We’ve pointed out the flaws in the price to earnings (PE) ratio many times before. Chief among these flaws is the fact that the accounting earnings used in the ratio are unreliable for many reasons:
Buried in the footnotes and MD&A, you can find where reported expenses understate true costs, red flags for earnings manipulation and significant differences that need to be reconciled when comparing companies. If you want to understand the underlying economics of the company’s business, you have to understand its accounting policies.
Recently, the SEC gave up trying to enforce its auditing rules in China. In this podcast, CEO David Trainer will explain how the SEC’s weakness on this key issue puts investors in Chinese companies in danger.
CEO David Trainer discusses how to manage risk to obtain high returns based on low market expectations.
Barron’s featured New Constructs for the eighth time this past weekend.
The reason we focus on Economic Earnings as opposed to Accounting Earnings is because Accounting Earnings are subject to too much manipulation – as Charlie Munger states below. This problem is not going away anytime soon.
HIDDEN GEM: Our detailed valuation model shows that IBM grew its “economic” profits more than it accounting profits during its last fiscal year. Economic profits rose by $1.15bn while accounting profits rose by $1.09bn.