Financial Shenanigans by Howard Schilit

 

Book No. 1: Financial Shenanigans by Howard Schilit

(Source: Amazon.com) 

Companies lie on their financial reports. Whether through omission, misclassification, or just outright fraud, lies that distort the fundamentals are common, and investors must know where to look to find them.

While some background knowledge of the income statement, statement of cash flows, and balance sheet is helpful, we like this book because the author uses real-life examples without the need for an accounting degree to understand how a company might try to mislead you. Some of the company names in the book might be a surprise but make it all the more enjoyable.

As you might imagine, although the tricks illustrated in the book have been revealed, other companies will try to pull them over on shareholders every year. The author put it best when he said…

Executives’ desire to put a positive spin on financial results has been around for as long as corporations and investors themselves. Dishonest companies have long used these tricks to prey on unsuspecting investors, and it is unlikely that will ever change. As King Solomon observed in the book of Ecclesiastes, “What has been will be again, what has been done will be done again.”

What we like about a book like this is that it helps traders know what not to buy, which is just as important as knowing what looks good. For investors with greater risk tolerance, identifying liars in management is also a great way to find stocks to short in a bear market.