If you are going to be an effective investor, you need to have a basic understanding of the language of business and have some comfort level with reading financial information. If you just open a 10-K report, you might feel overwhelmed.

But, if you can somehow break the learning process into bite size increments, you will find that, over time, it's really not beyond your ability to comprehend. And, the skills you acquire will enhance your abiliity to select good investments.

As they say, the only way to eat an elephant is one bite at a time. How might you go about learning more about reading financial reports in your investment club?

Recently, a member in one of my clubs recommended a book he actually found in a garage sale:

Warren Buffet and the Interpretation of Financial Statements

He's just beginning to try and read financial statements and he said he liked it because it was a very simple presentation of the information. Each topic is discussed simply in two to four page chapters.

I was curious so I ordered it.

I agree with him. And, I think it would be a great book for an investment club to build an educational program around. Each month, you could take one of the chapters, and learn more about a specific item that is important to understand in financial reports. For example, Cost of Goods Sold. This is a line item on an income statement. Or Inventory, an item on a balance sheet. Financial statements are a description of a business. It's like reading a story. If you can familiarize yourself with the language the story is written in, you will become better able to choose businesses to invest in.

To structure an educational program, I'd suggest you read the information in one of the short chapters each month. You could then have a fun club activity where you actually find and look at this piece of financial information for one of the companies you own or are considering investing in.

If you work through the book from beginning to end, you will be introduced to the three primary financial statements and will come away with how they relate to each other and the type of important information they can convey to you about whether you've found a good business to invest in.

You will have learned how to read a story which, if you are an investor in a business, is as important as being able to find the latest stock price.

--
Laurie Frederiksen
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