# How to perform Beneish M Model



## RandomInvestor (20 May 2017)

Hey guys so I am trying to perform this model for A2Milk to check if the company is manipulating their earnings. But there is no proper guide for it online. Could Best thing I found is this:

https://ycharts.com/glossary/terms/beneish_m_score
So these are the values I need to get:

For some reason below it shows "Salest" for example supposed to be little t. I have some questions what does that small t mean? Then it says t-1 ?

*Days Receivable Index (DSRI) is:*
DSRI = (Net Receivablest / Salest) / Net Receivablest-1 / Salest-1)

*Gross Margin Index (GMI) is:*
GMI = [(Salest-1 - COGSt-1) / Salest-1] / [(Salest - COGSt) / Salest] 

*Asset Quality Index (AQI) is:*
AQI = [1 - (Current Assetst + PP&Et + Securitiest) / Total Assetst] / [1 - ((Current Assetst-1 + PP&Et-1 + Securitiest-1) / Total Assetst-1)]


*Sales Growth Index (SGI) is:*
SGI = Salest / Salest-1

*Depreciation Index (DEPI) is:*
DEPI = (Depreciationt-1/ (PP&Et-1 + Depreciationt-1)) / (Depreciationt / (PP&Et + Depreciationt))

*SG&A Expense Index (SGAI) is:*
SGAI = (SG&A Expenset / Salest) / (SG&A Expenset-1 / Salest-1)

*Leverage index (LVGI) is:*
LVGI = [(Current Liabilitiest + Total Long Term Debtt) / Total Assetst] / [(Current Liabilitiest-1 + Total Long Term Debtt-1) / Total Assetst-1]

*Total Accruals to Total Assets (TATA) is:*
TATA = (Income from Continuing Operationst - Cash Flows from Operationst) / Total Assetst


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## tech/a (20 May 2017)

Wow

Is it really that complicated

Up---ride it and profit
Down---get out protect capital and profit


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## rnr (20 May 2017)

RandomInvestor said:


> Hey guys so I am trying to perform this model for A2Milk to check if the company is manipulating their earnings. But there is no proper guide for it online. Could Best thing I found is this:
> 
> https://ycharts.com/glossary/terms/beneish_m_score
> So these are the values I need to get:
> ...




Hi RandomInvestor

t = Time (Eg. Annual Accounts as at 30th June 2016) whereas t-1 = Time - 1 year as in this example (Eg. 30th June 2015)

Just picking one of the above as an example:-
*
Sales Growth Index (SGI) is:
SGI = Salest / Salest-1*
_Based on the line above this would read as follows:-_
SGI = Sales(30-06-2016) / Sales(30-06-2015)


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## minwa (20 May 2017)

tech/a said:


> Wow
> 
> Is it really that complicated
> 
> ...




So this is complicated and machine learning is not ?


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## tech/a (20 May 2017)

Who mentioned machine learning.


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## minwa (20 May 2017)

I find it funny you find this basic balance sheets stuff "complicated" (yes it's basic I only done year 11/12 accounting and I understand most of it) for trading/investing and yet you propose machine learning for trading/investing (in other thread).


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## tech/a (20 May 2017)

I'm a duck.

You have un realistic expectations

Oh and I see you only "done" red neck English as well!


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## minwa (20 May 2017)

Apologies, forgot you are a duck. Should not have held any expectations of logic.


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## cynic (20 May 2017)

At the risk of being off topic:


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## tech/a (20 May 2017)

Clearly a talent


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## RandomInvestor (21 May 2017)

rnr said:


> Hi RandomInvestor
> 
> t = Time (Eg. Annual Accounts as at 30th June 2016) whereas t-1 = Time - 1 year as in this example (Eg. 30th June 2015)
> 
> ...



Thanks Rnr


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## RandomInvestor (21 May 2017)

tech/a said:


> Wow
> 
> Is it really that complicated
> 
> ...



No idea what you are on about duck. I assume you are mentioning technical analysis.


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## tech/a (21 May 2017)

I certainly understand

One day when you trade OR invest you'll get it!

Crunching figures can be fun but procrastination
And trading paralysis through analysis just wastes
Time.

