Before diving into the topic, let’s play a small game;
I will give 100 bucks to you and one chance to invest in any of the two different portfolio’s,
You can invest this fund in any one of these portfolios;
Which has 0.7 probability to grow more than 15% or
You can also invest in this portfolio which has 0.5 probability to grow more than 25% but 0.7 probability to lose 20%. Remember you only got one chance.
If you had chosen the former portfolio then you would have left with just above 15% returns. Brilliants like me ( just kidding) who choose later one will end up burning their hands with some losses.
Some times 15% return is not so great but when compared with 10% loss then this is partying kind of return.
The point I am trying to make here is, we have to think and make a decision by considering every aspect of investment opportunity.
Checking in Corporate Scenario
Just for our better understanding, we will take an example,
If a large portion of unearned revenue is treated as earnings today then there will be less recognizable revenue left for the future. So, this is something like saying “ Fake it until You Make it “ which only makes us lazy.
In the same way, delaying payments today means the company will show higher expenditure in the future.
Research shows that companies with lower levels of accruals have more sustainable earnings. Moreover, “ Earnings increases that are pushed by high accruals, suggesting low-quality earnings and eventually with poor future (stock) returns. “
When earnings are manipulated in these ways, then they are not representative of the company’s true earnings power and are not recurring in nature.
Investing in Low Accruals
After going through all the things we have finalized to invest in low accruals and point here is how to find these stocks from a ton of stocks available on the exchange.
We have to download and export to Excel and do all the research and then pick those stocks or simply find that guy who already done this hectic process. I found readymade Low Accruals smallcase.
Usually, low accruals investing is a low risk but in this smallcase, the list of companies taken into the account by considering “ those companies which are experiencing high earnings growth. “ And this sits in the High-risk category but despite the high risk, this smallcase has a CAGR of 30%, so it’s worth taking the risk.