Limited Partners are often misled by emerging managers with a short track record of a few successful deals. With a small sample size (e.g., 5-6 deals), it's impossible to distinguish between skill and pure luck—the equivalent of flipping heads five times in a row.

Jeff Aronson warns that prolonged success breeds dangerous overconfidence. When an investor is on a hot streak and feels they can do no wrong, their perception of risk becomes warped. This psychological shift, where they think "I must be good," is precisely when underlying risk is escalating, not diminishing.

The dot-com era's accounting fraud wasn't one-sided. Professional investors and Wall Street created a symbiotic relationship with executives by demanding impossibly smooth, predictable quarterly earnings. This intense pressure incentivized widespread financial engineering and manipulation to meet unrealistic expectations.

Identifying flawed investments, especially in opaque markets like private credit, is rarely about one decisive discovery. It involves assembling a 'mosaic' from many small pieces of information and red flags. This gradual build-up of evidence is what allows for an early, profitable exit before negatives become obvious to all.

Successful investing isn't about being right all the time; it's about making your wins exponentially larger than your losses. Top investors like Paul Tudor Jones only enter trades where the potential reward is at least five times the risk, allowing them to be wrong often and still profit.

Bubbles provide cover for fraudulent activities, as rising prices mask underlying problems. In cases like the South Sea Company and Railway Mania, it wasn't until after the collapse that the full extent of financial engineering, corruption, and deception came to light, by which point it was too late for most investors.

A common investor mistake is underwriting a deal that requires 15-20 different initiatives to go perfectly. A superior approach concentrates on 3-5 key value drivers, recognizing that the probability of many independent events all succeeding is mathematically negligible, thus providing a more realistic path to a strong return.

A core discipline from risk arbitrage is to precisely understand and quantify the potential downside before investing. By knowing exactly 'why we're going to lose money' and what that loss looks like, investors can better set probabilities and make more disciplined, unemotional decisions.

A core conceit of fraud is faking business growth. Consequently, fraudulent enterprises often report growth rates that dwarf even the most successful legitimate companies. For example, the fraudulent 'Feeding Our Future' program claimed a 578% CAGR, more than double Uber's peak growth rate. This makes sorting by growth an effective detection method.