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Our Mission

New Constructs® aims to help restore the integrity of our capital markets to ensure that the United States remains the most prosperous country in the world (see our blog for more detail on "Why Integrity Matters" and "Why The US Capital Markets Are Important"). The original business plan for New Constructs was titled: "Bringing Integrity to the Capital Markets". We have lived up to that commitment every day since New Constructs was incorporated in July of 2002.

Our comprehensive research holds companies accountable and arms investors with tools for identifying companies that try to exploit the accounting system.

FAQ - regarding our Mission

What Is Market Integrity?
How Is Market Integrity Maintained?
How Does Our Research Fortify the Cornerstones of Market Integrity?
What Issues Does Our Corporate Disclosure Transgressions Report Reveal?
What Is Hindering Market Integrity and Why Are Corporate Disclosure Transgressions Not Being Addressed?
Why Are the U.S. Capital Markets So Important?
How Does Integrity Improve Our Standards of Living?
What Happens When Markets Lose Integrity?
What Do Markets without Integrity Look Like?

What Is Market Integrity?

Markets have integrity when buyers and sellers can trust each other to execute fair deals. Investors tend not to make bad investment decisions intentionally. Usually, investors make bad investment decision because they are misinformed or underinformed by sellers.

Critically, market integrity means capital is allocated rationally and efficiently. See our blog post: How Artificially Low Interest Rates Harm Economies in the Long Term for more details on how misallocation of capital can do serious long-term damage to societies.

How Is Market Integrity Maintained?

Investors are able to trust the markets when these three cornerstones of market integrity are in place:

  1. Accountability for accuracy and completeness of reported financials - companies need to know that their filings are reviewed with a fine-tooth comb to ensure they are deterred from Enron-type misreporting.
  2. Accuracy of profitability measurement - investors need to know that they can trust the profitability measures provided by the market. Reported Earnings and Income Statements have never and were never intended to fulfill this purpose. In reality, "earnings" are manipulated and "managed" to dupe investors more often than not.
  3. Transparency of valuation measures - there are myriad approaches to valuation, which often confuse investors. Many of the most common valuation techniques (e.g. Price-to-earnings ratio) are based on unreliable information such as earnings and are subject to manipulation. In truth, and as Warren Buffett has stated repeatedly, there is only one true way to value any investment - measure the present value of its future cash flows.

How Does Our Research Fortify the Cornerstones of Market Integrity?

  1. Accountability - hold companies accountable for all of the three issues listed above
    1. Provide investors with a list of companies that commit Corporate Disclosure Transgressions (report available in our Free Archive).
    2. Write reports and work with the media and Congress to bring light to disclosure transgressions. See News for many articles and interviews on disclosure transgressions. See Investment Perspectives for many reports on the same topic.
    3. Rigorously analyze SEC filings to identify all of the existing and potentially new disclosure transgressions that exist in corporate financials.
  2. Accuracy - hold companies accountable for the accuracy of reported financials
    1. Provide investors with reports on the true profitability of 3000+ companies by taking into account ALL relevant information, not just reported earnings.
  3. Transparency - show assumptions behind all profitability and valuation measures
    1. Profitability: each of our Company Valuation Reports provides a summary of all the adjustments (Appendix 2) we make to reported financials as well as a detailed reconciliation of Net Income and Economic Earnings (Appendix 3).
    2. Valuation: our reports (pages 6-7 and Appendix 8) and Company Models enable investors to measure, specifically, the future financial performance required to justify stock prices. For details on why this approach to valuation is more transparent and effective than picking target prices, see the "Cash Is King - The Truth About the Value of Stocks" in our Help Section.

What Issues Does Our Corporate Disclosure Transgressions Report Reveal?

  1. Omission of required disclosures - such as entire sections of the Financial Footnotes
  2. Unethical assumptions used in the calculation of earnings - such as volatility estimates that are far below their true level in order to reduce the cost of option expense reported in earnings
  3. Exploitation of grey areas in accounting - such as the use of operating leases to hide debt off-balance sheet
  4. Misrepresentation of profitability - the heavy reliance on reported EPS could be mitigated by offering a more comprehensive and standardized measure of profitability for all U.S. stocks

What Is Hindering Market Integrity and Why Are Corporate Disclosure Transgressions Not Being Addressed?

