September 25, 2019

Dear reader,

Today we bring you the second part of feature writer Alice Lloyd’s cover story on Professor Joel Litman.

It details how other Wall Street experts view his work… and how exactly he plans to get his system into the hands of regular U.S. investors.

Many of the biggest money managers on the planet – multibillion-dollar hedge funds, government-run sovereign funds, billionaires, and top financial advisers – use Joel’s “Investment Truth Detector” system to figure out the real earnings numbers before they buy or sell a stock.

Today, you can be one of the first individual investors to use his system, absolutely free.

In a special event this evening, Joel plans to walk you through the forensic accounting technique for which he’s been awarded a U.S. patent… and prompted invitations to speak at the top MBA programs and CFA societies in the world.

He believes it’s one of the biggest investment breakthroughs of the 21st century.

To reserve your spot for this FREE event, click here.

Righting Wall Street’s Wrongs

By Alice Lloyd, Feature Writer

The idea to right the wrongs baked into accounting rules was planted at the very beginning of Joel Litman’s career.

As a fledgling accountant, he (in his own words) “lucked into a job” working for the authors of the official guide to the generally accepted accounting practices (“GAAP”).

In his early 20s, he developed an appreciation for the rules’ circumstantial flaws – and an unusually sophisticated sensitivity to the institutional biases that held the status quo in place. He might have hardened into a cynic, but a teacherly temperament and innate interest in the deeper reasons why the world works the way it does kept him curious about what he might do differently. He recalls running up to his bosses with questions about the rules – “Why is a statement of cash flows not a statement of cash flows? There are a bunch of non-cash items. Why?” – questions for which there are no reasonable answers.

He worked as a consultant and then led a research team at the investment bank Credit Suisse – but he couldn’t forget what he’d learned working with the authors of the rulebook: that while the accounting rules may produce the wrong numbers, the real numbers are out there if you only take the trouble to look for them.

Knowing wasn’t enough for Litman… He wanted to spread the word. The uniform accounting database at Valens Research is essentially a list of companies and their actual values, spanning the 10 years since Litman founded the firm. It’s set up to highlight the reported prices that are most meaningfully different from their actual prices – the “oranges,” per Litman’s favored idiom, among “apples.” Litman’s system labels the misleading reported values in orange. The real, corrected values it casts in blue.

Corporate clients can consult the whole color-coded, decade-deep database or go by the reports and case studies Litman’s teams develop. And they’re in good company: Most of the world’s top long-term investors follow strenuously cleaned-up accounting, rather than rely on publicly reported financials alone. “The entire Wall Street establishment preaches as gospel an earnings number that’s regarded as nonsense by the top investors of the world,” Litman says, sounding a little like Thomas Paine: “Of the top 300 investors on the planet, 180 read uniform accounting research. Earnings aren’t the bottom line.”

The morning we met, Litman had been lecturing, via Skype, a business school class at the African Leadership University based in Mauritius. A volunteer engagement, the lecture went well into overtime when students got caught in a fever, yelling out companies – “Facebook!” “Tesla!” “Uber!” “Amazon!” – prompting Litman to recall whether they were accurately valued. Correcting for what the rules misrepresent, Facebook (FB) and Amazon (AMZN) are even stronger than they look. While Uber (UBER) and Tesla (TSLA) are just as weak, if not weaker, than reported.

These students were no different, Litman observes, in enthusiasm or expertise – no different from the audiences he addresses at the elite American schools where he lectures throughout the year, or at a recent rave-reviewed engagement at the Harvard Club. His lecture that day was an extended parable about Bruce Lee’s combat philosophy – seriously. “I love the whole Bruce Lee mentality,” he says. “The idea of creating one uniform system of martial arts, the best possible system. That’s what uniform accounting is: Let’s create one set of global accounting standards everybody can understand and get behind.”

Elsewhere in sports metaphors, uniform accounting fan Dave Daglio of BNY Mellon compares Litman’s uniform accounting to Oakland Athletics general manager Billy Beane’s famous Moneyball theory. “Joel’s methods ensure that liabilities, assets, or long-term investments like research and development are calculated correctly – and it provides a clear sense of what a company is doing, particularly how company is doing versus itself and versus peers,” he explains. “If you go to a baseball game and you watch a single game, you might think one hitter is particularly talented because he went three for four, but it’s the long-term numbers that matter.” Understanding how he hits curveballs, fastballs, good hitters and bad hitters – collecting the data – lets you know which player is actually the best. Litman does the same thing with companies: It’s Moneyball.

