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As I am reading IETC for the second time, I have come across a slight confusion. It lists that "stock holders equity is considered free" as an enterprising investor's problem with the accrual income statement. However, to me it sounds as if this point should be listed under the defensive investor. From what I understand, an enterprising investor tries to look for understatements in the accrual income statement and a defensive investor looks for overstatements in the accrual income statement. Correct me if I am wrong. Thanks.
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Thanks for buying the book and I see your point.

Think of it this way: the defensive investor is more conservative than the GAAP investor (think commercial banker), the enterprising investor is more forward-thinking (venture capitalist.)

Defensive expenses investment in fixed and working capital because they are uses of cash. In the defensive and GAAP income statement outlays for intangibles like R&D is also deducted right away.

Enterprising depreciates intangibles over its useful life (which tends to increase earnings), but expenses the noncash cost of stockholders' equity. The enterprising investor is optimistic (match R&D with hoped-for future revenue), but not foolish--his or her money has a cost, just like the venture capitalist who pencils in a required rate of return when deciding whether to invest in a promising opportunity.

Put differently, the defensive income statement has two adjustments, both of which tend to decrease earnings. The enterprising income statement also has two adjustment, one which increases earnings (intangibles) and the other which decreases earnings (stockholders' equity).
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