An Indian Civilizational Perspective

Advise for financial advisors

Investing and financial advisory is so tough that most don’t get it right. Any help we can get from various quarters is useful. Here is a very good – and succinct – list of things that EVERY financial advisor and investor should remember. It is from an interview by Charles Kirk with Herb Greenberg.

  1. THE NUMBERS DON’T LIE. They can be stir-fried, oven-fried or convection baked, but in the end they always hold the keys to the kingdom.
  2. QUALITY, NOT QUANTITY. Ignore the “beat the Street” headlines on earnings. It’s what goes into the earnings that counts.
  3. GAAP ISN’T THE SAME AS THE GOOD HOUSEKEEPING SEAL. Generally Accepted Accounting Principles, according to which all financial statements are supposed to be prepared, include plenty of gray areas that give management enough rope to hang itself.
  4. DON’T CONFUSE STOCKS AND COMPANIES. They sometimes go in opposite directions. The numbers may not lie, but stocks sometimes do.
  5. RISK ISN’T A FOUR-LETTER WORD. A good rule of thumb is that before you buy, instead of asking how much you can make, first ask how much you can lose. That is what the smart guys do.

GAAP, although not paid much attention by the investors, is very important in the final analysis.. specifically in context of how companies use (or misuse it). Greenberg’s advise on that front is also pretty impeccable:

GAAP is a big gray area. Virtually everything is subject to interpretation. I’ve learned that some managements are more conservative than others. Best thing is to compare the way companies and their peers in the same industries treat the same kind of accounts. Beware of companies that have no true public peers. They can account for anything any way they want and there was no way to tell whether they are being conservative or aggressive. And beware of companies that always seem to be changing the way they report certain metrics, especially if they have no apples-to-apples peers. Can’t wait until International accounting standards take effect. They will make GAAP look stringent.

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