Accounting, undoubtedly, is one of the most important skills an investor can learn. A lot of people think accounting is boring. I have seen firsthand many small business owners and investors struggle to gain an edge because they either refuse to learn accounting or try and give up. Accounting is essential to know – it’s the language of business. If you want to be a better investor, you must learn accounting.
Here’s how I learned accounting without ever going to business school or spending thousands of dollars on courses.
Find a company and print off their financial statements:
For this, I recommend finding either a small company that is simple to analyze, or a company you are familiar with. Right now, do not overcomplicate things with the complexities of business. If you pick a retailer like Target (NYSE: TGT), and you read inventory on their balance sheet, simply think about the goods on the shelves. For Coca-Cola (NYSE: KO), think about the beverages on the shelves at the store right now. Don’t overcomplicate things at this point.
Investopedia is a wonderful resource for learning objective information about investment concepts. I took my company from step 1 and went line by line on each statement and looked up the definition of each term. Some are easy – Cash & Cash Equivalents? It’s the money the company has in the bank. Move on – don’t worry about what it means that the money is available to be liquid within 60-120 days. Deeper understanding of these concepts will come with time. Other entries may take more time to understand, like Deferred Revenue. Think about when you pay $120 upfront to access a service for $10/month. The first $10 is recognized as revenue, and the other $110 is slotted as deferred revenue and realized over time. This was the most tedious thing I did to teach myself accounting – but when you spend time to look concepts up and engage with them they stick with you.
There are tons of quality YouTube videos with CPAs, small business administrations, and the like teaching individuals how to read and interpret financial statements. Most of these videos go into detail with some simple financial ratios as well covering thinks like the Current Ratio (current assets/current liabilities) and the Debt/Equity Ratio. If you are particularly stuck on a line on a statement, look for a YouTube video that breaks down the concept.
There are many books available cheaply or in a library that teach you how to read and interpret financial statements. Yes, they are not the most fun books in the world. But they do help cement accounting concepts. Books are going to be more digestible and fun than going line by line on Investopedia, but at the early stages you will need all the exposure you can get to learning this new language.
Take a course:
I am not entirely self-taught. After several years of reading and practice, I took one, yes one accounting course. There are many quality options for taking an accounting course. For this, I recommend a basic accounting course or one geared towards reading financial statements. Courses are available through your local university as non-degree student, via a community college, online through a university, or through Coursera or Udemy. If you have taught yourself the basics of accounting, an accounting course can do a lot to smooth out the rough edges of your self-taught knowledge.
Lastly, SEC FILINGS:
Here’s the deal. If you want to get better at investing and better at accounting, read company SEC filings, primarily their annual 10-K and quarterly 10-Q filings. Read many. When you think you’ve read enough, read more. Start with easy companies. Most individual investors who are trying to get better either start with a retail company or in the industry in which they work.
If you read a report from a retailer, you can see their strategy and the way they lay out a store. Then you can go visit their store and sleuth around and see if the store is laid out the way the company says it should be. If you work for a publicly traded bank, read your company’s annual report. Then read your competitors and see how the companies are the same and how they are different. After reading many, you’ll learn more about how a business operates than you ever will spending time watching financial news. You’ll learn a lot of companies do things the same way. For example, a lot of companies recognize revenue when a product is delivered or shipped. when you read more and more and you find a company that recognizes revenue “when an agreement is implied,” you will be able to spot areas for concern quite easily. This is the type of thing that cannot be taught but is learned through hours at practicing your craft.
I know a lot of you might have tried to read an annual report and found it arduous or boring. I would counter that objection with this – if you find the annual reports boring, you might be reading about a company that doesn’t interest you or is outside of your circle of competence. If you find a company you are passionate about and still cannot engage with the reports, you might not have the right makeup to be an investor.
Accounting is a pain to learn. But once you learn accounting, it is a true joy. You can engage meaningfully with a company’s financial statements. You can judge the honesty of a company’s management. You can spot inflection points in a company and make timely decisions. Learning accounting is a must if you want to become a better investor.