Quality of Earnings – Thornton O’Glove

In this talk, Thornton covers a wide range of investing topics, including the art of financial deviation analysis, the least complex and best way to invest in the stock market on a long-term basis, and an independent prediction about Berkshire Hathaway’s future and the bonanza that awaits its shareholders.

Financial Deviation Analysis

  • Presenter always have a bias in statistics (e.g., Department of labor have a bias of keeping down inflation rate)
  • Availability of information is creating too much noise. Those who have the advantage is to identify the signal in the noise (Bernie Madoff example where the signal of his scam would be to interview his accountants)

Understanding Quality of Earnings

  • Most analyst have a conflict of interest in the companies they are analyzing since companies they are analyzing often have relationships with the analyst firms
  • Auditors’ reports may not be reliable because interpretation of rules is complex and gives a lot of leeway of how financial data is interpreted and reported
  • CEO annual letter to shareholders can be compared to historical letters to see whether they delivered their promises
  • Determine which portions of income are recurring vs. one-time
  • Differences in reporting for shareholder vs taxes (companies take a conservative approach in tax reporting to minimize taxes)
  • Dramatic growth in accounts receivable and/or inventories that is not aligned with growth in revenue
  • Impact of accounting changes on reported earnings (LIFO vs FIFO)
  • Tendency for new management to take huge losses to clear the decks and position themselves to do well once they take ship

Best Pathway for Individual Investor Success

  • Invest long-term and almost never sell
  • Concentrate on purchasing branded name companies
  • Own as many stocks as possible as young as you can
  • The formulae that determine the stock market average and the price of individual securities