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What’s Behind the Numbers – Highly Recommended
What’s Behind the Numbers by John Del Vecchio and Tom Jacobs is a great book on the subject of forensic accounting, protecting your portfolio and financial statement analysis.
The book’s aim is to provide a “Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio”.
Although this is a value book, Del Vecchio is also a short seller and trader, so you get some interesting viewpoints, but it all comes back to value in the end.
One of the main topics of the book is on identifying companies in your portfolio that are showing red flags.
It’s true that companies practice dishonest accounting. The principle here is to look for companies you own that may be using aggressive accounting practices or number manipulations to please Wall Street.
What’s Behind the Numbers provides fantastic guides on what to look for in the cash flow statement, income statement and balance sheet. Even if your accounting isn’t top notch, it’s easy enough to understand and follow along.
What Accounting Tricks are Being Used?
There are a myriad of financial shenanigans that companies employ just to meet their quarterly earnings.
There are companies where they will give their customers a huge discount in order to grow their income before the end of the quarter. Companies and sales people aim to inflate number at the end of a quarter. For them, the higher the better. For shareholders, this is bad news as it sacrifices future revenue.
Tips like this is what this book is about. Packed with practical advice.
If I had to sum up the book in three words it would be “avoid huge losses.”
When you invest and smell something rotten in your portfolio, throw it out and leave it to stink somewhere else.
What’s Behind the Numbers also looks at conventional financial detective ratios like Days Sales Outstanding and Days Sales in Inventory. Metrics that are a part of the cash conversion cycle.
Is the Book for You?
In the book, Del Vecchio talks about how avoiding big losses has a higher positive impact in the long term than generating large gains. He introduces a shorting strategy based on fundamentals to do this.
The book is well-written, easy to follow and best of all, it is practical. You can immediately start applying what you read.
You do need a little fundamental knowledge and understanding of the basics to financial statement analysis to really get the maximum benefit out of it, but it is a book you will want to keep at your side for sure.
To read more about what’s in the book, read this interview with co-author John Del Vecchio. It’s a great interview with lots of insight and thoughts on how to position your portfolio.
Bonus: 15 Red Flags to Look Out for
Here are some tips from Old School Value on what red flags investors should look out for.
- Vanity metrics and useless language in the SEC filings to confuse investors
- New footnotes and disclosures that happened years ago start to appear
- Counting revenue when products are simply shipped, or using a percentage-of-completion method
- Press release numbers have a huge gap between the 10-K/10-Q
- Perennial special charges or gains
- Related but small party transactions between officers and directors
- Company being run like a family business
- Current or former directors and executives being offered lucrative consulting contracts/severance agreements
- Big increases in director’s fees or perks
- Audit committee seems inattentive
- Audit firms are paid an increase of non-audit fees
- Interest rate return on pension fund seems unusually high, or when 20 percent or more of operating income comes from pensions
- Off-balance sheet obligations that were not previously disclosed
- When you see the words “formal” or “informal investigation,” “subpoena” or “Wells notice”
- Unusually low or unusually high income tax rates where the norm of rates usually fall between 30 and 40 percent
What is Old School Value?
Old School Value is a suite of value investing tools designed to fatten your portfolio by identifying what stocks to buy and sell.
It is a stock grader, value screener, and valuation tools for the busy investor designed to help you pick stocks 4x faster.
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