- Hardcover: 288 pages
- Publisher: McGraw-Hill Education (16 October 2012)
- Language: English
- ISBN-10: 0071791973
- ISBN-13: 978-0071791977
- Product Dimensions: 16.3 x 2.5 x 23.6 cm
- Average Customer Review: 1 customer review
- Amazon Bestsellers Rank: #2,03,882 in Books (See Top 100 in Books)
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What's Behind the Numbers?: A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio Hardcover – 16 Oct 2012
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"[An] informative book ... Written in lively prose." Barron's 20130105
About the Author
John Del Vecchio is the cofounder and co-manager of The Active Bear ETF, a fund dedicated to shorting individual stocks with fundamental red flags. Previously, he managed a hedge fund for Ranger Alternative Management, L.P. In addition, he worked for well-known short seller David Tice and famed forensic accountant Dr. Howard Schilit. Del Vecchio coadvises the Motley Fool Alpha long-short newsletter. Tom Jacobs, is an investment advisor and portfolio manager with Echelon Investment Management in Dallas. He applies this book's earnings quality tests to value investing for clients.
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However, the book is not without its drawbacks. The portion of working capital management isn't very clear, and the charts accompanying that section provide little insight into what the authors are referring to regarding "proper" and "improper" working capital management (although they do point out that using the cash conversion cycle is a good indicator of working capital efficiency). The section on cash and accruals is amazingly short for a book about quality of earnings, no mention of how to measure accruals relative to cashflow or assets besides "Cash EPS should exceed or equal net income," and then lists what accruals are, without any further discussion. My biggest issue is that the authors rarely give absolute values of what to look for (What would you suggest is a high percentage of goodwill and intangibles to total assets? Of depreciation and amortization to fixed assets? How much of a percent change in DSO/DSI/etc. would be a red flag? What is too high an amount of inventories as a percentage of revenues from one quarter to the next?), but rather simply states to watch for trends and increasing/decreasing percentages, without any further clarification.
Perhaps the biggest flaw of the book was chapters 7 and 8, which deal with technical analysis and market timing. Both chapters were not only out of place for a piece on earnings quality, but offered only an introduction of sorts to both investing techniques. In my own experience I rarely ever use technical analysis (so maybe I'm biased here), but market timing should only be used by those that have a thorough understanding of the political macroeconomy, there's simply not much of value within the 20 pages or so of each topic. Given how much the authors talked about compiling a long/short portfolio, these chapters would've been better used to discuss how to identify potential short candidates, rather than discussing 50-day moving averages and whatnot. Totally out of place in a book that for the first 6 chapters focused solely on the fundamentals.
Overall, the sections on inventory management and cashflow analysis are certainly worth the purchase, but the fact that 15% of the book is spent discussing topics that have no real relation to earnings quality, on top of their rather vague guidelines on what to look for are ultimately what holds this book back. I would read this in tandem with "Quality of Earnings" and "Financial Shenanigans" for a more complete picture on "quality of earnings."
Second, people with any intention of buying a stock should at least read Chapter 1! This chapter provides a factual basis for reasonable expectations relative to stocks and stock investing. I found it to be a well-rounded presentation of the realities facing anyone who invests in stocks and the challenges to be faced.