How Warren Buffett Learned Accounting (2003 Q23 am)

Summary

In this video, Warren Buffett and Charlie Munger reflect on the importance of accounting knowledge for business professionals. While Buffett recalls enjoying accounting during his college years, he emphasizes the need to understand the principles behind accounting figures and how businesses manipulate these numbers. He suggests learning through business articles and annual reports, rather than just textbooks. Munger compares the basics of accounting to basic math, stressing that while the fundamentals are simple, understanding their application in business is a lifelong process, which requires constant learning and vigilance.

Takeaways

• 😀 Accounting is an essential skill for anyone interested in business, as it is foundational to understanding financial matters.
• 😀 Although the speaker is not currently up-to-date with accounting books, they fondly remember reading Finney during college.
• 😀 Reading good business articles and annual reports can be more beneficial for learning about accounting than books, especially those that address accounting issues and scandals.
• 😀 Understanding accounting involves knowing how figures are compiled and the principles behind them, but also recognizing what can be done with those numbers.
• 😀 To truly understand a business, you need to bring additional insights to the raw accounting data beyond just knowing the basics of accounting.
• 😀 The speaker believes that if they don’t understand a financial statement, it’s often because the management is intentionally obfuscating the figures.
• 😀 When management hides or complicates financial data, it typically signals that something may be wrong within the company.
• 😀 The process of learning accounting is ongoing, and it's a lifelong effort to relate accounting to broader business realities.
• 😀 Learning the basic rules of bookkeeping is akin to mastering basic math skills like addition and subtraction.
• 😀 Accounting knowledge comes with experience, and understanding how numbers are used and manipulated over time is crucial in recognizing business truths.

Q & A

Why does Warren Buffett think accounting is essential for business?

Warren Buffett believes accounting is essential because it provides the foundational knowledge for understanding a business. He emphasizes that while basic accounting knowledge is necessary, understanding the nuances and underlying principles is crucial for interpreting financial data accurately.

What does Warren Buffett say about accounting books?

Buffett mentions that while he read accounting books in college, he isn't up-to-date on the latest ones. He suggests that reading business articles and annual reports, rather than accounting books, is a more practical way to deepen one's understanding of accounting.

How does Buffett suggest improving one's understanding of accounting?

Buffett suggests reading good business articles that cover accounting issues and scandals. These resources help in learning how accounting figures are constructed and how they can be manipulated.

What role do accounting figures play in understanding a business, according to Buffett?

Buffett sees accounting figures as the raw material needed to understand a business. However, he stresses that one must bring additional insight beyond just the numbers to truly comprehend the health and operations of the company.

What is Buffett's view on obfuscation of accounting figures?

Buffett believes that when management intentionally obfuscates accounting figures, it is usually to hide something problematic. He argues that obfuscation often signals that something is wrong, and in such cases, it's best to avoid the business altogether.

What does Charlie Munger imply about learning accounting?

Charlie Munger compares learning accounting to learning basic arithmetic. He implies that understanding accounting involves mastering the basics, and then continuing to learn throughout one's life to connect accounting principles to the larger business reality.

How does Buffett differentiate between basic accounting knowledge and practical business application?

Buffett suggests that basic accounting knowledge is just the starting point. To truly grasp accounting in a business context, one must apply it to real-world situations, such as analyzing annual reports and understanding how businesses use accounting creatively.

What can be learned from reading annual reports, according to Buffett?

Buffett believes that reading annual reports can teach important lessons about how companies present their financial information. By analyzing these reports, one can observe how management handles accounting figures and what strategies they use to influence their portrayal of the company's performance.

Why does Buffett emphasize the importance of understanding underlying accounting principles?

Buffett emphasizes understanding the underlying accounting principles because they allow for a deeper interpretation of financial data. Recognizing how and why figures are put together helps in identifying potential issues and the true financial health of a business.

What does Buffett mean by 'you need to know what can be done with those' in reference to accounting figures?

Buffett is referring to the manipulation or presentation of accounting figures. Once you understand how numbers are generated, it's crucial to understand how they can be altered or presented in ways that may mislead or provide insight into the company's actual performance.