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One of the reasons that I invest most heavily in overseas markets is that the mantra that you can depend on corporate financial statements from US companies is simply no longer true.

Since 2000, the regulators have stopped regulating and the auditors have stopped auditing. Since Enron, not a single CEO or CFO of a major US corporation has goen to jail -- even though they have practiced accounting fraud on a scale un-imagined 10 years ago.

Do you really believe that the CFO's of our financial institutions had no idea that the mortgages they were writing and reselling were worthless pieces of paper?

Plus, as a former accountant, I can assure you that it is only the accountants that really know what is going on in a corporation. Reading a financial statement is a lot like trying to guess the size of an iceberg from what you see above the waters...

So, the other risk reductuion strategy that I use is to invest mostly or solely in equity funds so that any single company comprises less than 1% of my holdings. In addition, by using mostly actively managed funds, I have the advantage that the fund manager, if he is doing his job can actually visit the corporation he is investing in and interview the management. (Sort of like looking under the water at the rest of the iceberg).

That doesn't eliminate corporate risk -- but it does tend to reduce it.

While that kind of strategy tends to reduce the chance of me seeing any large gains, I am hoping that is also reduces the chances that I will incur large, irrecoverable losses.

posted about 1 year ago by George from Pennsylvania

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