IFB56: New 2018 GAAP for Marketable Securities Will Inflate Earnings

 
Welcome to episode 56 of the Investing for Beginners podcast. In this week’s episode we’re going to talk about something that Warren Buffett dropped in his latest shareholders letter and he was also mentioned on a video on CNBC that was released recently and this is relating to new GAAP figures that are going to potentially inflate earnings figures and we’re going to dive into that.
Andrew is going to start us off and talk a little bit about some of the background and then we’re just kind of go back and forth, so Andrew one should go ahead and start us off there big guy.

* New GAAP accounting rule will affect financial institutions, like banks, insurance companies.
* This new rule could inflate earnings for said companies.
* Isn’t the first times accounting rules have changed
* If you invest in these types of companies you need to be aware as the rule takes effect.

Andrew: yeah sounds good and like my M.O. for this podcast has been kind of to hate on CNBC. I just have to say like they put up a new video series and it’s probably the best thing on YouTube other than my own stuff obviously.
Okay great there they did like three hours with Warren Buffett on Squawk Box and edit it down and I think it’s about an hour to an hour half of the content on their YouTube channel right now and this was back in I think early February’s when they interview him mid-February is when it was released so he’s that’s straight from the Oracle himself talking about some of the stuff we saw with Bitcoin a lot of the market volatility we saw at the beginning the year and most importantly.
Which kind of from my understanding from the way I’m kind of interpreting all of this he just mentioned something as an aside and they talked about it briefly but like the whole majority of the finance industry right now is completely ignoring this and it’s going to have a big impact for a certain group of companies. And it’s relating to what they’ve referred to with these GAAP which is generally accepted accounting principles or practices. And it’s the way that these companies are having to report the financial data that’s all audited and it’s how they come up with the earnings number.
And so it’s going to be a big kind of thing and it’s all in a hand in hand with like the new tax reform stuff that we’re seeing and so it’s like this unprecedented thing and it’s definitely something we need to discuss.
We’re going to try to keep everything basic explain everything from the very top down and keep it in simple terms but it’s something that’s important to understand so we can know how to approach these type of businesses moving forward.
It’s not going to necessarily affect every single company that’s out there right now but it is something that we should definitely talk about.
I guess the first thing Dave I will ask you how would you break down some of the major aspects of this are going to be net income and marketable securities and then how those are defined so can you for the beginner that’s out there who doesn’t have an accounting background can you break down what net income is and then marketable securities after that?
Dave: okay so I’ll go ahead and take a stab at this so net income is really the easiest way to think of it is the money you make on the money, you make.
In simple terms think about your own paycheck when you bring home your paycheck and you pay all of your expenses the money you have left over there’s your net income so after you pay your rent your utilities maybe your cell phone bill maybe you got to get your dog washed or groomed any of those kinds of things that money that’s left over ...