Now in 2014, this book is nearly 30 years old. The author probably never anticipated that all financial statement analysis could be quantified and available for FREE on the Internet. However, the simple lessons the book offers are timeless because of the clear message: The GAAP rules are flexible enough to allow companies to present earnings data in a favorable light without bending any of the rules. Below are examples of the healthy skepticism championed by the author that continue to be relevant 30 years later.
The chapter dealing with Non-Recurring Earnings asks what should be done with Investment or Interest Income, are they part of operations or are they not? -- O'glove teaches how to look at earnings from Major Retailers and find that on 24% came from income other than what was sold in stores, and then poses the question about whether this should be included or excluded from the Bottom Line when analyzing whether the company is a good investment.
The chapter dealing with items on the Balance Sheet, particularly accounts receivables and inventories. O'Glove teaches to look inside the inventory balance and find what contributes to that number, and analyze whether that inventory balance is due mostly to finished goods sitting on shelves, signaling future problems with slowing sales or write-offs. O'Glove uses the example of Apple under John Scully in 1985, when its finished-goods inventory nearly tripled from the prior year and Scully explained the subsequent rally resulting from better inventory turnover.
The chapter on Dividends and Share Buybacks explains how increasing a dividend payout can subsequently lead to a worse return for shareholders than if the company performed share buybacks of common stock. The illustration of Wester Union is an example of companies becoming locked into paying dividends rather than a more efficient return to shareholders.
BOTTOM LINE: O'Glove teaches an analytical approach that requires work, but applying these lessons properly can make the difference between investing in the next WorldCom or the next Apple. Fortunately, O'Glove lessons have been converted into an Excel Spreadsheet by engineer Jae Jun at his Old School Value (OSV) website. The financial statement data comes directly from Morning Star, the proprietary algorithms are 100% transparent and all the tools focus on finding out what happens at the Publicly Traded Company Behind the Scenes. Once you become familiar with the Spreadsheet, modify to fit your needs, observe whether companies use GAAP tricks to brighten their earnings ... All this automated into a Spreadsheet that cuts down analytical time to 10 minutes at the most, allowing you to save time and read the Annual Report footnotes of worthwhile companies.
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Top reviews from other countries
Giuseppe
A bible for a Value investor disciple. A gripping, straightforward manual.
Reviewed in Italy on February 27, 2021Harsh Behere
A must read for serious investors
Reviewed in India on October 26, 2020
RYAN Semillano Soriano
Buenísimo. Muy recomendable!!
Reviewed in Spain on October 7, 2019