Reading 10-Ks

[oldschoolsting]

Hey guys, I am fairly new to investing on an individual stock basis.  I've been reading 10-Ks and other relevant docs on occasion for a little less than a year now.  I was wondering if y'all had any tips on how to read them efficiently.  Do you read nearly every word or do you just learn over time what is most relevant to you? When you go back and read the last few years', do you mainly look for changes or do you read them with just as much detail?  I know my way around an annual better than when I started but I've realized that it takes me a while to get through a 125 pg document especially when taking notes.

 

By the way, I'm referring to really digging into a company, not just scanning for potential investments.

 

Thanks.

[Guest Bronco]

Don't read every word.  They are put together by CPA's who are no good.

 

Seriously, I would focus on management discussion, financial info, and the risks to business.  But you really may miss something if you don't read the whole report.

 

May be able to skip report on controls and procedures and accounting pronouncements. 

 

This is just me, but I tend to screen companies by looking at FCF over past 3 years / current market cap.  If things look good, you can do a deeper dive.  But you may miss opportunities by just doing this.

 

I would just buy Deckers and Apple and call me 5 years from now. I was listening to Cramer driving home and apparently Tom Brady is wearing Uggs.  Who wouldn't want to emulate that a-hole. 

 

This 2 stock portfolio will probably outperform all the other crap you will read about over the next 5 years.

[Guest longinvestor]

Stating the obvious, fewer the companies you follow the better. You can read all of the 10-K. There is also something to listening to earnings calls and certainly attending ASM's. Written text cannot always convey what you need to know. All of the above is only possible in true value investing...hold concentrated portfolio where you can know as much as you need to know.

[Uccmal]

Hi oldschool, I have recently been learning more about US Banks.  My approach is to read the 10k.  So far I have read the 2009 10ks for BAC, USB, WFC, M&T, and BB&T.  My whole objective is to become familiar enough with US Bank Accounting to be able to easily vet companies.  The secondary objective is to add to my overall knowledge of accounting which can be applied elsewhere since banks are among the most complex entities.  I have been reviewing them with Online access close by to look up terminology and methodologies that I dont understand.

 

Obviously one cannot read, recall, and find useful 800 pages of 10k in the case of BAC, USB, and WFC.  So I have learned to skim commonalities and identify duplication. For example every bank has 30 or 40 pages of risks listed by headline.  The sections on interest rate risk, economic risk, and other systemic risks are generally the same for each bank.  With each 10 k there are two parts:  description of the business, and the AR.  These are essentially the same which potentially reduces reading by 300 pages.  If there is something that requires clarification I run a search in adobe to find earlier or later references.  In the case of banks I have basically evolved a mental list of need to knows such as:  Capital ratios, worst case scenarios (i.e. mortgage buy backs), revenue trends, deposit trends, recent acquisitions (FDIC or not).  For example BAC bought Countrywide without FDIC indemnification, which is the major source of its problems.  Once they are able to move these mortgages into foreclosure or modification the normalized earnings will take front seat.

[Guest longinvestor]

WEB's thoughts on reading 10-k's capture it perfectly. He places great importance on the stuff that is missing from the 10k.

 

Like numbers on servings of liquid (down people's throats) for KO

Household formations with real estate

ton miles carried for railroad

etc

 

Companies that fail to report these on the 10-k end up on the too hard pile for WEB. I remember him saying this about an oil company recently while answering a question about Conoco.

 

Not knowing how exactly WEB does his reading, it is reasonable to assume that he looks first for this kind of information in speedreading mode and decides if the 10k is worth reading at all. This would be one solution to page volume on 10k's. But it is going to take a thorough understanding of the business on your part to know what is the one thing to look for... aka Circle of competence. Sticking to this separates the men from the boys in the investing world

[lessthaniv]

Best advice I've ever received on reading 10-k's is to read them back to front. Start by reading the notes thoroughly. That's where most of "small print" exists. Once you understand what's buried in the notes, then read the rest of the report keeping in mind what you've learned from the notes.

