AP SBC: The Tragic Algebra Recurrence

A General Theory & Study of the NASDAQ 100 Index & Its Constituents

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GAAP stands for Generally Accepted Accounting Principles.

Such principles are fine for most things, and on the other things, in a pinch, they are certainly better than Wall Street’s principles. Finding the true economic owners’ earnings of companies is not a strong suit for GAAP, something of which companies have made sure.

Where there is money to be made, there is manipulation.

Good investors have replaced certain parts of GAAP – such as earnings, revenue recognition, cash definitions, lease accounting, inventory assumptions, and others – with their own bespoke theories, their mental models for many decades.

Such models, if their users wish to be successful in the art and skill of investing over the long run, ought to be grounded in the fundamental search for intrinsic value. Of a company, of a common stock, of a corporate bond.

For the companies of the NASDAQ 100 as well as the index itself, I will explore the latest turn in a mental model of mine some three decades in the making.

Here I present a new general theory and methodology for adjusting GAAP earnings to find owners’ earnings properly adjusted stock-based compensation, to be applied to just about every company in that index.