  1. Accountability
    1. Regulators, rating agencies and most investors are ill-equipped to keep up with Wall Street's constantly evolving financial machinations.
    2. Companies, except in a few rare cases, remain undeterred from Disclosure Transgressions (a free copy of our report to Congress is in our Free Archive).
  2. Accuracy
    1. In reality, reported earnings are manipulated and managed more often than investors realize.
    2. Wall Street has created myriad approaches to valuation in order to confuse investors. There is no generally accepted standard for valuing stocks.
    3. Lack of standard measures of profitability and valuation enable sellers of stock to engage in all sorts of financial engineering.
  3. Transparency
    1. As the primary providers of financial information, Wall Street and Corporate America have no incentive to provide better information to investors. They have made lots of money selling stocks and are happy with the current system.
      1. The financial sector lobby spends about $1mm and retains about 4 lobbyists per congressperson per year, according to many sources including Larry Summers; see his interview on ABC.
    2. Not enough people understand how to get to the truth behind profitability and valuation; so no one knows what to ask for.

Why Are the U.S. Capital Markets So Important?

As the single, greatest resource allocation mechanism in the world, our markets provide the greatest share of the financial fuel required to improve and reinvent the way the world lives and operates. It is no accident that many of the greatest, most innovative companies in the world reside in the United States. They are here because our markets award the most capital to the best businesses - more efficiently and with greater scale than anyplace else in the world.

Hosting the greatest, most innovative companies in the world enables the United States to benefit first and foremost from their inventions and the prosperity they create not only in the form their innovative products but also in the jobs they create and workers they attract from around the world.

The fact that the United States is the destination of more foreign investment than any other country in the world by a long shot (click here for FDI comparisons of the major countries) proves that US capital markets (debt and equity) are - currently - the largest and best in the world.

It is important to note that we earned this distinction because our liberal, democratic society has empowered, better than any other, the meritorious provision of resources, i.e. allocation of resources is based on the expected utility of the endeavor requiring the resources. Thanks to our founding fathers, our society was structured in a way that enables our markets to award capital objectively and meritoriously to where it expects to reap the largest return on its investment. To contrast, our society discourages allocation of capital based on nepotism, favoritism, fraud, fanaticism and bribery. These allocation methods decrease the efficiency of capital markets.

How Does Integrity Improve Our Standards of Living?

As the single, greatest resource allocation mechanism in the world, the U.S. capital markets are the primary driver of increases (or decreases) in standards of living for the world. When our markets lack integrity, they lose efficiency, and resources are misallocated. When resources are misallocated, they are often lost or destroyed by those seeking personal gain at the expense of others (e.g. Madoff, funding of terrorists, Wall Street banks that profit from misleading investors).

The grand improvement in standards of living today versus a few hundred years ago come not from the Earth having more resources (petroleum reserves are not greater, forests are not thicker, coals mines are not more full) but from the human ability to do more with less, i.e. allocate resources to more productive uses.

New Constructs stands for what is most important to the prosperity of the United States: the efficient allocation of resources, especially financial capital. In our opinion, the predominant force behind the rise of the United States from newcomer to the world stage just a few hundred years ago to the most powerful country in the world is our ability to do more with less, i.e. allocate capital to higher utility opportunities than other countries.

What Happens When Markets Lose Integrity?

When markets lose integrity, capital is misallocated to low or negative-return investments, i.e. money is wasted. When money is wasted, it loses value. In addition, bad investments lower the overall return on investment for an economy or society. This process does serious long-tem harm to societies.

A little-known risk in the capital markets system is that well before people take to the streets to protest injustice, they take their money out of the markets. They do not warn or announce such redemptions, it happens swiftly and forcefully. Confidence craters. Vast amounts of wealth are destroyed. By the time we get protests, the big damage is done.

Fairness is woven into the social fabric of our country. Our capital markets, judicial and electoral systems have set new standards of success for the rest of the world because the American people believe they can rely on the integrity of those systems. The right to free speech allows the American people to protect the integrity of these systems, and we have seen people take to the streets and protest in response to miscarriages of justice.

And as many of you know from personal experience, lost trust and integrity take a long time to rebuild - like the saying: it takes years to build character, but only a moment to lose it.

What Do Markets without Integrity Look Like?

Markets without integrity are inefficient and can lead to widespread suffering. Think: the former USSR.

In the United States, we have only seen markets without integrity on a fairly small scale. In those instances, they look like Bernie Madoff, Enron, WorldCom, mortgage markets in certain areas, etc. When resources are misallocated, they are often lost or destroyed by those seeking personal gain at the expense of others (e.g. Madoff, funding of terrorists, Wall Street banks that profit from misleading investors).