I figured for my first post I’d write about what you need to do before you start investing. Before you do anything, you need to get up to speed with the basics of accounting. It is the language of business and without any knowledge of it, you’ll be fighting an uphill battle when it comes to running a business or investing in businesses. Like any other language, it takes time to learn it.
You don’t need to major in accounting or become a CPA, but you do need to learn the basics of accounting and how financial statements work. Take an accounting class or two on the side, whether you go to college or not. Local community colleges have courses that you can take or you can probably find something online. I guarantee you that if you get comfortable in the language of business it will pay off later on down the road.
I usually try to ask myself if I’m truly comfortable with whatever it is that I’m invested in. Some stocks I’m looking to trade shorter term and not taking big positions so this isn’t as crucial. But for my larger positions that I’m looking to hold for a longer time, its important for me to be comfortable with the position so I can sleep at night. If the market were to shut down right now or if trading were halted in a stock that I own before I could sell the stock, would I be comfortable owning it? I need to know what it is that this business does, whether or not it has a strong balance sheet that can weather any storm, and whether or not operations are improving within it. To answer these questions, you need to understand how to read statements of cash flow, balance sheets and income statements (ie Financial Statements). These are the essentials of accounting.
I majored in accounting at Lehigh for three reasons:
(1) I started out in engineering and quickly realized I hated it.
(2) My family wasn’t well off so I needed to find a field that was reliable to work in. Relying on my parents for financial support wasn’t an option.
(3) I wanted to be in business and knew that understanding accounting was essential to being successful in business.
I can’t really remember when I realized that accounting was the best way to learn the basics of business. My parents weren’t into business or investing so most likely it came from reading books or articles about Warren Buffett. It’s been 20 years since I started getting interested in investing in high school, but I still regularly seek out Warren Buffett’s advice on investing. The guy is just a fountain of awesome advice.
I was catching up on some recent articles about him which is how I came up with the title of this post. He recently advised a teen cancer patient that “Accounting is the language of business and there’s nothing like getting it early and getting it into your system. Getting comfortable in a foreign language takes a little experience, a little study, early on but it pays off big later on.”
It’s great advice for anyone at any age and you need to start getting that knowledge into your system as soon as you can.