How important is being good at accounting?
On the public markets side - how critical is it to really know a lot of accounting nuances with DTAs, DTLs, etc? I’ve been building models with pretty basic assumptions around those types of ideas and more focused on revenue builds, margins, etc but was wondering on whether it was something I was overlooking
Would also be interested to hear if anyone ever came across an interesting idea that was heavily accounting driven (stories and examples appreciated) and how to improve at finding those types of ideas
Let's put it this way: deep diving into accounting is more useful for a short than for a long imho.
Looking at deferred revenue trends, capitalized vs expensed R&D, accounting of owned entities (equity method vs consolidation), etc. would potentially be part of the process for shorts, whereas for longs you can focus more on top line growth & margins if there are no red flags elsewhere. Ofc you still must have a clear understanding of non-recurring expenses, stock-based comps, etc. to get to a proper view.
Thinking aloud I'd say that "deep" accounting serves you not to fall into mistakes for a long, whereas it can be the base of the investment case for a short.
Strategy related ofc
Yeah. Deep dive into accounting to short is basically Jim Chanos.
Jim Chanos, Muddy Waters, Hindenburg, ... Certain reports they publish are very useful lessons of accounting indeed.
Yeah. I exchanged emails with Hindenburg's founder after reading his story on WSJ. Work ethic is definitely there.
would add on that specifically, timing in shorting is very important. accounting helps with timing. if you think something is overearning or a fad, you will start to see inventory buildup or aggressive revenue recognition right before a miss.
Accounting is very important.
You can have an accounting driven alpha angle like those high-profile short sellers. But also you should know advanced accounting to make sure companies are not playing shenanigans.
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