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Here is the review I wrote for Fool. Aug 20, InvestingByTheBooks. If your portfolio looses 50 percent of its value it needs to recover percent to reach the same spot. If you can avoid a fair number of the worst performers in the stock market you will have a good chance to outperform. In looking at the corporate accounting the If your portfolio looses 50 percent of its value it needs to recover percent to reach the same spot.
In looking at the corporate accounting the authors choose to focus on the few warning flags they think most effective and they especially look to aggressive revenue recognition. I think this is wise. An exaggerated sales number will have ripple effects all over the financial statements and since sales is a large number in relation to the earnings, even a small boost to sales without the corresponding costs will have huge impacts on the perceived profitability.
Most of the — still relatively numerous — warning flags the authors present try to detect if aggressive accrual accounting in an improper or unsustainable way has increased sales in the short term. Their favorite measure is Days Sales Outstanding. I quite liked the discussion on how to interpret changes in the measures they look to.
In this genre I still prefer Financial Shenanigans by famed forensic accountant Howard Schilit that John Del Vecchio previously worked for but this book is a welcome addition. Despite the above I hesitated a while to give the book a 4 star rating as it paradoxically left me with a feeling of false advertising.
Apart from the title, the cover also reads A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in your Portfolio and Learn how to detect corporate sleight of hand — and gain the upper hand with smart investing. In reality only about — pages are dedicated to how to analyze earnings quality. To shortly summarize the investment strategy the long side consists of longer-term small-cap value holdings and the short side of companies where the accounting signals future trouble.
The authors advice against simply shorting overvalued stocks in companies with bad business models. The reason is that nothing prevents the stock from getting even more expensive. Instead they wait for signs of aggressive accounting and declining earnings quality and use this as a trigger.
If management has been forced to borrow an increasing amount of earnings from the future, their underlying operations has started to deteriorate and this will show up in the earnings in due time. There are traces of these traits here as well. For a book on accounting and ways to detect if management is cooking the books the writing of this text is breezy and opinionated.
Long only investors are seen with mild contempt, as they obviously cannot know what is best for them. From what they write the authors know what they are doing professionally. However, my suggestion would be to split this book in two and write a more thorough text on the analysis of earnings quality plus one additional on long-short investing.
Apr 27, Harry Harman added it. Think of the South Sea Company bubble of the early s and the railroad and canal companies of the s. Those wishes ride hearses. Some of the best short sellers—whether short-only or managers of a long-short portfolio—miss or do superficial analysis of these details, because they focus on fads, frauds, failures, and the need to be right.
Shorting stock requires a loan of shares from your broker. For the first, use online sources to find the amount of shares shorted of a stock. Compare that to the float. Float means the shares that can be freely traded any given day, excluding restricted shares, insider holdings, and shares held by those with more than 5 percent ownership.
The higher the percentage of shares sold short short interest of float, the greater the risk that any positive news can send shares soaring, because demand will exceed supply. This is a classic short squeeze. No wonder any investor who ignores this metric often endures painful losses.
The second metric is days to cover. Here, divide short interest by average daily share volume traded. This is an indicator of how tough it would be if all the short sellers had to cover at once. If days to cover are low, there is likely enough volume to allow short sellers to exit their positions relatively easily.
If days to cover are many, then the risk of not being able to exit as prices rise is too high, and the dreaded short squeeze looms again. You can lose capital permanently with just one trade like that. The eventual small SEC fine was a mosquito bite. Those who did not see the revenue for the capitalized expenses—the accounting forest for the trees—and shorted AOL got killed one of the very best ways to make money is by avoiding loss.
Changes can come from economic slowdowns, poor collection, and so on, but the practice we want to catch is a change in payment terms that borrows revenue from the future to make this quarter look better than it is. Here is the key point that Wall Street gets wrong almost percent of the time. Often, a company will report higher DSO, implying looser payment terms. Then management will comment in the quarterly conference call that the customers are of high quality, with good credit, so the company expects to collect on the receivables, and there is no risk to collection la la la.
A great introduction to forensic accounting specifically applied to identify candidates for shorts in a traditional long-short portfolio position. With respect to that strategy, the author foc A great introduction to forensic accounting specifically applied to identify candidates for shorts in a traditional long-short portfolio position. With respect to that strategy, the author focuses on identifying two main kinds of financial chicanery, those related to revenue manipulation, and those related to gaming inventory numbers.
Both of these types of these potential illicit gambits are part of a firm's attempts to "channel stuffing", boosting "realized income" for a given quarter, by either accelerating progression in channel or delaying it, from "realizable income" that would have been realized in another quarter. Much of this activity is informed by the nature of contracts on the sales side and shipping on the inventory side. In either case, the firm essentially cannibalized its future revenue to artificially meet some number valued by the street.
Given its relative age, the book does show some interesting "historical curiosities" in the commentary, including the author's analysis of Netflix, which he shorted to great profit during an event in the early s. This aspect of trend in trading is not discussed much in the book, but that can be understood since it's really not in scope and there are probably many other books more suited to detail that topic.
Still, good to have that bit here in this book to lead newer readers in the right direction. Overall great read, will need the charts to understand the text, so straight audiobook won't do it. Also, buy the Kindle or a second-hand physical copy.
Aug 09, Jonathan Waite rated it it was ok. Some decent accounting tips and info, some technical analysis and some self promotion. Apr 08, Tirath rated it liked it. The book is strictly alright. Some of the good points covered are deferred revenues and finding ways of looking at disclosures - something that even experienced investors start overlooking after a while. But the book is a drag because there is a lot of fundamental stuff which would be boring for practitioners.
Somehow he puts in stuff about technicals, value investing, shorting, etc. A good browse - nothing more. Aug 08, Walter Weston rated it it was amazing. Best book on investing I have read in a long time. Lowell Herr rated it liked it Apr 22, Sean rated it really liked it Jan 17, Kejie rated it really liked it Nov 28, Greg Robitshek rated it really liked it Jun 21, Kingmeng rated it really liked it Dec 28, Jakub Taborowicz rated it it was amazing Feb 28, Morrow Bailey rated it really liked it Aug 19, Jason rated it it was ok Jan 02, Bryan rated it liked it Nov 23, Howard Y rated it it was amazing Apr 15, Victor Ahluwalia rated it it was amazing Jul 15, Comment Title.
This site uses Akismet to reduce spam. Learn how your comment data is processed. There are major rumors going round about the sport in general as it looks toward significant rule changes that will take place after the season. There have even been rumors that Liberty was thinking about dumping this investment-after only 2 years of being at it. As a sport at the moment, F1 suffers from being rather processional. Take a comparison between the last race just run at Monaco v the last 30 laps of the Indy no comparison save a bit of drama w Lewis Hamilton being hounded at the end by Max Verstappen.
Very true that Liberty is looking at shaking things up and adding prior race locations such as a Dutch race and possibly a new location in Vietnam. To be sure, large dollar amounts are involved in this sport. Enough for this rant-jl. I have 2 teasers recently from dave forest ala doug casey, first one about electric electricity to counter a Russian threat to the electricity grids in the USA. What he was talking about was the Vanadium rebox battery. For a fee he w ill divulge the name of three vanadium mining stocks.
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Fool Contributor John Del Vecchio is index provider to the Forensic Accounting ETF (FLAG), and co-manager of the Ranger Equity Bear ETF (HDGE). John DelVecchio. Principal at GW&K. GW&K Investment ManagementVillanova University. Collegeville, Pennsylvania, United States connections. John Del Vecchio is the co-founder and co-manager of The Active Bear ETF (NYSE: HDGE) a fund dedicated to shorting individual stocks with fundamental red.