The Interpretation of Financial Statements: The Classic 1937 Edition

"In 1984, [Warren] Buffet returned to Columbia to give a speech commemorating the fiftieth anniversary of the publication of "Security Analysis". During that speech, he presented his own investment record as well as those of Ruane, Knapp, and Schloss [other successful investment managers who were students of Graham at Columbia]. In short, each of these men posted investment results that blew away the returns of the overall market. Buffett noted that each of the portfolios varied greatly in the number and type of stocks, but what did not vary was the managers' adherence to Graham's investment principles." It is difficult to encapsulate Benjamin Graham's investing style in a few sentences or paragraphs. Readers are strongly urged to refer to his "The Intelligent Investor" to obtain a more thorough understanding of his investment principles. In brief, the essence of Graham's value investing is that any investment should be worth substantially more than an investor has to pay for it. He believed in thorough analysis, which we would call fundamental analysis. He sought out companies with strong balance sheets, or those with little debt, above-average profit margins, and ample cash flow. (For more insight, see Introduction To Fundamental Analysis and Testing Balance Sheet Strength.) He coined the phrase "margin of safety" to explain his common-sense formula that seeks out undervalued companies whose stock prices are temporarily down, but whose fundamentals, for the long run, are sound. The margin of safety on any investment is the difference between its purchase price and its intrinsic value. The larger this difference is (purchase price below intrinsic), the more attractive the investment - both from a safety and return perspective - becomes. The investment community commonly refers to these circumstances as low value multiple stocks (P/E, P/B, P/S). Graham also believed that market valuations (stock prices) are often wrong. He used his famous "Mr. Market" parable to highlight a simple truth: stock prices will fluctuate substantially in value. His philosophy was that this feature of the market offers smart investors "an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal."

A book that really makes you think. Benjamin Graham does it again. After reading The Intelligent Investor I had to find something else written by Graham. This book is full of everything you would need to know to start your analyzation of a companies books or balance sheets. Very informative!

Each portion of a financial statement is described in this book. it is more of a reference to go back to rather than a book to read through. It is very detailed.

What this book is: The 1936 edition of "The Interpretation of Financial Statements" by Benjamin Graham, the father of the modern academic discipline of financial analysis. In brief chapters with examples, Graham explains different entries you might find on a corporation's public balance sheet, how those assets and liabilities (debits and credits) add up, and what the meaning is with regard to that corporation's financial health. There are occasional glimpses of average figures by industry, but given that they were compiled in 1935, they are more interesting as a glimpse into the past - some things have changed, much more has remained the same. What this book is not: 1. It's not a primer on double-entry accounting. If you really don't know anything about double-entry bookkeeping, you'll find the book rough going, as basic familiarity is assumed. 2. It's not an editorial. There's remarkably little opinion given about how to value companies based on their balance sheet entries. That task is performed in the author's mammoth magnum opus, Security Analysis (I prefer the 1940 edition). This book does function admirably as a tableside glossary to that work. 3. It won't tell you how to get rich by investing. Readers looking for get-rich-quick guides should look elsewhere. 4. GAAP- or SOAP-compliant. Both Generally Accepted Accounting Principles and Sarbanes-Oxley postdated the publication of this book by many years. I enjoyed this book and found it a pleasant, intelligent and necessary introduction to Graham's Security Analysis. If you have interest in learning about the history of financial analysis, you will probably find this book of interest as well.

Although corporate 10Q's have become more complex due to a lot of the offbalance sheet investments they do, e.g. Enron. If a company is honest and has value this book will help you find it. So the way I approach my investing I have to assume all companies are honest unless proven otherwise.So much time is taken to explain diversification by many other books, but none gives you the practical expertise to make an informed decision. This book does. It is a handy reference that sits on my desk. I use it to review annual reports and to interpret online SEC filings just to make sure the companies I have invested in are actually healthy. This book is small, but what I have found over the years is that smaller books are better. They leave out the fluff and all you get are the meat and potatoes of what you need to know. If you take your time to understand the information presented and use it, you'll be teaching your broker a thing or two at the end of the day.