As a value investor, I like simplicity and the ability to compare stocks on a “apples to apples” basis. Unfortunately there are some major annoyances that make this task a lot more difficult than need be. I have compiled a list of items that I have learned to loath over a long career of trying to find a way to make a buck in the stock market without having strain on the brain.
(1) Fiscal year accounting. It all needs to be changed to calendar year reporting, plain and simple. It would be so much less confusing. Who wants to deal with a reporting period that occurs in two different years anyway?
(2) Goodwill/Asset impairment charges: sometimes these write-offs give the impression a company is actually losing money, but in reality they have no impact on cash flow. They are simply an accounting adjustment and are terrific at muddying up the waters.
(3) Companies with two classes of stock: usually when there are two classes, the objective is to keep management entrenched and in total control, as one voting class usually has ten times the voting power than the other, effectively eliminating the chances of any positive shareholder activism or takeover prospects. This is not a good thing and the reason I plan to sell my Steelcase (NYSE:SCS) position.
(4) Pension Fund responsibility: If a company has a pension fund, run for the hills! The uncertainty of how much a company will need to contribute in the future is a major negative. It’s just too hard to predict.
(5) Foreign Currency exchanges: When a company sells its product in a foreign country, it must convert that currency back into US dollars. If the US dollar is strong, then the conversion will have a negative impact on earnings. Who needs that stress?
(6) Uneven reporting quarters: many companies have seasonal shifts in their operations and consequently have one quarter with at least two additional reporting weeks in it -- this makes it hard to compare quarters on a sequential basis.
(7) GAAP earnings versus pro forma: Everybody should report the same way. GAAP reporting should be the only method allowed. Many companies utilize pro forma because it puffs up their earnings, as they don’t have to include such items as stock based employee pay.
(8) Deferred income tax expense: seriously? I get a headache just thinking about this one.
(9) Convertible securities/warrants: Anytime a company offers debt that can be converted into equity, confusion sets in.
(10) Secondary offerings: printing up additional shares to raise cash creates earnings dilution, typically not a good thing. Fuel Systems Solutions (NASDAQ:FSYS) has had three of these, in the past five years alone.
Bottom line: Warren Buffett invests only in companies he can easily understand. By eliminating confusion, complexity and ambiguity, the investor gains a clearer, more focused picture, thus making it easier to decipher the prospects of a particular investment. Buffett does this, shouldn't you? After all, it's easier to replicate the ideas of those who are successful, than to waste your resources trying to reinvent the wheel.