Accounting earnings are easy to manipulate while fundamentals crumble. A Credit Suisse analyst once admitted maintaining two sets of numbers: one for public disclosures, another for institutional clients. Wall Street research serves bankers, not investors, making it a dangerous basis for executive pay.
Chapters
Whatever you do, don't pay executives based on accounting earnings because they can grow accounting earnings while running the business into the ground. And I realized that there was a whole tip of the iceberg. Like the earnings report is the tip of the iceberg, and then there's all this information, balance sheet, cash flow, footnotes underneath it that affect earnings. And I was very fortunate early in my career to learn about all that data, learn how to model it. And then when I went to Wall Street, big moment for me, George, was during the tech bubble when I was talking to the analysts that cover technology at Credit Suisse. And by the way, Credit Suisse was the number one tech IPO banking firm during the internet bubble. So they were also, you know what I mean? So they were the most crooked, right? And one of the meetings I'll never forget was when talking to them about using the model I created and the model I created for the firm was one that focused on this comprehensive measure of earnings, a better measure of earnings, right? And These tech folks were new to the firm. Like they weren't there when I got there. They came in and a lot of things changed when they came in. But what they told me was like, David, we can't use your model because we have 2 sets of numbers. I said, what do you mean? He said, well, you know, the game works like in order for stocks to go up, they got to beat the number. So for the stocks I like, I have a low estimate. Like, well, how does that work for your valuation then? He goes, oh, I have a different number for my institutional clients. That's how I, you know, that's what supports my valuation. And I talk to them about that, but the number I put to the public is different. And I remember just being befuddled. Like, I didn't know you could have 2 numbers. When I went back to my boss and said, hey, this just happened to me. He just goes, no, no, no, don't tell me, go, go, go tell the global head of research. Like he didn't want to know because it's effectively illegal behavior and it's now illegal now. And so that's, you know, when I, when I experienced that, I realized that this thing that people think Wall Street is, which is a place of great research and super smart people doing all this great work to analyze companies, it's not that at all. The research serves the investment bankers. It's a mechanism to help the bankers sell more stock.
