Terry Smith: Investors Just Don’t Read The Accounts

In this interview with the Investors’ Chronicle, Terry Smith provides a great illustration of investors not reading the accounts of the companies they’re investing in. Here’s a excerpt from the interview:

When we were established ten years ago we were looking through our list of potential investee companies and one we looked at was IBM…

We discovered a $1.9 Billion mistake in the cash flow. It wasn’t what made us not buy it, we didn’t like the business anyway, but it’s still interesting to find that.

And Julian my partner and head of research rang IBM and said look… because whenever we find a mistake like that, and this is just one example, I could give you lots of… we always think well we’re probably wrong aren’t we. I mean it can’t be there really.

So he rang up IBM and they said we’ll call you back and then they called back and said, yeah absolutely right that’s wrong, $1.9 Billion wrong. And the more interesting part of the story is we sort of said, well oh is this the first time it’s come to your notice because it was like the previous year’s accounts that have been out for 10 months, they said yeah nobody’s pointed this out before.

Which I mean, it could mean every other investor had spotted it and decided not to bother doing anything about it. It seems a little unlikely doesn’t it.

I conclude from this, and it’s it’s not the only example I could give you but you probably don’t want all of them in the course of your podcast, that other people just don’t read the accounts basically and people rely on the management slide deck, they use adjusted numbers, adjusted from GAAP etc etc.

You can listen to the entire interview here: