Livestock Trading Thread: Baa or better

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Elephanthead: Sep 11, 2008; Toilet Rascal

My wife says buy Toyota. I think it is because she likes Toyotas.

# ? Mar 19, 2016 16:45

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# ? Jun 1, 2024 08:17

Hambilderberglar: Dec 2, 2004

Hi BFC, Short time listener, first time caller. I'm not sure if I should ask this here, somewhere else or make a thread, but does anyone have experience with LYNX as a broker?
I've read/am reading the BFC canon and I'm in Europe so my options seem to be generally not as good, but anything is a step up from keeping my money in my mattress if I plan on retiring ever.
I've been looking around on what my options are and I saw them namedropped on a link I found on jlcollinsnh. They seem to be (one of the only) the only one that have access to any of the Vanguard funds that are mentioned so often in my neck of the woods, but I'm leery of sending them thousands of my Euros without at least checking in here.

# ? Mar 19, 2016 18:19

Admiral101: Feb 20, 2006; RMU: Where using the internet is like living in 1995.

mike- posted:

This is a load of bullshit. There is a ton of discretion in d&a for financial reporting. Further, d&a presented for financial reporting is completely different than d&a for tax purposes, and when you are considering value you would want to use tax basis d&a as that is what would effect cash-flows. That alone makes the d&a presented for financial reporting relatively worthless, without even getting into the discretion valuation firms and audit firms have in determining the useful lives of amortizable intangible assets.

Adding back non-cash expenses and non-recurring expenses isn't controversial in the least bit. Comparing two otherwise identical companies where one has a large goodwill impairment and the other doesn't is a great example of why gaap measures aren't useful for valuation purposes without adjustments. I see and adjust for non-recurring income all the time, so I don't agree with your characterization that it's rare.

I didn't say to blindly accept managements adjusted figures - look back at my first post. But just blindly using GAAP figures is equally bad if not much worse. GAAP measures accounting profits, not economic profits, and the two are fundamentally different.

Can I ask your background here? Do you actually work in public? Or are you talking from the perspective of internal accounting of a public company? Please educate me on how financial reporting depreciation under GAAP is not based on the historical cost of the asset. Please give an example of how management can manipulate depreciation/amortization under GAAP under a given year. Yes, intangibles get weird when it comes to useful lives. edit: to clarify, I specifically have no idea what you're talking about when you say financial vs tax depreciation when it comes to cash flows. Both are based on historical cost. The only difference is going to be timing.

I'm also interested in what you define as "economic profits". When a company is taking impairment charges and large depreciation write-offs, there's definitely a reduction in both accounting and economic earnings in the company. Let me give an example here to illustrate what specifically annoys me about analysts and investors that trash GAAP:

IE: these oil service companies have been writing down large amounts of assets leading to huge GAAP EPS losses. But these GAAP EPS losses aren't being advertised as much as the adjusted figures which show these companies losing like 10 cents a share or whatever due to all of the impairment addbacks. The impairment doesn't mean these companies are suddenly free of all the debt they loaded on in order to acquire these assets. These impairments represent very real cash outflows (in terms of debt repayments). These just happen to show up on a different line in the cash flows statement. What's ultimately going to happen is these companies will be posting $1 "adjusted EPS" losses for a couple years before filing for bankruptcy and restructuring. This, to me, is why I consider adjusted figures to be ripe for abuse much more than GAAP. And is why I'm glad the SEC is finally starting to look into these "adjusted EPS" figures that get thrown around left and right.

Like I said before, I agree with you that evaluating R&D/tech/REITs using GAAP measurements makes no sense. But let's not kid ourselves: nobody evaluates tech and R&D companies on their fundamentals anyway. Fortunately, the majority of companies are not R&D/Tech/REITs.

Admiral101 fucked around with this message at 21:45 on Mar 19, 2016

# ? Mar 19, 2016 21:26

mike-: Jul 9, 2004; Phillipians 1:21

Admiral101 posted:

Can I ask your background here? Do you actually work in public? Or are you talking from the perspective of internal accounting of a public company? Please educate me on how financial reporting depreciation under GAAP is not based on the historical cost of the asset. Please give an example of how management can manipulate depreciation/amortization under GAAP under a given year. Yes, intangibles get weird when it comes to useful lives.

