STREET DOGS
The problem with earnings
Adam Smith says knowing mass psychology makes markets means they're good litmus paper for what is going on, writes Michel Pireu
If the profit numbers on income statements are treated with such reverence, it was obviously only a question of time before some smart fellows would start building companies not around the logical progression of a business but around what would beef up the numbers.… The idea of the whole game is to take an ice-cream freezer company and merge it into a valve company and merge that with a flour mill. The valves and the flour and the ice cream never get together except on a balance sheet and an income statement, but Wall Street does look for growing earnings, and with the right accountant this whole process can make the earnings grow like crazy. [Now] logic, to an outsider, would say that you have a company selling at 10 and you go and do a lot of research on it and figure out the sales and the profits and you figure if they can earn one dollar it will sell for 20. So you buy it and wait … but the market does not follow logic, it follows some mysterious tides of mass psychology. Thus e...
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