Most helpful positive review
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Great Book, but Important Sections of Second Edition Dropped
on February 1, 2011
I should begin by saying that I completely agree with the previous five star reviews. This is a magnificent book, and the second edition had a great influence on my investing. All serious investors should read this.
I would like to draw attention though, to the changes made since the second edition. The second edition described seven basic shenanigans which, for the most part, manipulated earnings and revenue, as these are the headline numbers that the bulk of investors look at. The third edition covers the same shenanigans, though the sections have been re-written, and the examples have been changed and updated. The third edition adds sections on shenanigans to manipulate cash flow numbers (yes, this can be done) and metrics that investors use frequently. The new sections are worth the upgrade to me, though if you read widely in the area, you won't find much new. Mulford and Comiskey's Creative Cash Flow Reporting, for example, covers the same material as the section on cash flow.
Those who haven't read the second edition should be aware that portions of the second edition have been eliminated. The sections on "Problem Areas" and "Looking Back . . . Looking Forward" are gone, but the topics they deal with have either been absorbed into the rest of the text or can be dropped without great consequence. The section on "Techniques for Detecting Shenanigans" has also been dropped, and I believe that this is unfortunate. While some readers may already be familiar with common-size analysis, for example, many investors don't have formal education in accounting and could use the explanation and examples. It was this chapter of the second edition that promped me to create common-size balance sheets and income statements for all potential investments, and I've found the exercise invaluable, both for detection of possible shenanigans and for general understanding the companies I'm researching.
If you are new to this area of stock analysis, or new to accounting, I would recommend buying both the second and third editions. The second edition should be cheap, as used copies of older editions are not usually in high demand. The third edition gives investors more to look out for, but without a systematic way to apply the techniques, I doubt many will put their new found knowledge to good use.