I'm also interested in what you define as "economic profits". When a company is taking impairment charges and large depreciation write-offs, there's definitely a reduction in both accounting and economic earnings in the company. Let me give an example here to illustrate what specifically annoys me about analysts and investors that trash GAAP:

IE: these oil service companies have been writing down large amounts of assets leading to huge GAAP EPS losses. But these GAAP EPS losses aren't being advertised as much as the adjusted figures which show these companies losing like 10 cents a share or whatever due to all of the impairment addbacks. The impairment doesn't mean these companies are suddenly free of all the debt they loaded on in order to acquire these assets. These impairments represent very real cash outflows (in terms of debt repayments). These just happen to show up on a different line in the cash flows statement. What's ultimately going to happen is these companies will be posting $1 "adjusted EPS" losses for a couple years before filing for bankruptcy and restructuring. This, to me, is why I consider adjusted figures to be ripe for abuse much more than GAAP. And is why I'm glad the SEC is finally starting to look into these "adjusted EPS" figures that get thrown around left and right.

Like I said before, I agree with you that evaluating R&D/tech/REITs using GAAP measurements makes no sense. But let's not kid ourselves: nobody evaluates tech and R&D companies on their fundamentals anyway. Fortunately, the majority of companies are not R&D/Tech/REITs.

I work in valuation for an investment bank. One of the things I do is value intangible assets for purchase accounting. I can make a decision on the useful life of an intangible that changes its amortizable life for financial reporting purposes, and someone else could easily and justifiably come up with a materially different life and value. These decisions will make significant impacts on how public companies report under GAAP. But anyways, none of that matters for value, because the financial reporting amortization isn't related to actual economic profits, the tax amortization is and you don't see that in GAAP.

Your example is dumb as hell - the asset impairment doesn't represent real cash flows in terms of debt repayments, the debt repayments themselves reflect the cash flow. Of course the impairment doesn't mean the company is free of any debt, but if there is a debt repayment its going to be a cash flow whether or not the asset is impaired. The impairment itself has nothing to do with a companies cash flow - it's a non-cash expense. You don't pay the impairment fairy when you impair an asset. Now, do changes in a company's economic profit trigger impairments? YES. But GAAP doesn't measure this, and isn't intended to. The impairment itself is a mechanism to tie the income statement and balance sheet.

I don't care if you consider adjusted figures more ripe for abuse than GAAP. Adjust the earnings yourself.

# ? Mar 19, 2016 22:03

Admiral101: Feb 20, 2006; RMU: Where using the internet is like living in 1995.

mike- posted:

I work in valuation for an investment bank. One of the things I do is value intangible assets for purchase accounting. I can make a decision on the useful life of an intangible that changes its amortizable life for financial reporting purposes, and someone else could easily and justifiably come up with a materially different life and value. These decisions will make significant impacts on how public companies report under GAAP. But anyways, none of that matters for value, because the financial reporting amortization isn't related to actual economic profits, the tax amortization is and you don't see that in GAAP.

Your example is dumb as hell - the asset impairment doesn't represent real cash flows in terms of debt repayments, the debt repayments themselves reflect the cash flow. Of course the impairment doesn't mean the company is free of any debt, but if there is a debt repayment its going to be a cash flow whether or not the asset is impaired. The impairment itself has nothing to do with a companies cash flow - it's a non-cash expense. You don't pay the impairment fairy when you impair an asset. Now, do changes in a company's economic profit trigger impairments? YES. But GAAP doesn't measure this, and isn't intended to. The impairment itself is a mechanism to tie the income statement and balance sheet.

I don't care if you consider adjusted figures more ripe for abuse than GAAP. Adjust the earnings yourself.

Glad you could clarify you were talking about specifically about amortization and not depreciation. Also glad you could clarify that people like you are coming up with the amortizable lives, as opposed to management. It's reassuring that these calculations are likely reviewed by auditors when they're material. And it's likely that upper management isn't plugging amortizable lives in order to hit GAAP EPS targets. Does management often challenge your amortizable life calculations when it turns out they're about to report an earnings miss?

