1. Understand Financial Reporting. You must be able to read and understand financial statements. It is common to hear them dismissed as irrelevant, biased and misleading. Most times this comes from someone who never learnt to read them, and is too lazy to. This site tries to show you where adjustments are necessary, but that IN NO WAY detracts from their importance. You cannot predict the future without a firm grasp of the past and present. Regardless of their shortcomings, the financials are your source of the ‘facts’ that can contradict the media’s ‘story’. They fix the starting point for your projection of the future.The best way to learn is sitting in a comfy chair with a book from the library and a selection of Annual Reports to see the real thing. Don’t use the reports of Banks or OilExploreCo’s. Their financials have a slightly different format. Choose a normal business that produces and sells a product. To find a how-to book the section of the library you want is not the “Personal Finance” section (332.0). Even the “Investing” section (332.6) will not teach you much more than how to impress people at parties. You want the “Business” section (657.3).
    • Making Sense Of Accounting Information – a Practical Guide by Leon Haller does an excellent job of explaining ‘how’ a business survives and prospers. It takes a more economic perspective and effectively includes ‘time’. Of all the books this one gives you an ‘understanding’ that goes beyond definitions. It is light on ratio analysis which you can get anywhere on the web.
    • Financial Statements for Non-Financial People by Ron Price is heavy on ratio analysis and gives only definitions of the different line items, without attempting to provide an understanding.
    • Understanding Company Financial Statements by R.H. Parker has very good descriptions of the Balance Sheet line items that explain what gave rise to the item and different choices management has. But it uses the European format for Financial Statements which is different from the North American norm.
    • Interpreting Company Reports for Dummies covers the definitions of the statements and line items and ratios. But you must be able to tolerate its fonts.
    • How To Read Financial Statements from the Canadian Securities Institute is a good start that won’t overwhelm you. But it is too basic to be considered sufficient education.
    • The Interpretation of Financial Statements by Benjamin Graham is NOT recommended because business itself has changed since it was written in 1937. The accounting terminology has changed, the reporting rules have changed. Management has become much more creative in their accounting. Just because Graham wrote one of the supposed ‘investing bibles’ (“Security Analysis”) does not mean that this book is still relevant.
    If you do not understand financials and how to use them to develop your own story about a company, and/or if you do not want to spend the time doing this work, please do not kid yourself. You should not be stock picking. Stick to ETFs and indexing.
  2. Spreadsheet Software. There are many spreadsheets offered on this site. A list of them is on the Spreadsheets webpage. Hopefully, when you see how useful they are, you will be motivated to learn the software.
  3. An Independent Mind. You can only make money in the stockmarket when you take positions based on your belief “the market” is wrong. Research shows that following the market ( using charts, or analysts’ upgrades) doesn’t make money. While it is true that being ‘right’, alone, won’t make you money, you DO make money when the market realizes for itself how right you are.
  4. Be Good with Numbers. The media presents ‘simple’ math. It is necessary to sit down with a pencil and calculator to prove to yourself what is correct. While some issues can be argued conceptually, many more need you to work out an example. For instance: the media claims that a high ROE is a ‘good thing’. They also claim that buying back shares is a ‘good thing’. No one will ever tell you that combining the two is a ‘bad thing’. You need to figure this out for yourself.
  5. Have Time and Enjoy the Process. Finding and monitoring 20 different companies takes a lot of time and effort. It cannot be done in a spare moment, or whenever you get a chance. It is a committment that needs attention. That may not be a bad thing if you enjoy the ‘game’. But it can be ‘work’ if you don’t.

Oh, Come on! Lots of investors don’t have all that training. It is true that since 2000 retail investors with little, or no accounting, finance or math skills have piled into the do-it-yourself market.

But are they really making their own decisions? Read the damning conclusions reached in the abstract of this academic paper. Are they really making money? When brokerages have allowed researchers to look at their data, the conclusions have been “NO”. The discussion forums have threads at year end asking participants for their results. Most all replies admit to “not counting …” something. And a long list of excuses are given: not counting leverage interest expense, not counting FX losses, not counting my bond portfolio, not counting my (safe) RRSP account, not taking out effects of added savings, etc.

This site is for people who want to know what they are doing, and why.



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