10 Investment Guidelines: Part 2
Second, when it comes to unaudited financial statements, one has to be careful. Typically, only annual financial results, not quarterly, are not audited, but most public companies will have the quarterly financial statements reviewed by independent accounting firms before disseminating the information to the public. Therefore, on some level, while the greatest amount of accuracy will be present in the annual financial statements, we should not dismiss the quarterly unaudited statements.
When it comes to GAAP vs. "pro forma" accounting, it is best to understand what the differences may be for those two types of accounting styles. There may be some very good reasons to favor "pro forma" over GAAP for certain companies and under certain conditions. But be careful not to fall into the "pro forma" accounting trap that hurt so many investors during the tech and internet mania of the 1990s. 8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce. The bottom line of investing is that it is all about risk vs. return. If everyone is chasing the same investment opportunity, then it is likely that capital is abundant rather than scarce. When capital is abundant, then there tends to be a sense of urgency to deploy that capital, and returns are chased. As capital remains cheap, we will create conditions whereby excessive speculation runs rampant and potential "marginal moron" conditions can be created. When capital is scarce, then opportunities to the investor will be attracted to the capital. This allows the investor to be far more selective across a greater array of investment alternatives. Hence, return on capital outcomes will tend to be higher as investors separate higher return opportunities from lower return alternatives.- Loading Comments...
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