Each Saturday morning I look forward to my electronic copy of Barron’s. It is to those who enjoy a morning cup of coffee and the paper my equivalent enjoyment.
Barron’s offers a section called “other voices” which is the ability for others to write a 1000 word essay or less with their thought provoking views. This week Jack Adamo wrote a piece on adjusted earnings versus GAAP. How should investors view “adjusted earnings?”
While I don’t know Jack Adamo, I can say that now days there are so many adjustments, for pension funding, mergers & acquisitions, stock compensation, severance adjustments, asset write-offs, restructuring, etc. In this fast past business environment, there are far too many of these to say that they are extraordinary.
In fact, as I look at companies and their financial discipline, I am looking five plus years back keeping all of these adjustments included in the calculation. It is part of the business of being an investor and owner. As I tell my team, if we have to use “yeah, but” to explain things then we have lost the reader or listener. As for investments, I want to keep my world as simple as I can. In my view, a true restructure, asset write-down are decisions that were made some time back that are now having a negative consequence. We should all be held to our decisions….both the excellent ones and the not so good ones. Excluding what we don’t like and including what we do seems to be quite difficult for an investor to keep things straight. I don’t know about you, but I am trying to figure out how to keep things simple.
In my view, while GAAP is not perfect at least it is consistent across the board and I can simply adjust for the known GAAP deficiencies instead of all the one-timers across the companies I am invested in. To be clear, I invest in good well run companies with strong managers that think long term. So this is not a knock on my investments or the CEO’s that run these companies.
Measuring short-term vs. long term results tends to produce tendencies and “one-timers” exclusion could be tenancies in this business. As Investors we just have to be mindful of that.
One of the books on my list of reads this year:
Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports
by Howard Schilit and Jeremy Perler.
I know what you are thinking….but investing and reading are my Saturday cups of coffee.