The Accruals Anomaly: Idea Exchange
It’s Friday night, and I’m waiting to go out. In the meantime I’ve decided to start a friendly challenge for my blog visitors.
The stock market is so vast with data that all types of “anomalies” can be “discovered” in hindsight. One anomaly that I believe will exist till the end of time is the accruals anomaly. You really can make profits more or less consistently by buying stocks of companies with conservative accounting and by shorting stocks of companies with aggressive accounting. With your input, I would like to compile a list of both types of companies here. I will reciprocate each idea with one of my own. Just provide a brief description of how reported earnings do not reflect true economic earnings.
All the best. . . .
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@Veblen:
I’m sure you are right. In fact, Sanford C. Bernstein had a great article on the topic a few years back. If you click here https://www.alliancebernstein.com/Research-Publications/CMA-created-content/Institutional/Summaries/27182_BalanceSheetAccruals_AnOverlookedSignalOfFutureStockPerformance.htm and then click on “Black Book Version” on the right hand side, you should be able to download the PDF. Excellent analysis, IMHO.
My problem after reading it was the difficulty of a guy who struggled a bit with accounting in B-school… identifying exactly what line items should I screen for? I know accounts receivable, accounts payable, and prepaid expenses are likely targets, but surely there must be others. Any suggestions?
And as for implementation, I presume it best to create a common size balance sheet so you can look at the percentage of total assets and get a better sense of what items are accelerating.
Anyway, this is something I find interesting, so please respond or email me if you’d like to trade ideas.
Best,
Peter
Thanks for the great link!
You bet! Hope you can find some good longs and shorts with this info. And if you do, please share – I’m sure they would make good case studies.
Peter, If you want a primer on what to look for, get a copy of Dr. Howard M Schilit’s “Financial Shenanigans” (McGraw Hill) 2nd ed. I have a vague recollection that the author had a website and newsletter – I don’t have the details – I guess you can find that stuff with a Bing search. Cheers,
Thanks, Nemo! I’ve had that book in my Amazon wishlist for a while, but it sounds like it is time to get it and read it. Thanks again.