What’s Behind the Numbers? Book Review

What’s Behind the Numbers? Book Review

This is an ambitious book.  It tries to draw together financial statement analysis, value investing, short-selling, technical analysis, market timing, and portfolio management into one slim book of 254 pages.

It spends the most time on financial statement analysis, going over revenue recognition, inventories, and all of the squishier areas of accounting that most industrial companies face.  It will not help you much with financial companies, they are far more complex, and deserve a book all their own.

I was surprised that the book did not suggest common summary measures of accounting quality, such as Normalized Operating Accruals.  It did feature Cash Flow from Operations less Net Income, which is almost as good.

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The book focuses on the short side — how do you make money from failure?  The long side suggests maxing out on small cap value stocks, and idea which  I like, but can get overfished at times.

Think of it this way: do you want to run a portfolio that is systematically short company size, long value, short liquidity, long quality, etc?  I helped do that for 4.5 years at a hedge fund, and boy that ride was bumpy.  The market can remain insane longer than you can remain solvent.

But, to the book’s credit, it understands position sizing for short positions, which is momentum following.  Short more of things that fall.  Do not add to shorts when the prices rise.  This is a key insight of the book, and it is a reason why value managers often don’t do well in a long-short context.

My last complaint is that the book does not explain even in broad terms how they balance the various portfolio management ideas.  If you buy this book, you are on your own.  You do not  have a full roadmap to guide you.  If you were going to use this as a main strategy, you would have to fill in a lot of holes.

Now, I’m often critical of turn-the-crank books — follow my rules, and you will make money.  But I am more critical of almost turn-the-crank books — follow my rules, and you still won’t know exactly what to do.

Is this a good book?  Yes.  Read it and you will learn a lot.  Will it help you analyze stocks?  Also yes.  You can make a lot more money by avoiding stocks with a high probability of losing money.  Will it tell you exactly what to do?  No.  That is a strength and a weakness — I’m not sure any book on investing that offers a formula can be exact, and be good.  Investing is an art, not a science.  Then again, science is an art, not a science, but that’s another topic — all the great discoveries come from not following the scientific method.

So if you want to learn, this is a good book.  If you want a foolproof way to make money, sorry, this won’t do it for you, and the same for almost every other investment book.


There are far better books on all of the topics that they cover, and most of them have been reviewed at my blog.  Far better to read books that specialize on a single topic, than one that is a hodgepodge.


This is a good book, but average investors should not buy it as a formula, because they can’t implement it.  Average investors could benefit from the book, because it gives them a taste of a wide number of investing topics.  Just be aware that you aren’t getting a full dose of anything.  If you still want that, you can buy it here: What’s Behind the Numbers?: A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio.

Full disclosure: I borrowed this book via Interlibrary Loan.  It is going back tomorrow, and I will not buy a copy to replace it.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

By David Merkel, CFA of alephblog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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