Financial Statements
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Financial Statements

Introduction

What is a "financial statement"

  • A financial statement is more of a financial story. It tells the story of an asset in terms of dollars.
    • In this way, it forces you to face reality. If you work really hard but lose money every year, then your effort means nothing. No one gives you credit for working hard.
  • Applicability whether it's a business, property, or life decision

Your life has a P&L

Connect to Warren Buffett's quote about a punchcard

“I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”
“Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”
  • What is the "capital" you have in life?
    • Time, energy, focus, etc.
    • While there are various circumstances at birth, most people have the same amount of time available to them. Warren Buffett has just as many hours as you have in a day.
    • So what is the difference between you and Warren Buffett? A billion decisions made cumulatively over the course of decades. He decided to do little things every day and invest his time more wisely, and he ended up very financially successful.
  • What are the only 20 investments you would make?
    • What would be your criteria for deciding?
      • Financial success is only one type of success. Satisfaction (or utils if you're in economics) can come from a variety of sources. Someone people really value time to relax, others value relationships.
      • Ultimately, your criteria for deciding is where your true priorities emerge.
    • What are the outputs or results you'd be looking for?
      • Are you looking for a quick result? Lose weight or get rich quick? Or are you more oriented to the long term?
      • What is the payoff you're looking for? Again, this can be a philosophical question applied to many situations.
  • What are the 10 most important life decisions you'll make?
    • Where you go to college
    • Who you marry
    • You career
    • Having children

The "Story" of Any Asset

Financial statements are a reflection of "the story" of any asset

Outputs vs Inputs:

"The outputs of competitive advantage, reinvestment, and capital allocation may be quantitative, but the inputs require qualitative evaluation."

  • How everything is an asset (website, competitive advantages, etc.)
    • In the context of business, an asset is anything used to generate revenue. But that can be broadened everywhere if we substitute the word "value" for "revenue".
    • Everything can be used to generate value and it can be used to different degrees of efficiency.
      • A bar of iron isn't that expensive. Beat the iron into a sword and it's worth some more. Take the entire bar and turn it into needles and it's worth a lot more. Use the bar to make balancing springs for Rolex watches and it's worth a fortune all of a sudden.
      • Time is time. One second per second. It can be used to varying degrees of efficiency. 8 hours of sleep at night is probably worth more than sixteen 30-minute naps throughout the day. Three hour-long meal breaks is probably better than spending 3 hours gorging yourself at once.
    • So one way to judge the ability of an agent (you or some other company) to generate value is how much they produce for the amount of assets they have. Microsoft will be held to higher standard in regards to revenue as opposed to the grocery store down the street.

Find examples of tweets where people post an income statement and ask "what business is this?" It's not just defining line items but getting creative in how you think about "the story"

What is driving the business? Is that what people care about?

How does the income statement conflict with your perceptions about the company? This is an example of how an income statement forces you to face reality.

Tips and Tricks

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