Motley Fool Money
Hand-Wavy Finance
Sat Jul 15 2023Description
The episode discusses various tactics used by companies to manipulate financial expectations and investor sentiment. It explores hand-wavy finance techniques, rebranding strategies, financial engineering methods, and the question of truthfulness in job interviews. The chapter also highlights the importance of low-cost index funds and cautions against making investment decisions solely based on podcast content.
Insights
Hand-wavy finance
Companies often use hand-wavy finance techniques to distract investors from bad news or distort reality. This includes focusing on trendy topics like AI and rebranding the company to align with current trends.
Financial manipulation
Companies employ various tactics to manipulate financial statements and present more favorable numbers. These include adjusting earnings statements, using different metrics like EBITDA, and engaging in financial engineering practices.
Strategic information management
Companies strategically manage information to manipulate investor sentiment. This includes sandbagging, the big bath theory, and smoothing earnings through accounting practices. The question arises whether investors prefer real-time truthfulness or strategic information management.
Truthfulness in job interviews
The episode explores the dilemma of truthfulness in job interviews. While hiring managers may not want to hear about past failures and weaknesses, maintaining optimism as CEOs is crucial. It also discusses Vanguard's non-hand-wavy investment approach and the importance of not solely relying on podcast content for investment decisions.
Chapters
- Hand-wavy Finance and Rebranding
- Financial Manipulation and Accounting Practices
- Financial Engineering and Strategic Information Management
- Truthfulness and Optimism in Job Interviews
Hand-wavy Finance and Rebranding
00:01 - 07:02
- Steve Jobs deliberately lowered Wall Street expectations for Apple to create positive surprises each quarter.
- Hand-wavy finance refers to techniques used by companies to draw attention away from bad news or distort reality.
- One example of hand-wavy finance is when companies focus on shiny new things like AI to distract investors.
- Mentions of AI in earnings calls have increased significantly, while mentions of ESG have decreased.
- Hand-wavy finance often lacks unique perspectives and involves rebranding the company to align with trends.
- Companies like Facebook reposition themselves as metaverse companies, even if their core business is different.
- Kroger CEO mentioned artificial intelligence instead of data science, causing a drop in stock price.
- Using sophisticated language like algorithms can make things sound more impressive and less questionable.
Financial Manipulation and Accounting Practices
06:32 - 13:47
- Using an algorithm can make instructions sound more credible and trustworthy.
- Looking at how companies address bad news can reveal hand-wavy tactics in finance and investing.
- Adidas is facing inventory problems after breaking ties with Kanye West, their main profit engine.
- Adidas CEO downplays inventory problems by highlighting jerseys made for the World Cup.
- Adidas' sales are flat at 5.3 billion euros, but up 7% without the Yeezy brand.
- Gross profit has decreased by about 5% due to discounts and write-offs of inventory.
- Adidas missed top line sales in North America, which was expected according to the CEO.
- Nautilus used a comparison baseline to make a small increase seem significant, despite a significant decrease in net sales.
- Companies have ways of adjusting earnings statements to present more favorable numbers.
- Earnings before interest and taxes (EBIT) is useful for comparing companies as it ignores debt.
- EBITDA adds back depreciation and amortization to the EBIT number, ignoring capital expenditures.
- If EBITDA still doesn't work, companies can adjust EBIT.com by adding back stock-based compensation and one-time charges.
Financial Engineering and Strategic Information Management
13:25 - 20:23
- Companies can use financial engineering techniques to manipulate Wall Street expectations and investor sentiment.
- Sandbagging is deliberately lowering Wall Street expectations to exceed them and create positive investor sentiment.
- Apple's Steve Jobs was known for sandbagging, while General Electric's Jack Welch aimed to meet expectations precisely.
- The big bath theory involves throwing all the bad news in one quarter to make future quarters look better by comparison.
- Investors should be cautious of companies using the big bath strategy as it may indicate underlying issues.
- Smoothing earnings is a financial engineering technique where companies manipulate accounting practices to achieve desired results.
- Banks often use aggressive or conservative estimations when accounting for bad loans, allowing them to smooth earnings over time.
- Admitting past mistakes can be a strategic move for companies, similar to Domino's Pizza acknowledging their previous pizza quality.
- The question arises whether investors want companies to tell the truth in real-time or strategically manage information.
Truthfulness and Optimism in Job Interviews
20:03 - 22:49
- The question is whether we want people to tell the truth in real time, especially during job interviews.
- Hiring managers may not want to hear about past failures and weaknesses from candidates.
- Managers may constantly be putting out fires and need to maintain optimism as CEOs.
- Vanguard offers a non-hand-wavy investment approach with low-cost index funds like VTI.
- Investing in the entire stock market through Vanguard eliminates the need for detailed analysis.
- Vanguard provides exposure to all types of companies, including AI-focused ones like Tesla.
- Jack Bogel's books on Vanguard are informative but dry, emphasizing simple investing principles.
- The Motley Fool reminds listeners not to make investment decisions solely based on podcast content.