I realize that a $1M impairment does not equal a $1M cash outflow. It does, however, reflect a very real $1M hit to the economic value of the company. This $1M hit to the value of the asset (relative to what was originally paid) is reflected by reducing GAAP net income by $1M. In my mind, a company's net income should be the change in the economic value of the company (edit: I realize GAAP EPS does reflect asset value appreciation, which is why I said it's not appropriate for REITs). That is why GAAP impairments exist - to show that the company's assets are suddenly worth $1M less even though no cash transaction took place. But adding back the impairment to adjusted earnings does not show this economic weakness in the company. Which is how you have energy companies that are going to show -$2/share of adjusted loss when GAAP says it's more like -$30/share. Am I misunderstanding what you're trying to express about impairments?

And telling investors to "adjust the earnings yourselves" is all fine and good. But the SEC was kind of created to be sure corporate management wasn't out selling snake oil to the public and the investor class. I'm sure you're happy with the wild wild west financial reporting of "adjusted earnings" and "figure it out yourself" - but I personally prefer when the wild wild west reporting stays in the supplemental information, and not at the forefront of these earnings calls.

Admiral101 fucked around with this message at 23:24 on Mar 19, 2016

# ? Mar 19, 2016 22:50

mike-: Jul 9, 2004; Phillipians 1:21

Admiral101 posted:

Glad you could clarify you were talking about specifically about amortization and not depreciation. Also glad you could clarify that people like you are coming up with the amortizable lives, as opposed to management. It's reassuring that these calculations are likely reviewed by auditors when they're material. And it's likely that upper management isn't plugging amortizable lives in order to hit GAAP EPS targets. Does management often challenge your amortizable life calculations when it turns out they're about to report an earnings miss?

I realize that a $1M impairment does not equal a $1M cash outflow. It does, however, reflect a very real $1M hit to the economic value of the company. This $1M hit to the economic value of the asset is reflected by reducing GAAP net income by $1M. In my mind, a company's net income should be the change in the economic value of the company. That is why GAAP impairments exist - to show that the company's assets are suddenly worth $1M less even though no cash transaction took place. But adding back the impairment to adjusted earnings does not show this economic weakness in the company. Which is how you have energy companies that are going to show -$2/share of adjusted loss when GAAP says it's more like -$30/share. Am I misunderstanding what you're trying to express about impairments?

And telling investors to "adjust the earnings yourselves" is all fine and good. But the SEC was kind of created to be sure corporate management wasn't out selling snake oil to the public and the investor class. I'm sure you're happy with the wild wild west financial reporting of "adjusted earnings" and "figure it out yourself" - but I personally prefer when the wild wild west reporting stays in the supplemental information, and not at the forefront of these earnings calls.

While I was talking about amortization in my example, similar problems exist with depreciation. Amortization and depreciation both accounting concepts that are guided by accounting conventions, and often bear little to no resemblance to the economic life of an asset. The problem with these is not a management team gaming the life of an asset in anticipation of earnings misses, the problem is that depreciation and amortization treatment can vary significantly between companies which is why comparing a figure including them without adjusting tells you little to nothing. And in the end, this is a financial reporting concept; the value impact of depreciation and amortization relates to how they are treated for tax purposes, which has no connection to the treatment for financial reporting.

Here is a another example of why GAAP earnings don't reflect economic profits: Lets assume there are two identical companies, both with the exact same cap structure, the same growth, the same risk, the same revenues, costs, the same everything. But assume one had acquired some part of its business and had to book goodwill and intangibles, while the other didn't. So one of the two has a larger asset base (from goodwill and intangibles) on its balance sheet as a result of the purchase accounting. And let's assume they had recently had the exact same problem in their business that impacted their operations. This event was significant enough that it triggered a goodwill impairment for the respective company, and as a result they had to book an impairment loss of $20 million. So when you look at both companies GAAP earnings, you see that one is $20 million lower than the other, despite the fact that they generated exactly the same revenue, they have the same cost structure, they have the same debt payments, etc. The economic profits are identical, but the accounting earnings are different. So you say you want to see that impact reflected in the net income of the companies - it's there for one, but not the other.

Even if you think of the same example without an impairment, you still have problems. Since one of the company's booked some intangibles as a result of an acquisition, its amortizing certain intangibles created in the acquisition, so its operating profit is lower even though they are identical in every way (ignoring the tax benefit of the amortization which is completely different than the financial reporting amortization). GAAP accounting has a purpose, its a set of guidelines for accrual accounting that attempt to ensure reasonable consistently for financial reporting purposes.

