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4 To determine whether a company is an OPM addict, read the “Statement of Cash Flows” in the financial statements. This page breaks down the company’s cash inflows and outflows into “operating activities,” “investing activities,” and “financing activities.” If cash from operating activities is consistently negative, while cash from financing activities is consistently positive, the company has a habit of craving more cash than its own businesses can produce—and you should not join the “enablers” of that habitual abuse. For more on Global Crossing, see the commentary on Chapter 12. For more on WorldCom, see the sidebar in the commentary on Chapter 6.

5 For more insight into “moats,” see the classic book Competitive Strategy by Harvard Business School professor Michael E. Porter (Free Press, New York, 1998).

6 See Cyrus A. Ramezani, Luc Soenen, and Alan Jung, “Growth, Corporate Profitability, and Value Creation,” Financial Analysts Journal, November/ December, 2002, pp. 56–67; also available at http://cyrus.cob.calpoly.edu/.

7 Jason Zweig is an employee of AOL Time Warner and holds options in the company. For more about how stock options work, see the commentary on Chapter 19, p. 507.

8 See note 19 in the commentary on Chapter 19, p. 508.

9 For more on these issues, see the commentary on Chapter 12 and the superb essay by Joseph Fuller and Michael C. Jensen, “Just Say No to Wall Street,” at http://papers.ssrn.com.

10 Stock splits are discussed further in the commentary on Chapter 13.

* “Dilution” is one of many words that describe stocks in the language of fluid dynamics. A stock with high trading volume is said to be “liquid.” When a company goes public in an IPO, it “floats” its shares. And, in earlier days, a company that drastically diluted its shares (with large amounts of convertible debt or multiple offerings of common stock) was said to have “watered” its stock. This term is believed to have originated with the legendary market manipulator Daniel Drew (1797–1879), who began as a livestock trader. He would drive his cattle south toward Manhattan, force-feeding them salt along the way. When they got to the Harlem River, they would guzzle huge volumes of water to slake their thirst. Drew would then bring them to market, where the water they had just drunk would increase their weight. That enabled him to get a much higher price, since cattle on the hoof is sold by the pound. Drew later watered the stock of the Erie Railroad by massively issuing new shares without warning.

† Graham is referring to the precise craftsmanship of the immigrant Italian stone carvers who ornamented the otherwise plain facades of buildings throughout New York in the early 1900s. Accountants, likewise, can transform simple financial facts into intricate and even incomprehensible patterns.

* The king probably took his inspiration from a once-famous essay by the English writer William Hazlitt, who mused about a sundial near Venice that bore the words Horas non numero nisi serenas, or “I count only the hours that are serene.” Companies that chronically exclude bad news from their financial results on the pretext that negative events are “extraordinary” or “nonrecurring” are taking a page from Hazlitt, who urged his readers “to take no note of time but by its benefits, to watch only for the smiles and neglect the frowns of fate, to compose our lives of bright and gentle moments, turning away to the sunny side of things, and letting the rest slip from our imaginations, unheeded or forgotten!” (William Hazlitt, “On a Sun-Dial,” ca.1827.) Unfortunately, investors must always count the sunny and dark hours alike.

* The company to which Graham refers so coyly appears to be American Machine & Foundry (or AMF Corp.), one of the most jumbled conglomerates of the late 1960s. It was a predecessor of today’s AMF Bowling Worldwide, which operates bowling alleys and manufactures bowling equipment.

* Nowadays, investors need to be aware