You can do nothing by simply doing nothing.
You may have noticed that no matter how hard you grind down into a company it will
Do what it does in spite of your opinion after analysis.
Often in complete contrast to what it " Should do "

Analysis---any sort
Is nothing more than an indication of " likely " company health and or price direction
It's how you MANAGE your investments or trades which determine performance
( discretionary investing/trading ).

The thing I like about A2M is it's move into the US.
Even a duck knows that's a big market.


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## galumay (21 May 2017)

luckily there is more than one way to pluck a duck, so while speculating/trading on price action may work for a % of people, there are others who choose to be investors and understand the business they become a part owner of. 

Most studies suggest almost no traders/speculators will be successful in the long run and not many investors will have outperformance of their benchmarks either. 

Its probably fair to say that nearly everyone would be better just buying ETFs and tracking indicies, of course the fact that all of us ducks are here on ASF implies that we hope to be amongst the outliers of the bell curves, on the positive edge, whatever our strategy is.


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## Boggo (21 May 2017)

RandomInvestor, two examples here (no reflection on any of the posters involved) but a good example of what tech/a is saying (you may eventually learn that the duck is actually here to help you, it may cost you a few $$$ first though).

Links below are to the last two pages as examples in both cases. In the first one admittedly it is only one stock but it does show how all the effort and calculations mean nothing if you ignore reality.

Here is an example of where you can analyse all you want but how do you know the (already out of date when you it anyway) analytic data is not BS.
(also worth reading the posts and comparing the weekly chart price and volume around the time of each post - not everyone was in the dark)
https://www.aussiestockforums.com/threads/qin-quintis-limited.8695/page-6

Then we look at another way of doing it, inputs are reality, no theory unless there is something obvious that may price action in the direction you have identified.
https://www.aussiestockforums.com/threads/asx-momentum-trade-book-part-2.29971/page-45

I have yet to see anything in the former that comes close to the latter for outcome, consistencey or simplicity.


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## galumay (21 May 2017)

...and ever the religious debates continue! I dont know what the answer is, once again the thread is basically being hijacked by those from a different 'religion'. I tried the light hearted approach, but there are still those that insist their way is the true way - despite the reality of the statistics. 

I suspect I have been guilty of posting in the trading/speculating threads in the past, maybe we should all try and be a bit more disciplined about not dragging threads off topic, or adding to off topic commentary?


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## tech/a (21 May 2017)

Can you point me to a fundi trading method demonstrated here which is performing as well as Petes!

Don't tell me Buffett
I'll puke


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## minwa (21 May 2017)

tech/a said:


> Can you point me to a fundi trading method demonstrated here which is performing as well as Petes!
> 
> Don't tell me Buffett
> I'll puke




Puke in the corner and let the thread get back on topic.


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## Boggo (21 May 2017)

galumay said:


> ...and ever the religious debates continue! I dont know what the answer is, once again the thread is basically being hijacked by those from a different 'religion'. I tried the light hearted approach, but there are still those that insist their way is the true way - despite the reality of the statistics.
> 
> I suspect I have been guilty of posting in the trading/speculating threads in the past, maybe we should all try and be a bit more disciplined about not dragging threads off topic, or adding to off topic commentary?




I guess you are referring to my post.

All that I am attempting to do is get the OP to look at examples from both sides.
There is no need for him to go outside of this site to do that and in the links I have provided there are two extremes of both ways.

It is up to the OP to decide which he/she wants to follow, just provide the opportunity to compare both extremes, work towards the middle and then work out what they feel is best for their situation.

The original question was _"Hey guys so I am trying to perform this model for A2Milk to check if the company is manipulating their earnings. But there is no proper guide for it online."_

The intention is to give the OP the option of looking at it another way which some of us on here have done to significant advantage without having to give a rats about whether it is manipulated or not.

I am not going to marry the flamin thing, I don't want its family history, just a short "friends with benefits" relationship will do nicely thanks .


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## tech/a (21 May 2017)

Thought so!

Carry on


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## galumay (21 May 2017)

I give up, continue your "religious" vandalism at will!