# ? Mar 19, 2016 23:26

Admiral101: Feb 20, 2006; RMU: Where using the internet is like living in 1995.

mike- posted:

While I was talking about amortization in my example, similar problems exist with depreciation. Amortization and depreciation both accounting concepts that are guided by accounting conventions, and often bear little to no resemblance to the economic life of an asset. The problem with these is not a management team gaming the life of an asset in anticipation of earnings misses, the problem is that depreciation and amortization treatment can vary significantly between companies which is why comparing a figure including them without adjusting tells you little to nothing. And in the end, this is a financial reporting concept; the value impact of depreciation and amortization relates to how they are treated for tax purposes, which has no connection to the treatment for financial reporting.

Here is a another example of why GAAP earnings don't reflect economic profits: Lets assume there are two identical companies, both with the exact same cap structure, the same growth, the same risk, the same revenues, costs, the same everything. But assume one had acquired some part of its business and had to book goodwill and intangibles, while the other didn't. So one of the two has a larger asset base (from goodwill and intangibles) on its balance sheet as a result of the purchase accounting. And let's assume they had recently had the exact same problem in their business that impacted their operations. This event was significant enough that it triggered a goodwill impairment for the respective company, and as a result they had to book an impairment loss of $20 million. So when you look at both companies GAAP earnings, you see that one is $20 million lower than the other, despite the fact that they generated exactly the same revenue, they have the same cost structure, they have the same debt payments, etc. The economic profits are identical, but the accounting earnings are different. So you say you want to see that impact reflected in the net income of the companies - it's there for one, but not the other.

Even if you think of the same example without an impairment, you still have problems. Since one of the company's booked some intangibles as a result of an acquisition, its amortizing certain intangibles created in the acquisition, so its operating profit is lower even though they are identical in every way (ignoring the tax benefit of the amortization which is completely different than the financial reporting amortization). GAAP accounting has a purpose, its a set of guidelines for accrual accounting that attempt to ensure reasonable consistently for financial reporting purposes.

Focusing on your example: I do understand the point you're trying to make. Please correct me if I'm wrong on this: Company A and Company B both have $10M in 2012. In 2013, Company A buys SmallCo for $10M to start its widget business. The $10M purchase was composed of $6M of fixed assets and $4M of goodwill. On the other hand, in 2013, Company B buys $6M of fixed assets to start its widget business. It also spends another $4M on all the operational sunk cost BS that it takes to get into the widget business. Both companies had to of spent that same amount in order to stay identical. Otherwise, if Company A was able to do it for $6M of fixed assets and $3M of operational sunk cost BS, why did they spend $10M on an acquisition?

In 2013, pretending depreciation doesn't exist, Company A has GAAP net income of -0-. Company B has net loss of $4M. In terms of economics, both companies end up in the exact same place at 12/31/13.

In 2014, the widget business shits the bed. Company A has to write off $4M of its goodwill for a $4M loss. Company B writes off nothing because it has no goodwill.

Do you see where I'm going with this? Company B wrote nothing off, because in this scenario with two identical companies, Company B recognized the loss in a prior year. The net effect is that the identical companies indeed recognized the same amount of GAAP losses - it's just a timing difference. This is why corporate SEC filings have 5 years of comparative income statements.

12/31/14 equity is exactly identical.

Admiral101 fucked around with this message at 23:57 on Mar 19, 2016

# ? Mar 19, 2016 23:51

mike-: Jul 9, 2004; Phillipians 1:21

Admiral101 posted:

Focusing on your example: I do understand the point you're trying to make. Please correct me if I'm wrong on this: Company A and Company B both have $10M in 2012. In 2013, Company A buys SmallCo for $10M to start its widget business. The $10M purchase was composed of $6M of fixed assets and $4M of goodwill. On the other hand, in 2013, Company B buys $6M of fixed assets to start its widget business. It also spends another $4M on all the operational sunk cost BS that it takes to get into the widget business. Both companies had to of spent that same amount in order to stay identical. Otherwise, if Company A was able to do it for $6M of fixed assets and $3M of operational sunk cost BS, why did they spend $10M on an acquisition?

In 2013, pretending depreciation doesn't exist, Company A has GAAP net income of -0-. Company B has net loss of $4M. In terms of economics, both companies end up in the exact same place at 12/31/13.

