======window_dressing======
Window dressing is a collection of ethically questionable but often legal maneuvers used to make a company's or a fund's performance look more attractive than it really is. Think of it as putting on your best clothes for a photograph, while conveniently hiding the mess in the rest of the room. Just before the end of a [[reporting period]] (like a quarter or a year), a [[fund manager]] might sell off their losing investments or a company might delay paying its bills. The goal is to polish the public-facing [[financial statements]] or performance reports to impress [[shareholders]], lure in new [[investors]], or simply secure a fat end-of-year bonus. While not always outright fraud, it's a practice that can obscure the true financial health and performance of an investment, creating a misleading picture for anyone trying to make a sound judgment. For the diligent investor, window dressing is a red flag waving in the wind.
===== How Does It Work? =====
This is where the magic (or mischief) happens. The techniques vary depending on whether you're looking at a mutual fund or a company.
==== For Fund Managers ====
Fund managers are under immense pressure to show good results. At the end of a quarter, they have to disclose their [[portfolio holdings]]. To make this list look impressive, they might:
  * **Dump the Losers:** Sell stocks that have performed poorly so they don't appear on the list of holdings sent to investors. This practice is sometimes called //portfolio pumping//.
  * **Buy the Winners:** Snap up shares of high-flying stocks that have had a great quarter right before the reporting date. This creates the illusion that the manager was smart enough to hold these winners all along.
  * **Mask High Turnover:** A manager might engage in rapid trading throughout the quarter but clean up the portfolio at the end to look like a steady, long-term holder.
==== For Companies ====
Corporate managers have a whole toolbox for sprucing up the numbers, especially the [[balance sheet]] and income statement.
  * **Boosting Cash:** A company can simply hold off on paying its bills and suppliers until after the reporting date. This keeps more cash on the books, artificially inflating [[current assets]] and making liquidity ratios like the [[current ratio]] look healthier.
  * **Inflating Revenue:** To hit a quarterly sales target, management might offer huge, unsustainable discounts to customers, pulling future sales into the current period. This boosts top-line [[revenue]] but can crush profit margins.
  * **Manipulating Expenses:** A company can delay routine maintenance, cut the R&D budget temporarily, or change its [[accounting policies]]. For example, switching its inventory accounting from [[LIFO]] to [[FIFO]] during a period of rising prices can lower the reported cost of goods sold and boost profit. Such changes must be disclosed, but often in the fine print.
===== Why Should Value Investors Care? =====
For a [[value investing]] practitioner, window dressing is more than just a cosmetic issue—it's a direct assault on the core principles of the philosophy.
Value investing is about peeling back the layers of a business to understand its true, long-term [[intrinsic value]]. Window dressing does the opposite: it adds layers of obfuscation and paints a picture based on short-term appearances, not long-term economic reality. A company that boosts its quarterly revenue with deep discounts isn't creating sustainable value; it's borrowing from the future. A fund manager who buys a hot stock on the last day of the quarter isn't a genius; they're playing a game with appearances.
More importantly, it's a major character flaw. Management teams that resort to these tricks are signaling that they prioritize looking good over //being// good. This can be a symptom of deeper problems or a culture that is willing to bend the rules. As Warren Buffett says, "There's never just one cockroach in the kitchen."
===== How to Spot Window Dressing =====
While you can't always catch every trick, a skeptical and diligent eye can spot many of the tell-tale signs.
=== Scrutinize the Timing ===
Be extra vigilant when analyzing performance around the end of a [[fiscal quarter]] or [[fiscal year]].
  * Did the company announce a massive, one-time asset sale in the last week of December?
  * Did revenue spike in the final month of a quarter, only to fall off a cliff in the first month of the next?
  * For funds, does the [[portfolio turnover]] seem unusually high just before a reporting date?
=== Compare, Compare, Compare ===
Context is everything. No company or fund exists in a vacuum.
  * **Historical Comparison:** Look at the company’s financial reports over five or ten years. Are there sudden, dramatic, and unexplained shifts in key metrics like [[accounts receivable]] days, inventory levels, or profit margins?
  * **Peer Comparison:** Benchmark the company against its direct competitors. If its financials look significantly different without a good business reason (e.g., its cash levels are suddenly way higher), it's worth digging deeper.
=== Read the Fine Print ===
The best clues are often buried in the footnotes of a company's [[annual report]] (or the [[10-K]] filing in the U.S.). This section, often ignored, is where management must disclose things like:
  * Changes in accounting policies.
  * Explanations for large, one-off transactions.
  * Details about how revenue is recognized.
Reading these notes isn't always exciting, but it’s where you can discover if the beautiful "window display" is hiding an empty store.