STI 001: Warren Buffett Advice-Follow The Facts and Follow Your Reasoning

Image of Key saying "Knowledge is the key to Success"
Knowledge is the Key to Success

Well hello, everyone. I’m Clarence Butts and thank you for taking the time to download this podcast. I’m inviting you to follow my personal journey to become a better, smarter, more successful stock market investor. I will be talking to financial advisors, other self taught investors, reviewing books and investing my own money to build stock portfolios little by little up $10,000 and share my results with you month by monthly. The reason is to force me to raise my financial IQ and hopefully help someone else out there trying to do the same thing.

One disclaimer: I am not a financial advisor. So, I will not be detailing the individual stocks or making stock purchase recommendations. This podcast is about financial education.

First off, let me share a couple of sound bytes from an interview with the Oracle of investing, Warren Buffet, in which he is talking about his influences and then I’ll talk more about a couple of points Warren makes in the interview that are very important for anyone trying to be a better stock market investor. Take a listen.

Interview with Warren Buffett and Jay-Z

Follow The Facts and Follow Your Reasoning. Warren has said this in many interviews on Television and at trade show interviews where I’ve seen him in person many times. I use to work for a Berkshire Hathaway Company — and he would come into our booth to and takes pictures with customers holding his wallet. Very personable. But to me this brief statement is profound.

Follow the Facts: Question–what are the facts of a company that we might want to invest in. My personal opinion is that the facts are 3 things. The 3 areas that any company can generate cash are Cash from operations or the widgets it sells, Cash from investing and Cash from Borrowing. There are the only ways entities have to generate cash. Once you have visibility to these three areas of cash generation, you know the facts. But if you don’t have visibility to these three areas, you have to depend on other people’s opinion of the company.

This brings me to the first realization I had to come to grips with. To make better investments, you need a general understanding of accounting.

I put off reviewing accounting for a long time. I had a book on accounting sitting on my self for several years. Looking back, that procrastination cost me a lot of money.

I’m not suggesting that we need to take full-time accounting classes. I’m saying that my stock market investing got considerably better after getting a general over-view or refresher course on accounting. What you learn by reviewing accounting is that there a numbers of General Accepted Accounting Principles that can be easily manipulated in favor the company. If all you focus on is revenue, earnings, profit and sales as indications of company success, you could be in for a rude surprise like Lehman Brothers Collapse. Take a listen as Dick Fuld, then Lehman Brothers CEO.

Anyone with a hair of accounting knowledge and could see the cash buckets I described earlier. Cash from Operations, Cash from Investing and Cash from Borrowing could easily see that Lehman was broke 3 years prior to the financial crisis of 2007. They could not make payroll without borrowing money. So, accounting–yes, I know it’s boring and tough to read and understand, but it is vitally important to know to get visibility to the FACTS. Like Warren Buffet said—Follow the FACTS and Follow your reasoning and you’ll do alright.

That will do it for today. Drop me a line with some feedback, tell a friend and check me out next week. Until then. See ya.

check my financial results for 2014 here