Learning accounting is like learning a foreign language.
Learning a foreign language takes time to get the basics drilled down and integrated into understanding and usage. Accounting is no different.
You can reach different levels of proficiency. First, there’s the basic level of understanding with the ability to speak simple phrases and read on an elementary level. Then, you can be conversant, participating in simple conversations on topics beyond the most immediate needs. Next, you can be proficient to the degree you feel comfortable using the language in professional and complicated settings.
The highest level is when you can talk fluidly or natively. It’s when the language flows naturally and the words come to you before you think about them.
As an active stock picker, you need to reach the final level of learning the language of accounting. If you’re a beginner, learning accounting must be your one priority. There’s no shortcut. To evaluate businesses and achieve investment success, you need to be as comfortable with that as you are with your native language.
This is an accounting reading list for people who don’t have time to flick through unimportant books:
Bookkeeping All–In–One For Dummies
You’d be amazed at how many people claim to be proficient in reading financial statements but don’t know how figures arrive as they do because they don’t know the principles of double-entry bookkeeping, debits, credits, balancing of the ledger, and so forth. To be an investor, you need to think like a business owner. Bookkeeping is the foundation from which your other knowledge about accounting grows.
Accounting for Non-Accountants
An all-around well-constructed book that takes you through accounting concepts from a business owner’s perspective. Author Wayne Label is straightforward and gets to the right level of complexity.
This book, which is a reference guide, deserves a spot on the bookshelf of every business owner, accountant, and investor. You’ll get into greater detail into the nuances of IFRS and US GAAP and it goes beyond what you’ve already learned from the books above.
I can’t stress enough how important it is to learn accounting from the perspective of a business owner. It’s only when you’ve got that covered that it’s time to go into crunching numbers. You want to lay the right foundation. I enjoyed Managerial Accounting because it does that through real examples and industry-specific case studies.
This book is important. As you would know by now, accounting is a big subject and there are big forces in play. In this book, you’ll learn the approximations and significant limitations of accounting and how there are ways in which management can either confuse or trick investors. Investing is about avoiding stupidity rather than seeking brilliance. This book teaches you how.
This book reinforces the investigative mindset you must have when gauging the numbers of a business. Author Thornton O’Glove provides a framework for evaluating earnings quality using simple methods and intellectual exercises that make you think. You’ll get introduced to adjusting the numbers to reflect economic reality which is an important exercise in getting to the company’s true return on invested capital.
Time to put your knowledge about accounting to practice for the ultimate exercise as an investor: valuing a business. There are lots of ways in which you can go wrong here because your mind can get clobbered by complexity. Remember that in the investing game, just as many smart people fail as stupid ones. The smartest people tend to drift into the more intellectual and elegant concepts, distracting them from the simpler fundamental truths. This book introduces you to valuation with a firm objective to keep you to these fundamental truths.
Annual reports and newspapers
As with everything else, theory must be practiced to get you to a fluid level of proficiency. There’s no better way than reading bunches of annual reports. This can be an intimidating activity, but I assure you that the stuff you don’t grasp the first time around reading your first annual report will start to make sense as you flip through more of them of different businesses in different industries. At some point, you’ll start to learn the difference between the companies where management wants you to understand their business and companies where management muddles your understanding.
Then, you want to couple the stuff you learn from reading about different businesses with what’s going in the economy through the Wall Street Journal, Financial Times, your local business newspaper, and the like. Certain patterns start to emerge and it’ll get easier over time.