89: How To Learn Accounting

To be a good investor you must first learn the language of business

Nov 18, 2022

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The Importance of Accounting

A friend asked me how to go about the task of learning accounting, which is essential if one wants to understand and evaluate companies. Here’s Warren Buffett speaking to CNBC’s Squawk Box in 2015:

Accounting is the language of business, and you have to be as comfortable with that as you are with your own native language to really evaluate businesses. And accounting tells you a lot and it can be used in many ways to deceive. You saw it in Enron, for example. … But you really have to understand what can be done with accounting when it gives you correct answers and when it gives you wrong answers.

Buffett and Munger tell us that accounting is only the starting point in analysis, something I’ve found to be true. You have to first understand the accounting rules and how they’re set up; how the accountants attempt to reflect reality in the numbers.

Then you need to take those numbers and understand exactly how they relate to the underlying economics of the situation so you can make an informed judgment about a company, its business performance, and its valuation. Accountants get close. It’s the investor’s job to take it to the finish line.

Where to Start?

First, Buffett’s take: Read Business Magazines and Lots of 10Ks

So how to go about learning accounting without an expensive degree? I also posed that question to Twitter. Here are some of the responses and resources you might consider (not all I’ve read or can personally vouch for, but they’re very likely to be good recommendations).