Barron’s: Accounting Games Companies Play

Barron's (newspaper)
Barron’s (newspaper) (Photo credit: Wikipedia)

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.

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Top Five Wealth Building Factors

Net worth of the United States by sector as a ...
Net worth of the United States by sector as a fraction of GDP 1960-2008 (Photo credit: Wikipedia)

Today I found this Survey $25 Million Plus Investors 2012 by Spectrum Groups.  The site had some good insights that I would like to share plus I added my two cents.  Here are their top five factors:

5)  In the Right Place at the Right Time

Being in the right place at the right time.  For large investors of $25M or more, being at the right place at the right time was more important to frugality.  My two cents: Being at the right place happens probably more than you think.  Are you reading up on what is going on in the world?  Do you associate with similarly situated and minded folks as your aspiration and your interest?    I do agree being frugal is important…no doubt.  Living below your means is how you take some income and convert it into investments.  This is how you create momentum and with momentum comes the ability to cease an opportunity when the right one shows up.

4)  Taking Risk

Ah…the difference between high net worth and ultra-high net worth is the latter ranks taking risker higher than those with with investments less than $25M.  Do you know your risk tolerance level?  That is going to be important if you are going to leverage risk into your investment strategy.

3)  Smart Investing

In a recent study by Spectrum Group, millionaires, regardless of level agreed Smart Investing was the third most important factor. From my perspective, allocating your resources into asset classes and vehicles is such a critical decisions that requires thorough analysis and consideration.  If someone tells you it is a good thing and yet you know nothing about it….run away from yourself and your tendencies to give your money to someone else to invest.  Knowledge is Power and being knowledgeable about your money and investments is how you win.

2)  Education

Higher Education and Advanced Education is an important factor.  I would add to this category that we should include daily reading materials on global/geopolitical, political, and economics in order to stay knowledgeable.

1)  Hard Work

Millionaires, regardless of level, credit their wealth to hard work.  I do think, also, the harder your work the luckier you get which loops #1 to #5.

And for me, I have added an extra one…number zero, where it all begins.

0)  All People can Make Money, it Takes a GENIUS to Keep It!

Be strategic on what you make, how you spend it and what you invest in.  Live below what you need, and be respectful of the economy, it can get shaky and you have to be ready for what it will bring you.

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