Earnings Manipulation for Pros

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The Wall Street Journal has a fascinating little story today. A pair of Stanford researchers examined half a million earnings reports and concluded that companies routinely adjust their earnings upward. How did they figure this out? It turns out that a favored way of doing this is to use accounting adjustments to boost your earnings per share ever so slightly — say, from 5.4 cents to 5.5 cents, which then gets rounded up to 6 cents. And a difference of a penny a share in the headline earnings number makes a noticeable difference in your stock price:

The authors’ conclusions rest on a simple piece of statistical analysis. When they ran the earnings-per-share numbers down to a 10th of a cent, they found that the number “4” appeared less often in the 10ths place than any other digit, and significantly less often than would be expected by chance. They dub the effect “quadrophobia.”

….In their most intriguing finding, the authors found that companies that later restate earnings or are charged with accounting violations report significantly fewer 4s. The pattern “appears to be a leading indicator of a company that’s going to have an accounting issue,” Mr. Grundfest said.

So here’s your pro investing tip for the day: If you’re thinking of buying stock, check to see if the company has too few threes or fours in the first decimal place of their earnings-per-share numbers over the past few years. If they do, buy the stock! These guys know how to please the analysts. But don’t hold on too long! Eventually they’ll restate and you’ll be screwed. Timing is everything.

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SIX TRUTHS

Reclaiming power from those who abuse it often starts with telling the truth. And in "This Is How Authoritarians Get Defeated," MoJo's Monika Bauerlein unpacks six truths to remember during the homestretch of an election where democracy, truth, and decency are on the line.

Truth #1: The chaos is the point.

Truth #2: Team Reality is bigger than it seems.

Truth #3: Facebook owns this.

Truth #4: When we go to work, we're in the fight.

Truth #5: It's about minority rule.

Truth #6: The only thing that can save us is…us.

Please take a moment to see how all these truths add up, because what happens in the weeks and months ahead will reverberate for at least a generation and we better be prepared.

And if you think journalism like Mother Jones'—that calls it like it is, that will never acquiesce to power, that looks where others don't—can help guide us through this historic, high-stakes moment, and you're able to right now, please help us reach our $350,000 goal by October 31 with a donation today. It's all hands on deck for democracy.

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