[zarley]

I tend not to read 10k's just for the sake of reading 10k's.  I dig into them to find information about the company that isn't generally available in other places -- I go in looking for something specific (usually more detail about assets, investments, debts, compensation, etc).  Yes, I will also read things like the mgmt discussion and more general business descriptions but you can often find that sort of thing in presentations and press releases.

 

The goal is to understand the business/industry.  So, the 10k is useful for filling some gaps, but it's just one piece of the puzzle.  For me, the other pieces include 10Q's, other SEC filings, conference call transcripts, company/industry presentations, general business articles, industry-specific articles, executive profiles, opinions of respectable professional investors, etc.  I only go this far if the financials look good from a quick review (cash flow & balance sheet mostly).

[Uccmal]

The only problem with emulating Buffett is that he read and understood thousands of financial reports before he was 30 years old.  He knows exactly what he wants to see and exactly what is missing.  He also has intrinsic mental advantages above us normal above average folk.

 

Fortunately for us even he manages to goof up occasionally - Salomon Bros comes to mind - he could read the finacials but didn't understand the culture.

[Guest longinvestor]

The only problem with emulating Buffett is that he read and understood thousands of financial reports before he was 30 years old.  He knows exactly what he wants to see and exactly what is missing.  He also has intrinsic mental advantages above us normal above average folk.

Fortunately for us even he manages to goof up occasionally - Salomon Bros comes to mind - he could read the finacials but didn't understand the culture.

 

True, no way to emulate. Yet, I would argue that the approach is business understanding first followed be voracious reading.

 

Despite occasional goof-up's he readily admits to, he understood the franchise value of KO as a 10-year old making 20% profits on a 6 pack he bought from his uncle's store. The ton-miles carried in railways he understood long before he bought BNI. (He said he was sleeping at the switch when the opporunity came knocking in the 90's). So with Gillette, Gannett, Geico etc. And chewing gum etc.

 

My point is we all know somethings in our own lives, we just dont know how to think about them. And the discipline required. This we are trying to learn from WEB. We dont need to repeat 30 years of WEB.

[twacowfca]

The most important aspect of the annual report is the BS coefficient.  The outperformance is huge for companies that have clear annual reports with no BS that frankly discuss the bad as well as the good, compared to companies with annual reports that are full of obfuscation, issue dodging, blame shifting and weasel words.

[Myth465]

I pretty much know if  I am going to invest in a company before reading an Annual. In my opinion their are more than half a dozen better ways to get to know a company. The investment presentations in my opinion are far more useful. Those plus sitting in a empty room or car and thinking can do wonders for your insight.

 

I do read the reports on every company I invest in. I look for read flags, trends, and other things. The most important thing to me is the shareholder letter. The bites and pieces I find interesting are some of the risks, lawsuits and other details, and a few of the accounting choices / estimate rationales. I am an Accountant / Auditor, numbers can realistically be whatever Management wants and inmo Auditor independence is a farce so the financials are always reviewed with some skepticism.

 

The key is not to read millions of pieces of paper. Its to get to know the businesses and to think as owners or I guess longer term renters. INMO you should have some sort of purpose prior to reading a 10k, it shouldnt be light Saturday night reading. Uccmal appears to have a good plan, and if I ever wanted to understand banking thats what I would do. My other methods for getting to know those businesses have utterly failed.

[Parsad]

Hey guys, I am fairly new to investing on an individual stock basis.  I've been reading 10-Ks and other relevant docs on occasion for a little less than a year now.  I was wondering if y'all had any tips on how to read them efficiently.  Do you read nearly every word or do you just learn over time what is most relevant to you? When you go back and read the last few years', do you mainly look for changes or do you read them with just as much detail?  I know my way around an annual better than when I started but I've realized that it takes me a while to get through a 125 pg document especially when taking notes.

 

By the way, I'm referring to really digging into a company, not just scanning for potential investments.

