What do you think?
Rate this book
What's Behind the Numbers?: A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio
Learn how to detect corporate sleight of hand--and gain the upper hand with smart investing
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?
Praise for What's Behind the Numbers?
"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 AE 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
"This work will be a sought-after reference book among investment managers and analysts for years to come."
--Janet J. Mangano, CFA Institute's Financial Analysts Journal
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?
Praise for What's Behind the Numbers?
"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 AE 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
"This work will be a sought-after reference book among investment managers and analysts for years to come."
--Janet J. Mangano, CFA Institute's Financial Analysts Journal
288 pages, Hardcover
First published September 19, 2012
15 people are currently reading
298 people want to read
Ratings & Reviews
Friends & Following
Create a free account to discover what your friends think of this book!
Community Reviews
Displaying 1 - 10 of 10 reviews
November 26, 2012
Great book of interest to any and all investors, written by my colleagues at the Motley Fool. There are a lot of red flags that investors can find in financial statements to alert them of financial trickery, and this book outlines them.
Here is the review I wrote for Fool.com:
http://www.fool.com/investing/general...
Here is the review I wrote for Fool.com:
http://www.fool.com/investing/general...
August 21, 2018
If your portfolio looses 50 percent of its value it needs to recover 100 percent to reach the same spot. If you can avoid a fair number of the worst performers in the stock market you will have a good chance to outperform. One way to avoid some of the holdings that kill performance is to look to companies’ earnings quality. The two hedge fund managers John Del Vecchio and Tom Jacobs have written What’s Behind the Numbers? to show how this could be done.
In looking at the corporate accounting the authors choose to focus on the few warning flags they think most effective and they especially look to aggressive revenue recognition. I think this is wise. An exaggerated sales number will have ripple effects all over the financial statements and since sales is a large number in relation to the earnings, even a small boost to sales without the corresponding costs will have huge impacts on the perceived profitability. Most of the – still relatively numerous – warning flags the authors present try to detect if aggressive accrual accounting in an improper or unsustainable way has increased sales in the short term. Their favorite measure is Days Sales Outstanding. I quite liked the discussion on how to interpret changes in the measures they look to. In this genre I still prefer Financial Shenanigans by famed forensic accountant Howard Schilit (that John Del Vecchio previously worked for) but this book is a welcome addition.
Despite the above I hesitated a while to give the book a 4 star rating as it paradoxically left me with a feeling of false advertising. Apart from the title, the cover also reads A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in your Portfolio and Learn how to detect corporate sleight of hand – and gain the upper hand with smart investing. In reality only about 130 – 140 pages are dedicated to how to analyze earnings quality. The rest discusses the authors’ investment process in general and their short selling in some more detail. However, as long as you know this and don’t expect any of the subjects to be covered in massive depths, what is being said is sound and often interesting.
To shortly summarize the investment strategy the long side consists of longer-term small-cap value holdings and the short side of companies where the accounting signals future trouble. The authors advice against simply shorting overvalued stocks in companies with bad business models. The reason is that nothing prevents the stock from getting even more expensive. Instead they wait for signs of aggressive accounting and declining earnings quality and use this as a trigger. If management has been forced to borrow an increasing amount of earnings from the future, their underlying operations has started to deteriorate and this will show up in the earnings in due time.
To work with a strategy like this you have to combine two very different mindsets and it’s interesting to see the authors quote investors like Ben Graham and Warren Buffett when describing their long side but William O’Neil, Paul Tudor Jones and other traders when it comes to the limited time horizon of the short side.
A fair proportion of hedge fund managers display a self-assured and almost brash personality type with little patience for other investors that don’t measure up to their standards. There are traces of these traits here as well. For a book on accounting and ways to detect if management is cooking the books the writing of this text is breezy and opinionated. The case studies repeatedly follow the formula “in this company we saw this problem that no other realized was there and then the stock tanked” - it becomes quite tiring after a while. Long only investors are seen with mild contempt, as they obviously cannot know what is best for them.
From what they write the authors know what they are doing professionally. However, my suggestion would be to split this book in two and write a more thorough text on the analysis of earnings quality plus one additional on long-short investing.
In looking at the corporate accounting the authors choose to focus on the few warning flags they think most effective and they especially look to aggressive revenue recognition. I think this is wise. An exaggerated sales number will have ripple effects all over the financial statements and since sales is a large number in relation to the earnings, even a small boost to sales without the corresponding costs will have huge impacts on the perceived profitability. Most of the – still relatively numerous – warning flags the authors present try to detect if aggressive accrual accounting in an improper or unsustainable way has increased sales in the short term. Their favorite measure is Days Sales Outstanding. I quite liked the discussion on how to interpret changes in the measures they look to. In this genre I still prefer Financial Shenanigans by famed forensic accountant Howard Schilit (that John Del Vecchio previously worked for) but this book is a welcome addition.
