Originally Posted by
ValueNZ
Toddy, complicated accounting creates inefficiencies in markets which we can take advantage of. It's all about trying to determine the true economic reality of the business, ie the cashflows and the timing of those cashflows. If everyone knows what a business is worth then it'll be priced accordingly.
One example of complicated accounting creating inefficiencies I found last year was Jackson Financial (JXN nyse), an annuity company that used massive hedges on their policyholder liabilities. These hedges would create massive profits and losses under GAAP accounting rules, and each time this occurred the stock would skyrocket and plummet respectively. This is despite cashflows remaining steady, and the underlying business remaining fundamentally unchanged. So under GAAP, a conservatively run business looked like a casino, and as such as was priced accordingly. It's up about 100% since I posted about it last August.