 

Read the 10-Q's, 10-K's and all filings, including proxies.  Some of the information you are getting is simply wrong.  You absolutely need to read the financial statements, notes & MD&A front to back.  Can they be manipulated?  Yes, but they are still the foundation of your knowledge about the business.  I cannot imagine investing in any stock without reading them.  And you need to read three years worth at a minimum!

 

The more you read, the more efficient you will get, and certain things will become more prominent.  That is the starting place.  Then combine that with other research on the company, it's operations, competitors, etc.  Conference calls and investor presentations are the very last thing you should look at.  The company's CEO is their best salesperson!  Never make a decision to buy a stock based on management.  Always focus on the fundamentals.  If you do that, your batting average will be high.  Cheers! 

[ragnarisapirate]

I agree with just about everything that has been said.

 

As has been said, you should read the proxies... ESPECIALLY the part that includes transactions with related parties. This is generally a good way to see how management does things; not to say that there is anything wrong with related party transactions, there isn't- they just need to be fair to shareholders! This is probably most true if you deal in nano-caps as a bunch of us do.

 

Additionally, actually talking to management to learn about the business/industry can do wonders for your understanding.

[Myth465]

 

Read the 10-Q's, 10-K's and all filings, including proxies.  Some of the information you are getting is simply wrong.  You absolutely need to read the financial statements, notes & MD&A front to back.  Can they be manipulated?  Yes, but they are still the foundation of your knowledge about the business.  I cannot imagine investing in any stock without reading them.  And you need to read three years worth at a minimum!

 

The more you read, the more efficient you will get, and certain things will become more prominent.  That is the starting place.  Then combine that with other research on the company, it's operations, competitors, etc.  Conference calls and investor presentations are the very last thing you should look at.  The company's CEO is their best salesperson!  Never make a decision to buy a stock based on management.  Always focus on the fundamentals.  If you do that, your batting average will be high.  Cheers!  

 

This is tough.

 

I agree with everything you wrote, but feel that people recommend reading reports without telling people why or what to look for. People act as if the key to value investing is sitting huddled in a semi lit room with reports all over the place. I disagree with that concept. I think the key is understanding a business, understanding its Management, understanding its advantages and moat, and finally buying when its cheap.

 

Annuals, proxies, qs, and 8ks go along way towards all of that understanding, but again inmo you need to know what you are looking for. People have several different thoughts on Management. I dont bother talking to them, but I do listen to calls and investor presentations.

 

I think knowing where there motives lie is quite key to investing and I also think its fairly transparent most of the times. You take 3 years worth of shareholder letters, and 10ks, and you cross check things. Are the metrics the same, do they keep changing, do they always blame others (the cycle, economy, commodities, consumer, blah blah blah). Do they do what they say they were going to do, do they generally just have no idea whats going on and appear to be reactionary. You can cross check all of that with 3 years of letters, and reports.

 

Presentations are cliff notes to me. I love them. I know the basics of an oil company or manufacturing company. I know whatever I am looking at seems cheap on some metric. What I need to know is whats there plan and why this is different. I can scan a presentation in 20 minutes (with my BS detector set to max) or can read for 3 hours after a long day of pretending to work. For me I have to find ways to cut corners. The pros have a bit more time and can afford the time, but until I get there I cant. I read the presentation. If I like what I see, then its off to the 10ks and proxies. Then some thinking, some thumb twiddling, check a few sites, then maybe later in the week or 4 months later I buy depending on my capital and how I feel that week. Sometime she gets away and gets stuck on a watch list. Sometimes I buy and it moves up 20%, and my favorite is when it collapses right after I have done my homework.

 

For me I have a circle of confidence and know enough about 5-10 industries to grasp whats going on. What I need to know is a bit about Management, their general strategy, the price, why its cheap, what they will do about it being cheap, and what are the potential company specific risks / catalysts. I can pick a good bit of that up from Qs, press releases, presentations, and other reports. I brake out the Ks when I feel decent about the idea and prospects.

