I was reading this article on “Fixing CAPE“, the article itself is interesting if you are into debating the finer details of predictive financial/economic models, but that isn’t the point of this post. One of the concepts that the article discusses at length is how reported vs. pro-forma earnings are shaping the analysis of company and market valuations.
Included here is one of many interesting charts in the article – it is amazing that the gap exists at all (pun intended), considering earnings should be earnings and the fact that these are such incredibly different numbers indicates that there is a growing amount of financial wizardry at play. If nothing else, this hurts the individual investor more as understanding the financial structure of the businesses available to invest in becomes harder and harder. To some extent, this helps to make a case for investing in private companies over public companies as private companies are often focused on running the business instead of financial wizardry to satisfy wall street. Granted not all private companies are run by honest individuals but that argument can be made for any company on earth.