Despite the above I hesitated a while to give the book a 4 star rating as it paradoxically left me with a feeling of false advertising. Apart from the title, the cover also reads A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in your Portfolio and Learn how to detect corporate sleight of hand – and gain the upper hand with smart investing. In reality only about 130 – 140 pages are dedicated to how to analyze earnings quality. The rest discusses the authors’ investment process in general and their short selling in some more detail. However, as long as you know this and don’t expect any of the subjects to be covered in massive depths, what is being said is sound and often interesting.
To shortly summarize the investment strategy the long side consists of longer-term small-cap value holdings and the short side of companies where the accounting signals future trouble. The authors advice against simply shorting overvalued stocks in companies with bad business models. The reason is that nothing prevents the stock from getting even more expensive. Instead they wait for signs of aggressive accounting and declining earnings quality and use this as a trigger. If management has been forced to borrow an increasing amount of earnings from the future, their underlying operations has started to deteriorate and this will show up in the earnings in due time.
To work with a strategy like this you have to combine two very different mindsets and it’s interesting to see the authors quote investors like Ben Graham and Warren Buffett when describing their long side but William O’Neil, Paul Tudor Jones and other traders when it comes to the limited time horizon of the short side.
A fair proportion of hedge fund managers display a self-assured and almost brash personality type with little patience for other investors that don’t measure up to their standards. There are traces of these traits here as well. For a book on accounting and ways to detect if management is cooking the books the writing of this text is breezy and opinionated. The case studies repeatedly follow the formula “in this company we saw this problem that no other realized was there and then the stock tanked” - it becomes quite tiring after a while. Long only investors are seen with mild contempt, as they obviously cannot know what is best for them.
From what they write the authors know what they are doing professionally. However, my suggestion would be to split this book in two and write a more thorough text on the analysis of earnings quality plus one additional on long-short investing.
Read
May 1, 2022What This Book Does for You: Show me where I’m going to die, so I don’t go there.
managers often devoted more energy to keeping up appearances than to keeping the books. Think of the South Sea Company bubble of the early 1700s and the railroad and canal companies of the 1800s.
Aggressive accounting may not be illegal, but it’s chicanery. It’s usually tough to catch until it’s too late
Many investors wish for one magic metric to rule investing. Those wishes ride hearses.
Management may change the company’s revenue recognition policy to raise revenue this quarter and massage inventory treatment the next, manage working capital to boost operating cash flow, obscure real earnings power with serial acquisitions
Imagine you are reading this in 1979 and we told you that General Motors, Woolworth’s, and Eastman Kodak—strong and undoubted Dow components2—would in 33 years all be bankrupt. You would never have believed us
Large brand-name stocks give the illusion of stability
nominal (the actual number) returns and real (the number minus inflation)
The only information that matters comes from the company’s filings with the SEC. The real information is in the actual filing’s pages, and, more important, in the footnotes, where the data aren’t always presented in easyto-read tables. Even some of the best analysts’ eyes glaze over at footnotes, but that’s where management discloses what the law says it must. Some of the best short sellers—whether short-only or managers of a long-short portfolio—miss or do superficial analysis of these details, because they focus on fads, frauds, failures, and the need to be right.
Shorting stock requires a loan of shares from your broker. When the price of the stock you shorted (borrowed and sold) rises, your broker issues a margin call—requires you to put up cash against the loan to cover the rise in the stock’s price. Many investors who were short Crocs, got margin calls they couldn’t meet, were forced to cover (buy back the stock), and suffered enormous losses.
For the first, use online sources to find the amount of shares shorted of a stock. Compare that to the float. Float means the shares that can be freely traded any given day, excluding restricted shares, insider holdings, and shares held by those with more than 5 percent ownership. The higher the percentage of shares sold short (short interest) of float, the greater the risk that any positive news can send shares soaring, because demand will exceed supply. This is a classic short squeeze. The short sellers’ losses mount, they begin to cover, and their buying drives the price up further. No wonder any investor who ignores this metric often endures painful losses. The second metric is days to cover. Here, divide short interest by average daily share volume traded. This is an indicator of how tough it would be if all the short sellers had to cover at once. If days to cover are low, there is likely enough volume to allow short sellers to exit their positions relatively easily. If days to cover are many, then the risk of not being able to exit as prices rise is too high, and the dreaded short squeeze looms again.
