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What's Behind the Numbers?: A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio Hardcover – October 10, 2012
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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, is an investment advisor and portfolio manager with Echelon Investment Management in Dallas. He applies this book's earnings quality tests to value investing for clients.
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Top Customer Reviews
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.Read more ›
Some parts are kind of good, like using the DSO and DSI numbers and monitoring their change. What I didn't like though on these chapters are the links to a stock graph. Several times the autors point out a fundamental change in the inventories or the cashflow and two pages later you'll see a stock immediatly rising or declining as if it was a direct consequence of the change these autors write about. They can't possibly know if the stock movement was due to the fundamentals or just random noise or some macro economic event.
For the chapters on fundamentals I could still give a 3*, but the later chapters on technical analysis and stock charts are way to basic. It they'd just let these chapters out the book would have been better. It's just a series of stock charts (from investors.com and CANSLIM related websites) with basic TA stuff (determine the trend by looking at the chart, 50 day moving averages, ...).
Two stars is my total score for this book.
It spends the most time on financial statement analysis, going over revenue recognition, inventories, and all of the squishier areas of accounting that most industrial companies face. It will not help you much with financial companies, they are far more complex, and deserve a book all their own.
I was surprised that the book did not suggest common summary measures of accounting quality, such as Normalized Operating Accruals. It did feature Cash Flow from Operations less Net Income, which is almost as good.
The book focuses on the short side -- how do you make money from failure? The long side suggests maxing out on small cap value stocks, and idea which I like, but can get overfished at times.
Think of it this way: do you want to run a portfolio that is systematically short company size, long value, short liquidity, long quality, etc? I helped do that for 4.5 years at a hedge fund, and boy that ride was bumpy. The market can remain insane longer than you can remain solvent.
But, to the book's credit, it understands position sizing for short positions, which is momentum following. Short more of things that fall. Do not add to shorts when the prices rise. This is a key insight of the book, and it is a reason why value managers often don't do well in a long-short context.
My last complaint is that the book does not explain even in broad terms how they balance the various portfolio management ideas. If you buy this book, you are on your own. You do not have a full roadmap to guide you.Read more ›
Most Recent Customer Reviews
"If so, maybe fraud!"
That's the extent of the knowledge contained in this piece. Accounting 101, far inferior to Howard Schilit's work.
If your portfolio looses 50 percent of its value it needs to recover 100 percent to reach the same spot. Read morePublished 9 months ago by investingbythebooks
More attention should be paid to the issues addressed in this book.Published 10 months ago by Frank Anderson
This book is an excellent primer on earnings quality analysis. The chapter on revenue recognition is unique. Read morePublished 12 months ago by Wanaphat
Demystifies much of the hubris around short selling... if you're an investor in the market today, reading books like this one can give you the advantage most will never have --... Read morePublished 12 months ago by Jesse Moskel
The book gives clear and very practical tips on how to invest. It shares research and data to support the authors' conclusions.Published 15 months ago by VICTORIA SANTOS
Good book. What I can add here will hopefully help individual investors. For an individual investor who wants to go the extra mile, there is a cost-effective (as opposed to FACTSET... Read morePublished 18 months ago by M S Sharma