Some, like the rule that dictates how accountants evaluate research and development costs, are philosophically
But what it all amounts to is more thrilling: a sort of hard-won secret knowledge that comes from not just knowing the rules of accounting... but knowing better. Knowing, in other words, what’s wrong with the rules that dictate how companies are valued. Because as Litman says, there’s plenty wrong. And knowing how it’s wrong is valuable. Litman and his team give their clients a perspective on the market that ordinary analysts either don’t know or conceal from all but a select group of investors. And the locus of this labor – as far as humanly possible from Wall Street – makes me feel like I’ve wandered into a Joseph Conrad novel. For one thing, you’d be hard-pressed to get an American investment banker to build a painstakingly detailed database like the one his staff has developed over the last decade. Why not? “Because it’s boring!” Litman says. “It’s profitable, especially in the long term, but it’s not fun.” What Litman has built since his firm, Valens Research, got its start in 2009 was made possible by hard work, yes. But also by the fact that the rules of accounting misrepresent actual values – more so than most investors realize. Frequent weekday readers of the Financial Times may already know this. (I’m an infrequent weekend reader myself.) The standard system of rules that accountants use is often wrong. Litman’s ever-growing database corrects 130 of the most egregiously misleading errors baked into the rules system.
flawed: Are research and development costs an investment in future profit, or a loss? Often it’s the former, but not according to the accounting rules. What it all amounts to is more thrilling: a sort of hard-won secret knowledge that comes from not just knowing the rules of accounting... but knowing better. for short-term political expediency: “The pension accounting rule was developed with Congressional pressure in the 1990s to save the market from the appearance of loss in a high-stakes year for recession recovery,” Litman explains when I ask for the third or fourth time how on earth it all got so very, so convolutedly bad. “The rule was written to hide what would have looked like one bad year but could have been explained away. And it set in place a quarter-century of confusion.” When you think about it, it almost makes sense: Accountants are a put-upon people. They do the math. They follow the rules. Even when they know the rules are wrong, they still follow the rules. I mean, they’re accountants. But what if one day, an accountant took a look around at his rule-following colleagues, Others, like the rule that dictates how accountants report pension costs, were altered
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September 2019
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