The BP oil spill, shortcuts were made in the safety of the drilling equipment emergency cutoffs, in the Los Angeles methane leak, the company had put off maintenance to try to make rate payers pay for improvements instead of out of profits to the company. The Northern California San Bruno pipe explosion - safety funds had been diverted to executive bonuses.
Smart investors (and insurers of these companies) should be digging into long term risks. It is not that we cannot predict it - we are too cheap and profit oriented to pay to mitigate it.
5. The companies are incontinent. The rank and file neither know what GAAP or non-GAAP really are within their limited scope. To appease bosses that themselves have bosses, etc, they don't 'cook' the books, they rely on numbers that are fudged or optimistic from 3 divisions down the ladder and across the world and then fudge them some more.
Simple Example: If you have a 90% 'truthfulness' data transmission rate things get bad quickly. Say I tell my 10 underlings to go get staplers. They then go tell their 10 underlings to go buy staplers, etc. If the transmission rate is 90%, then at the first step down I get 9 staplers, not 10. The next layer down I get 81+9 = 90 staplers from 110 folks. The next layer down I get 729+81+9 = 819 from 1,110 people. By layer 8, I am below a 50% data transmission rate to go get staplers. Granted there are now over 111,111,110 people working at the company then, but you get the idea.
Now bubble that upwards instead. Do you think that the folks there are giving a 90% truthfulness rate in what they tell their bosses? I know the situation is a lot more complicated and layers get jumped and the chain of command is not nearly so nice. Still, I think the point stands that the companies maybe are just dumb and it may just be their fate to be so.
... or are they? At least, will they have data breaches every few years? What's the annual cost of doing all the work needed to prevent data breaches? If it's less than the averaged-out cost of cleanup, why weren't they doing it all along? If it's more, and they're accepting data breaches as a cost of doing business, shouldn't they be reporting that cost?
And if they don't think it's going to happen again, why not?
If you think that is a valid assumption, perhaps this risk is not mitigated entirely, but it would certainly change the risk profile of such a black swan event, would it not?
This isn't extreme good fortune, which would appear in both numbers.
It is futile to predict the future. GAAP is just there to try and make it easier to interpret the past, by applying some rules to compare companies against each other.
Although, I never really was able to reconcile Thiels' criticism of an 'indefinite' worldview. It appears to me if the factors that influence things are not only the unknowns but the are unknown unknowns (i.e. you don't even know what you would need to know that will determine the fate of the company/country/whatever). In that case, how could you be anything but uncertain and just try to structure your life to benefit from convexity or as Taleb coined, anti-fragility?
4. Companies increasingly occupy Extremistan, where a large portion of their financial performance comes from one-off, Black Swan events. Both the GAAP and non-GAAP numbers are true but useless; the future cash flows of the company depend upon unforeseeable events in the future.
The description that the article gives of the non-GAAP results supports this. Take, for example, a lawsuit against the company that results in a $5B judgment, payable out over many years to survivors of an environmental disaster. GAAP results include this lawsuit, non-GAAP results exclude it. Which more closely represents the future financial performance of the company, from the POV of a long-term value investor? Well, that depends whether there will be future lawsuits like this one. It depends whether the verdict will be reversed on appeal. It depends how many survivors survive.
The same goes for things like severance pay and patent lawsuits. Increasingly, it also applies to "normal" business, things like product introductions and the price of oil.
In Zero to One, Peter Thiel mentions (and decries) that an increasingly large portion of America is adopting an "indefinite" worldview, where the future cannot be known and it's futile to try to predict it. I'm not sure folks really understand the potential implications of this shift. Does "investing" have any meaning when the assumption is that returns will be dictated by large, random events? Does "meaning" have any meaning? What does it even mean to be rational, when reason is a tool we use to predict and our assumption is that events are unpredictable?