Warren Buffetts Annual Letter to Shareholders is just out. I like the part where he warns about reading too much into companies net income figures because management can use flexibility in accounting rulesto manipulate them.
He even applies this line of thought to his own company, Berkshire Hathaway, which saw its net income rise from $8B in 2009 to $13B in 2010. This doesnt mean much, Buffett says, because: Charlie and I could quite legally cause net income in any given period to be almost any number we would like.
So its important to pay attentionto other series such as book value. And its good to compare how much different cash flow is from net income: if the latter is substantially higher than the former, you could have some aggressive accounting to worry about (but even that divergence is not necessarily manipulation-free).
Retail investors might follow the stock picks of someone who knows how to analyze stocks, like Buffett himself. They are publicly available in 13-F filings. For example, back in 2009 around this time, the 13-Fs revealed Buffettwas accumulating Burlington Northern stock big time. About a year later, it closed up30%in a takeover bid by Buffett himself.
Yet, considering the pitfalls and work involved in picking individual stocks, its no wonder Buffett, Peter Lynch, Benjamin Graham and many other distinguished investors have advised retail investors to invest passively through index funds and exchange-traded funds.
Even if you like to buy value stocks(orfollow some other kind of active approach), it might be less risk and work to makebets through broad-based ETFs (buy during bear markets) or sector ETFs (for example, the homebuilders ETFforhardy contrarians).