Watched the Charlie Munger interview in Caltech (March 2008) again last night. Munger is truly amazing. The way he put things across is both eloquent and direct. He talks about issues ranging from his favorite subject on mental models, the problem with the social sciences, his fear for nuclear proliferation and what young poeple should do to get ahead in life.
He said something along the line that after being around people who are the best in their field, he realised that he'll never be the GREATEST in any field. So the question is 'How to do very well without being very good in anything?" Soln: Given that there is so much folly in the world, he think the if he simply avoids all these follies, he's pretty sure to he'll do quite well.
He also talks about the folly that has gone into derivatives accounting. The fact the accountants 'blessed' the accounting figures and FASB issued the accounting rules in no way means that the numbers mean anything. Imagine that you have 200 regulators looking at the books of Freddie and Fannie and NOT be able to figure out what is really wrong BEFORE it blows up tells us much about how convoluted the accounting of these two institution is.
Studying FRS 39 in my Advance Financial Accounting course now, and i must say that Prof Pearl Tan makes the whole , and i find some of the rules rather silly. Due to rules in derivatives accounting (for cash flow hedge), we have to recognise the associated asset or liability for the hedge instrument. However, due to the 'matching' principle, companies are required to recognise the 'hedged item' even before it materialise or risk and reward has been transferred. That's crazy!!! The whole idea of revenue recognition has been flipped upside down.
Furthermore, the inputs that goes into 'estimating' profits and fair value would allow two parties to BOTH book a profit in zero sum game. Such atrocities are once again blessed by the accountants. If you tie management compensation to the these numbers that are estimated (or fabricated), what numbers do you expect to get? Of course we will expect aggressive accounting, and unless the auditors can VERIFY that the numbers are wrong, the accounts will be certified True and Fair if not risking losing the clients. But such estimates are in its essence NOT VERIFIABLE. We can only trust the manager's conscience in estimating the fair value of such opaque accounting figures. Gosh, i have been partly brain washed by Prof JJ!!! AAAAHHHHH!!!!
Go watch the video and be blown away!
http://today.caltech.edu/theater/item?story%5fid=30623
If any of you wants the extracted audio, drop me a mail :)
Charles T. Munger, vice chairman of Berkshire Hathaway Inc., is the business partner of Warren Buffett and a major contributor to Berkshire Hathaway's legendary performance record. Forbes lists the self-made Munger as one of the 400 richest people in the United States.
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