Warren Buffet and The Interpration of Financial Statements

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On my flight out to Toronto I read Warren Buffet's book on the Interpretation of Financial Statements. Quite a quick and easy read for those of you who have a grasp of financial statements already (ie. know that the names and components of the statements)

So what does Warren look at when he's investing?

1) A consistent product - ie. low R&D costs. If the company has to keep investing to change it's product then that means it's in an extremely competitive industry, not a good sign when searching for a company with a durable competitive advantage.
2) Low Debt - looking at the cash flow statement, if a company generates enough cash from operating activities, it doesn't need to finance its investments through debt or equity.
3) Zero Preferred Stock - his theory is that a company with a durable competitive advantage doesn't need to issue stock for capital - they have such tremendous earning power that they have enough to buy back shares, which leads us to our next point.
4) Treasury Stock - this means the company has enough money to buy back its shares and it's sitting there waiting to be reissued.
5) Leverage - Warren stays away from companies that are highly leveraged. Banks borrow at 6% and lend out at 8%, generating earnings for the company. However, once the borrowers start defaulting on their loans, the earnings disappear and the need to pay back the loan is left on the shoulders of the company - a total disaster.

Those were a couple things I took from the book, a quick summary for your benefit. Back to work!

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Accounting - 2nd time's a charm?

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I can't count the number of times I've made fun of accountants (Yes - I'm sorry but I do come from a Marketing and Finance background and you guys get a couple of shots in on us too :) It's all in good fun)

The point is, lately I've actually revisited accounting and some of those liquidity, profitability, solvency ratios and analysis of financial statements.  Honestly, this time around I find it so much easier to understand and it's a lot more applicable to my business situation.  When I analyze my own financial statements what would I say about my company?  Is it doing well?  Would/should an investor put money into it based on the analysis?  I'm sure investors go beyond just looking at the financial statements to decide whether to invest, but it is still one of the criteria that they look at.

For all you business/commerce kids.  Remember how financial statements seemed like endless memorization of ratios and elements of the financial statements?  If you spend some time running your own business big or small, you'll quickly find that it's quite easy to understand when applied to the real world. 

Profit/Loss (statement of earnings) = Revenues - Expenses.

Statement of Retained Earnings: What you have right now in RE + the Net Earnings - Dividends you paid out = Your new balance (it's just like a bank statement!)

Balance Sheet:  Really?  Just make it balance.  Expenses aren't in here.  Just stuff that you own, owe, confirmed that you will receive, and confirmed that you will pay.

Cashflow Statement:  Three ways to use/get money in a business - operating activities, investing activities, and financing activities.  All things having to do with getting money into your business is under financing; all things having to do with your company buying/investing in hard assets is under investing activities, everything else - operating. 

Alright accountants, don't give me hell just yet, these are just some easy guidelines I'm providing, I'm sure you guys will say there's a deeper science to this.  This summary is for all of us who aren't accountants.

So there you have it.  Financial statements summarized in a blog post :)

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59 Seconds - Richard Wiseman Part 2

As promised, here's the rest of the review on the book. Some of the key interesting things I found and think both you and I can apply in our everyday lives.

The remaining areas are: Relationships, Stress, Decision making, Parenting and Personality

Relationships: Wanting to start a relationship? Staring for even a few seconds in a person's eyes will help develop mutual attraction. Rekindling a relationship? Do things that you would do as if it were still "early" in the courtship period. Read: something exciting.

Stress: Go somewhere with sunshine. At higher temperatures and sunshine, people are in a better mood and improved their memory. Also, being conscious of the activities that you are doing every day that are helping you burn calories will actually make you lose weight without doing anything extra. Start counting those calories from walking 2 flights of stairs, carrying 4 bags of groceries, etc.

Decision Making: Want to know if someone is lying to you? Ask them to email you. 14% of people lie in emails, 21% in texts, and 27% in person. WHAT?! And you thought seeing their facial expressions and body language would be a total giveaway.

Parenting: praise your kids for their effort, not for their achievements. Kids praised for their efforts will think that they should keep working hard for their achievements, whereas the same can't be said for kids praised for their achievements.

Personality: I wish I could share the short personality test in the book but I probably shouldn't. Here's a tip though, if you want to find out the personality of someone that you're with, ask them to describe their pet's personality; research shows that a pet's personality is a reflection of the owner themselves.

So there you have it. My first book review and many more to come! Hope you enjoyed this one.

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59 Seconds - Richard Wiseman

Cover via Amazon

Every two weeks I will be posting a book summary that highlights key points from a book I've recently read. 

This first post is on 59 Seconds by Richard Wiseman.  The book is truly for busy people that hope to change some of their existing habits for the better.  Wiseman covers the topics of Happiness, Persuasion, Motivation, Creativity, Attraction, Relationships, Stress, Decision Making, Parenting, and Personality.  Quite a bit of material but it was an easy and enjoyable read.  I actually did most of my reading on the treadmill!

Now from each section there is a key takeaway:

Happiness: writing about your daily life beats talking about it any day.  Talking about it doesn't make you happier, keeping a journal of it does.  Amazing that 90% of the public believe that talking about it helps.  So stop talking.  Get to writing.

Persuasion: When you are fundraising, saying that every dollar helps vs. saying "every penny helps" will make a significant difference in the amount that you raise.  In one experiment, a box labeled "every penny helps" generated 62% of all contributions while "every dollar helps" generated 7% of all contributions.

Motivation: Engage in Doublethink.  Think about the biggest benefit from achieving your goal, then think about the biggest hurdle to attaining that goal. 

Creativity: Outline the problem, then distract your conscious mind by solving puzzles that have no relation to your defined problem at all.  Apparently this increases the number of creative solutions you will come up with for your problem.

Attraction:  Staring into someone's eyes even for a few seconds will make them more attractive to you.  No, this is not a joke.  Also, touching someone on the upper arm increases your chances of receiving the favor you asked for by 20%.

I'm going to split up this post into 2 and the other sections will be summarized in tomorrow's post - stay tuned.

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