Mail Bag: How to Read Large Numbers on Financial Statements

I'd worry. A university professor once told me it was unethical to correct a professor. Since a university professor is my superior I'm supposed to just honor and respect whatever they say without questioning it. My "participation" grade dropped to the minimum amount. So do try to approach the professor in secret and not with an attitude of I am right you are wrong. Otherwise they can (and will) make things even more difficult for you.

This is mind-blowing ...

A university professor once told me it was unethical to correct a professor. Since a university professor is my superior I'm supposed to just honor and respect whatever they say without questioning it.

It makes me thankful that the woman running the liberal arts department in my university program demanded critical thinking. If you could prove your point with logic, evidence always won, professor or no professor. Titles, rank, experience, seniority ... none of that mattered, only being right, and demonstrating your way was better. Concurrently, she demanded you be ruthlessly critical of your own work products and efforts. She would never tolerate someone like that anywhere near one of her students. That was just what "normal" was to us. If we were in the right, she had us covered. If we were wrong, she trained us to figure out how and why so we could become better thinkers.

I should give her a call or go visit her ... it's been awhile since we last talked.

I have quite a bit of experience with academia, especially with professors at extremely "elite" and "prestigious" programs. They don't like to be actually corrected. They like to be superficially corrected, so that they can show how open-minded they are, but they don't like actual divergent views. Just like most people in the world.

I suppose when in such a sub-optimal situation, the silver lining is you learn to deal with needlessly political situations? That's a life skill, so there's that ... I'm trying to look on the bright side. Think of it as increasing charisma points, haha!

Thinking along those lines, it might be worth it for the asker to print off Apple's financial data as above and say to the professor something along the lines of:

"Can you walk me through the correct way to calculate this? I have been trying to understand how to work out these figures the way you told me to, but I
have calculated that Apple made only $39.5 million profit last year! What am I doing wrong?"

Gives her an easy way out, "It says millions! ... Oh, it said MILLIONS on the test too? I'm so sorry!" Of course, if she just says "Nothing, you're completely correct, investors are crazy buying it at this price, don't you think?", it's probably time to transfer schools 🙂

Feign ignorance, fall on your sword, provide a way for the professor to save face, improve your grade, and work on your acting skills? Yes ... this is definitely +charisma points material. And, as all Sims players know, that leads to future job promotion and earning power. You are destined to become CEO!

It's certainly, strategically, the wisest thing to do. There's this huge moral question, at least to me, though, of leaving someone like that in charge of an expensive education for people who spend a lot of money to become highly competent in their field. We wouldn't tolerate an electrician or heart surgeon who couldn't do their job so why do we, as a society, think it's okay for a university professor to fail such basic standards? Shouldn't the people hired to train tomorrow's executives and entrepreneurs be held to a higher, not a lower, standard? Why do people just accept this sort of thing?

My suspicion is it has to do with the motivations of the student themselves. The desire for a good grade trumps the desire to learn the material. A lot of students, in other words, aren't actually interested in becoming wiser, more knowledgeable, or more effective, they just want to do what it takes to get a better paying job in the short-term. They'd rather get an "A" and forget all of the material tomorrow than get a "B" and learn it for life.

It's a nutty way to behave. At least in my mind. The whole reason I did a liberal arts education, with course loads stuffed with music, history, science, philosophy, accounting, finance, and politics was because people wiser than me said it was the best way to learn how the world worked so I could tie it all together and bend it to whatever I wanted to accomplish; to redirect a small enough portion of GDP to my own family's treasury so I could be free to spend my time doing whatever I wanted. And I'm not just saying that - I once purposely took the only "C" I've ever earned in my entire life on an intermediate or advanced accounting course because the temporary professor, who had been brought in after a faculty member died, didn't know how to calculate the GAAP formulas correctly and this Russian exchange student and I refused to use his clearly wrong calculation for leases, sale-leaseback transactions, and other finance structures (her rage was a sight to behold - she'd outright yell at him in class in this thick, Soviet-style tirade about how she was paying money to be instructed incorrectly and he should be fired). We refused to budge because being right was more important than the grade. I couldn't bring myself to knowingly produce bad work. It went against every fibre of my moral constitution so it wasn't a hard choice.