In 2014, the widget business shits the bed. Company A has to write off $4M of its goodwill for a $4M loss. Company B writes off nothing because it has no goodwill.

Do you see where I'm going with this? Company B wrote nothing off, because in this scenario with two identical companies, Company B recognized the loss in a prior year. The net effect is that the identical companies indeed recognized the same amount of GAAP losses - it's just a timing difference. This is why corporate SEC filings have 5 years of comparative income statements.

12/31/14 equity is exactly identical.

The timing difference is the point! That's the reason that GAAP earnings don't reflect economic earnings in the case of impairments. That's why you would adjust out an asset impairment to compare both companies at 12/31/14 - so you can see that they actually generated the same cash flow that year.

# ? Mar 20, 2016 00:21

Admiral101: Feb 20, 2006; RMU: Where using the internet is like living in 1995.

mike- posted:

The timing difference is the point! That's the reason that GAAP earnings don't reflect economic earnings in the case of impairments. That's why you would adjust out an asset impairment to compare both companies at 12/31/14 - so you can see that they actually generated the same cash flow that year.

I'm curious how many of the "adjusted earnings" calculations that you (and corporate management's) do that involve reducing earnings by the amount that you believe assets are impaired/below book value in years before they're actually impaired by GAAP. I'm going to stretch and say exactly -0-.

So in Company B's earnings calls for 2013 and 2014, they would be reporting a $4M adjusted loss and a $0 adjusted loss, respectively. Operating cash flow negative $4M and cash flow -0-, respectively.

But in Company A's earnings calls for 2013 and 2014, they would be reporting a $0 adjusted loss and a $0 adjusted loss. Operating cash flow -0- and -0-, respectively.

Assuming that both companies were being run by Mike Pearson, of course.

Do you see where I'm coming from?

Admiral101 fucked around with this message at 00:41 on Mar 20, 2016

# ? Mar 20, 2016 00:30

mike-: Jul 9, 2004; Phillipians 1:21

I don't see your point. The reason to adjust earnings is to figure out the actual cash flows the company is generating from its assets.

# ? Mar 20, 2016 00:40

Admiral101: Feb 20, 2006; RMU: Where using the internet is like living in 1995.

mike- posted:

I don't see your point. The reason to adjust earnings is to figure out the actual cash flows the company is generating from its assets.

If that's what you want earnings to be, why don't you just take GAAP "cash flows from operating activities" and just divide by shares outstanding...? That's pretty much what you're looking for.

And that's not what GAAP EPS is supposed to be.

Admiral101 fucked around with this message at 00:44 on Mar 20, 2016

# ? Mar 20, 2016 00:42

Admiral101: Feb 20, 2006; RMU: Where using the internet is like living in 1995.

Better yet: please provide an example of a company that's not a tech stock, REIT, or pharma/R&D company where you think GAAP earnings is a poor barometer of the company's economic health?

# ? Mar 20, 2016 00:47

mike-: Jul 9, 2004; Phillipians 1:21

Admiral101 posted:

If that's what you want earnings to be, why don't you just take GAAP "cash flows from operating activities" and just divide by shares outstanding...? That's pretty much what you're looking for.

And that's not what GAAP EPS is supposed to be.

Are you mental? I never said that is what GAAP eps is supposed to be. I'm explaining why GAAP eps isn't useful for valuation.

# ? Mar 20, 2016 00:48

Admiral101: Feb 20, 2006; RMU: Where using the internet is like living in 1995.

mike- posted:

Are you mental? I never said that is what GAAP eps is supposed to be. I'm explaining why GAAP eps isn't useful for valuation.

Valuation methodology heavily depends on industry and since you're tangently involved with investment banking you know that.

In industries where the fundamentals matter, GAAP/EBITDA is top of the pile.

Please tell me the companies/industries that aren't tech/pharma/REIT where GAAP is a poor metric.

Admiral101 fucked around with this message at 01:07 on Mar 20, 2016

# ? Mar 20, 2016 01:03

mike-: Jul 9, 2004; Phillipians 1:21

Admiral101 posted:

Valuation methodology heavily depends on industry and since you're tangently involved with investment banking you know that.

In industries where the fundamentals matter, GAAP/EBITDA is top of the pile.

