The Lex Column: Mr Blobby’s returns

Appeared in The Financial Times on 16 July 1996

Few authors have popularised the arcane world of accounting as successful as Mr Terry Smith, UBS’s former head of research. Back in 1992, his notorious “blob guide” identified a dozen ruses used to inflate reported profits and named the companies which employed them most. Four years on, as the second edition of Mr Smith’s Accounting for Growth is about to be published, the state of British accounting is much improved: the Accounting Standards Board has closed, or is in the process of closing, most of the loopholes Mr Smith highlighted.

But what about the companies that figured prominently in Mr Smith’s blob guide? Some, like Grand Metropolitan and Trafalgar House, have been disappointing investments. But others, like British Aerospace and Granada, have been phenomenal successes. Indeed, anybody who bought shares in just those companies which used seven or more of the ruses Mr Smith identified would have done rather well. Since the book was published, such a portfolio would have risen 116 per cent –outperforming the market by 30 per cent.

The blob guide was, of course, never intended as a simple method for picking stocks. It was designed to make investors think by sowing scepticism about the figures companies report. Mr Smith especially wanted to wean shareholders from their fixation on earnings per share as the only measure of corporate success and look at yardsticks like cash flow and return on investment as well. Despite everything the ASB has done in recent years, Mr Smith’s broader purpose remains as valid today as ever.

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