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When I was a doctoral student of finance at the University of South Carolina a momentous event occurred at the beginning.  I was assigned to Professor Eric Powers, Ph.D. 

Eric had just arrived from finishing his Ph.D. in finance at that Massachusetts Institute of Technology.  He studied under professors Gertner and Sharfstein. 

These are contemporary icons of academic corporate finance.  I was interested in market micro-structure.  

But Eric insisted that I learn the corporate side. 

I grew to love research in corporate finance.  Today I am the leading expert in the area on the faculty at the University of Puerto Rico Graduate School of Business on the Rio Piedras campus. 

I had a startling lesson in working on one of our studies.  We replicated a major study of internal capital markets and could get neither statistical nor economic significance. 

In other words we could not replicate the results. 

This taught me how "mushy" earnings data can be in terms of relating to firm specific variables.  The big lesson to me in this is that precise estimates of earnings are a waste of the time due to the mushiness of the data. 

We know that earnings are supposed to be directly related to firm value mushily at best. 

Firm value is the share price times shares outstanding.  This is also called the market capitalization or "cap."

The first law of finance is M&M theory.  It is proof that the only way managers can increase firm value is to increase bottom line earnings. 

Mergers and acquisitions won't help. 

I am constantly amazed at how investors I speak with will clearly show me that they remember all of this.  But when it comes to actually following this wisdom common sense flies right out the window. 

They go back to reading reposts of analysts who are supposedly tight with management in the know for future share price rises. 

Studies show that the truth could not be further from the truth.  Analysts are so biased in their reports that they almost never tell anybody when to sell a share of stock. 

The beat goes out every day to buy, buy, buy.  Never to sell. 

Here is an amazingly simple way to cut through the muck to get down with the best earning firms. 

-Doc Brown