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## RandomInvestor (22 May 2017)

Boggo said:


> RandomInvestor, two examples here (no reflection on any of the posters involved) but a good example of what tech/a is saying (you may eventually learn that the duck is actually here to help you, it may cost you a few $$$ first though).
> 
> Links below are to the last two pages as examples in both cases. In the first one admittedly it is only one stock but it does show how all the effort and calculations mean nothing if you ignore reality.
> 
> ...



I am not interested in technical analysis so far it seems you are referring to that?


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## Boggo (22 May 2017)

RandomInvestor said:


> I am not interested in technical analysis so far it seems you are referring to that?




I was referring to it as another and perhaps a simpler option if you were intending to profit from A2M.

Disregard any reference then of course if it just a numbers study exercise.

Let us know though how 'the model' works out and if it indicates that they are 'manipulating' the figures


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## tech/a (22 May 2017)

So explain to the duck

You calculate 8 ratios from the financial statement supplied by the company
You then combine the 8 ratios to get a score which if less that -2.2 suggests figures are not manipulated.

Two things
If you can't trust the figures how can you trust them in theses calculations

If the score is above -2.2 do you leave this alone period!


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## luutzu (22 May 2017)

tech/a said:


> So explain to the duck
> 
> You calculate 8 ratios from the financial statement supplied by the company
> You then combine the 8 ratios to get a score which if less that -2.2 suggests figures are not manipulated.
> ...




Beneish and Altzman scores does seem to measure what they say it would, but only for industrial companies. Or business similar in nature. So finance, insurance, banks or even a good [or bad] retailer might not be flagged by these.

So for ABC Learning... 




Lower pane show probability of manipulation at 21%. You'd want that to be at the near zeros. [btw, I came up with that measure, so it's trademarked by yours truly ]

But the final M score is just an overview, investors ought to look further into the factors that made up that final score. 

Beneish himself broke the various underlying factors into two groups, 

1. Distortions that can result from earnings manipulation: DSR, AQI, DEPI and TATA (Accruals);

2.  Predisposition to engage in earnings manipulation: GMI, SGI, SGAI, LEVI.

As shown in the lower pane, Sales Growth Index [red line] jumps in 2004 to 2005, but.. .sales increases but margin decline.
Margin is shown by the Gross Margin Index [blue line]. It's rising but based on Beneish definition, a rising BMI mean declining profit margin from previous year [and is where Beneish's ratio doesn't make graphical/chart sense... anyway]





So it does give indication of a company's "predisposition" to manipulate earning. But there are a whole bunch of other factors to look into, apply it to the business in question to get a proper interpretation.

Like Altzman's Z score on financial distress...




All these measures doesn't mean the share price won't go up and keep going up. It doesn't mean the company's own fortune ahead won't change for the better. 

And judging by the behaviours of the fundies, the pros, the value and the smart money guys... they'd probably make more money doing TA and ride the wave. That's what most of them did anyway, just a whole lot dumber.


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## Boggo (22 May 2017)

luutzu said:


> ....
> 
> And judging by the behaviours of the fundies, the pros, the value and the smart money guys... they'd probably make more money doing TA and ride the wave. That's what most of them did anyway, just a whole lot dumber.




That bit reminds me of a tongue in cheek comment in an article that I read (and can't find now) where they asked the question of how do you recognise a fundy surfer.
He is the one who jumps on his board after the wave has passed


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## luutzu (22 May 2017)

Boggo said:


> That bit reminds me of a tongue in cheek comment in an article that I read (and can't find now) where they asked the question of how do you recognise a fundy surfer.
> He is the one who jumps on his board after the wave has passed




And I was one of the idiots who jumped on right after the fundies did on that one 

Ah man, worked so hard to almost doubled my puny capital the previous two years. Needed to get out to get a real job so thought to park it somewhere safe. What's safer than a childcare business highly recommended by the smart monies. Little did I know that they too don't know.


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## RandomInvestor (22 May 2017)

Boggo said:


> I was referring to it as another and perhaps a simpler option if you were intending to profit from A2M.
> 
> Disregard any reference then of course if it just a numbers study exercise.
> 
> Let us know though how 'the model' works out and if it indicates that they are 'manipulating' the figures



Ah ok.


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## RandomInvestor (22 May 2017)

tech/a said:


> So explain to the duck
> 
> You calculate 8 ratios from the financial statement supplied by the company
> You then combine the 8 ratios to get a score which if less that -2.2 suggests figures are not manipulated.
> ...



