Value Ideas Blog
Today we want to take a look at one of the latest books that we have read, namely “What’s behind the Numbers; A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in your Portfolio” which is written by John Del Vecchio and Tom Jacobs. The book is around 265 pages long, well written in a fairly American style and quite easy to understand. As a rating we would suggest 4 of 5 stars.   The book opens with the sentence: “Show me where I’m going to die, so I don’t go there” and that is actually what the book is about. The management of public companies faces enormous pressure to beat Wall Street guidance by a penny and make things look better than they are and therefore weaken their earning quality. “What’s behind the Numbers” tries to show how one can detect weak earning quality and where the management of a company most frequently tries to hide the information that shows their chicanery. The book starts with a few data points from the history and explains that investors tend toward the bias that they are investing mostly in the wrong time, in expensive market environment. The authors of the book try to protect the investor with a shorting mindset which leads to successful investing, simply by avoiding the statistical basement revealed by the date, and the fact that after them overvaluation can continuously be identified. But the authors also state that identifying business models that will fail is extremely difficult; determining when they will fail is even harder, if not impossible. For this reason the authors recommend to wait until there are aggressive revenue recognition, weakening balance sheets, and deteriorating cash flow trends. In a nutshell, wait until there are negative catalysts for profits of a company in the near future, like an increase in inventory. They describe this style of investing as the flip side of “value investing with a catalyst”. The good thing about this investment style is that it doesn’t cost you any money, because of the fact that you can “only win 100% with a short and it doesn’t matter if you start by a stock price of 100 Euro or at a stock price of 50. A lot of successful short sellers didn’t bet against a company on valuation; instead they tried to find potential catalysts which are in their favor. As the authors suggest, the time to sell or short is not when you think a business model can’t survive. The time is when the numbers suggest that management is covering up poor performance and when the stock has already begun to fall.   The approach of the authors and the book focus clearly lie on aggressive revenue recognition practices, but the book also gives you some examples where you should look for business model shorting (look for business models which are dependent on huge leverage).  


  The only thing which I don’t like about this book is the structure of documentation and by that I mean that whenever an example is given, the author states how good his profit was on this short and the fact that the book is a little bit repetitive in some parts. I think the book has taught us some important lessons to avoid losses because of the fact that every blowup which we can avoid improves the performance of our portfolio. And it comes with the message that you have to be aware of the emotion of having to be right. So overall we can wholeheartedly recommend this book if you like to increase your abilities of short selling or avoiding some losses.

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