As Wall Street embraces earnings season, investors await the split-second alerts that determine a stock's immediate future, hoping that the securities they own release a beat and positive forward guidance. To many, this is a sign of a healthy, high-performing company. But to Warren Buffett, the deceptive way these "beats" are often manufactured is nothing short of "disgusting."

In Berkshire Hathaway's (BRK.A) (BRK.B) 2022 shareholder letter, the Oracle of Omaha pulled back the curtain on what he calls one of the "shames of capitalism": the manipulation of operating earnings by managers who want to present a specific narrative to the buy-side audience. 

As we navigate a market increasingly driven by hype — particularly in the artificial intelligence (AI) sector — Buffett’s warnings about "bold imaginative accounting" are a necessary reality check.

The Deception of Beating Expectations

The core of Buffett’s frustration isn't with the earnings themselves, but with the lack of integrity in how they are sometimes reported. While GAAP (generally accepted accounting principles) provides a standard, managers often favor adjusted operating earnings, which allow them to exclude certain costs to make the bottom line appear more attractive.

Buffett is blunt about this practice: "It requires no talent to manipulate numbers: Only a deep desire to deceive is required." When a company "beats" an analyst's estimate by a penny through accounting maneuvers, it is heralded as a triumph. In reality, Buffett argues this is a form of dishonesty that misleads investors who are looking to buy into new companies.

This critique extends to the culture of corporate leadership. He notes that this "tampering" is often viewed as "sophisticated" by CEOs, directors, and their advisors. Even reporters and analysts frequently embrace these manipulated figures without enough skepticism.

Buffett believes this is a shame: The system creates a massive incentive for corporations to show they are making as much money as possible, sometimes at the expense of transparency. 

The Modern ‘Circular’ Economy and AI

We see a modern variation of these concerns in today’s tech-heavy market. Artificial Intelligence has driven many companies to report substantial sums in their earnings. However, a closer look reveals a complex web of cross-investments.

In many cases, money is being invested in one company, counted as revenue for another, and then reinvested back where it came from. One recent example of this pattern is Nvidia’s (NVDA) $30 billion investment into OpenAI. 

OpenAI remains one of Nvidia’s top customers, and this money will likely be spent on OpenAI’s requirement for AI infrastructure (chips sold by Nvidia), effectively just reinvesting the money from where it came. This creates a vision of massive value, but it places doubt on where that value truly lies. 

In an environment in which companies are essentially investing in each other’s revenue streams, the overall growth of the broader market may be more fragile than the charts suggest.

How To Navigate Earnings Season

For the retail investor, the best defense against "imaginative accounting" is to look past the quarterly headline. To traverse this earnings season successfully, consider the following practices: 

• Don’t make spontaneous decisions: A single quarterly report can show whether a company is accelerating or decelerating, but it shouldn't be the sole basis for a long-term investment. Focus on the underlying fundamentals and the long-term vision.
• Be skeptical of "adjusted" metrics: Listen to the guidance and do your own research. If a manager is constantly "beating" expectations by narrow margins while excluding major costs, ask yourself if they are managing the business or managing the numbers.
• Prioritize proven profitability: In a market full of hype, diversification is vital. Buffett’s lesson remains — look for highly profitable value stocks that don't need accounting tricks to prove their worth, rather than constantly chasing "the next Nvidia."

The Bottom Line

Ultimately, Warren Buffett’s message is a call for honesty. Markets function best when information is transparent, not “imaginative.” By staying grounded in fundamentals and ignoring the game of manipulated expectations, you can build a portfolio that thrives on reality rather than corporate fiction.

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