It begs the chicken and egg, question, though. Are people like me and her more likely to end up financially independent early in life because we think independently, have ruthless self-imposed standards, and are willing to ignore others when we know the data is on our side, or are we only willing to take those risks because we've already experienced some degree of success that insulates us? I was probably earning more than the professor that year, as a college student, which could have subconsciously changed my behavior patterns. I didn't need a job. I had no specific plans for after I graduated. That had to influence my opportunity cost, even in subtle ways.

I don't know ... it strikes me as a cultural problem. It's like when the government saw that high school graduates did so much better in every area of life, the politicians decided everyone needed a high school education. Only, instead of elevating the population, they just kept lowering standards, making it easier to get to the point it became the bare minimum necessary to survive for most men and women. They're doing the same thing with college, now. It's becoming the new de facto baseline. There's this wild grade and degree inflation that waters down the value of the end product/service itself.

This is not uplifting ... I'm going to go play Cities:Skylines for awhile before I have to put myself to work this afternoon.

Haha! You would not believe how clear the directly inverse correlation between learning and grades is sometimes. At my undergraduate, you had people purposely take classes they would literally learn nothing in so they could get As, to get the top jobs in investment banking or management consulting, or pad their law school or medical school applications. For example, there was a student who had played in orchestras for years and had a long music background who took Music 101, where he learned nothing, just so he could get an extra A. The same thing was true for many other subjects as well. This is of course because many investment banks had strict GPA cutoffs.

You know, on the games where you get to assign the points to your character at the start, I can never bring myself to sacrifice too many charisma points... never know when they might come in handy 🙂

I do agree with the moral issue, though. I personally don't remember having any issues like this (or any other students who did), but it would be incredibly frustrating to be doing the correct thing, as confirmed by a previous professor, all the course textbooks etc... and be marked down for it.

I wonder what I would have done? Would I have taken my own advice above? Argued the point in class? Or would I have been completely oblivious that there was even a mistake, ha. And of course, along the lines of your chicken and egg question - what would a more/less successful version of myself have done differently? But every time I try to put down my thoughts in words, it comes out as gibberish, and all I know for sure is that I have spent too long sitting at the keyboard thinking about it, and really really need to go to bed.

Regardless, I'd certainly have enjoyed being a fly on the wall as an angry Russian woman rants at the professor, that's for sure. My friend's ex-girlfriend comes to mind...

Dale Carnegie really is truly universal (although the way in which you run the actual "scripts" should be different for different cultural contexts).

People in academia (or engineers in the Valley, or people managing other peoples' money) may think they are truth seekers, but just like all people, it is far more likely that they love hearing people talk about them, love hearing people repeat what they say back to them, and like people that are interested in them.

As you said, the exceptions to this rule in life are a great treasure that deserve to be celebrated and cherished.

innerscorecard :

I've had a completely different experience in my majors of math, physics, and computer science, in terms of whether professors are willing to be corrected. Much of the material in those majors is fairly logical/deductive. Also, in computer science one has to constantly have the mentality of fixing problems via debugging, hypothesis testing, etc so that may explain the difference.

When a student asks me if a statement I made could be wrong because of reason X, I usually just say, "OK, let's look up the facts on Wikipedia, Google Scholar, etc. and then reason through this."

If you mean people don't tolerate divergent views in terms of completely incompatible worldviews, then sure, that's always true. For example, the value and efficient market people. Those two parties get along brilliantly!

I totally agree about professors just wanting to talk, be liked, and having people be interested in them. In undergraduate I used this as a psychological trick to get better grades. I reasoned that professors would only ever test something they mentioned in class. Thus, I did not read many of the textbooks, but meticulously noted and reviewed everything the professor ever said or wrote in class. This allowed me to get the highest mark ("A" in the U.S. system) for all classes using a pretty concise note system.

Many professors seems to love talking. You would not believe how much self-absorbed babbling goes on behind closed doors from professors on committees, panels, meetings, etc. I try to treat this as an example of who I don't want to become. If one has nothing to say, say nothing. If a meeting does not have action items being advanced at an acceptable pace, then it should be terminated now. In the future I plan to apply aggressively a "bureaucracy/logistics" monitor, which will just terminate these things when they get out of the acceptable ranges. This will probably make me a black sheep, but I've always enjoyed that so it's no loss.