 

On a new industry all this goes out the window. I dont generally have time, so I cheap. I find a guru, and watch them for a year or so. I learned about Insurance, Realty, Conglomerates, Leasing companies, and Drilling companies this way. I learn the industry overtime with a small bet in a guru centered stock or just by watching some guys many think are smart. Overtime you get the key metrics, and drivers for the business. At some point you know what to focus on and can review some of the key competitors and make an informed investment.

 

I think one must find a model that fits them and their situation. If you come across 5 decent ideas a week, work 40 - 45 hours a week in a non related field, have kids or a personal life then......

 

Those are my thoughts, and remember they are worth exactly what you paid for them.

[coc]

Thought a few quotes from Bill Ackman would be pertinent here, given his reputation as a very thorough analyst. These come from testimony he gave regarding Farmer Mac and MBIA. Clearly, he is a professional, so I wouldn't recommend anyone who is basically doing stock analysis on the side try to emulate him, but I found it interesting and thought you all might as well.

 

Apologize for the formatting, it's from legal testimony.

 

(re: MBIA)

 

Q. What did you do next, if

24 anything, to learn about MBIA?

25 A. I called the company. And I

2 asked them to send me the annual reports

3 from the time they became a public

4 company. Plus any other information I

5 thought they would find useful.

6 Q. Did they?

7 A. Yes.

8 Q. What did they send you other

9 than annual reports?

10 A. It was primarily annual reports

11 and there was a folder with an operating

12 supplement, some press releases. Maybe

13 some -- may be a one-page summary of the

14 company.

15 Q. How did you identify yourself to

16 them?

17 A. By my name and company. I may

18 not have actually spoken to someone. I

19 think they may have had a voice mail where

20 you leave your address if you want annual

21 reports.

22 Q. I assume you read the annual

23 reports?

24 A. Yes.

25 Q. What next did you do?

1 W. Ackman

2 A. I read everything I could find

3 on the company. I did a Lexis, L-E-X-I-S,

4 dash Nexis, N-E-X-I-S, search. And I

5 generated a lot of articles that had been

6 written about the company.

7 I did a search on Google on the

8 internet. I went to the MBIA website

9 where they have a lot of ancillary

10 materials, they have analysts reports

11 written about the industry. I went to the

12 Moody's website. I took a trial

13 subscription at Moody's, and I read pretty

14 much everything they had on structured

15 finance, which was not an area that I had

16 much familiarity with prior to my looking

17 at the company. I looked at Standard &

18 Poor's website. Fitch, F-I-T-C-H,

19 website.

20 I basically tried to gather as

21 much information as I could about the

22 industry generally and then structured

23 finance, and then the company in

24 particular.

25 Q. After you read these materials,

1 W. Ackman

2 what did you do next?

3 A. I talked about the investment

4 with my partner David Berkowitz.

5 Q. About what period was this?

6 A. I think it was either --

7 sometime in June or possibly early July.

8 Q. And what was the substance of

9 your conversation with Mr. Berkowitz?

10 A. I explained to him why I thought

11 this was an interesting short sale

12 candidate. And an interesting company, on

13 which we could purchase credit defaults.

14 Q. What was his view?

15 A. He agreed with my analysis.

16 Q. All right, this analysis was

17 done on the basis of the annual reports?

18 A. Yes.

19 Q. You read the Moody's report on them?

21 A. I read probably, you know, 50

22 Moody's reports. There's one specific one

23 on the company. But there are lots of

24 other related reports on different

25 segments of not -- not specifically MBIA

2 but specific to the industry.

