Good Losses, Bad Losses

July 20, 2022

Good Losses, Bad Losses

Consilient Observer

Good Losses, Bad Losses

July 20, 2022

All Losses Are Not Created Equal

Accounting is the language of business and certain principles, including conservatism, guide how accountants reflect the range of business activities on financial statements.
Investors must look past simple measures of profits to understand a business’s true ability to create value.
The rise of intangibles means more investments than ever are expensed immediately versus capitalized, which makes the financial statements of today appear distorted relative to those of the past.
Academics distinguish between GAAP losers, companies that have losses but a high return on investment, and real losers, or those that have expenses unrelated to investment that exceed sales.
Evidence from recent decades shows that GAAP losers produced attractive total shareholder returns relative to the real losers and profitable companies.

Download PDF

Counterpoint Global’s culture fosters collaboration, creativity, continued development, and differentiated thinking.

Related Insights

Consilient Observer

New Business Boom and Bust

15-Jun-2022

Burgeoning industries often follow the same developmental pattern as a child’s brain, with an overproduction of options followed by a pruning of those that are not useful. This appears wasteful but is in fact an elegant solution. We discuss this pattern for companies, describe why investors should care, and offer some current examples of where this pattern of entry and exit is playing out.

Consilient Observer

Wealth Transfers

10-May-2022

Investors focus on management's investments in the business, but they should also pay attention to wealth transfers that arise from management buying and selling the company’s stock.

Consilient Observer

Intangibles and Earnings

12-Apr-2022

The shift from tangible to intangible investments has complicated the ability to interpret financial statements. One solution is to record intangible investments on the balance sheet and then amortize them over their useful lives. These adjustments recast profitability for some companies and are inconsequential for others. Overall, we estimate that earnings for the S&P 500 would be about 10 percent higher with these changes. This suggests great caution in comparing earnings or valuation multiples over time.

IMPORTANT INFORMATION

The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm”), and may not be reflected in all the strategies and products that the Firm offers.

This material is for the benefit of persons whom the Firm reasonably believes it is permitted to communicate to and should not be forwarded to any other person without the consent of the Firm. It is not addressed to any other person and may not be used by them for any purpose whatsoever. It is the responsibility of every person reading this material to fully observe the laws of any relevant country, including obtaining any governmental or other consent which may be required or observing any other formality which needs to be observed in that country.

This material is a general communication, which is not impartial, is for informational and educational purposes only, not a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy. Information does not address financial objectives, situation or specific needs of individual investors.

Any charts and graphs provided are for illustrative purposes only. Any performance quoted represents past performance. Past performance does not guarantee future results. All investments involve risks, including the possible loss of principal.

For the complete content and important disclosures, refer to the article pdf.