I honestly think between your blog and your About.com page, there's years of studying you could do. I wonder, how much self study has to do with success and personal achievement in life. I like looking at this stuff, are people successful because they love the process of it, I think so, Atleast, that's how I structure my thoughts, to enjoy the process of it.
I wonder, if you didn't go to school for a topic, but studied acquired knowledge about that topic via self study(any means you desire) for 4 years, how your thinking and skills in that topic would differ from someone who underwent 4 years of study for it.

Really tired though, so just thinking out loud.

It's the egg, Joshua. IMO.

And you are in the non-sheep minority of America.

Wow, what a seemingly insignificant blog post that has had me thinking for 2 days!

It seems like a good life lesson to learn whichever way the student acts. Maybe the teacher would be happy to be corrected. Or... maybe she wouldn't agree that she was wrong. Maybe she would get embarrassed and then angry and then vindictive.

Real world stuff there. Truth, in this world, seems like it is not respected, or even seen by barely anyone. So is taking the risk worth it? What is the potential upside to correcting her? The downside? (to me, if the downside outweighs the upside, or if there is really no substantial upside, I would not do it)

The student's main goal is to learn, graduate and secure a fruitful position in life. If he knows the truth about the mathematics, and the test results didn't hurt him too badly, why press the issue? Is this a hill he wants to die on?

I fought for the common good many times over my first 15 years in my career. Most of the time it was NOT worth it. It did little to no good, and probably, no certainly, had negative effects. The systems of society are set. Our time on earth is limited. I believe that we should fight like hell for the few things that will have a great meaning to our lives and let the rest go.Focus on your own ambitions and leave the stupidity of others to marinate. (when you have bested a fool, you accomplished nothing) Otherwise, you will wake up 20 years later and be nothing but tired.
It seems true that fighting for truth should be reserved for the youthful, or those with nothing to lose, or those who are completely secure. The rest of us are sheep of sorts. There, I admit it. This is just my real-life opinion based on years of experience.

A few years ago I was "hand picked" to go to a seminar about workplace culture. The main takeaway, and what the presenter spent the whole day leading up to, was the question, "Do you want to be right, or do you want to be successful?"

That one crazy question has been the guideline for my behavior ever since! It has changed my life. (for the better, I might add) It's amazing how that bull sh.. corporate seminar, and the seemingly caring nature of my "devil wears prada" boss at the time, has changed my life completely.

One more anecdotal story,
My best friend is an early retired government employee. He gets a pension and health benefits free for life. He is an idealist(not my own ideals I might add), and always has been fighting for this or that. In the end, he has advice for everyone. All the answers based on his version of right and wrong. Interestingly though, he lost most of those fights for justice, and burned alot of bridges along the way. So, why could he manage to fight so vigorously for decades? Because he had a job where, short of murdering someone, he could not be fired, and now he has the means to live comfortably for the rest of his life.

The moral to me is to reach the point that my friend, or Joshua is at in life as soon as humanly possible, while spending little time diverting your energy along the way.

Baaaa...

Forgot one point,
Maybe the student could go underground and seize this opportunity to create something. Maybe like an "Angie's list" for college professors. Maybe fix the problem and make a business out of it too.

Turn the negative experience into a means to an end.

My quick response would be that the teacher's job is to teach correct information and they are not doing so. Therefore, they need to be corrected. Not necessarily publicly, but corrected nonetheless.

This student caught the error but many others did not...which means they blindly accepted the teachings as truth...and that is a huge problem.

I agree with you completely!

Personally speaking, what is right will always be what is right, and I only prefer the truth for myself.
However, I can't say today that I would directly act on it. (If you caught me 20 years ago, that's another story) The world is different now, both for me and for society as a whole, IMO. Sadly, that's my dilemma.

I have but one question (at the risk of being shunned by the Kennon community at large),

Where does my responsibility to my fellow man, or society, or classmate end?
What I mean is, if I figured out the correct answer to the exam question because I have inherently better knowledge or analyzation skills than others in my class, what then is my responsibility?

