Reading 10-Ks

[Guest Bronco]

I have the following financial statements in my desk (don't tell my boss!)

 

Power Corp of Canada, Loews, BRK, BAM BAM, and Biglari Holdings. All conglomerates of sorts I guess.

 

Since I am making no money on those except Biglari, my advice is don't read any reports and buy Apple on dips and Deckers on dips.  But don't buy the shoes.  They suck.

[beerbaron]

I guess there is no real debate here. All I understand from what is being said is that the 80/20 rule applies perfectly when it come to information gathering.

 

BeerBaron

[Uccmal]

Apple makes shoes?

 

beerbaron, Or  the 95/5 rule...

 

I wonder who at FFH read the Canwest reports?  ;)  Must be FFHs rogue trader...

 

 

[Guest Bronco]

The I-shoe.

[Myth465]

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.

 

beerbaron, Or  the 95/5 rule...   I wonder who at FFH read the Canwest reports?   ;)  Must be FFHs rogue trader...

 

Lol you guys are really getting good at the one liners.

 

I guess there is no real debate here. All I understand from what is being said is that the 80/20 rule applies perfectly when it come to information gathering.

 

BeerBaron

 

You just summed up my 4 paragraphs of my BS, with one sentence. Talk about 80/20 and Pithy. Greenblatt said that Investments typically hinge on 1 or 2 important variables. The key inmo is correctly position oneself to be correct with record to those variables. Hopefully MOS bails you out when you are materially wrong.

[Parsad]

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.

 

Who says he doesn't read them?  He doesn't make any decisions based on them, but he reads them when he's looking for something in particular.  I'm sure he does.  I know he's read Alice's analyst reports over the years.  And he reads the reports of certain analysts he's favored in the past...thus the Korean stock handbook he received from that one analyst.

 

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?

 

I read anything I can get my hands on, thus the reason I don't have alot of time to read books.  And if I can get them free...the better!  ;D 

 

Alnesh subscribes to a bunch of magazines that he never gets around to, so he hands them off to me.  I also read all sorts of accounting trades, and mining industry trades, even though we don't invest in commodities.  Build a complete base of knowledge...even for industries you don't invest in.  That also keeps me from getting bored as well!  Cheers!

[coc]

Thanks for the info on H-W Sanjeev. I'm not surprised those guys are thorough - it's the thread I see holding together all great analysts and investors.

 

Regarding trade journals, I find them useful. Nowadays, it's all on the web, too. For example, I get a daily and weekly e-mail from Insurance Journal that keeps us up to date on insurance goings-on. Dealbook from NYT is another great one - anything deal-related going on is usually covered. Offshore Mag for drillers, O&G Financial Journal for energy, etc. Another easy thing to do is go to Yahoo! Finance and subscribe to the RSS Feed of incoming headlines for companies you're interested and their competitors - it'll help you keep up on the major industry developments.

 

Let me pitch in another underrated source: blogs. An example I'll use is, we were doing some research into the medical device industry and I came across a few blogs written by doctors and healthcare IT professionals that were quite useful. There are dozens, probably hundreds of them out there. You can pick up scuttlebutt this way. The same applies for retail, energy, you name it...industry followers and professionals often have blogs with good links, commentary, etc. that you might not find on your own.

 

[ERICOPOLY]

It's interesting how much respect Ackman attracts for his rigorous research, while at the same time his largest holding is Citigroup -- a pick that gets little respect from others that do independent research because "it's too much of a black box and can't be understood".

 

A Martian would not be unreasonable to say that Ackman thinks Citigroup is the best financials investment out there (in his weight class) -- why else would he make it his only financial holding?

 

(not that it matters but Citigroup is my #2 holding -- and what I do isn't exactly research... more like selective coat-tailing).

 

 

[Parsad]

And in case anyone was still wondering after I described what happens at Hamblin-Watsa.  From tomorrow's Globe & Mail, Prem comments:

 

To improve their guesses, the Fairfax team studies hard. “We’re all research analysts,” Mr. Watsa said. “That’s what we consider ourselves.”

 

Amen to that!  Cheers!

[beerbaron]

It's interesting how much respect Ackman attracts for his rigorous research, while at the same time his largest holding is Citigroup -- a pick that gets little respect from others that do independent research because "it's too much of a black box and can't be understood".

 

A Martian would not be unreasonable to say that Ackman thinks Citigroup is the best financials investment out there (in his weight class) -- why else would he make it his only financial holding?

