cash flow statement<\/a> the income statement and the balance sheet. For example, you brought up Enron Dave; I talked about that my value trap indicator book that was a company actually that the way they manipulated their numbers they were able to make their income statement look good but they weren’t able to hide how much debt they were loading up on.<\/p>\nSo even though they were able to in a sense manipulate how the numbers worked in one in one aspect they weren’t able to hide it in the other that’s why it’s important not to get narrow focus don’t be like a horse with blinders on the side and just look at one little set of numbers but look at the whole picture.<\/p>\n
Right if we have the circle of life we have this sum flow of cat of cash and money and if one little part of its broken and then it’s all going to leak out right. So you want to make sure that the whole picture is that you’re looking at the whole picture and that’s really one big way that you can avoid an earnings manipulation another thing I really don’t want to get too technical and honest to god I always try not to get too technical, but I can’t help myself when you have revenue is something that’s a lot harder to manipulate than earnings because earnings there’s a lot of things you can do with it.<\/p>\n
You can say oh well you know I’m paying this employee this much this year and this much of that year and all we have to pay taxes this much this year this much that you’re you can as an accountant you can kind of pick and choose in the sense of where to put those numbers and what years and things like that and it’s still legal.<\/p>\n
But with revenue you can’t do that. It’s literally: this is the money that’s coming in, and there’s not much wiggle room.<\/p>\n
One way that you can mitigate earnings manipulation is to look at revenue. Another way to mitigate, and you saw the manipulations, is to look at the whole picture and see okay if everything looks nice. Say there’s this one thing that they’ve really mucked up, and it’s really smelly over here, well let’s sniff that out and let’s make sure that the whole thing is solid.<\/p>\n
These are just kind of some of the things if you’re first starting now try to get the basics of this understood so that as you move along you’re not blindly jumping into these things that can trip up investors.<\/p>\n
Again it doesn’t happen all the time, I haven’t heard of any so sort of earnings manipulation in years, and you know obviously they tend to kind of all pop up around the same time– when all these businesses are crashing and the economy is going through a sort of depression and the stock market is in a bear market.<\/p>\n
I think another way is to evaluate management themselves and use that as a basis to avoid these kind of poor situations where you can get your capital taken away like a Bernie Madoff type of deal just because you didn’t do any due diligence on where your money’s going as far as how it’s being used in the stock market.<\/p>\n
Dave:<\/strong> exactly no you\u2019re your that was a great way of putting everything and I think that was really what I was trying to go for when I was talking about that I certainly wasn’t trying to be doom and gloom but I just I do want to make sure people are looking at the whole picture, and I think that is, so that’s so important to look at the whole picture and have a kind of your eyes open about everything you know.<\/p>\nAs my basketball coach used to say you know dribble with your eyes open and with your head up and I think that’s one of the things when you’re thinking about buying a company is making sure they just you got all your ducks in a row, and you looked at you know you’ve done your due diligence, and you’ve tried really hard to look at all the aspects that you possibly can and make an informed decision, and that’s really what anybody could ever want.<\/p>\n
Andrew is right there hasn’t been any earnings manipulations and in quite some time and hopefully, there never will be. But you know I think it’s good for you always to make sure that you’re just dribbling your eyes up with your eyes open and with your head up.<\/p>\n
Andrew<\/strong>: I love that obviously there’s so much potential with the stock market and so many things that can be done there’s so much money to remain on Wall Street it’s been done for years I will continue to be done for decades but with the important caveat that yes be careful this is serious business this is your hard-earned cash, and it’s not as simple as just throwing money around and being like oh well I like this company or oh I use this company every day maybe I want to buy that.<\/p>\nIt’s not that simple and it’s not as complex as oh I have to interview management and watch what they’re doing from 9:00 to 5:00 it’s somewhere in between that and so be realistic be optimistic and I think the way you put it or I guess your basketball coach put it is really great you know dribble and keep your eyes open and your head up.<\/p>\n
Dave:<\/strong> yep I agree so I think without I think that’s going to wrap it up for us for tonight. I hope you enjoyed our conversation of going back to the basics and I think Andrew did a great job of explaining what a stock is and kind of the circle of life so to speak with the big three with the earnings the cash flow statement and the assets and balance sheet the book value.<\/p>\nSo I think without any further ado I’m going to go ahead and wrap it up. I hope you guys enjoyed our show you guys have a great weekend we’ll talk to you next week.<\/p>\n","protected":false},"excerpt":{"rendered":"
This is part 1 of the 5 episode “Back to the Basics” series from The Investing for Beginners Podcast. Each episode covers the fundamentals of the stock market and investing to provide a solid foundation for those who are looking to compound their wealth over time. Here are the links to each of the episodes: […]<\/p>\n","protected":false},"author":8,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"footnotes":""},"categories":[5973,1178],"tags":[136,5845,316,70],"yst_prominent_words":[1462,1870,5850,5846,1314,1986,5849,1241,1827,5853,1991,5716,5851,5848,5852,5847,5654,1179,4718,1995],"_links":{"self":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts\/6467"}],"collection":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/users\/8"}],"replies":[{"embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/comments?post=6467"}],"version-history":[{"count":1,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts\/6467\/revisions"}],"predecessor-version":[{"id":21338,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/posts\/6467\/revisions\/21338"}],"wp:attachment":[{"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/media?parent=6467"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/categories?post=6467"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/tags?post=6467"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/einvestingforbeginners.com\/wp-json\/wp\/v2\/yst_prominent_words?post=6467"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}