Duck you have a good point. I don't know what to say anymore lol.


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## Boggo (22 May 2017)

RandomInvestor said:


> Duck you have a good point. I don't know what to say anymore lol.




RandomInvestor, I think the duck will agree that you don't have to say anything, you've got it.

While some see it as us having a go, really we are just highlighting a significant potential flaw which you now see.

Cheers


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## tech/a (22 May 2017)

With out being a smart arse
Just pop over to Charts of interest and have a look at WTC


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## RandomInvestor (22 May 2017)

Boggo said:


> RandomInvestor, I think the duck will agree that you don't have to say anything, you've got it.
> 
> While some see it as us having a go, really we are just highlighting a significant potential flaw which you now see.
> 
> Cheers



Feels like you guys are trying to suck me into the art of technical analysis haha. But I am still confused what ur on about. This part here confuses me "we are just highlighting a significant potential flaw which you now see." I'll look back to what you previously wrote.


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## RandomInvestor (22 May 2017)

I looked at those 2 links and I don't know what I am looking at. But I read again what you said on the first page, about profiting from A2Milk I think you are thinking shorting it?


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## Boggo (22 May 2017)

RandomInvestor said:


> Feels like you guys are trying to suck me into the art of technical analysis haha. But I am still confused what ur on about. This part here confuses me "we are just highlighting a significant potential flaw which you now see." I'll look back to what you previously wrote.




The flaw I refer to is what tech/a highlighted in post #24, ie, in your original post you are attempting to find data to input in the formulae _"to check if the company is manipulating their earnings"_.
If they are manipulating their earnings wouldn't that also imply that all of the data items you are attempting to input would likely be manipulated too ?

How do you know what are accurate or what is also "manipulated".


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## Boggo (22 May 2017)

RandomInvestor said:


> Feels like you guys are trying to suck me into the art of technical analysis haha.




We wouldn't do that, you can take a horse to water but you can't make him drink is the old saying


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## RandomInvestor (22 May 2017)

Boggo said:


> The flaw I refer to is what tech/a highlighted in post #24, ie, in your original post you are attempting to find data to input in the formulae _"to check if the company is manipulating their earnings"_.
> If they are manipulating their earnings wouldn't that also imply that all of the data items you are attempting to input would likely be manipulated too ?
> 
> How do you know what are accurate or what is also "manipulated".



Ah yeah! Thats what I was thinking about when duck wrote that, but didnt write it because something didn't make sense. But yeah you're right lol. But with what you just said I am trying to say something but don't know to say it like I think its this, that you get those numbers at face value and through the the beneish model see if there is manipulation. But this is same as what I said before.

I don't know what is accurate or what is manipulated that's what I am trying to find out and having no luck. My learning of value investing seems at its end lol.


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## Triathlete (23 May 2017)

RandomInvestor said:


> I don't know what is accurate or what is manipulated that's what I am trying to find out and having no luck.




This is what I find hard about trying to analyse reports.
I started out using FA for many years but in my situation I found it takes too much time and so took the plunge into learning about T/A. I do not use indicators mainly EW, Cycles and Fibonacci levels.


I now find it so much easier to make decisions based on what I am seeing on a chart.

I still use FA but I use a paid service for this now "Lincoln Stock doctor" then use the charts to see if what they are saying and what is showing on the chart are agreeing.

The thing with TA for me now is even if I never use FA  or read another report I would still be able to make money just from looking at Monthly and weekly charts and making decisions with what I am seeing on a chart.

Below is an extract from Market Wizards:



Triathlete said:


> Just been reading Market Wizards and since I like to use charts in my investing
> 
> I found the question asked to William O'Neill.."The art of Stock Selection" rather interesting......
> 
> ...





Happy Investing and Trading...


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## Boggo (23 May 2017)

RandomInvestor said:


> ...
> 
> I don't know what is accurate or what is manipulated that's what I am trying to find out and having no luck. My learning of value investing seems at its end lol.




I wouldn't give up on it, just don't adopt a religious attitude towards it or assume it is totally reliable.
There are numerous threads on here where it was obvious to blind freddy that something was amiss but yet some were ignoring reality.

