119Chapter8. Recognizing Success
W
hat makes an investment attractive? A price substantially
lower than value. Estimating value requires making judgments
about probable future performance, but the only available basis for
prognosis is the recor dof the past. The historian Daniel Boorstein
likene dplanning for the future without knowing some history to
planting cut flowers.
Investments cannot be made on the basis of such temporary gar-
dens either but require a look at the history of business. If account-
ing is the language of business, numbers are its history. Just as his-
tory is complex, broad, and replete with contradictions, so too are
the numbers of business history. If you focus on a few key numbers,
however, the roa dmap to goo dinvestment selection becomes clear.
Start with the management’s discussion and analysis of the busi-
ness. In addition to a narrative assessment of the business, this sum-
marizes the most important numbers in the company’s financial
statements. So you don’t have to go to the trouble of doing the
calculations—just look them up. This discussion also interprets the
meaning of those numbers from management’s perspective. So you
also don’t have to become an expert in accounting to make sense of
this stuff.
Beware of using secondhand databases. Lots of Web sites give
you a chance to employ screening tools to search through 12,000 or
more different businesses with dozens of different variables of the
kin d describe dbelow. These tools operate as filters to give you a
limite dnumber of businesses to examine more closely. In principle,
this is precisely the kin dof technique that is sensible to use.
However, you cannot be sure the search engines are working
with data of integrity. The data do not usually include information
about a company’s accounting policies, footnote information, or
management’s discussion and analysis. The data are not always up-Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use