John Del Vecchio - Whats behind the numbers?: a guide to exposing financial chicanery and avoiding huge losses in your portfolio

Copyright 2013 by John Del Vecchio and Tom Jacobs. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

ISBN: 978-0-07-179198-4
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To my parents Barbara, John, and AllenJDV
To my partner Vilis IndeTJ

We thank our agent, Bob Mecoy, for his steady hand, unfailing confidence, and sense of humor and our sponsoring editor Stephanie Frerich at McGraw-Hill, for taking us on and being enthusiastic, patient, and good-humored. We couldnt be more fortunate with agent and editor. We also thank The Motley Fool for giving us both our starts and the freedom to grow, and for encouraging all viewpoints and strategiesnever a party line. And thanks to Motley Fool colleagues and friendsanalyst Alex Pape and senior analyst Michael Olsen, CFAfor taking scarce time available after their demanding jobs to provide comments and corrections on parts of the manuscript. And to technical writer, graphic artist, and fine artist Martha Hughes for manuscript preparation.

JDV: I would like to thank my parents Barbara, John, and Allen for all their love and support over the years. Special thanks to my business partner Brad Lamensdorf. Without him, The Active Bear ETF (HDGE) would not be possible. Thanks to Dean Somes, Jeff Williams, and Tom Sprunger for all their hard work on market timing. Jeff Middleswart for allowing us to use my work as case studies in this book. Tom because this book would not be possible without him. And finally to The Motley Fool where Tom and I first met and a place that spawned many opportunities for us in the ensuing years.

TJ: I would like to thank John for introducing me to the field of earnings quality early in my value investing career, asking me to do this book with him, and being a great collaborator and friend. To The Motley Fool for giving me my first and many opportunities as an investment analyst and to make lasting friendships there. To my late father, who bought me two shares of Ford Motor in 1968 to start my investing life, and taught me economics lessons (some of which I remembered and others only through mistakes). And foremost to my partner, Vilis Inde, for his many years of love, support, good humor, and patience.

Simple: Show me where Im going to die, so I dont go there.

Many investors have owned a stock that skipped merrily on its way higher and higher, the CEO a deity, everything skittles and beeruntil one day they wake up to see that stock has detonated a bomb in their brokerage account. They had whistled past the graveyard, and now they are in it. With this book, you wont be one of them. We help you find where the investing bodies are buried, so you dont join them.

The world has never known since the earliest slingshot hawkers at the corner of Boulder and Dinosaur a time without financial chicanery. From Dutch tulipomania to the first joint stock companies, 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.

Shareholders be damned was the smug rule of managers until the Crash of 1929 and Great Depression led to their first obstacle, the 1934 founding of the U.S. Securities and Exchange Commission. Sure, the Great and Glorious Company Management Oz still tried smoke, fire, sound, and nonsense to prevent Dorothy and the shareholder gang from paying attention to what was really behind the curtain, but when the persistent Totos could finally poke their noses behind the management curtain, they did so with the watchdog SEC on their side.

The game may have become tougher in the ensuing decades, but managements have remained inventive. Some know they can placate the majority of shareholders with high-calorie, low-nourishment earnings press releases. Its then just a touch more work to distract the handful who actually listen to earnings conference calls or read the transcripts, but after that its a breeze. Few investors even glance at company SEC filings, and only a fraction of those burrow into their seemingly objective financial statement lines and obscure notes.