Public Equities and Fair Value
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Valuation Storm Brewing
From VC Confidential
Article regarding FAS 157 -
Final Regulations Under Section 409A
From Ask the VC - PEIGG Issues Updated Guidelines
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A good friend of mine is an analyst at a large, well-regarded hedge fund. We fell into conversation about the New Dial, and how valuation specifically relating to SFAS 157 is influencing the way publicly traded companies are reporting earnings.
My friend subscribes in part to the investment philosophy of Martin Whitman, who -- aside from being a storied value investor -- is a well-known critic of the direction of recent changes in GAAP. Mr. Whitman favors GAAP for the protection of creditors, not equity investors, and sees recent attempts at transparency as self-defeating.
My friend’s perspective: smart investors put their faith in companies whole, not a string of reported numbers. The “primacy of the income statement,” as Mr. Whitman calls it, is an unfortunate byproduct of humans having a limited capability to measure the immeasurable. In other words, there are many semi-transparent windows into a company whole. The more windows you keep in view, and the more clearly you can view what lies behind them, the more accurate will be your assessment of the company. Some of these windows are quantitative, but many of the most meaningful windows are qualitative. To be too highly focused on a thin slices of quantitative data, such as earnings numbers, is a silly approach to investing.
What does SFAS 157 do for this analyst? Perhaps it presents a few additional windows to peer through, because it certainly gives management some new dials to turn. So if an analyst can come to a thorough understanding of how to peer through these newly crafted windows, then perhaps there is more transparency in the system. The challenge that presents itself is this: if the new data is too highly nuanced – if the New Dials are so complexly manipulated, and only a few practitioners can actually understand what’s really going on behind the reported numbers, then what we have is further opacity, not transparency. Right?
Which will be the case? Certainly we hope for transparency. The US markets have always been attractive in part due to the strength of our regulatory system. Let’s hope we’re marching forward, not backward.