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Monday, September 22, 2008

Investing: Understand the Business - Learn the Books

"Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable." - Warren Buffett


Ok. Believe it or not ladies and gentleman, I've calmed down enough, to discuss learning the books, when it comes to investing. A few days back, I discussed the importance of 'learning the business'. When we are investors, we have to ask questions, and understand the business that the company engages in. How they earn profits. Where does the earnings come from?

The next thing you have to look at? Is "the books". The balance sheet. This isn't too difficult to find. Google Finance has a lot of information on each company, well organized. On each companies main page, you will find the summary. But you can click on the link for each company that reads "Financials", and find more detailed information.

For instance, if you go to Google's webpage on Frontline Ltd. (FRO)? You will find the section called "Financials".

In this Financials area, you have the section on their Income, a section on their Balance Sheet, and a section on their Cash Flow. Each of those sections has a link, that takes you to more detailed information.

When you are taking all of this information in? Look to their debt / equity ratio. Now as I mention in the video below? The debt / equity ratio of companies in different sectors are going to be very different. Learn to understand why that is. But look to their debt / equity ratio, and then find the reasons. Find the explanations. Listen to what management is saying, and then look to the Financial Section, to see what the numbers say.

What is the main thing you are looking for? Earnings potential in the future. I discuss that in the following video ... (Video included)



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Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.

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