Some of the red flags at Big Un were obvious. Perhaps the biggest was the change in auditor, from PKF to the highly illustrious accounting firm Rothsay Resources. And the business model was sketchy. There were “characters” involved. The stock failed the sniff test.

But much of what has been uncovered by the Australian Financial Review’s excellent expose seems to be intentional misrepresentation. That’s not easy to find as an external investor with limited resources.

Still, there is one lesson we can all take out of the saga: when it comes to investing, there are no fixed rules.

I know, I know. Warren Buffett’s number one rule is never lose money. His number two rule is never forget rule number one. My only rule is that, when logic demands it, you should be prepared to break every single other rule. Even Buffett’s number one*.

The one thing about Big Un that tripped many was the copious growth the company was reporting in its quarterly cashflow statement. The old saying goes “earnings can be faked, but cash flow never lies”. Except that it does. And apparently, in this case, intentionally so. And that’s the problem with all investing rules. While they work in general, it is the exception that brings you unstuck.

Learn the rules. Sometimes apply them. But there is no substitute for independent thought and rigorously applied logic.

*Firstly, I think this is age dependent. If you are in your early twenties and don’t have a lot to lose, be prepared to lose it. The investment will be worthwhile. Secondly, as long as portfolio allocations are managed sensibly, being prepared to lose a little money for the chance to make a lot has been a very successful investment strategy.

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Hugh Dive

Great note Steve. Earlier this week we were looking to do a piece combing through BIG's Appendix 4Cs and to over the last year to try find some obvious signs for retail investors that they should have concerns, without much success. The quarterly cash flows appeared strong and the only sign we could find was the categorisation of operating cash flows as "Receipts from customers and other sources" - not really massive warning sign when these accounts were examined in mid 2017. Hugh

Will Hart

Hugh/Steve, I think the only warning signs available to external investors was the very large discrepancy between reported ARPU (~7-8k), up front cash receipts per user (~10k) and the packages actually available for purchase per the BIG website and product page (~1-4k pa). In addition, the company undertook numerous supplier payments as scrip at huge discounts, which cost many multiples of what a cash payment would have incurred. Both factors make it questionable as to the 'quality' of the cash flow being reported. Will

Steve Johnson

Good points. I didn't ever spend much time on it. If the language is promotional, I give it a miss.