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"You have to understand accounting and you have to understand the nuances of accounting. It's the language of business and it's an imperfect language, but unless you are willing to put in the effort to learn accounting-how to read and interpret financial statements-you can't know anything about business yourself." - Warren Buffett.

I wish to select stocks myself given the time that I am willing to put in. Obviously, to select stocks, one does not need to have the accounting knowledge of a Chartered Accountant. So how much is enough just to get started?

This question is inherently subjective. But I would like to obtain at least a small indication of where I should start exploring if I intend to learn to read the financial statements of publicly traded companies.

  • What is your background in terms of education ? Accounting is a very vast area. Have you have had any basic courses of accounting in your studies ? – DumbCoder Apr 11 '16 at 8:03
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    With a bit of common education, you can read them on the surface. The point he is making is that you need to learn the finer methods of hiding information to be able to read it between the lines. Companies often try to ambiguate data they don't want to be published (within legal limits), and as an untrained reader, you will then not see it. – Aganju Apr 11 '16 at 11:58
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    @Aganju Never ever read financial statements superficially. You will shoot yourself royally in the foot. Either read and understand properly or read other reader's analysis, more than one – DumbCoder Apr 11 '16 at 13:34
  • Taking a course in Managerial Accounting would be a great start. I bet Coursera offers such a course for free. – Pete B. Apr 11 '16 at 16:26
  • I'd say you need to understand the balance sheet, income statement, and cash flow statement, the rest well is good to know but those 3 are important. – NuWin Apr 19 '16 at 19:48
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Background:

I'm a senior majoring in accounting and management information systems.

Here is a question I answered a while back about financial statements and employee retention. In the answer that I provided at the bottom it was to assess a company's ability to pay by use of ratios. Likewise, similar accounting methods need to be understood and implemented when assessing stocks(which is where I believe Mr. Buffet was going with this).


Examples:

  1. How do COGS, across 3 different countries, affect foreign tax credits concerning Administrative bonus's in reported SGA?
  2. Why would a company have a stock split of 1:3 when they had five years of consecutive losses of net income?
  3. What are the effects of LIFO and FIFO on net income?

As we can see the severity of the questions decreases, but if you can not answer question 3 then you should study accounting principles.

So how much is enough just to get started?

You will never have enough knowledge to start, period. You will have to continuously be learning, so start sooner than later.


However you need neither economics or accounting knowledge if you were to learn technical analysis, many doubt the workings of this technique, but in my experience it is easier to learn and practise.

A comment on @Veronica's post.

Understanding economics and accounting are fundamental. Analysis, seeing trends, and copying are instinctual human traits that helped us evolve (we are very good at pattern recognition). Taking an intro economic and accounting course at a local community college is an excellent place to start when breaking the mold of pattern-thinking. You have to be critical in understanding what elements move a company's A/R in the statement of cash flows.


Where to start:

Read.

Literally, don't stop reading. Latest edition of of Kesio's accounting principles? Read it. Cover to cover. Tax policies on Section 874, 222, 534? Read it.

This is your money, do not be lazy with it.

Take a class, read a book, ask questions!

Good Luck,


"Welcome to [the] Science [of Business], you're gonna like it here"

- Phil Plait

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From my experience you don't need knowledge of accounting to pick good stocks. The type of investing you are referring to is fundamental. This is finding out about the company, this websites should help you start off:

http://en.tradehero.mobi/how-to-choose-a-stock-fundamental-analysis/

Investopedia will also be a useful website in techniques. A bit of knowledge in economics will be helpful in understanding how current affairs will affect a market, which will affect stock prices.

However you need neither economics or accounting knowledge if you were to learn technical analysis, many doubt the workings of this technique, but in my experience it is easier to learn and practise. For example looking at charts from previous years it shows the last time there was a huge recession the dollar did well and commodities didn't. In this recession we are entering you can see the same thing happening.

Read about the different techniques before limiting yourself to just looking at financial statements you may find a better technique suited to you, like these technical analysts:

http://etfhq.com/blog/2013/03/02/top-technical-analysts/

Hope this helps.

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