I could probably put together a list where you could look at the ASX news, the post from individuals on here and on other sites and then look at what is actually happening with stock $$ wise.

One recent example was VOC, go back to about Sept last year in the posts and read on from there while glancing at the weekly chart positions as you go and you will see the obvious (to some).

I really do believe that FA and TA work well together as Triathlete describes but the chart is definitely the BS detector.

This is post #143 from there (didn't realise I had a list of failed stocks ) and the most accurate post on there is #144.

Just my  again, Cheers

Post #143 from page 8 of the VOC thread in Oct '16.


craft said:


> Hers some details traditional VOC and AMM should maybe consider before selling.
> 
> MTU listed 29/10/2004 at 25 cents. Until they delisted as part of the VOC deal, the share price increased at a compound rate of more than 40% p.a. for 11 Years
> 
> ...


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## Klogg (23 May 2017)

Boggo said:


> I wouldn't give up on it, just don't adopt a religious attitude towards it or assume it is totally reliable.
> There are numerous threads on here where it was obvious to blind freddy that something was amiss but yet some were ignoring reality.
> 
> I could probably put together a list where you could look at the ASX news, the post from individuals on here and on other sites and then look at what is actually happening with stock $$ wise.
> ...




You do realise you've quoted the person who very likely has the best record on this forum (there may be a few I'm not aware of that have better performance in terms of CAGR). People would bend over backward to replicate his success and his methods, and you've cherry-picked one post to suit your views.

Please tell me, what is the performance of your portfolio like? (CAGR since inception will do)


As an aside - I have to say I got this wrong (VOC). I did factor in some risk with the acquisition, but I didn't think it would be to this scale. That said, historically I've been right approximately 70% of the time (from memory - I did a review of this not long ago) and it gives some fairly good returns (20%+ per annum). I have to take the wrong with the right, because that's what this particular framework demands. If I choose at a later point to try my hand at technical analysis, then I'll make my decisions purely on this.


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## luutzu (23 May 2017)

naughty boggo. Can't call the lord's name in vain like that.


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## luutzu (23 May 2017)

RandomInvestor said:


> Ah yeah! Thats what I was thinking about when duck wrote that, but didnt write it because something didn't make sense. But yeah you're right lol. But with what you just said I am trying to say something but don't know to say it like I think its this, that you get those numbers at face value and through the the beneish model see if there is manipulation. But this is same as what I said before.
> 
> I don't know what is accurate or what is manipulated that's what I am trying to find out and having no luck. My learning of value investing seems at its end lol.




Don't give up dude. 

Investing is not as difficult as it sound. That's not to say it's easy. But there are much harder ways of making money to pay those bills.


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## Boggo (23 May 2017)

Klogg said:


> You do realise you've quoted the person who very likely has the best record on this forum (there may be a few I'm not aware of that have better performance in terms of CAGR). People would bend over backward to replicate his success and his methods, and you've cherry-picked one post to suit your views.
> 
> Please tell me, what is the performance of your portfolio like? (CAGR since inception will do)
> 
> ...




I am aware of the quality of of craft but I have used that page of that thread as a starting point and that post because of the comment that referred to MY non existent list of failed stocks.

Post #143 is also a good starting point because it was followed by post #144 which was probably the most accurate post on the whole thread.

Are you suggesting that I cannot copy and use a post where I am mentioned because the poster "has the best record on this forum".

Don't be offended because you got it wrong, nobody gets it right all the time and the reference to VOC is not having a go at those who struggle with a loss, it is simply an effort to demonstrate to the OP that sometimes the theory and reality don't align and when they don't then sit on hands rather than blindly believing what is published.


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## Boggo (23 May 2017)

luutzu said:


> naughty boggo. Can't call the lord's name in vain like that.




I so baaad


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## Klogg (23 May 2017)

Boggo said:


> I am aware of the quality of of craft but I have used that page of that thread as a starting point and that post because of the comment that referred to MY non existent list of failed stocks.
> 
> Post #143 is also a good starting point because it was followed by post #144 which was probably the most accurate post on the whole thread.
> 
> ...




I'm definitely not offended. I'm far from perfect, so I expect to make some mistakes.

