Book Review: Interpretation of Financial Statements

Whether one is investing, managing a business, or beginning to learn finance, this book is the 101 rapid course in Financial Statements. A must read, have.

Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage by Mary Buffet & David Clark (Scribner; 1st edition, 2008)

The author has written this book with the objective of making Financial Statements understandable to almost anyone. Every component of Balance Sheet, Income Statement, & Cash Flow Statement is dismantled and explained in simple language without any financial jargon. Anybody, who would, in some way, be starting to learn finance or accounting, should read this book first.

Importance of Financial Statements in Investing

The author sets the stage for delving into all the elements of financial statements. She starts by explaining the types of businesses that Buffett would buy in part or a whole. She explains how Buffett took the value investing philosophy advocated by Benjamin Graham and augmented it with his philosophy of durable competitive business advantage. Graham believed in buying interest in business whose stocks are undervalued and selling it when the price is escalated, with less regard to the type of business. Whereas, Buffett looks at businesses that always have, what he calls, a durable competitive advantage.
How does he unearth the hidden treasures? Only with the help of financial statements. Beginners and novice investors or traders just look into the metrics on the quote snapshots, which does not tell much about the financial strength or the competitiveness of a business. Financial Statements are what he turns to to discover the gems. These don’t require reading between the lines, but just understanding the lines.

Income Statement – Where to Get the Bottom-line Measure

The book first elucidates the metrics in the income statement, which is the most important of all the financial statements. It contains the bottom-line metrics, the net income, and all the components that equate to the net income. It is not enough to just look at the most recent statement. Buffett's uses 10 years’ worth of bottom-line numbers to predict the durability of a company for at least the next 10 years.

How to Determine the Strength, Size, Sustainability, and Solvency

The next section details the components of a balance sheet. This provides a different view of a company. It tells about the size of a company, the liabilities, the magnitude of debt it carries, and the shareholder equity.
The third section details the importance of cash flow statement. It explains what to look for in a cash flow statement. It is necessary to look into actual cash coming in and going out as the net income may not be actual income earned, it is just the sales recorded and it may have been sold on credit to the customers.

One Financial Statements Pocket Guide to Definitely Carry for Quick Reference

The last section illustrates how Buffett makes his buy decision, once he has determined that the fundamentals are strong based on financial statements. The price paid for a stock determines the return. Even if the company is a good investment, if the price is not right, Buffett lets it go or awaits an opportunity. He also compares the return on treasury bonds to estimate the right price to pay.
Every term on a financial statement is crisply explained in one or a few pages. This is a great book for those who are averse to reading pages of fluff. If this book is published with small text, it could be the bestselling pocket reference to interpreting financial statements.

Book Review: Blue Ocean Strategy

By W. Chan Kim, Renée Mauborgne

A blueprint for developing successful products and services by obviating the competition; creating a whole new marketplace and a brand new consumer.

Blue Ocean Strategy - How to Create Uncontested Market Space and Make the Competition Irrelevant, by W. Chan Kim and Renée Mauborgne (Harvard Business School Press, 2005)

The Facebook Effect

Who would have thought that Facebook would threaten Google’s dominance on the Web. Facebook is blurring the line between the various modes of social interaction and communication. It is consolidating email, tweets, sharing of digital media, and networking There are so many other websites each offering specific services. But Facebook is attracting traffic from all others. It has overtaken Google as the most visited website. If each of the other specialized service providers is strong in its own business, how is Facebook able to compete against them all at the same time? Or does it? Facebook's strategy is a good example of what this book is all about.

The Red Ocean – Crowded Marketplace

Every strategist knows that one needs to come up with a novel idea to compete against companies in its industry and to sustain the dead-heat race to dominate the marketplace. The author calls this marketplace battle, the “red ocean”. Companies package in more functions and features and price the products or services against the competition. Everyone is competing against offering the commonalities, slashing the profit margins as a consequence. The best way out is to just not swim in the “red ocean”. Rather take a calm back-stroke in the “blue ocean”.

The Blue Ocean – The Serene Getaway

“Blue Ocean” is an uncontested marketplace. Companies swimming in the “blue ocean” offer products and services with features that are divergent from those offered by the proclaimed competition. The book introduces Cirque du Soleil as perfect example of such a strategy. Cirque du Soleil offers a unique form of entertainment that does not necessarily compete against any particular form of entertainment. It combines circus acts with theater arts with a hint of Broadway musical. Each venue has its own theme. It does not directly complete with the name-old circuses, or Broadway shows, or operas. With this unique offering it is also able to charge a premium price for its shows. Thus a “blue ocean” is about carving a niche marketplace that does not exist, which the author quotes as “value innovation”.

The Strategy Canvas and Analytical Framework

This book offers some effective analytical tools and a strategy framework to help strategists to create uncontested marketplaces. The primary tools are:

The Strategy Canvas: This is a two-dimensional graphical tool with the horizontal axis showing a list of factors with which the company is competing, and the vertical axis representing the level of competence ranging from low to high

The Four Actions Framework: This involves the actions of Reducing, Eliminating, Raising, and Creating factors to differentiate from the competition.

