Fundamental Reporting: Core Model
In the short-run, the market is a voting machine ... but in the long-run, the market is a weighing machine.- Benjamin Graham (Warren Buffett's mentor)
What's Wrong With Reported Figures?
The primary purpose of many reported figures is for accounting and the IRS; earnings do not necessarily represent the true economic performance or financial state of a company. For example, earnings do not indicate whether the company is sitting on a mountain of cash or slipping into a black hole of debt - just the performance over a particular period. This is precisely why Warren Buffett and many other professional investors construct their own performance metrics.
Another and perhaps more important reason we do not follow reported earnings is earnings figures ignore the costs associated with share buybacks. While buybacks are almost universally hailed as positive developments by analysts and media pundits, many companies compromise their balance sheet and future growth in the pursuit of the short term glory associated with reporting higher earnings.
In reality, buybacks decisions have a significant impact on the long-term performance and are only good for shareholders when companies repurchase shares at fair or dear valuations. Unfortunately, buyback activity is very cyclical and correlates strongly with market performance. In other words, most share repurchases are executed at elevated market valuations and ultimately dampen long-term performance.
The Core Model
Instead of relying on reported figures, Fundamental Reporting focuses like a laser on the fundamental value ultimately created for and retained by shareholders. This is what would be weighed on the metaphorical scale in Graham's quote above. Our model summarizes value created for and retained by shareholders by monitoring the three places profits end up:
- On the balance sheet: Profits retained on the balance sheet should increase shareholders' net asset value (NAV) on the balance sheet. We monitor whether there is more or less equity for shareholders.
- In the open market: Companies often repurchase their own shares in the open market. We monitor the net impact to identify whether shareholders have been diluted or buybacks have increased their stakes.
- With shareholders: Companies often share their profits with shareholders in the form of dividends. We keep track of all of the dividends received by individual shareholders over each period analyzed.
Looking at fundamental performance in this way accounts for both operating performance and the net impact management has on companies via buybacks. Our model produces the most comprehensive and accurate summary of fundamental performance available. Please watch our videos below as we explain why fundamentals can be important, why Fundamental Reporting is the best lens with which to monitor them, and how the core Fundamental Reporting model works.
Fundamental Reporting Videos
Part 1: Why Focus on Fundamentals?
Part 2: Why Fundamental Reporting is Better
Part 3: Fundamental Reporting Mechanics
FR: Another Perspective on the Credit Crisis
Two Fundamental Reporting Tools
Our Fundamental Reporting tools can be used by virtually any fiduciary, investment professional, or investor involved in analyzing or managing equity portfolios.
- Our tools and data rely on data from third parties. While we try to ensure that the data is accurate, we cannot guarantee its accuracy. We encourage our users to report suspicious data to us so we can verify or fix the data.
- Much of the data we use is derived from financial statements. It is thus vulnerable to varying reporting conventions and potential manipulation. As a result, our figures and tools may materially misrepresent the true financial health or performance of some companies or portfolios.
- Fundamental Reporting expressly denies any and all responsibility for actions taken as a result of the information provided.
- Fundamental Reporting is provided as a supplement to other reporting and research tools. Investors, advisors, and other users of the Fundamental Reporting tools should conduct a broader and more thorough analysis of each investment in the course of their own due diligence prior to making any investment decisions or rendering advice.
- While Fundamental Reporting provides information regarding equity portfolios, it does not recommend any particular investments.
- Individual investors should consult a financial professional before making investment related decisions.