EBITDA is not a GAAP measure, genius.

Virtually all going concern businesses are valued using the same principles. It really boils down to two things, what are the future cash flows going to be and how risky are they.

# ? Mar 20, 2016 01:13

Admiral101: Feb 20, 2006; RMU: Where using the internet is like living in 1995.

mike- posted:

EBITDA is not a GAAP measure, genius.

Virtually all going concern businesses are valued using the same principles. It really boils down to two things, what are the future cash flows going to be and how risky are they.

Thanks for informing me of that. I've spent a long time searching for where I could find the "Statement of EBITDA" on the 20-F filings before you mentioned that. I appreciate you mentioning.

Weirdly though, it seems that EBITDA starts from GAAP earnings. Not the "adjusted earnings" that corporate management keeps citing. Could you please provide clarification - I'm worried I'm doing my EBITDA calculations wrong.

Please tell me the industries where GAAP is a poor reflection of the "economic earnings" of the company (as you call them). Again, please exclude R&D, tech, and REITs.

# ? Mar 20, 2016 01:24

ryanbruce: May 1, 2002; The "Dell Dude"

Blah blah blah words. All I care about is should I bet on black or red?

# ? Mar 20, 2016 01:28

crazypeltast52: May 5, 2010

ryanbruce posted:

Blah blah blah words. All I care about is should I bet on black or red?

Uh, green. just look at your avatar!

# ? Mar 20, 2016 01:45

Shrinkage: Oct 23, 2010

ryanbruce posted:

Blah blah blah words. All I care about is should I bet on black or red?

It depends, are you using gaap or adjusted statements to value your colours?

# ? Mar 20, 2016 01:45

mike-: Jul 9, 2004; Phillipians 1:21

EBITDA is literally an adjusted operating profit metric - it's adjusted to be a closer representation of cash flow. EBITDA is used all the time because it's a way better representation of what's important to value (cash flows), than what isn't (accounting earnings).

GAAP earnings aren't very useful for valuation for hardly any company in any industry and I've made like 5 posts in the last two days explaining why. In the cases where it is, it's really just coincidence that the accounting profits are the same as the economic profits. If economic profit versus accounting profit is something that you think is zany you should probably just read an introductory valuation or finance textbook or something.

# ? Mar 20, 2016 01:46

Admiral101: Feb 20, 2006; RMU: Where using the internet is like living in 1995.

mike- posted:

EBITDA is literally an adjusted operating profit metric - it's adjusted to be a closer representation of cash flow. EBITDA is used all the time because it's a way better representation of what's important to value (cash flows), than what isn't (accounting earnings).

GAAP earnings aren't very useful for valuation for hardly any company in any industry and I've made like 5 posts in the last two days explaining why. In the cases where it is, it's really just coincidence that the accounting profits are the same as the economic profits. If economic profit versus accounting profit is something that you think is zany you should probably just read an introductory valuation or finance textbook or something.

Have your years calculating amortizable lives in investment banking given you insight on normalized GAAP income? Do you understand that accounting income and cash flows are correlated to a degree?

Since I'm not getting through to you via accounting examples: would it be any better if I just cited Buffet/Munger when they describe non-GAAP (like EBITDA) numbers as "bullshit income"? I know it's kind of distasteful in making those kinds of citations but I feel obligated to because I'm running out of ways of how GAAP works.

Please advise.

Admiral101 fucked around with this message at 02:10 on Mar 20, 2016

# ? Mar 20, 2016 02:00

mike-: Jul 9, 2004; Phillipians 1:21

Admiral101 posted:

Have your years calculating amortizable lives in investment banking given you insight on normalized GAAP income? Do you understand that accounting income and cash flows are correlated to a degree?

Since I'm not getting through to you via accounting examples: would it be any better if I just cited Buffet/Munger when they describe non-GAAP (like EBITDA) numbers as "bullshit income"? I know it's kind of distasteful in making those kinds of citations but I feel obligated to because I'm running out of ways of how GAAP works.

Please advise.

http://www.berkshirehathaway.com/letters/1986.html

quote:

Additionally, the Scott Fetzer acquisition required other major purchase-price accounting adjustments, as prescribed by generally accepted accounting principles (GAAP). The GAAP figures, of course, are the ones used in our consolidated financial statements. But, in our view, the GAAP figures are not necessarily the most useful ones for investors or managers. Therefore, the figures shown for specific operating units are earnings before purchase-price adjustments are taken into account. In effect, these are the earnings that would have been reported by the businesses if we had not purchased them.