The process involves mapping the existing strategy of a company along with the competition in the same canvas; then applying the four actions framework to diverge from the competing industry factors.

How to Differentiate and Identify New Customer Segments

The second part of the book provides a valuable analytical framework that helps to develop a value curve by providing steps to fine-tune the different factors identified using the strategy canvas. It not only provides the visual tools to conceive a new marketplace but also provides the analytical framework to identify new segments of customers, and to develop a target cost structure based on the price the customer may be willing to pay.

Steps to Implement, Execute, and Sustain the Lead

Once a new strategy has been developed, then comes the most difficult part, the implementation and execution. The success of the “blue ocean” not only lies in the development of new value curve, but also relies on the buy-in of all the internal and external stakeholders. The book provides clear and time-tested guidelines of how to overcome the barriers-to-change that the new strategy will bring about. It doesn’t stop there. This development of the “blue ocean” strategy does not happen just once. The company should be on the lookout for changes in all fronts, vis-à-vis macro-economic changes, political climate, technological evolutions, imitations, and changing consumer behavior.

This is a great book for all the strategy executives, turn-around specialists, marketing and consumer research analysts and all those who are interested in keeping up with the ever changing market dynamics. The book is studded with plethora of visually illustrated success stories of organizations that knowingly or unknowingly swam in the “Blue Ocean”.

This article was originally published on Suite101.com

The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home

Are the decisions we make on rational grounds really the correct ones? Economically and objectively speaking they may be irrational but favorable as well.

The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home by Dan Ariely (Harper; 1 edition, June 1, 2010)

Dan Ariely, though this book, reasons the day-to-day decisions we make at work and in personal lives through experimentation and analysis of behavioral psychology. The book is divided into two parts. First part reasons the decisions and actions taken in a workplace based on intuitions, beliefs and hunches. Second part presents some illuminating cases on how our emotions and perceptions influence the decisions we make in personal life such as getting used to things, searching for a partner with specific traits, and how the decisions we make are widely disparate based on the format of information presented to our mind although the facts are alike.

Do Companies Get More For More?

Exorbitant compensation for CEOs has always been a matter of debate, filler for media, political rhetoric, and ire of investors. The book presents some interesting results of experiments conducted on compensation. The results are counter-intuitive  at least when it comes to jobs requiring using intellectual capacity. When it comes to physical labor, more pay may yield more output up to the physical ability. The opposite is true when it comes to compensating CEOs. There might be some hidden reasoning behind high CEO pays, which is to motivate the other employees to work harder up the ladder to be in the CEO shoes.

Why We Seek Meaning, Value, Love, and Own Our Fruit of Labor?

Many of you may have faced this situation, where you work hard to create a deliverable only to find out later that your boss puts it under the pile or even shred it. But you got paid and even commendation for the work done. Do you not care since you got compensated?

Today, we move at full throttle in a race to reach a destination that we hardly know. In this journey, we are outsourcing an increasing number of things that we think will save us time. From the meals we eat to fixing things around the house. If you bake a cake out of a cake mix which gives instructions on what out-of-the-box ingredients to add and in what quantity, to what degree can you boast of the tasty dessert as your creation?

When several of us work to solve a problem, each comes up with an idea or solution. Why do we always have a bias that the one we came up with is the better one?

Adaptation: The Key to Survival, Satisfaction, and Success.

When we put a finger into boiling water we immediately feel the heat. But when we put the finger in water and then gradually warm the water we don’t feel the water heating up until it becomes very hot. Our mind adapts to the surrounding gradually. The book presents the theory of Hedonic adaptation. When we obtain things we dream off, it excited us as soon as we have it. But the excitement fades away as time passes and we seek objects of higher excitement and the process continues. It’s like chasing Happiness on a treadmill.

Of the many potential life partners we particularly seek a person who is “compatible”. We look for traits that fit our gamut. It is impossible to find all the traits we need. So we learn to love what we have. We adapt sublimely.

How the Environment Effects Emotions and Emotions Affect Decisions?

The book presents vivid cases of events that are true to Joseph Stalin’s famous quote, “The death of one man is a tragedy, the death of millions is a statistic”. Why don’t we feel the same empathy for someone faraway whose sufferings are as severe as the one’s who is in close proximity? Why, often, philanthropists found or donate largely to charities that support the research towards acute or terminal illnesses to which they or their beloved ones are victims.

Sometimes we make impulse decisions in haste when our mind is filled with negative emotions like hate or anger. These may have long term consequences that we will regret for a long time. How can we take control of our negative feelings so that our decisions are rational?

This book encourages us to question our intuition and to take a step back and analyze the decisions we will make by factoring in elements of economics, influences of emotions, and weighing alternatives. The author has shared many of his experiences from the excruciating pain he had undergone when he was injured with third degree burns and reached a point where he had to decide between keeping one of his arms and having it amputated. He made an irrational decision, which to this day he keeps questioning. The book is thought provoking, illuminating,  entertaining and helps to understand how we can take control of our mind and the decisions we make that might have a lasting effect on the path we intend to travel.