We have discussed how stealth knowledge, or wealth, etc, could be the free and correct? choice for some individuals' way of living. Should I feel compelled to give help to those many people who won't/may not accept it? Joshua gives freely of himself (knowledge) on this blog (for those who seek it out and who openly value the discussion, no matter what the truths), but is it his obligation to tirelessly try to fix all the problems of the financial/cooking/mental model communities? Will most people even accept his recommendations for making, say, a better 'au jus' sauce? When does it become impossible and where should the cutoff be?

The first paragraph is really my question. (rhetorical?) haha

(I think I feel like buying more Nestle shares now)

What I mean is, if I figured out the correct answer to the exam question because I have inherently better knowledge or analyzation skills than others in my class, what then is my responsibility?

It's really fascinating to me to study how different cultures answer this; e.g., look at how cheating is viewed from a moral standpoint in Western nations versus Eastern nations.

I read the article and read the comments. I am not so sure why everyone assumes that the teacher is the “stupid one”. For all we know, the student might be purposefully twisting the truth, or omitting important facts, in order to make themselves look good (even if it is in their own eyes). I do not believe that this supposed error really would have taken that many points in an exam to be that material.

I would be interested in learning what grade the student received in this exam. I would also like to learn how many points were subtracted for this issue. My guess would be – the points that were lost were immaterial (Assuming thesis prof is dumb is correct). Given the fact that I have been a student, and have seen students react to grades, I think that we are simply not told the whole truth.

I once had an exam, where the question asked if a bond is quoted at 103, how much can you earn if you sell one bond? The options included 103, 97, 1030 or 970. Many assumed the answer to be 103. Few had read the textbook, where the minimum treasury bond denomination was listed as $1000. So 103 was essentially $1030. Yet, many lost points on this example and complained that the professor is dumb or that they weren’t taught this.

The moral of the story: Do not jump to conclusions, without getting as much facts as possible. If you as an investor teach yourself to make conclusions too quickly, your results could suffer. If everyone believes something to happen, then the profitable endeavor could be to assume a position under which you stand a chance to profit if “everyone else” is incorrect in their assumptions.

What you're seeing isn't the full story. I had an email exchange with the student in question, which provided more detail, none of which is published here because I wanted to protect his/her identity, going so far as to not mention the university or even the country in which this occurred.

Even if, for some bizarre reason, he/she lied to me multiple times about every relevant fact, which would be a stupid thing to do given it would quickly become evident when the issue was escalated to the dean, the professor in question has no way of being identified so there is there is no harm done. However, by posting about the way to read large numbers, some new investors might learn something fairly rudimentary that makes financial statements less intimidating. It seems to be one of those things those of us who read them regularly take for granted, automatically adjusting the numbers in our head. It's a win-win for everybody.

I believe that 100%. When I asked my accounting professor why WalMart constantly for decades has had significant negative working capital. He did not believe me, and said that is a sign of weakness and WalMart is a successful multibillion dollar company. And that I must have been misinterpreting the statements. I showed him it and he said it was probably a one time anomaly But I have found WalMart to have has this feature for DECADES. I have not studied retail in depth in general for investment purposes (Oil & Gas has been taking up my time) but I believe it is not a sign of weakness, while I'm familiar with that many supermarkets operate negative because of the constant cash and there is no need to have that much and that results in negative W.C. I don't know if this applies to WalMart or not, but I am almost certain it is not a one time thing or I am misinterpreting the statements. Professors are humans too they make mistakes as well. Whether they like to admit that or not never forget that.

Oh man, this story hurts me because it was a specialist in the field who told you that. The major strategy behind Wal-Mart's expansion was that negative cash conversion cycle. You can't understand the enterprise without understanding that was the secret sauce to the growth in the early years. Sam Walton used to talk about how he'd have to stave off the Procter & Gamble reps saying something like, "I know you boys think I'm expanding on your dime, and it's true. I am. But I sell more than anybody else per square foot" or something like that. It would be like not understanding that McDonald's is really a quasi-real estate company in drag or, at one time (not these days), the entire profitability of the Marriott empire was built on hardcore pornography and alcohol (ironic given the Mormon family value face of the place - the checks clearing was more important). You have to know the core economic engine to value the firm correctly.

