Archives for posts with tag: Investing

As an accountant and CPA, I always thought I understood basic financial concepts. Net Earnings was computed by deducting all your expenses from Sales. And Cash Flow was, well, cash flow, or your Net Earnings plus Depreciation. These were defined by generally accepted accounting principles or GAAP and used to publish a firm’s financial results.

Well, guess what? That is not the way it is anymore. I started to discover this when some of the young people I advise go to work for firms like Salesforce. For many high growth technology firms, like this one, there really aren’t much Net Earnings anyhow and they even report Sales in ways I was never taught!

So recently the Wall Street Journal had an article called “Fanciful Measures of Profit.” This trend does go back to my days in the 1990’s at USG Corporation. USG had borrowed huge sums of money and due to the interest expense (and a slump in the construction markets) we had no earnings. So we reported EBITDA, Earnings before Interest, Taxes and Depreciation. As their CFO, I would joke to investors that when you have no earnings, you report EBITDA instead. My old friend, Warren Buffet’s partner, Charlie Munger, called these “bullshit earnings”, and he was not far off. But the fun did not end there!

The Journal reported that this year alone, companies have filed 450 documents with the Security Exchange Commission, SEC, with variations of my old EBITDA. A popular one is EBITDAO which adds back the cost of stock options issued to management. There is also ones that add back pension cost, leasing cost, exploration costs and almost anything else you can dream up. Technically, all these so-called financial measures must be shown with the traditional GAAP reported earnings. But in quarterly earnings calls and meetings with investors, firms primarily stress these adjusted earnings calculations because it makes them look better. And stock analysts have adapted and now use many of these new earnings measures when they review a firm and recommend their stock.

I am having a hard time with all this. I was taught that, in the end, all firms need to make real net earnings and to generate cash flow to survive and grow. But today companies get around this by borrowing money and issuing more stock. And if the firm, like Salesforce, is in a trendy field like software platforms on the cloud and is growing rapidly, no one seems to care if they have GAAP profits or not. Salesforce stock has climbed over 80% in three years without much real Net Income at all. This was also the story of high sales and stock growth without earnings for years for companies like Amazon and Facebook.

So what to do? Every investor needs to decide for themselves. For every Amazon, Facebook or Salesforce that soars and succeeds, there are dozens of firms that fail. Or, heaven forbid, the next great idea comes along and wipes out the competitive advantage, market share and quickly the value of their stock!

But I have decided that even an old CPA needs to be open to the way this new economy of ours is working and to make some investments in firms that may not have met my conservative old standards. After all, my wife, Tricia, is the one who insisted in 2004 we buy stock in some small computer firm called Apple! (We should have bought more!)

Only time will tell if this new investment approach works!

The famous stock investor, Peter Lynch, said to “buy what you know”. The Wall Street Journal ran an interesting article about that with some of the pros and cons. The article was aimed more at consumer companies and their stock but it can relate to a broader range than that.

One fund manager in the article realized that his teenage daughter loved a retail jewelry company. Before he could invest, the company filed for bankruptcy and closed all their stores due to on-line competitors. Moral: be very cautious when investing in any teenagers’ fascination of the moment.

Another investor found a number of West Elm and Williams Sonoma catalogs and boxes that his wife had ordered being delivered to his new house. He bought the stock which proved to be a timely investment over the last couple of years. Moral: wives know things their husbands do not!

This brings me to my wife, Tricia. She has her own investment account. When we meet with our financial advisor all of her stocks are up from when she bought them. My stocks are, well, varied might be a good word.

But it may be useful to look into this in a little more detail and see what and why Tricia invests in various companies.

Tricia bought the stock where her brother works, Honeywell, a few years ago and it has more than doubled! But J.C. Penny, where her sister worked, went south when the guy from Apple joined and tried to change the place. (To be fair, her sister retired about then and Tricia told me to sell but I was slow!)

Her stocks also include retailers that she buys from like Under Armour, Urban Outfitters and William Sonoma, mentioned above. All have made money. She also owns two restaurant groups that we and our friends frequent, Panera Bread and Blooming Brands which owns Outback, Bonefish and Flemings . These have also at least doubled in value.

But her investment grand slam was buying Apple stock. She insisted on this after first buying an early G4 laptop for herself on Valentine’s Day in 2002. At the time, everyone, from our financial advisor, to our Banker,  to me strongly suggested she Not buy this small, second level company. Well, you know the rest. Moral: for business and life stories listen to me, for stocks ask my wife.

The overall message here is that I have learned that buying what you know or what you like can be a great strategy or, better yet, a great part of your overall investment strategy. I have also been around long enough to add that Buying things is often the easy and fun part. Selling things and knowing when to sell is a lot harder to do. This is true of stocks, companies or even collectibles. So, like with most things in life or business, think about it before you do it!