What's Behind the Numbers?: A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio [Hardcover]

John Del Vecchio (Author), Tom Jacobs (Author)

Book Description

Publication Date: September 19, 2012

Learn how to detect corporate sleight of hand—and gain the upper hand with smart investing

“At Crazy Eddie, we succeeded in perpetrating our financial fraud for many years because most Wall Street analysts and investors took for granted the integrity of our reported numbers. What’s Behind the Numbers? teaches investors to critically look under the surface and spot red flags that could help them avoid potential losses from fraudulent companies like Crazy Eddie.”
—Sam E. Antar, former Crazy Eddie CFO and convicted felon

“I know of no other book that better teaches the reader how to determine earnings quality at a company, so you can avoid large losses on stocks you would otherwise own, and score profits by going short. Not only that, this book teaches you how to grow wealth with small-cap stocks in a way that would make value deity Ben Graham proud. . . . Essential for any investor.”
—Jeff Fischer, Portfolio Manager, Motley Fool Pro and Motley Fool Options

“Under [Del Vecchio and Jacobs’s] tutelage, forensic accounting is reduced to Math 101. We learn how to employ the metrics they use to expose fi nancial chicanery in companies, to unearth the best short sales, and to protect ourselves from owning those stocks most likely to blow up and wreak havoc on your portfolio. Read What’s Behind the Numbers? so you can keep your portfolio clear of ticking stock bombs.
—Jeffrey A. Hirsch, Chief Market Strategist, Magnet Æ Fund, and Editor-in-Chief, Stock & Commodity Trader’s Almanacs

“Wow! A must-read for anyone who thinks they know how to make money in the stock markets! Del Vecchio and Jacobs forced me to confront the stark reality of What’s Behind the Numbers? It isn’t pretty. . . . One of the best books on investing I have read in years.”
—Tom Meredith, former Chief Financial Officer of Dell Inc., venture capitalist

About the Book:

Companies are under more pressure than ever to “beat by a penny,” but you don’t need to be a forensic accountant to uncover where the spin ends and the truth begins. With the help of a powerhouse team of authors, you can avoid losing a chunk of your portfolio when the next overhyped growth stock fails by knowing What’s Behind the Numbers?

Investing experts John Del Vecchio and Tom Jacobs mix a potent combination of earnings quality analysis, long-side investing, and short-side portfolio risk management to help you create a long-short portfolio with less volatility and greater returns, while avoiding landmine stocks that will blow a hole in your financial security.

First, the authors explain the practical side of financial analysis. They demystify widely held assumptions about stock performance, expected returns, earnings quality, and short sellers. Then they comb the financial statements to find the places where companies hide poor earnings quality. Finally, they provide the value and special situations investing to pair with the short-side thinking and offer a tactical manual for applying what you’ve learned in the technical, day-to-day world of portfolio management.

Armed with this wealth-saving guide, you can confidently trade based on clear data—not the aggressive accounting tactics companies use to make their numbers look better than they are. Better still, it helps you start protecting yourself right away with:

• Rules for finding companies playing with—rather than by—the numbers
• Repeatable methods for uncovering what companies don’t tell you about their numbers
• Multistep approach to deciding when to sell a stock and when to short sell it
• Reliable formulas for determining when a stock will get hit

The next time a company goes south, you can be the successful investor who knew What’s Behind the Numbers?

Editorial Reviews

Review

“[An] informative book . . . . Written in lively prose.”

(Barron’s 2013-01-05)

About the Author

John Del Vecchio is the cofounder and co-manager of The Active Bear ETF, a fund dedicated to shorting individual stocks with fundamental red flags. Previously, he managed a hedge fund for Ranger Alternative Management, L.P. In addition, he worked for well-known short seller David Tice and famed forensic accountant Dr. Howard Schilit. Del Vecchio coadvises the Motley Fool Alpha long-short newsletter.

Tom Jacobs, Portfolio Manager of Motley Fool Special Ops, applies this book’s earnings quality tests to his value and special situations long side to form a long-short portfolio. He is managing partner of holding company Complete Growth Investor, LLC, principal of The Marfa Group, Inc., and a real estate investor.

