The Three As

Accounting is the language of business. The intelligent investor is an appraiser of businesses. In order to make a proper estimate, he has to be able to navigate through the numbers and figures of a business. A good understanding of accounting and what key things to look for when reading a financial report and a 10k are essential. You don’t necessarily need a high IQ or a business school background. However, you do need to put in the effort and discipline of studying the key variables of a business through its economics to make an informed decision.

Areas of competence means that you have to analyze a business that you understand. It doesn’t mean you have to know in detail the products it produces, but you have to know “how” it makes money and “why”. You have to have enough direct expertise and experience in the field to feel comfortable in predicting if the business has a real competitive advantage and if it will continue to do well ten years from now.

A piece of a business is what you are buying. You have to “feel” like an owner and choose businesses where the management acts as if they were the ‘owners’ and not just the ‘managers’. Think long-term. You are buying a “claim check” to the future prospects of the company. In the end, if it is a business you understand and like, you will want to have more than just “A piece of it”, you’ll want to invest in it even more and watch it prosper over time.