Warren Buffett understands why GAAP-earnings should be adjusted when looking at a company from a valuation standpoint. Since you seem kind of retarded, here is the wikipedia article describing how warren buffet ADJUSTS EARNINGS for valuations purposes:

https://en.wikipedia.org/wiki/Owner_earnings

quote:

In 1986, Warren Buffett detailed his valuation method. He stated that the value of a company is simply the total of the net cash flows expected to occur over the life of the business, discounted by an appropriate interest rate[citation needed].

Rather than using Wall Street earnings numbers for valuing a business, Warren Buffett stated that he prefers to use what he calls Owner Earnings. He defined owner earnings as follows:

"These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges...less (c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume....Our owner-earnings equation does not yield the deceptively precise figures provided by GAAP, since (c) must be a guess - and one sometimes very difficult to make. Despite this problem, we consider the owner earnings figure, not the GAAP figure, to be the relevant item for valuation purposes...All of this points up the absurdity of the 'cash flow' numbers that are often set forth in Wall Street reports. These numbers routinely include (a) plus (b) - but do not subtract (c)."[1]

mike- fucked around with this message at 02:25 on Mar 20, 2016

# ? Mar 20, 2016 02:19

Admiral101: Feb 20, 2006; RMU: Where using the internet is like living in 1995.

mike- posted:

http://www.berkshirehathaway.com/letters/1986.html

Warren Buffett understands why GAAP-earnings should be adjusted when looking at a company from a valuation standpoint. Since you seem kind of retarded, here is the wikipedia article describing how warren buffet ADJUSTS EARNINGS for valuations purposes:

https://en.wikipedia.org/wiki/Owner_earnings

Thank you for the copy/paste. It really reminded me of how valuations work. Consistent with EBITDA, Buffet indeed adds back D/A/I/T. Not consistent with EBITDA, Buffet deducts current year capex (this is a very large number). The copy/paste you made goes on to talk about the "absurdity of the cash flow" numbers that are often reported by corporate management. I especially like the part that, like I mentioned earlier, states that corporate numbers [paraphrasing] "routinely add, but do not subtract".

I do apologize for being mentally challenged. Could you please put me in contact with your manager who would hopefully be able to explain such concepts in simpler terms? I'm assuming these are topics that you have overhead him discussing.

Please advise.

# ? Mar 20, 2016 02:43

Pirateparty: Apr 12, 2007; Scurvy

Anyone think Tesla will get to 3 hundy in the near future?

# ? Mar 20, 2016 02:57

Agronox: Feb 4, 2005

It warms my blackened bullshit heart to read a nice accounting / valuation argument. I mean that seriously. There's a lot of throwing darts in most investment threads so when we can actually talk about valuation measures it's a good thing (at least until we start calling each other retards, etc).

I hope to have a little effort post written up in the next few days about the thing that started this argument: Valeant! Mine were ultimately winning trades but I still managed to gently caress it up in some ways, which I hope to get into.

# ? Mar 20, 2016 02:58

mike-: Jul 9, 2004; Phillipians 1:21

I'm just glad that in the end, all posters, even the retarded ones, agree that accounting earnings need to be adjusted for valuation purposes. Thank you, Mr. Buffett.

# ? Mar 20, 2016 03:07

Agronox: Feb 4, 2005

...while keeping in mind that you should not take management's word for what those adjustments should be, in which case you start with GAAP figures.

All right, I'm done, the short bus will be here any minute so I have to get ready

# ? Mar 20, 2016 03:26

oxsnard: Oct 8, 2003

Agronox posted:

...while keeping in mind that you should not take management's word for what those adjustments should be, in which case you start with GAAP figures.

Pirateparty posted:

Anyone think Tesla will get to 3 hundy in the near future?

Case in point.

# ? Mar 20, 2016 03:29

crazypeltast52: May 5, 2010

Speaking of management talk, does anyone else habitually vote against every compensation package and board member on their proxies? I realize management likely gives zero fucks what I say and my vote would never even register, but I want to think I make them all a little more motivated to act in the benefit of shareholders.

