March 2023

To Our Business Partners


Warren Buffett’s (CEO, Berkshire Hathaway Inc.) letter to shareholders was recently released, and one of the things he talked about was the questionable practices involved in public companies reporting earnings.  The game for the last several years has been “beating expectations” of analysts who follow the companies, which often involves manipulation of reported earnings.  Beating expectations (as opposed to comparing earnings to previous quarterly or annual results) has become the main measure of success or failure these days.  Buffett calls this activity “disgusting.”  A common practice among analysts and company investor relations is to talk down expectations for future results, knowing full well that they can exceed those expectations in the next quarter, and thus boost the performance of the stock.

In our own analysis of company reporting, one of the things we watch closely is how reported earnings compare to operating cash flow. (Without getting too deeply into the weeds, the actual cash a company takes in is a better measure of success than accounting earnings.  Cash (flow) is KING.) In a healthy environment, the cash flow number is always greater than the reported earnings.  When it is the opposite, manipulation of the earnings figure is often the culprit.

While we concentrate on the activities of individual companies, one recent report noted that reported earnings for the S&P 500 have now outpaced reported cash flow by over 20%!  This is a sure sign that the general quality of reported earnings has declined.  This is not an uncommon phenomenon.  As the economic cycle ages, it becomes more difficult for companies to maintain growth of earnings.  In an effort to keep the momentum going, many company managements start to cut corners and report “adjusted earnings” to show results that can justify healthy valuations, and therefore bouyant stock prices.  More disturbing is the idea that Wall Street analysts that buy into these earnings “adjustments” (manipulations!) reward stocks in the maketplace on earnings “beats” and punish the stocks on earnings “misses.”  Caution is warranted.

This is why, in the current environment where valuations are still quite high, it is essential to pay close attention to the quality of earnings and, more important, valuation levels.


Despite the February declines in stock prices, our group* of widely owned stocks stands at 86% of estimated VALUE. We remain extremely disciplined, refusing to overpay for the good companies we follow.  Acquiring stocks at low market prices relative to well-thought-out conservative estimates of company values will lead to very satisfactory investment returns over a long period of time.  Paying too much for even the best merchandise yields unacceptable results in the stock market.


Stock market indexes produced negative returns in February, following gains in January. Most indexes suffered declines of 1-3%, while the Dow Jones Industrials declined over 4%. The Dow is now the only index that is down in 2023, after showing the best results in 2022. Over the last twelve months, all the indexes we monitor have notched negative returns, within a broad range of down 2-9%.  The NASDAQ, with its still-heavy weighting toward technology companies, is a distinct outlier, down over 16% during the period. Our group of portfolio stocks* has matched the popular averages over the shorter periods discussed and produced superior returns over the longer period.

Steve Nichols, CFA • Bill Warnke, CFA •  Andy Ramer, CFA

*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 19 stocks that are held in our clients’ accounts. Portfolios might hold some or all of these stocks, depending on investment guidelines unique to each client, the timing of purchases and sales, and start dates of accounts. The performance of this group of stocks is a good proxy for our equity performance but might vary widely among accounts. Of course, past performance is not necessarily indicative of future results.

We hereby offer to deliver to you without charge a copy of our current Form ADV Part 2, in accordance with the U.S. Securities and Exchange Commission’s “Brochure Rule.” Please contact us if you would like us to send you a copy.