 

***

 

 

Q. Okay. Anything else?

 

17 A. Yes. Having read all the annual

18 reports from 1986 through until 2001,

19 which I find to be a useful exercise in

20 looking at any company, because you can

21 see gradual changes in a business, and you

22 can see what management said, you know, in

23 one year and what happened in the next

24 year. And what I saw was a company that

25 was gradually what I would call moving out

1 W. Ackman

2 on the risk spectrum. That over time they

3 were expanding the mandate, if you will,

4 in terms of the risks they were willing to

5 accept. And that there had been an

6 acceleration in the risks they had been

7 willing to accept, particularly in the

8 last three or four years.

 

***

(re: Farmer Mac)

 

11 Q. Tell me what the other reasons

12 are in addition to these twelve?

 

13 A. I found the disclosure

14 misleading. If you compare - - I

15 read everyone of their financial

16 statements from the beginning of

17 time until today and you can - -

18 when you compare, you know

19 disclosure and how it changes year

20 by year you begin to get a sense

21 that management is trying to create

22 an impression and in my opinion

23 very often not the truth.

 

 

 

[Myth465]

Ackman's a beast, and comes off as wicked smart. Steve Eisman seems very similar.

 

I would never do much of anything if I did that for every company I had the slightest interest in. Hell I dont do 10% of that and I still dont do much lol.

 

One must tailor things to fit oneself, and not tailor oneself to fit things. A guy with a kid, and a 9-5 trying to copy these guys makes as much sense as someone weighing a buck fifty trying to do that workout he found in Pumping Iron. Oh ya though it was written by Arnold, it must be good for me.

[coc]

Ackman's a beast, and comes off as wicked smart. Steve Eisman seems very similar.

 

I would never do much of anything if I did that for every company I had the slightest interest in.

 

One must tailor things to fit oneself, and not tailor oneself to fit things. A guy with a kid, and a 9-5 trying to copy these guys makes as much sense as someone weighing a buck fifty trying to do that workout he found in Pumping Iron. Oh ya though it was written by Arnold, it must be good for me.

 

Again, as you say, I wouldn't recommend a non-professional attempt that, but I wanted to illustrate what really thorough analysis looks like and why he does it.

 

There's a quote from Confidence Game (about the battle between Ackman and MBIA) that was something like "Bill did what he always does on vacation...read financial statements."

 

I would be curious to spend a week in Prem's (or anyone from H-W's) shoes to see his/their process.

 

[Myth465]

Thanks again for the link. Its mind boggling the amount of work they put in.

 

I think these guys have a secret weapon that few of us will get without those years behind us.

 

Experience.

 

I can look at a company similar to one I have invested in and pick things up rather quickly. I could buy anyone of the drillers after Deep Water Horizon because I held Ensco for about 3-4 years and also lost some money on some of the crappier commodity drillers. Buffetts competitive advantage inmo, is that he is a genius, and is he has literally seen just about everything over 30 years.

 

I remember one of the guys who runs a pretty famous value fund, said they dont even have to write up stocks. After doing it for so long, chances are they have already written it up or owned it at some point. They just have to update their write up and get up to speed.

[beerbaron]

If don't manage 10M$ then I don't see how doing what Ackman does as making any sense. Youre better to invest your time finding empty beer cans, your gonna get better return on your time.

 

One advantage we have over Hackman tough is that we can invest in small companies easily understood. In 2 days I was able to read 10 years of financial history of a small cap.

 

One other thing, I find that the 10-K have just too much undigested information. It's almost like reading a text law, never any comments on what something means.

 

I also don't like that the cover letters are not always available on EDGAR. For me, the cover letter is a valuable piece of information. Especially for finding the "lack of it".

 

I find Canada's MD&A & Annual Reports are usually more comprehensive for some reason.

 

BeerBaron

[Rabbitisrich]

Thanks again for the link. Its mind boggling the amount of work they put in.

 

I think these guys have a secret weapon that few of us will get without those years behind us.

 

Experience.

 

I can look at a company similar to one I have invested in and pick things up rather quickly. I could buy anyone of the drillers after Deep Water Horizon because I held Ensco for about 3-4 years and also lost some money on some of the crappier commodity drillers. Buffetts competitive advantage inmo, is that he is a genius, and is he has literally seen just about everything over 30 years.

