Morgan Stanley IM: Good Losses, Bad Losses

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• Accounting is the language of business and certain principles, including conservatism, guide how accountants reflect the range of business activities on financial statements.
• Investors must look past simple measures of profits to understand a business’s true ability to create value.
• The rise of intangibles means more investments than ever are expensed immediately versus capitalized, which makes the financial statements of today appear distorted relative to those of the past.
• Academics distinguish between GAAP losers, companies that have losses but a high return on investment, and real losers, or those that have expenses unrelated to investment that exceed sales.
• Evidence from recent decades shows that GAAP losers produced attractive total shareholder returns relative to the real losers and profitable companies.

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