Product Details

• Hardcover: 256 pages
• Publisher: McGraw-Hill; 1 edition (September 19, 2012)
• Language: English
• ISBN-10: 0071791973
• ISBN-13: 978-0071791977
• Product Dimensions: 6.4 x 1 x 9.3 inches
• Shipping Weight: 1.2 pounds (View shipping rates and policies)
• Average Customer Review: 4.7 out of 5 stars  See all reviews (20 customer reviews)
• Amazon Best Sellers Rank: #100,316 in Books (See Top 100 in Books)

Most Helpful Customer Reviews

4 of 4 people found the following review helpful

5.0 out of 5 stars Forensic Accounting and More November 19, 2012

By Richard M. Rockwood

Format:Hardcover

The first thing I want to tell readers is that I really enjoyed the material in this book. It's well written and it's a book that both "professional" investors and those who do their own investment work will find insightful.

I'm always interested in learning more about forensic accounting techniques and when I saw this book on Amazon I was immediately interested. I recognized one of authors of the book right away as I had followed Mr. Jacobs career for many years dating back to his Motley Fool days. I was also intrigued when I read that Mr. Vecchio had worked for David Tice AND Dr. Howard Schilit, both legends in the forensic accounting field.

For those that haven't read the book yet it certainly covers forensic accounting, and does so using real examples in an easy to understand format, but it also contains much more. So just what is the thesis of the book? They explain it on page 19:

"With the tools in this book, investors will increase their chances of achieving high real returns by weeding out or avoiding the stocks that perform so poorly that they will ruin overall returns and possibly destroy capital permanently."

To reach this goal they advocate using an investment approach that combines a small-cap value strategy (while also participating in select special situations) with a short component.
I found their short thinking quite interesting as they state not to short companies "...based on overvaluation, fads, frauds, or poor business models" which is what I would have considered to be perfect short candidates. They instead advocate waiting until the aggressive accounting methods discussed in the book are used by companies, i.e.... "wait until there are negative catalysts for profits in the near future - a year or two at most, the rough time period that the value-with-catalyst investor seeks."

To summarize I found the book filled with great forensic accounting information while also detailing an effective investing methodology. As they mention in the book even if you don't short stocks yourself "...the short-selling expert's tools - and the shorting mindset - can lead to successful investing, simply by avoiding the statistical basement revealed by the data." Read more ›

6 of 7 people found the following review helpful

5.0 out of 5 stars When 'Behind' Should Be 'In Front' For Investors October 17, 2012

By Michael Martin VINE™ VOICE

Format:Hardcover

Long-only investors will benefit greatly from the book's insights and especially how to get out of their losers quickly by following a few simple fundamentals on the balance sheet and income statement. In my opinion, this is a must-read for investors who have trouble letting go of failed investments and who have come to understand the hard way that "time does NOT heal all wounds." Cisco investors holla!

The authors spend their days more like forensic accountants looking for the chicanery (that is a lot more prevalent that you may care to believe). I found the authors' research head-shaking in that regard. There are far too many accounting tricks that publicly traded companies use in order to make their quarterly numbers. And sooner or later that catches up with them.

One company he writes about has recently offered big discounts to generate revenue for the near quarter, but that's 'robbing Peter to pay Paul' according to the authors. As they state, "eventually there will be an earnings shortfall, like there always is with companies like this, and the stock will tank."

By understanding the tactics, you the investor will have side-stepped such a debacle and you will have done the first thing you need to do in any investment process: preserve your equity.

8 of 10 people found the following review helpful

5.0 out of 5 stars A must-read for any serious investor October 13, 2012

By Todd Wenning

Format:Hardcover

If you are passionate about investing, this book is a must-read. John and Tom explore many important -- yet frequently overlooked or misunderstood -- topics such as earnings quality, deep value investing, short-selling, long/short portfolio construction, and technical analysis. These are not topics commonly found in today's investing books and they're certainly not all discussed in one place, so this is a book to keep alongside your other favorite investing books as you'll likely reference it often.

This is not beginner material and requires the reader to have a basic understanding of investing and financial statement analysis, but John and Tom are both excellent writers who thoroughly explain these higher-level topics in a down-to-earth and easy-to-understand fashion.

Whether or not you fully adopt John and Tom's approach to investing, you'll put down the book a more complete investor. A long-only buy-and-hold investor, for example, will still appreciate the earnings quality sections that can help detect aggressive accounting practices that distort "true" earnings and signal trouble ahead. The chapters on reading charts and market timing -- topics that fundamentals-focused investors often scoff at -- are compelling and may convince even the staunchest buy-and-hold investor to consider the use of moving averages and relative-strength indicators to help make better entry point decisions.

