Learning accounting is just like learning a foreign language.
When learning a foreign language, it takes time to get the basics drilled down and integrated into one’s 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 in which you feel comfortable using the language in professional and more complicated settings.
The highest level is when you can talk it fluidly or natively. It’s when the language flows naturally and the words come right to you before you even think about it.
Here’s the deal: As an active investor looking to beat the market, you will need to reach the final level of learning the language of accounting. Therefore, if you’re just starting out in the world of business and the markets, learning accounting must be your full priority. There’s no shortcut. To really evaluate businesses and achieve success in the markets, you need to be as comfortable with that as you are with your own native language.
This is an accounting reading list for people who don’t have time to flick through unimportant books. I assure you that each book on this list is worth your time. You just must be willing to put in the work.
That’s right. To learn accounting the way it should flow through your mind, you have to know how figures are put together. You would be amazed at how many people I know who 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 and credits, balancing of the ledger, and so forth. To become a great investor, you need to think like a business owner. Bookkeeping is the foundation from which all your other knowledge about accounting grows.
This is an all-around well-constructed book that takes you through important accounting concepts from a business owner’s perspective. Author Wayne Label is very straightforward in his explanations and touches the right level of complexity. In addition to having read Bookkeeping All-In-One For Dummies, you will get one level deeper in how accounting transactions turn out as they do reading this book.
This book—which is really a reference guide—deserves a spot on the bookshelf of every business owner, accountant, and investor. You’ll get into greater detail between the nuances of IFRS and US GAAP and it goes beyond what you’ve already learned about simple accounting.
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 as an investor. You want to lay the right foundation. I thoroughly enjoyed Managerial Accounting because it does just that through real examples and industry-specific case studies.
This book is very important. As you would know by now reading the aforementioned books, accounting is a very big subject and there are very big forces in play. In this book, you will learn the approximations and significant limitations of accounting and how there are lots of ways in which management can either confuse or trick investors. Knowing this stuff takes your knowledge and investing decisions to another level. Extraordinary investing is about avoiding stupidity rather than seeking brilliance. This book teaches you how.
In line with Financial Shenanigans, 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 makes you think deeply. You will 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 intellectual exercise as an investor: valuing a business. There are lots of ways in which you can head in the wrong direction in this area because your mind can get clobbered by complexity very easily. 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 the concept of valuation with a firm objective on keeping you to these fundamental truths. Only after reading this book does it make sense to dive into more exotic concepts of valuation.
Annual Reports and Business Newspapers
As with any discipline, theory must be put to practice to get you to a fluid level of proficiency. There is no better way than reading bunches and bunches of annual reports. For many, this is 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 will start to learn the difference between the companies where management wants you to understand their business and companies where management tries to muddle 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 you will find your circle of competence.
And there you have an investing superpower since few market competitors are willing to put in the same amount of work as you do.