Munger on Accounting

7:51 AM  Pisstol Aer   Labels: ,
"Proper accounting is like engineering. You need a margin of safety. Thank God we don't design bridges and airplanes the way we do accounting." - Charlie Munger in the Stanford Lawyer in 2002

"…accounting [is] the language of practical business life. It was a very useful thing to deliver to civilization. I've heard it came to civilization through Venice which of course was o­nce the great commercial power in the Mediterranean. However, double-entry bookkeeping was a hell of an invention. And it's not that hard to understand. But you have to know enough about it to understand its limitations - because although accounting is the starting place, it's o­nly a crude approximation. And it's not very hard to understand its limitations. For example, everyone can see that you have to more or less just guess at the useful life of a jet airplane or anything like that. Just because you express the depreciation rate in neat numbers doesn't make it anything you really know." - Charlie Munger at a talk he gave at USC Business School in 1994

Financial statements provide an estimate, not some absolute truth about what's going on in a business. As a result, sound judgment on the impossible or hard to measure intangibles of a business matters a bunch.

If you cannot measure something well it doesn't make the factor lose significance. Over-analyzing the easy to measure stuff while ignoring what's difficult to measure but important can be costly for an investor.

Adam

Charlie Munger at USC Business School in 1994
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Munger on Accounting
Munger on Accounting
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