Theory and reality don't always align, agreed. But if my investment decisions are made based on the performance of a business, and I then change that decision to be based on share price movements, will this give me a better or worse performance overall?

Sure, in this particular case had I followed the technical analysis, I would have been in a better position than current. But if I did that in every case, would the same have occurred? I have to pick my investment method and stick with it, so I need a statistical set that is far greater than one... 
This is the reason I compare overall results (CAGR in this case, as it's a starting point for this), because that's what really matters.

I'm only challenging what you wrote because you used that quote as a basis for stating that people should have followed TA. In this case, it panned out that way, but as I mentioned above, one result is not enough to prove or disprove this method of investing. 

Because of the lack of data points to show the overall result (i.e. one data point, being the VOC investment) I would even argue that it's borderline irresponsible to suggest that this investment method is not worthwhile to someone who is still very early on in the learning process.


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## Boggo (23 May 2017)

Klogg said:


> ...
> 
> I'm only challenging what you wrote because you used that quote as a basis for *stating that people should have followed TA*. In this case, it panned out that way, but as I mentioned above, one result is not enough to prove or disprove this method of investing.
> ...




Wrong, wrong, I am not saying that anyone should have followed TA, I am simply saying that where there are discrepancies, different opinions, inconsistent reports and mixed opinions among quality posters then there is a fall back and that is a quick glance at the chart to see what is really happening.
In the case of VOC from late Aug to early Sept 2016... you work it out.


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## Ves (23 May 2017)

Boggo said:


> The flaw I refer to is what tech/a highlighted in post #24, ie, in your original post you are attempting to find data to input in the formulae _"to check if the company is manipulating their earnings"_.
> If they are manipulating their earnings wouldn't that also imply that all of the data items you are attempting to input would likely be manipulated too ?
> 
> How do you know what are accurate or what is also "manipulated".



That the underlying data itself is 'manipulated' itself isn't necessarily relevant for this formula.

The formula itself measures divergence in ratios calculated at Point A (usually year 1) and Point B (usually year 2).

The theory is that increasing levels of divergence from one period to the next increases the _probability_ that there could be earnings manipulation.  Clearly,  this calculation is not generally completed as a stand-alone exercise.


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## Boggo (23 May 2017)

Just to lighten the mood  

A fundamentalist would want to know what is wrong with the drain system.
.
.
.
A tech analyst would want to know who built the fence


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## Klogg (23 May 2017)

Boggo said:


> Wrong, wrong, *I am not saying that anyone should have followed TA*, I am simply saying that where there are discrepancies, different opinions, inconsistent reports and mixed opinions among quality posters then *there is a fall back and that is a quick glance at the chart to see what is really happening.*
> In the case of VOC from late Aug to early Sept 2016... you work it out.




Going by the bolded statements, aren't they the same thing? You're saying not to use TA, but to fall back to TA.


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## Boggo (23 May 2017)

Klogg said:


> Going by the bolded statements, aren't they the same thing? You're saying not to use TA, but to fall back to TA.




There's no Analysis in glancing at a chart to see that it is on a 45 degree angle downwards.
You don't have to be a meteorologist to see on a weather map that it is likely to rain tomorrow.


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## craft (23 May 2017)

luutzu said:


> naughty boggo. Can't call the lord's name in vain like that.





Boggo said:


> I so baaad




What a pair of....

I wouldn't trade places with either of you - and that doesn't require even a millisecond of thought.

Tech, In relation to the thread topic

You brought up complexity - A spreadsheet or computer program could calculate the whole market instantly - so its neither complex or time consuming.

What's it good for? -- Same sort of thing a divergence indicators is good for! A heads up.

Neither is needed once you a have a more in depth understanding - you will see all you need and more fully in the raw data, but both useful in their respective ways early on/scanning.


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## luutzu (23 May 2017)

craft said:


> What a pair of....
> 
> I wouldn't trade places with either of you - and that doesn't require even a millisecond of thought.
> 
> ...




That was at least a couple of milliseconds of thought. Can't be sure as I haven't done a DCF but it definitely isn't less than 1mmsec. 

Come on craft, we weren't insulting you. Boggo wasn't anyway


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