Edit: It's my capital and by god I'm going to try to make sure it gets more of the company's pie. Luckily no more golden toilets show up that I'm aware of.

# ? Mar 20, 2016 04:02

hot cocoa on the couch: Dec 8, 2009

crazypeltast52 posted:

Speaking of management talk, does anyone else habitually vote against every compensation package and board member on their proxies? I realize management likely gives zero fucks what I say and my vote would never even register, but I want to think I make them all a little more motivated to act in the benefit of shareholders.

Edit: It's my capital and by god I'm going to try to make sure it gets more of the company's pie. Luckily no more golden toilets show up that I'm aware of.

yes. I take great delight in voting against these even though as you say, it really does nothing

# ? Mar 20, 2016 12:41

Arkane: Dec 19, 2006; by R. Guyovich

Pirateparty posted:

Anyone think Tesla will get to 3 hundy in the near future?

If it's gonna happen anytime soon, it'll probably be in the next 3 weeks. Model 3 will make or break the company.

# ? Mar 20, 2016 16:25

Elephanthead: Sep 11, 2008; Toilet Rascal

Did any of the top 20 stock gainers of 2015 have good earning per share?

# ? Mar 20, 2016 16:57

Michael Transactions: Nov 11, 2013

R.A. Dickey posted:

Great question... I think financials still have a ways to go, I hold the higher betas (BAC, C), but like GS also, more of a medium to long term trade though. I like TWTR at these levels also (but have been very wrong about Twitter before). Beyond that...things are rough, its a weird market. I've been trading energy, CNX and ETFs mostly, but not seeing much at these prices that I like.

I don't like wading into financial because I have a hard time understanding them. TWTR and CNX look ok but too high debt for me.

The S&P is still really high up, I guess now isn't the best time to find value stocks.

# ? Mar 21, 2016 01:10

Cheesemaster200: Feb 11, 2004; Guard of the Citadel

mike- posted:

I'm just glad that in the end, all posters, even the retarded ones, agree that accounting earnings need to be adjusted for valuation purposes. Thank you, Mr. Buffett.

To be fair, who is using company reported earnings (GAAP or otherwise) as their unilateral valuation technique?

In my opinion, GAAP isn't intended to be a end-all, be-all for reported earnings. It is supposed to be a standardized number that all companies report for comparison. Adjustment to GAAP earnings may be done by management per their understanding of an impairment, etc. However the individual investor is the one that judges the validity to that impairment to valuation, or makes any other adjustments to earnings that may be applicable.

# ? Mar 21, 2016 02:28

VendaGoat: Nov 1, 2005

tumor looking batty posted:

The S&P is still really high up, I guess now isn't the best time to find value stocks.

I won't say why.

Wait until april 26th, at the earliest. July 21st at the latest.

...

# ? Mar 21, 2016 04:02

Michael Transactions: Nov 11, 2013

VendaGoat posted:

I won't say why.

Wait until april 26th, at the earliest. July 21st at the latest.

...

That's when Dark Souls 3 is released

# ? Mar 21, 2016 04:20

VendaGoat: Nov 1, 2005

tumor looking batty posted:

That's when Dark Souls 3 is released

drat it! Do not leak pertinent information!

# ? Mar 21, 2016 04:28

greasyhands: Oct 28, 2006; Best quality posts,
freshly delivered

added more DWTI at 124.98

I guess this market rally has been the fastest quarterly turnaround since 1933? i.e. since the throes of the great depression. It really makes no sense in the face of declining earnings and a relatively expensive overall market to start with. I'll be moving towards a yield heavy portfolio and eventually towards a short SPY position if it continues going up.

greasyhands fucked around with this message at 15:43 on Mar 21, 2016

# ? Mar 21, 2016 15:40

Agronox: Feb 4, 2005

Valeant might be my favorite stock to follow. Every day there's some crazy new bullshit.

(I'm on the sidelines position-wise at the moment though)

# ? Mar 21, 2016 17:56

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# ? Jun 1, 2024 08:17

Josh Lyman: May 24, 2009

Should have sold my AAPL before today's event.

# ? Mar 21, 2016 18:02

The Something Awful Forums > Discussion > Ask/Tell > Business, Finance, and Careers > Livestock Trading Thread: Baa or better

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