 

I remember one of the guys who runs a pretty famous value fund, said they dont even have to write up stocks. After doing it for so long, chances are they have already written it up or owned it at some point. They just have to update their write up and get up to speed.

 

I wonder about that phenomenon of simply updating write-ups. I read an AGM transcript with a respected value fund which owned DELL, and their thesis was straight out of 2003, i.e. negative working cap., low cost advantage, etc...

 

It also irritates me when respected managers with great long-term records say that they review their thesis when the stock price plummets. Isn't that activity more rewarding before the damn drop?

[oldschoolsting]

Wow! This is a damn good site!  Thanks for the all the responses.  I like to see the slightly differing opinions with everyone backing up their views.  I'm pretty confident that I'll find my groove with experience and I'll probably err on the side of being overly conservative...I've always gotten this guilty feeling when i haven't done my homework!

[Uccmal]

Awesome discussion.  Nice writeup about Ackman.  The part I like is that he is using totally public information.  Trial subscription to Moody's to save money...

 

 

I think time in has something to do with it.  By that I mean quality hours in rather than years of time as a mutual fund salesperson.  The 10000 hours of time rule probably has something to do with it.  One of my greatest hits was options on FFH.  I had been a shareholder for 8 years and read or at least skimmed all of their ARs back to when they were Markel holdings.  This gave me the background to invest in the options with some degree of comfort.  The best investments I have are often companies where I read the AR or recent Qs, bought some stock, and got to know it over years.  At times I have sold out and bought back in later when things looked better.  

 

SSW is an example of this.  I have held it over two years and now have a high degree of confidence in its future success. I hold three times what I started with.  I am working toward this with BAC.  As time goes on and I read media articles every day I am learning more about the smallish investment I have in BAC through the Warrants.  As I learn more and  more unfolds I may increase the size of the investment ahead of a return to value, or may decide it is a dog and move on.

[ragnarisapirate]

If don't manage 10M$ then I don't see how doing what Ackman does as making any sense. Youre better to invest your time finding empty beer cans, your gonna get better return on your time.

 

One advantage we have over Hackman tough is that we can invest in small companies easily understood. In 2 days I was able to read 10 years of financial history of a small cap.

 

 

Additionally, if one is reading the 10Ks of a small cap, you can get through them faster. I think that the last one I read was ~25 pages?

[Parsad]

I would be curious to spend a week in Prem's (or anyone from H-W's) shoes to see his/their process.

 

I've seen what they do, and when I tell you that you need to read financials, you really do!   ;D  Hamblin-Watsa's analysts tear it up.  You should see their desks.  They are covered with reports, newspapers, analyst reports, you name it.  I remember Wayne Cadawallader's desk, and it was covered with reading material...there was no place to put a cup of coffee!  These guys do the grunt work tearing everything apart.  If you think you can consistently find good ideas without doing the work, you are fooling yourself.  Eventually you will make mistakes that will bring down your batting average unless you put in the work.  

 

And guess what...the investment committee all do the same!  Whether it's Prem, Brian, Sam, Chandran, etc, you will find stuff on their desk.  They are busy in meetings, but they do the grunt work too.  It's just that they've done it for such a long-time, they develop a very good base of knowledge.  Prem's desk is messy...he's got so much on the go, and he reads alot himself.  He's got a ton of papers, books, etc on there every time I've seen it.  You should ask MrB exactly how hard the analysts work!  They are on the road alot too, visiting various companies.  They do the work, and that's why their numbers are so good.  You can't have one without the other.  There are no shortcuts!  Cheers!

[elltel]

I find it amazing that WEB doesnt read analyst reports. While I dont rely on them I still find that sometimes there are nuggets of information in them that is sometimes useful.

 

Apart from annual reports and company presentations... does anyone read outside the subject matter? For example trade publications.  Does anyone read, for example,  other monthly subscriber publications from the 'gurus' out there?