Such well-written yet challenging investing books like this don't come around often. Do yourself a favor and add this one to your collection.

(In full disclosure, John and Tom are former colleagues.)

3 of 3 people found the following review helpful

5.0 out of 5 stars Win by not losing February 9, 2013

By Charles Lewis Sizemore, CFA

Format:Hardcover

In the opening lines of What's Behind the Numbers?, co-authors John Del Vecchio and Tom Jacobs offer to "help you find where the investing bodies are buried so you don't join them." These are appropriate words to begin a book on the detective work of finding financial chicanery.

Numbers covers the art of short selling--a lonely endeavor that requires thick skin. By definition, you aim to win when others lose. This means that when you're right, you're hated; and when you're wrong, you are shown no sympathy. In Del Veccio and Jacobs' words, short selling is considered "un-American at best and criminally manipulative at worst."

Moreover, shorting stocks requires taking an unsentimental approach to investing and--perhaps most importantly--keeping the ego in check. Very few investors have the disposition to be successful short sellers; John Del Vecchio is one of them.

Del Vecchio is the co-manager of the Active Bear ETF and the creator of the Del Vecchio Earnings Quality Index that drives the Forensic Accounting ETF. Tom Jacobs is the portfolio manager of Motley Fool Special Ops and a specialist in small-cap value opportunities. In Numbers, Del Vecchio and Jacobs reveal some of the tricks of their trade and expose some of the myths that tend to get novice short sellers in trouble.

To start, overvaluation is not a sufficient reason to initiate a short position. A stock that is irrationally expensive can always get more expensive. Likewise, while it is tempting to short a fad stock--think of Crocs, the maker of colorful rubber clog shoes--fad stocks can stay trendy for longer than you think. The same is true of questionable business models--think Netflix.

And what about the stocks of companies engaging in fraud? Well, maybe.... But good luck finding them ahead of time. Remember, if management is engaged in something illegal, they're not likely to mention it in the footnotes of their financial statements.

What is missing in each of these cases is the catalyst. What is the sign that the jig is up--and that the stock is due for a tumble?

Some traders rely on contrarian indicators, gauges of investor sentiment towards a stock, or simply the feeling in their gut. But Del Vecchio and Jacobs take a more rigorous approach.

The key is aggressive accounting and specifically aggressive revenue recognition and inventory management: "The time to sell or short is not when you think a business model can't survive. The time is when the numbers suggest that management is covering up poor performance."

And how might you know when this is the case? Del Vecchio and Jacobs spend most of the book telling you, but I'll give two examples that I found to be particularly insightful.

The first is a metric called Days Sales Outstanding (DSO), which measures accounts receivable in proportion to sales. An unusual increase in DSO can mean that future sales and being pulled forward by looser payment terms or special financing.

This hurts future profitability in two ways. The most obvious is that sales that might have happened in the following quarter have now already happened. But worse, those sales might have come with more favorable pricing had the company not been in such a hurry to book revenues. In order to keep Wall Street happy for another quarter, management makes the eventual day of reckoning worse.

A second, similar metric is Days Sales in Inventory (DSI), which measures inventory build-up. You don't need to be a CPA to see why this metric is important. Inventory build-up suggests that the company's products are not selling as briskly as forecast. It also means that discounts will probably be needed move the merchandise, which will lower profit margins.

All inventory is not equal, of course. A build-up of raw materials inventory may mean that demand is stronger than ever. It is the build-up of finished goods that should be a major red flag.

What's Behind the Numbers? is full of little tricks like these, explained in simple terms that non-CPAs can understand. Before you attempt to short another stock, read and re-read this book, particularly the chapters on aggressive revenue recognition and aggressive inventory management.

I'll leave you with two final nuggets of wisdom from Del Vecchio and Jacobs.

First, don't be too eager to jump into a short position. As the authors point out, "You make as much money shorting a stock that falls from $70 to $5 (93 percent) as one that falls from $100 to $5 (95 percent)." Getting into a trade too early will turn a would-be profitable short into a frustrating loss.

Second, watch out for crowded trades. Don't short a stock if the short interest is too high as a percentage of the float. This puts you at risk of being short-squeezed as your fellow sellers all scramble to buy at the same time and send the share price to the moon.

If you are a serious investor, pick up a copy of What's Behind the Numbers? and keep it close at hand. More than anything else, it will help you to win by not losing. Read more ›