Thursday, July 26, 2012

Accounting As A Second Language

I’m often told by visitors to the site that this content is rather advanced for the investing beginner. As such, a question I often receive is “Where do I start?” or “How do I become proficient enough to understand what makes for a good investment?” The answer is to learn and understand accounting.

Accounting is a language on its own. It’s not intuitive (at least, it wasn’t for me), but once mastered it is a very powerful tool for understanding a company’s past and present; it can even give the investor glimpses into a company’s future.

Every quarter, management will host conference calls and issue a release which describes the company’s progress. Often, the statements managements make through these media give a very rosy view of management’s progress. But investors who do not understand accounting have nothing else to go on. Meanwhile, an understanding of accounting can actually tell an investor much more about a company’s performance and prospects, both positive and negative.

Short of taking an accounting course, the best place for investors to start is probably a beginner's accounting textbook. Such a publication would cover the necessary elements, giving those with a value investor’s temperament the quantitative understanding necessary to be successful.

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