Warren Buffet and The Interpretation of Financial Statements

I have been dabbling in stocks in the past few years. I have managed to pick a few really good stocks but there are also not-so-good ones. I thought to myself: “There has to be a better way of picking stocks than random guessing.” What better way to learn about investing than learning from Warren Buffet, the most successful investor in the world. I promptly bought a copy of the book “Warren Buffet and the Interpretation of Financial Statements” started learning.

Warren Buffet and The Intepretation of Financial Statements

The reason Warren Buffet is so good at picking stocks is because he reads thousands of financial statements everyday. I thought I knew how to read financial statements, but in this book, Warren Buffet gives detailed breakdown of each component and what to look out for:

  • consistently high Gross Profit Margins (Gross Profit / Total Revenues) >40% = durable competitive advantage (check for last 10 years)
  • Selling, General and Administrative Expenses should be between 30-80% of gross profit
  • Don’t have to spend heavily on R&D
  • Low Depreciation Cost as a percentage of gross profit
  • Little or no Interest Expense <15% of operating income
  • Increasing Retained Earnings = durable competitive advantage
  • Treasury Shares/Stock = durable competitive advantage
  • Buy back stocks = durable competitive advantage

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