If Litman is the Billy Beane (or the Bruce Lee) of accounting, we’re all potential students of his craft. He’s now launching a new initiative that stands to greatly expand his reach: a subscription service to give independent investors access to his analysis and accounting database. It’s nothing if not a teaching tool. It’s the next step in Litman’s mission to mine the true math from the rubble of the broken accounting rules.

Being an accountant, “I’m pretty conservative in nature,” Litman admits: “It wasn’t until several years into my accounting career that I first said, ‘None of this makes any sense.'” Even so, the progression is clear. While working as a consultant, he felt he was able to make more of a difference – showing clients what the financials really meant – but he wanted to publish more widely. On Wall Street, however, no one was really listening.

Over the last decade, Valens’ research has found an eager audience. But it’s an audience limited to top investors and clients of the firm. With his next project – called Altimetry – the idea is bigger. As Litman puts it, “Let’s get this in the hands of Americans!”

For long-term investors, choosing the right companies is key. “He’s exposing me to data about companies I never would have looked at before,” says Whitney George, president of Sprott – a global asset-management firm, and a Valens Research client. George tells me he uses Litman’s database not just to monitor companies they own but also to screen for new investments he wouldn’t otherwise notice. And, with Altimetry, the extension of similar opportunities to individual investors is an appealing prospect. George – who, along with Daglio, serves on a uniform accounting advisory council Litman founded – has already signed up for the new service.

One unexpected upside of the new venture, he tells me, is its creative demand: Composing a colorful case study for his new subscribers is, in many ways, a richer challenge than pulling together a hard-boiled report for a corporate client.

He and his colleague Rob Spivey strolled the Boston Common, chomping on Philippine cigars, while they brainstormed a recent composition: “Florence Nightingale Was a Data Scientist.” It tells the story of the pioneering nurse and social reformer’s often-overlooked impact on the field of biomedical recordkeeping – all as a means of introducing Valens’ study of CVS Health (CVS) and Aetna’s new foray into large-scale biomedical data collection.

“He’s spending so much time and energy on this because he has a passion for trying to teach people how to really think about value and companies and strategies of companies,” says Miles Everson, the CEO of MBO Partners and, until recently, the head of global advisory and consulting at PricewaterhouseCoopers. “There’s an authenticity or an honesty and purity about how he sees the world – and the way he makes his money is obviously publishing the information and providing it, but he doesn’t feel slippery.” Everson argues that Litman doesn’t actually try to sell you on the companies he’s choosing to highlight. Instead, he’s just genuinely excited to tell you what he knows.

Individual investors and institutions technically receive the same advice at the same time. The CVS-Aetna analysis, for instance, goes to elite Valens clients and retail investors who sign up for Altimetry. But Altimetry subscribers get an engaging story about a historical heroine who harnessed the power of biomedical engineering. Whereas institutional clients get just the numbers and facts.

Taking such conventionally inaccessible, tedious, and technical material as the alchemy of accurate accounting and making it not just accessible but interesting and exciting for a general audience is the kind of impossible task only a natural teacher would want to take on.

“The teaching continues at every level,” Litman says, of the path that’s led him here – and its goal, all along, to find the most efficient way to tell the truth about financial statements. “If I could speak to a million people at once about this stuff, I would.”

Of course, that’s kind of the whole idea: Subscribe, and you’ll be one of them.

Now here are some of the stories we’re reading…

President Trump, Please End the American Era in the Middle East

Arguing with all the assurance that they showed when fingering Saddam Hussein as the source of all evil, they would have us believe that, once spanked, Iran will behave… 

Facebook says ‘tens of thousands’ of apps suspended over privacy issues

Facebook’s acknowledgment that its data privacy issues are significantly larger than it previously disclosed is sure to ratchet up political pressure on how it and its Big Tech brethren do business. 

White House infighting thwarts movement on guns

The competing forces have created paralysis with just about everybody involved in the discussions – most notably senators – and have delayed the White House’s release of its long-awaited package.

The Rise of Networked Vigilante Surveillance

What happens when you fuse startup culture, artificial intelligence, and fearful neighbors? Call it the rise of networked vigilante surveillance. And we’re not prepared for it.

Read our latest issues of American Consequences by clicking here.

And let us know what you’re reading at [email protected].

Regards,

Chris Gaarde
Assistant Editor, American Consequences
With P.J. O’Rourke and the Editorial Staff
September 25, 2019