Warren Buffett Accounting Book: Reading Financial Statements for Value Investing Paperback – April 28, 2014

First, here is some context explaining why I read that book. I have been in and out of the stock market for the last 30 years. I already studied most of the topics explained in the book both from college level courses in accounting and finance and from a lot of reading but I never felt quite sure of myself when picking stocks. Of course I tend to spend most of my time in my own professional area (which is not Corporate Finance) and in my personal life so I don't have the dedication of Mr. Buffett. This book comes in at a very good time for me as I am reviewing my past record in stock / investment picking, what have I already studied and what I have learned from my past experience.The authors of the book take the hand of the reader and guide him through the ideas and steps needed to come up with some value estimate of a company stock. The authors explain how to get that valuation from a reading of the company financial statements. The first part of the book introduces the ideas and the mechanics of the valuation process. The second part of the book is a guided tour of a financial report, explaining all items very simply with simple examples and hints. The books shows how to get the data needed to make an estimate of a stock value including a simple formula of the free cash-flow. One problem I have when reading financial statements is that I am easily confused by the wide range of terminology used to refer any single concept; the authors of the book are aware of that problem and often list the many names that are used to refer to any item in the financials; that is not exhaustive but that helps.The authors show how to use the valuation methods to compare investment alternatives which is the basic motivation for the valuation metrics in the first place since none of those metrics provides an absolute reference.So I read that book as I would have read a tour guide. I first got the financials of some great Buffett stocks and other stocks I am interested in from the SEC web site. Then I read the financial exhibits as I was reading the book. I found the whole exercise very invigorating and I hope it provides a good start for my next investment investigation.The level of mathematics used in the book is at the High-School level. The authors don't explain where their valuation formulas come from but the astute reader will have no problem deriving the formulas used in the book if he starts from the classical formula S(N,a) = a^1 + a^2 + ... + a^N where 'a' is the discount factor 1/(1 + D) or (1 + G)/(1 +D) if there is a growth factor involved. One can get a quick refresh on those matters by looking on Wikipedia.

After reading Warren Buffett's Three Favorite Books, I was excited to find installment two in the series. While the first book provides an outstanding foundation on the principles of value investing, this book takes the reader through Buffett’s methods for understanding key financial statements – balance sheets, cash flow statements and income statements. The book will appeal to the seasoned investor and neophyte alike because it is written in a clear, narrative format while also detailing which data and key ratios are important to the value investor.The book balances the purely quantitative approach with the vitally important need for qualitative analysis. This book brings that elements of value investing together better than any other I’ve read.Finally, the authors provide a straight forward discount cash flow calculation for approximating intrinsic value. Determining intrinsic value is essential for the value investor because a company can meet all the value investing criteria and still be a poor investment if it isn’t purchased at a good price. Certain key ratios can be used as indicators of a good bargain but approximating intrinsic value is the essential component in purchasing a good value that will provide the prudent investors with outstanding returns over the long run.

It’s important to remember that reading this book won’t turn you into Warren Buffett overnight. There’s no secret formula.Instead, you’ll gain a solid understanding of the basics of financial statements and what they tell us about a company’s health and performance.While financial statements from public companies can seem complicated at first, don’t worry—this book provides a quick and friendly overview. You might have already come across similar information on various finance websites, so you’re already making great progress!The book beautifully simplifies key ideas for evaluating companies, making these important concepts much easier to understand. For example, here are four helpful rules:Rule 1—Low debtRule 2—High current ratioRule 3—Strong and steady return on equityRule 4—Effective management incentives.It does a wonderful job of explaining how to read financial statements and breaks down concepts like DCF, cash flow, and EBITDA in a clear and approachable way. Overall, it’s a great introduction to the topic. I would recommend just getting the Kindle version of the book.

Written for non-accountants like me. I have always followed Buffett’s advice for idiots: buy index funds and hang on. I have always wanted to be more sophisticated and buy individual stocks. I have read much of what Buffett has written but he tells us the specifics of what he looks for reading financials. I can’t divine the tea leaves of his annual report to know how he does it. This book attempts to do that. My concern is that they never say how they found the secret formula. I am supposed to take them at their word that they know. Maybe they do and maybe they don’t. Finding out they didn’t can be a very expensive lesson.