Learning from the best seems like a good strategy. So, I read John Train’s 20-year old book “The Midas Touch” to learn more about Warren Buffett’s approach to stock picking.
Buffett says that investors must understand the accounting information that companies are legally obligated to publish. If you can’t understand this information, then your situation is hopeless.
Investors may hope to rely on research analysts to interpret the accounting data. However, advice from good analysts gets disclosed to many people at once. There is little hope that the opportunity will still be there once the investor hears about it.
Buffett made the following comments at a Columbia Business School seminar:
“When managers want to get across the facts of the business to you, it can be done within the rules of accounting. Unfortunately, when they want to play games, in at least some industries, it can also be done within the rules of accounting. If you can’t recognize the differences, you shouldn’t be in the equity-picking business.”
Investors must understand the nuances of accounting to be successful. If you are like the vast majority of investors who understand little about accounting and its subtleties, you are likely better off investing in an index rather than individual stocks.