Distressed Debt Investing's Book Recommendations: Equity Shorts

This past week, ValueWalk conducted an interview with Dr. Howard Schilit, author of Financial Shenanigans and founder of CFRA which used to be one of my favorite resources for independent research related to dubious accounting. Given the current state of the market (overbought), I thought I would take a few minutes and give my thoughts on each of the books that I have learned from in regards to equity shorts.

My favorite quote from the interview (on how to begin the process of detecting earnings quality issues):
Start with reading the actual financial statements (Balance Sheet, Statement of Income and Cash Flows) and accompanying footnotes for at least two periods and look for changes -- in account titles, accounting principles, estimates. After you have concluded your analysis and evaluation, then read the commentaries found in the MD&A, Letter from the President, other subjective reports by "friendly" sell-side analyst. Also, interview management when you have read all these documents and be alert when management is giving an evasive or untruthful answers.
Before I begin with the recommendations, I think there needs to be a quick point made. While I think that the majority of the accounting disclosure books can be used for shorts, they can also be used to determine if a management team is prudent and conservative. That being said, the books listed below have greatly increased my ability in shorting common e equities (as well as buying protection on a number of issuer).

Many of these books cover the same topics in nature (i.e. growth of sales versus growth of AR), but each presents ideas in a unique spin that I think all investors can learn greatly from. I personally have read each of these books below multiple times and recommend each of them highly. I will give a flavor with bullet points for each of them below:

  • Recommended by Blue Ridge Capital's John Griffin to Columbia Business School Students
  • The book title spells it out: The book is 100% devoted to short selling and the categories that go along with that: "Bubble Stocks", high growth companies with low returns on capital, companies that can't internally finance themselves
  • Unlike the other books below, this book deals less with accounting disclosure and more with the short sale process that a long/short hedge fund might engage in (it is also less technical)
  • If you had to read one of the books on the list, I would recommend this one
  • Written by Michelle Leder, of Footnoted.com fame
  • Very good introduction to basic financial statement analysis and understanding of corporate footnotes
  • Michelle does an incredible job at providing a substantial amount of case studies throughout the book
  • If you want a quick read to polish up your "accounting gimmicks" skills, I would recommend this one
  • Of all books in this post, this one is BY FAR the most comprehensive
  • That being said, this book is not for the faint of heart: It is HIGHLY technical and sometimes a very tough read. But, I promise you, you will learn more about "sustainable financial performance" and accounting disclosure than any other book on the list
  • This book also does an incredible job at really digging into the cash flow statement and has helped me better understand a company's free cash flow potential
  • If you think you are an expert in this detecting earnings mismanagement, and want to further sharpen your skills, I would recommend this book.
  • To give you a sense of how much I enjoy this book: I own both the second and third editions, and have read them both multiple times
  • Relies heavily on case studies with actual short recommendations from CFRA - I.E. The back their claims up with solid performance
  • Very focused on accounting disclosure and management - depreciation rates, AR charge offs, etc
  • I very much like Dr. Schilit's writing style which made the book a fairly quick read despite clocking in at ~300 pages
  • If you want a deep dive into accounting mismanagement and want a read that is not too easy but not technical, I would recommend this book
  • In my opinion: The original book on accounting disclosures and mismanagement. If you have not read it yet, you are really missing something special
  • This was the first book I read on "Quality of Earnings" - I have read it so many times that my copy is falling apart. I use it as a reference very often.
  • Goes through the major ways a management team can manipulate earnings.
  • Delves into some of the intangibles. For instance, there is a whole chapter on parsing a Chairman's Annual Letter that comes with the annual report. While the book heavily relies on number, it also shows you how to think about those numbers in a holistic way.
  • For the best treatise on the quality of earnings, I would recommend this book.



hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.