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Basic accounting book for value investing

Discussion in 'Trading/Investing Resources' started by goponcho, Nov 15, 2013.

  1. goponcho

    goponcho

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    Hi,

    Was going to plunge into the intelligent investor and security analysis soon.
    I however heard some basic reading on accounting would help prior?

    I do have a basic understanding of economics through year 12 and reading basic economics by sowell. Otherwise not much relevant background knowledge other than reading several TA books.

    Any suggestions on books or whether it will be needed?

    Thanks ppl
     
  2. skc

    skc Goldmember

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    I think it is definitely required. You need good understanding of accounting to see through the company reports. Too many investors fail to understand basic differences between NPAT and cashflow, for example.

    This would probably have most of what you are after.

    http://highered.mcgraw-hill.com/sites/0073379549/information_center_view0/table_of_contents.html

    Don't waste time doing credits/debits and T-account etc. The stuff on cost accounting is interesting as it teaches you how businesses make investment and how operational leverage works, but it's probably not an imperative.

    I would also suggest some understanding on corporate finance. Principles of Corporate Finance by Stephen Gray was the one used in my uni course and I found it a pretty good read.

    May be go to your nearby university and see if you can find a 2nd hand textbook or two on these topics.
     
  3. jchambers

    jchambers

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    The Intelligent Investor is a great book for principles in security analysis.

    I don't think you will need to do much reading on accounting prior. However, I do suggest you understand financial statements as that is the basis of the book.

    If you do not know how to do this, take any accounting text book and skip straight to the financial statement analysis section. My university textbook was 'Financial Accounting 7' from memory?

    Definitely read Graham's book though.
     
  4. ROE

    ROE

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    You dont need to know a lot about accounting to invest successfully in the market, you just need to know how to read the balance sheet/Cash Flow and that can be learned fairly quickly...

    http://www.investopedia.com/articles/04/031004.asp

    It is more important that you spend time and look for the right business because accounting stuff will becomes less of an issue if you are in the right business...

    Good management, business easy to understand, business that don't need complex financial setup etc..

    if you into those business balance sheets are straight forward and easy to understand

    it is usually a myth that investment managers and adviser gives to people the impression that you go to know this sort of stuff to be a successful investor ...from experience its mostly common sense and ability to read keys financial statements.

    from my observation most successful investors are not accountants, there are a lot of them out there not many are very successful at investing that give you a fair idea that accounting is not required to be successful :)
     
  5. DJG

    DJG

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    Balance Sheet
    How much cash do they have?
    Can they pay their short term liabilities easily?
    Can they easily cover their interest expense (interest cover ratio)
    Do they have enough strength when it comes to long term non current assets?
    Is most of their assets made up tangible or non tangible items? Is most of their assets goodwill?

    P/L
    Is profit increasing?
    Is the the operating and net margin increasing?
    What is their greatest expense?
    Is that or those expenses worth? IE if they've spent an extra $10m on marketing, how many extra customers do they now have and will they repay that 10m?

    C/F
    Is it primarily operating cash flow? If not then I'd swiftly stop there.
    Do they get most of their cash from proceeds in sales of assets, proceeds from share issues and loans etc.

    The CF statement is the best statement to read in my opinion. It's very hard to manipulate compared to the other two. A company can be making hundreds of millions in profit yet if cash flow is out of whack then it'll soon fail.
     
  6. goponcho

    goponcho

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    Thank you for taking the time to reply.

    Seems to be views that some briefer background reading might be sufficient. I am half way through the Intelligent Investor and it has been okay. So I think I will just try reading up on the few links that were provided for online information and seeing if this will suffice when readin Security Analysis.
    If i get stuck ill hunt down a text :D

    Thanks!!
     
  7. luutzu

    luutzu

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    Better to get an Investment textbook than an accounting book. While accounting textbooks also have financial statements analysis etc., the investment books cover these from an investor's perspective rather than an accountant. Also have other topics re financial markets, investment management etc.
     
  8. goponcho

    goponcho

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    Any suggestion on a particular one? Feel there is probably a bucket load of investment text books with a large range of quality
     
  9. galumay

    galumay learner

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    I found, "Financial Statement Analysis" by “Martin Fridson and Fernando Alvarez” quite good, its available on iBooks too.
     
  10. luutzu

    luutzu

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    Go to kickass.to [torrent site] and get most of these books for free... or so i am told :p
    Was also told you need to download a torrent downloader


    Any entry, mid level, uni Investments textbook should be OK.
    - 'Fundamental of Investment Management' by F A Hirt, SB Block
    - 'Investments' by Bodie, Hane & Marcus

    There's the 'Interpretation of Financial Statements' by Benjamin Graham and Meredith.
    It's an old book with some old terminology but I did find it useful, especially the conclusion:

    That investment success does not come about from accounting analysis, but from future earnings. It is the future that will make you rich, not the past.

    However, you cannot estimate future prospects without understanding historical operations, current financial positions etc. of the company.


    ---
    Also check out 'Financial statements for dummies'...

    I tried to read Security Analysis before... finished it but don't remember anything from it.
    Probably save that to last... read 'Common Stocks and Uncommon Profits' by Phillip Fisher, Peter Lynch's One Up on Wall Street
     
  11. tom82

    tom82

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    What investment textbooks do you recommend?
     
  12. luutzu

    luutzu

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    The two i mentioned above were ones assigned to us. One of them is a first year the other a third year textbook ( i think Bodie et al is 3rd year). I was told they're among the most popular/best ones use at universities.

    The thing about textbooks, and i didn't read all the chapters so take it with a lot of salt, is they cover everything in the investment/finance world. They're supposed to so you have to read wider to get perspectives on what makes the most sense, what is practised and what works and not.

    They cover topics like Technical Analysis (charting), other methods like odd-lot tradings... but main focus, as i remember, was the efficient market hypothesis and CAPM, alpha and beta... stuff that if you, like me, first read and assume since it's an academic text it must be the way... but with enough hindsight, you'll probably come to see it's quite wrong and if somewhat right, are useless.

    For my money, i'll first not read the textbooks but read Phillip A Fisher, then Graham's the Intelligent Investor, read the reports and interviews on Warren Buffett... and refer back to the textbooks as reference for such things as how to read the financial statements, the general market structure and players.

    From the guys mentioned, the main thing to take away is to value a stock as a business, to look at it not as daily or second by second quotations, but as real businesses... then to see the prices, the market, as simply a place to transact in selling or buying a share of that business.
     
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