By the way, I didn't mean to say that the article was insignificant to anyone, including myself. Just that its purpose was straightforward and concise. I believe it's always good to learn or relearn lessons to keep us sharp.

What got me thinking was the side story of the professor and all the comments made. I sometimes link things (in my head) with the ills (as I see them) in society. It makes me crazy some times.

I wonder, if you didn't go to school for a topic, but studied acquired knowledge about that topic via self study(any means you desire) for 4 years, how your thinking and skills in that topic would differ from someone who underwent 4 years of study for it.

It was a big, hot mess in the early years with huge gaps in knowledge but the upside is that I picked up all sorts of other information, techniques, and skill sets in niches that were far more esoteric and ended up really, fundamentally understanding how it all fit together on the most basic level because I had to if I wanted to make sense of any of it. In those early years, there was a point at which I could understand advanced statutory reinsurance accounting principles but couldn't tell you how international dividends were taxed. It was totally unbalanced but I just stuck with what I knew and understood so I avoided mistakes largely by being defensive.

That caused me to think a lot more independently. It was a terribly inefficient way to go about it - I still remember being a kid and not knowing that dividends weren't deducted as expenses from earnings per share (I kind of laugh on the inside when I see someone write me with that question because I know exactly what they are thinking or where the confusion lies), which is so elementary but that was just assumed everywhere.

It also meant my standards were a lot higher and I didn't get sucked into bubbles because I had to figure out what it was I was trying to do - buy profits. I suspect the entire reason I was unscathed by the dot-com boom, even with my relatively tiny amount of capital as a teenager, was because I had spent the years prior to that reading the 1990's ValueLine reports at the public library, which, at that time, went back to the 1980's in the historical information tables. I saw a world in which "normal" was defined as mediocre utility stocks paying 6% to 8% annual dividends so when prices got so high they were 2% or 3%, I couldn't accept the trade-off for the slow growth.

As for your other question, for me, I think the success comes in loving the process. If I'm sitting on a beach, there is nothing I'd rather be doing that hanging out with Aaron and an annual report in front of me. Some people need hookers and cocaine but for me, it's seeing how the world fits together through the lens of peoples' allocation decisions; how these stories come together of individual men and women who have a vision and make it happen.

I know people who do exactly what I do but are miserable. In the earlier years when I'd cross paths with some of them, at first they honestly thought I was kidding, or somehow faking it. They couldn't understand how I could possibly love the work and would look at me like I was insane. It's just a job to them. For me, it's like playing a real life game of monopoly. I just get these huge endorphin kicks from going about my life and looking around knowing that, like a video game, I'm collecting cash from everyone around me. You want that cheeseburger? Sure, I'll see some of the money show up in a future dividend payment I'll get to enjoy myself. Need a mortgage? I own shares of banks that will do that. I like passing buildings and knowing their history (e.g., my old hometown was where both the saltine cracker and Aunt Jemima was invented. I get joy out of passing a building and knowing what happened there.) It's entirely driven by passion. I can't imagine doing anything else.

Even in video games, I get obsessed with maximizing resources from time to time, be it designing weapons or accumulating wealth. I think my personality type is just a maximizer; a little work up front then fun for the long-run. I imagine, though, that if I had access to, say, a family member who ran a multi-million dollar mutual fund, I'd be a decade ahead of where I am now. We'll never know for certain. As it stood, I enlisted everybody for help. I'd randomly ask bankers about the industry or phone an accountant and ask what something meant. I had no shame because the desire to know overcame any social rules. I once had a conversation with an employee of Johnson Controls in line at the dry cleaner's place because he mentioned working there, which I saw as a chance to extract whatever information I could.

I feel the same about creating good code/technologies, and understanding certain companies. I think I'm just obsessed with optimizing everything. But often the optimizations are most interesting across qualitative dimensions. The strictly quantitative problems are usually solved by armies of people stacked in pyramids. In contrast, optimizing a problem with photos might require me to invest a new technology. Or, finding bargain companies in a $40 oil environment may require me to understand an entirely new industry.

They are interesting kinds of problems because they don't just require hitting nails with a hammer faster (quantitative), but require insight and ingenuity.

*invent a new technology.