Be Aware of But Remain Detached from Your Trade Be Honest About Your Risk Tolerance

Be Cautious of GAAP-Based Accounting

There are managers who actively use GAAP to deceive and defraud. They know that many investors and creditors accept GAAP results as gospel. So these charlatans interpret the rules "imaginatively" and record business transactions in ways that technically comply with GAAP but actually display an economic illusion to the world. As long as investors - including supposedly sophisticated institutions - place fancy valuations on reported "earnings" that march steadily upward, you can be sure that some managers and promoters will exploit GAAP to produce such numbers, no matter what the truth may be. Over the years, Charlie Munger and I have observed many accounting-based frauds of staggering size. Few of the perpetrators have been punished; many have not even been ensured. It has been far safer to steal large sums with a pen than small sums with a gun.