 Good day, fellow investors. This will be an introductory video on how to spot fraud, how to avoid mistakes, how to avoid losing money when it comes to investing, how to avoid misrepresented earnings. This is part of a 60, 70 page report that I have published on my free stock market investing course. So if you haven't enrolled there, please enroll in the description of the video below. So let's immediately start with the video discussing what it is all about. How to spot those fraud things, how to simply stay away from that. And I'm going to call Rudyard Kipling here, six honest serving men, they will tell you all you know. So what, why, when, how, where and who apply common sense and that's all you need. We're going to discuss simple steps that will keep you out of trouble. Avoid losing money, how to spot those signs and then of course it's always about the cash. One great movie that I urge you to watch online or on Netflix is the China Hustle discussing muddy waters that will use some examples, which is a hedge fund that looks for those frauds, then finds them, shorts the stock and discloses the fraud. It doesn't always work well. So it's very interesting how the market works but it's a very interesting story and each investor should look at that movie. It's really a movie that I recommend. So let's start. Now, how to identify problems? Well, the first issue is aggressive accounting gap versus non-gap principles, generally accepted accounting principles. And this is just an example from a car company that I will use not to mention it so I don't get sued but look at the earnings per share attributable to common stockholders, basic gap. So in each of the last quarters, the earnings to common stockholders are much lower when you use generally accepted accounting principles and then adjusted non-gap, those are much, much better and everything looks extremely well. So that's something investors, that's something companies use to make the situation look better and then it's up to you whether you want to believe the company or stick to generally accepted accounting principles. Just an example here to see how companies improve what they do, how they can work on their earnings to make it look differently. Why is this so important? Perhaps it might not be fraud, it might not be utter fraud but this is the most important thing. Fraud, you go to jail, misrepresentation of earnings, you get the fine but the stock goes down anyway. And if we listen to Buffett, never lose money, never lose money, never lose money, then it's simple. If you see something fishy, you simply avoid it. Buying a stock is like buying a secondhand car. You see a car and then you have to start researching, asking the question, what is odd with the car, what doesn't work so that you don't buy something wrong and avoid losing money. Let's go on with the examples. So the key is, okay, everything starts with the revenues and then you have a lot of things in between till you come to the bottom. This is again, this car company that I'm using public investment relationship data, the revenues in the fourth quarter was 6.3 billion. However, the net income was 100 billion gap and 400 million non-gap. So that's a huge difference and there is a lot in between adjusted EBITDA, what are expenses, what are not expensive, what goes into expenses, what are earnings, what are capitalized earnings. And you see how just small changes there have a big impact on the bottom line. So you always start looking at the top line and then you see, okay, where does it lead? Of course, this is something very important, just the sentence down below, you can surely read it. Read and it tells you what you need to know. Of course, you can't read it because it's always in a small print. So read the footnotes of the accounting reports. It tells you what goes into the accounts, what detracts from that revenues and how it works. Example, stuffing the channel, a company that recognizes revenue, they call a customer, tell them, oh, buy in December so that we can charge, record the purchase in December so that we can have better growing revenues for our investors and will give you a discount. And at some point, something like that works but only as long as you have investors to keep buying your products at the discount ahead of time. This is something you have to be very wary about and there are a lot of ways you can check that. These accounts receivable, are those days accounts receivable going up? If yes, then, you know, there is something fishy, might not be, might well be. Going back to the car company I was discussing, accounts receivables in a year are up 40%. Sales are up just 1.1% for the comparative quarters. So okay, that's something that one has to look into before investing. The key is to compare the change in accounts receivable with the rate of change in revenue, ideally over the number of quarters over a number of years. Ask yourselves, are there any significant differences in the rate of change? Do you know what's going on? Why is the allowance for doubtful accounts sufficient to cover future collection problems? Look at the accounts receivable days for each quarters and ask yourself if any trend's steady improving or getting worse. So just a little bit of ideas on what to do when it comes to this. The key is as always, as I'm mentioning, don't lose money over the long term. Other examples, percentage of completion accounting, estimation future revenue streams. Discount rates, pension obligations, accounts payables, inventory management, and all of that you can read more in the report on my investment course because it's a 70 page report and I can't make two hour videos to explain everything in detail. Cash is always king, as we said, turnover is vanity, profit is sanity, but cash is king. So this is an example for muddy waters, rhino stock. Cash and cash equivalents after they got 100 million from their IPO quickly went down over the coming quarters. They had excess costs and earnings that went also up 10 times. So something that they added to the earnings, who knows based on what. And then if you look at the total current assets, those are pretty stable, 240, 270, 270, total assets also growing, everything looks fine, but if you look at the advances for inventory from 34 to 64 million, and you see that there are a lot of oddities and the result was a simple glowing to zero as muddy waters exposed them. Another company that gives a good explanation of accounting acquisition accounting is B&G Foods. It's a company that acquired all those brands about the foods, grew fast and in 2015, I analyzed it and I said it's not going to end well and I was wrong for a whole year. The stock was 36 when I analyzed it. I wrote an article about it and then it went up to 50, 50% up only to come to the inevitable because the accounting was aggressive, a lot of goodwill, which makes things tricky and risky. Goodwill also something you can read and I will make a special video about it, so please subscribe and click that notification bell if you're watching this on YouTube. Capitalized costs, another company again, going back to the car company. So cumulatively capitalized costs, capitalized costs, so they are putting it as an asset even if it is a cost five billion on property, plant and equipment of 10 billion. Again, an oddity that you just, I'm not saying anything, I'm not implying anything, you just need to check the longterm how that is going on. Always management, check the management. So what are they doing wrong? Is it that they are focusing on growth no matter the cost, they are trying to pretend everything is good or they're really tackling down issues and problems. We work, Adam Newman is getting 1.7 billion to leave the company he ran into the ground, so always check the gurus, the heroes, what are they doing, they will do things just to keep their story alive for as long as it goes because the paycheck they get is not that much related to the longterm investing success that other investors get. Also, check the management, how many resigning CFOs are there, Tesla had a lot of them, which might mean nothing but might also mean something. With auditors, it's very simple, auditors are paid by the company to audit the company, they have standard procedures and they will very rarely find something, so forget about auditors. Look for a lot of things, pension fund assets being changed to liabilities, high leverage, poor cash flow, increase of debt, receivables taking longer and longer to pay back, dividends not supported by earnings, doing something just for the market, leverage going up, look at the covenants, taking underlying profits, no real profits, they exclude the bad news, adjusted profits, deferral selling costs, et cetera, irregular exceptional items turning up each year for the adjusted earnings and look to being optimistic about the amount owed by customer and its recovery. Another short by Muddy Water is an excellent example with style education, they discussed how it was a fraud, they are taking money out of the company but it doesn't matter, the stock is just exploding and now has a price earnings ratio of 336, no matter what they found. So it's about the market always but we as longterm investors really have to be careful and better avoid questionable things. Another thing, management related party transactions always see whether the management has your best interest, Tesla owners have settled the claims for saving bailing out solar city, bailing out Elon Musk, his private loans, et cetera. So Elon Musk is still in court for that and we'll just see how it works. So this is something that you might not be able to apply immediately but if you read the report and look at such things somewhere down the road in the next 10, 20, 15 years, I hope this saves you once a lot of money by not investing in some risky stock and that's why we have made this report and we have made this video. Investing is about accumulating knowledge over time and then doing the right thing when it's necessary to be done. Not doing a lot of things constantly, acquiring knowledge and then buying big when the time to buy big and saying no when there is the time to say no. Thank you for watching and I'll see you in the next video.