You can lose capital permanently with just one trade like that. The ambulance doesn’t get there in time.
The eventual small SEC fine was a mosquito bite.
Those who did not see the revenue for the capitalized expenses—the accounting forest for the trees—and shorted AOL got killed
one of the very best ways to make money is by avoiding loss.
We want to compare the quarter’s DSO both year-over-year (to account for business seasonality) as well as sequentially (from one quarter to the following). Changes can come from economic slowdowns, poor collection, and so on, but the practice we want to catch is a change in payment terms that borrows revenue from the future to make this quarter look better than it is. Here is the key point that Wall Street gets wrong almost 100 percent of the time. Often, a company will report higher DSO, implying looser payment terms. Then management will comment in the quarterly conference call that the customers are of high quality, with good credit, so the company expects to collect on the receivables, and there is no risk to collection (la la la). Wall Street analysts usually take management’s word for it and then regurgitate this explanation in their own research reports. This is called “stuffing the channel.”
managers often devoted more energy to keeping up appearances than to keeping the books. Think of the South Sea Company bubble of the early 1700s and the railroad and canal companies of the 1800s.
Aggressive accounting may not be illegal, but it’s chicanery. It’s usually tough to catch until it’s too late
Many investors wish for one magic metric to rule investing. Those wishes ride hearses.
Management may change the company’s revenue recognition policy to raise revenue this quarter and massage inventory treatment the next, manage working capital to boost operating cash flow, obscure real earnings power with serial acquisitions
Imagine you are reading this in 1979 and we told you that General Motors, Woolworth’s, and Eastman Kodak—strong and undoubted Dow components2—would in 33 years all be bankrupt. You would never have believed us
Large brand-name stocks give the illusion of stability
nominal (the actual number) returns and real (the number minus inflation)
The only information that matters comes from the company’s filings with the SEC. The real information is in the actual filing’s pages, and, more important, in the footnotes, where the data aren’t always presented in easyto-read tables. Even some of the best analysts’ eyes glaze over at footnotes, but that’s where management discloses what the law says it must. Some of the best short sellers—whether short-only or managers of a long-short portfolio—miss or do superficial analysis of these details, because they focus on fads, frauds, failures, and the need to be right.
Shorting stock requires a loan of shares from your broker. When the price of the stock you shorted (borrowed and sold) rises, your broker issues a margin call—requires you to put up cash against the loan to cover the rise in the stock’s price. Many investors who were short Crocs, got margin calls they couldn’t meet, were forced to cover (buy back the stock), and suffered enormous losses.
For the first, use online sources to find the amount of shares shorted of a stock. Compare that to the float. Float means the shares that can be freely traded any given day, excluding restricted shares, insider holdings, and shares held by those with more than 5 percent ownership. The higher the percentage of shares sold short (short interest) of float, the greater the risk that any positive news can send shares soaring, because demand will exceed supply. This is a classic short squeeze. The short sellers’ losses mount, they begin to cover, and their buying drives the price up further. No wonder any investor who ignores this metric often endures painful losses. The second metric is days to cover. Here, divide short interest by average daily share volume traded. This is an indicator of how tough it would be if all the short sellers had to cover at once. If days to cover are low, there is likely enough volume to allow short sellers to exit their positions relatively easily. If days to cover are many, then the risk of not being able to exit as prices rise is too high, and the dreaded short squeeze looms again.
You can lose capital permanently with just one trade like that. The ambulance doesn’t get there in time.
The eventual small SEC fine was a mosquito bite.
Those who did not see the revenue for the capitalized expenses—the accounting forest for the trees—and shorted AOL got killed
one of the very best ways to make money is by avoiding loss.
We want to compare the quarter’s DSO both year-over-year (to account for business seasonality) as well as sequentially (from one quarter to the following). Changes can come from economic slowdowns, poor collection, and so on, but the practice we want to catch is a change in payment terms that borrows revenue from the future to make this quarter look better than it is. Here is the key point that Wall Street gets wrong almost 100 percent of the time. Often, a company will report higher DSO, implying looser payment terms. Then management will comment in the quarterly conference call that the customers are of high quality, with good credit, so the company expects to collect on the receivables, and there is no risk to collection (la la la). Wall Street analysts usually take management’s word for it and then regurgitate this explanation in their own research reports. This is called “stuffing the channel.”
