108 THE WARREN BUFFETT WAY
I do not mean to say that you should simply give up. Keep doing
your research, and strive to be alert for signs of trouble. It should not
surprise us that Warren Buffett gives us some valuable tips:^33
- “Beware of companies displaying weak accounting.” In particu-
lar, he cautions us to watch out for companies that do not expense
stock options. It’s an obvious red f lag that other less obvious ma-
neuvers are also present. - Another red f lag: “unintelligible footnotes.” If you can’t under-
stand them, he says, don’t assume it’s your shortcoming; it’s a fa-
vored tool for hiding something management doesn’t want you
to know. - “Be suspicious of companies that trumpet earnings projections
and growth expectations.” No one can know the future, and any
CEO who claims to do so is not worthy of your trust.
In conclusion, Buffett wants to work with managers who are straight
shooters, who are candid with their shareholders and their employees.
His unshakable insistence on ethical behavior as a condition of doing
business has taken on added signif icance since the outbreak of corporate
scandals. However, he would be the f irst to acknowledge that taking
such a stand will not, in and of itself, insulate investors from losses trig-
gered by fraud.
I must add my own caution: I cannot promise that following the
tenets of the Warren Buffett Way described in this book will protect
you 100 percent. If company off icials are f lat-out lying to investors
through fraudulent accounting or other illegal maneuvers and if they’re
good at it, it can be diff icult, often impossible, to detect in time. Even-
tually the perpetrators end up in jail, but by then the damage to share-
holders is done; the money is gone. What I can say is this: If you adopt
the careful, thoughtful way of looking at investments that Buffett
teaches us and take the time to do your homework, you will be right
more often than you are wrong, and certainly more often than those
who allow themselves to be pushed and pulled willy-nilly by headlines
and rumor.