investments “super super well” even BEFORE entering a short position. However this explains, why he didn’t hold through the position but covered at the exactly wrong point. The ability to hold through is closely correlated to the knowledge of the stock.

The second issue is his so-called research into Bank stocks. He says the following:

Tilson: Way over-levered with a huge storm bearing down upon them. Whereas we think the U.S. financial sector sort of went through its valley of death, and has dramatically stronger balance sheets today, much lower levels of leverage. Deutsche Bank, last I looked, assets to tangible equity are levered about 49 to one. And JP Morgan’s 13 to one, Goldman’s 13 to one, right?

So you wouldn’t touch the European financials with a ten foot pole, no matter how cheap they looked. But our view on owning U.S. financials – and our major positions are in Goldman and Citi, with a smaller, more TARP Warrant kind of position in JP Morgan and Wells Fargo, are the major positions there.

To put it into the words of the “master”: This kind of research is super super bad.

I cannot believe the Tilson omits the significant accounting differences between US GAAP an IFRS especially regarding derivatives. US banks benefit from very generous rules how they can net out derivatives exposures, which make their balance sheets a lot smaller than comparable European banks.

And they are fightig hard as this article shows:

The more cohesive approach took the form of a set of proposals on netting for financial instruments. Jointly unveiled by the FASB and the IASB on January 28, the new rules will eliminate one of the biggest differences between firms reporting under US Generally Accepted Accounting Principles (Gaap) and International Financial Reporting Standards (IFRS) – whether over-the-counter derivatives should be reported on a gross or net basis.

However, critics argue the proposal to standardise reporting on a gross basis could massively inflate the balance sheets of major dealers in the US – in turn, hitting leverage ratios hard. In addition, some participants say the proposals could make it more difficult to net trades cleared through central counterparties (CCPs) – a treatment even more restrictive than the current rules under IFRS.

So Tilson might make money on his US bank stock investments, but if he does it has nothing to do with outstanding research, as he doesn’t bother to check even the most fundamental accounting differences underlying his investment thesis.

Summary: Tilson might be a great communicator, but following this interview I am kind of disappointed regarding his fundamental analysis skills. Calling oneself a value investor, giving a lot of interviews and showing up in Omaha every year is maybe not enough.


  • “omits the significant accounting differences between US GAAP an IFRS especially regarding derivatives”

    Even Simon Johnson, chief economist at the International Monetary Fund in 2007 and 2008, had recently committed the same blunder, so it looks like an epidemic disease.
    We had a discussion on the subject.

  • John,

    I could rant all day about exactly the same topic. For instance this whole “repo to maturity” thing at MF global wuld not be possible under IFRS.

    The same applies for insurance companies where US GAAp and STAT are applied jokes in accounting.


  • Hi. Thanks for the link. I am glad that you pointed this issue out. I workes as an investment manager for 12 years, and spend much of the last four specialising in Banks & Insurance stocks. It used to drive me absolutely around the bend listening to so called experts going on about leverage ratios at banks without ever acknowledging the accounting differences. As well as Deutsche Bank, Barclays Bank balance sheet looks materially different under US GAAP than it is reported. I seem to recall that they make some efforts in the notes to net out the differences between the standards – and as you point out one of the principal differentiating factors is how client derivative positions (both assets and liabillities) are reported.

    Other than that, it is a misnomer I belive to suggest that high leverage is the cause of all of the problems of Euopean banks, and that is why US banks are a better investment. For example, Svenska Handelsbanken and DNB have entered the present crisis with higher leverage ratios and higher loan to deposit ratios than say an bank in Italy or Greece. It is not only the amount of equity that you hold, but whether that equity has a clear and present threat to its current standing. Heaping more equity on Italian banks will not necessesarily help them. (BTW, I am not arguing for less euity for banks, on the contrary – just railing against the type of knee jerk ‘analysis’ that you have pointed out in the WT interview). Thanks. (Rant over).

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