March 16, 2019
A great introduction to forensic accounting specifically applied to identify candidates for shorts in a traditional long-short portfolio position. Though the author technically covers both the long and the short sides of the strategy, the real value for the book is an exposition on introducing the reader to the pertinent docs/filings they will need to assess income/growth quality, which directly informs the decision to add a firm into the short list.
With respect to that strategy, the author focuses on identifying two main kinds of financial chicanery, those related to revenue manipulation, and those related to gaming inventory numbers. Both of these types of these potential illicit gambits are part of a firm's attempts to "channel stuffing", boosting "realized income" for a given quarter, by either accelerating progression in channel or delaying it, from "realizable income" that would have been realized in another quarter.
Much of this activity is informed by the nature of contracts on the sales side and shipping on the inventory side. In either case, the firm essentially cannibalized its future revenue to artificially meet some number valued by the street. The authors contend that quickly identify these patterns in the filings/quarterly and other line item statements are great decision criterion for short-list admissibility since they are historical predictors for poor performance in the mid/longer term.
Given its relative age, the book does show some interesting "historical curiosities" in the commentary, including the author's analysis of Netflix, which he shorted to great profit during an event in the early 2010s. Of course, we now know that Netflix has been one of the growth stories of this decade since 2010/2011, so whereas the author may have reaped dividends on the short, in that particular case the long position would probably have also realized good returns as well. This aspect of trend in trading is not discussed much in the book, but that can be understood since it's really not in scope and there are probably many other books more suited to detail that topic.
The final section on the long position is basically a 3-hour override of "deep value"/small caps and is basically rehashing Graham style special situation/cigar butt value identification. Definitely better books on those, including the "Manual of Ideas", "Ground Rules", and of course "Security Analysis". Still, good to have that bit here in this book to lead newer readers in the right direction.
Overall great read, will need the charts to understand the text, so straight audiobook won't do it. Also, buy the Kindle or a second-hand physical copy. Recommended
With respect to that strategy, the author focuses on identifying two main kinds of financial chicanery, those related to revenue manipulation, and those related to gaming inventory numbers. Both of these types of these potential illicit gambits are part of a firm's attempts to "channel stuffing", boosting "realized income" for a given quarter, by either accelerating progression in channel or delaying it, from "realizable income" that would have been realized in another quarter.
Much of this activity is informed by the nature of contracts on the sales side and shipping on the inventory side. In either case, the firm essentially cannibalized its future revenue to artificially meet some number valued by the street. The authors contend that quickly identify these patterns in the filings/quarterly and other line item statements are great decision criterion for short-list admissibility since they are historical predictors for poor performance in the mid/longer term.
Given its relative age, the book does show some interesting "historical curiosities" in the commentary, including the author's analysis of Netflix, which he shorted to great profit during an event in the early 2010s. Of course, we now know that Netflix has been one of the growth stories of this decade since 2010/2011, so whereas the author may have reaped dividends on the short, in that particular case the long position would probably have also realized good returns as well. This aspect of trend in trading is not discussed much in the book, but that can be understood since it's really not in scope and there are probably many other books more suited to detail that topic.
The final section on the long position is basically a 3-hour override of "deep value"/small caps and is basically rehashing Graham style special situation/cigar butt value identification. Definitely better books on those, including the "Manual of Ideas", "Ground Rules", and of course "Security Analysis". Still, good to have that bit here in this book to lead newer readers in the right direction.
Overall great read, will need the charts to understand the text, so straight audiobook won't do it. Also, buy the Kindle or a second-hand physical copy. Recommended
August 9, 2017
Some decent accounting tips and info, some technical analysis and some self promotion.
May 23, 2025
To understand a company you need to look beyond the numbers. Will teach you to be critical
Stop looking at the income statement so much
I wish this app had partial ratings
Stop looking at the income statement so much
I wish this app had partial ratings
April 8, 2013
The book is strictly alright. Some of the good points covered are deferred revenues and finding ways of looking at disclosures - something that even experienced investors start overlooking after a while.
But the book is a drag because there is a lot of fundamental stuff which would be boring for practitioners.
Somehow he puts in stuff about technicals, value investing, shorting, etc.
A good browse - nothing more.
But the book is a drag because there is a lot of fundamental stuff which would be boring for practitioners.
Somehow he puts in stuff about technicals, value investing, shorting, etc.
A good browse - nothing more.
August 9, 2013
Best book on investing I have read in a long time.
February 18, 2013
If you handle your own investing, this very readable guide is indispensable.
March 30, 2017
Good investing book. Simple intro to public company financial statements.
Displaying 1 - 10 of 10 reviews