 

(not that it matters but Citigroup is my #2 holding -- and what I do isn't exactly research... more like selective coat-tailing).

 

 

 

Eric, who else beside Berkowitz are you following? Starting my master in January, won't have much time for research anymore so I will have to co-tail the greats.

 

BeerBaron

[ERICOPOLY]

It's interesting how much respect Ackman attracts for his rigorous research, while at the same time his largest holding is Citigroup -- a pick that gets little respect from others that do independent research because "it's too much of a black box and can't be understood".

 

A Martian would not be unreasonable to say that Ackman thinks Citigroup is the best financials investment out there (in his weight class) -- why else would he make it his only financial holding?

 

(not that it matters but Citigroup is my #2 holding -- and what I do isn't exactly research... more like selective coat-tailing).

 

 

 

Eric, who else beside Berkowitz are you following? Starting my master in January, won't have much time for research anymore so I will have to co-tail the greats.

 

BeerBaron

 

Really just the Fairfax guys, Berkshire, and Berkowitz. 

 

As an extreme example (Buffett&Munger), I feel completely free to trade in and out of Wells Fargo without doing any research whatsoever because it has the Buffett&Munger seal of approval.  I hope I never convince myself for a moment that I will think clearer than them -- so do I really need to sit down and read every detail in Wells Fargo's annual report looking to uncover the hidden fraud?  Mentally I sort of pretend that they are the analysts that work for me -- only they are the best in the world and I conveniently don't have to pay them.  They don't even mind that I cheat over their shoulder -- heck, Buffett gets on CNBC and hands out stock tips on WFC and AXP.  Put differently, would I not take their advice if I was just a director and they were on my payroll?  Perhaps some directors cannot delegate -- to these guys, I don't hesitate to delegate.  If Buffett were managing my personal portfolio and allocating my money to stocks that I hadn't researched personally, should I be worried?  Every shareholder of Berkshire I suppose has to put up with this "uncertainty"  :)

 

I do actually have enough time to do original research, and that sounds exciting in a rugged individualist sort of way,  but I instead try to limit it to reading about (to my level of satisfaction) investments that have already been pre-selected by selective investors.  I think that they will still make mistakes from time to time, but they'll make less mistakes than I would.

 

This year I violated this winning formula when I bought KSP -- although I will give myself some credit for identifying it from day one as a fairly speculative gamble. 

 

I think a lot of people on this board can do much better through independent research -- because you have small funds and can find the larger mispricings in the smaller stocks.  My results would likely go down though, due to competency limits.  And with that, a couple of words from wiser men : "A man's got to know his limitations" (Harry Callahan).  "Only three things to gamblin'," Puggy once said, "knowing the 60/40 end of a proposition, money management and knowing yourself."

[Uccmal]

Sanj, I have been thinking alot about this.  Part of what you have created here is a collection of analysts with highly varied backgrounds.  Individually, many of us cannot do the sheer amount of research required in every investment case whether it be time constraints, but collectively we can do as good or better a job than most analyst teams.  Prem has a team of analysts whose jobs are to rip apart companies and create ideas.  I expect he and the investment committee get a one page summary of smaller investments and grill the analyst on the details.  Ultimately, they will invest without knowing everything.  

 

I'm getting a bit philosophical about this.  Francis Chou has invested in BAC warrants based purely on odds.  He has read the AR, obviously, but doesn't trust the numbers (his words).  Ultimately, he will invest in every position he has, not knowing everything.  The same with Ackman and Citi, or Berkowitz and AIG/BAC.  They are making well educated guesses.  Buffett would have done the same thing with Goldmans Sachs and GE in 2008 (he was not an insider in either case).  I dont believe he would know more about the situation at either of these companies than their managers which isn't saying much at the time, as both were recipients of massive funding.

 

I think there is a process of handicapping that each of us engages in according to what we are able to do and understand.  This is not to imply that I recommend blindly buying a stock without research.  It does imply that I will sometimes enter positions based on a general knowledge of the company and checking for basic solvency concerns.  I had to do this at the bottom of the market in 2009 when I bought options in SBUx, GE,    

WFC, AXP, SPY options etc.   There was no knowing then what the outcome was going to be on anything.  

[Uccmal]

While we can control for some variables through research we cannot control for all variables.  Francis and OCI comes to mind as an example.

 

Further to this:  FFH is my largest holding and I have read 25 years of ARs.

[Parsad]

Al, you are correct!  Buffett, Prem, Francis et al, have years of experience and a significant base of knowledge.  Oldschoolsting was asking about reading 10-K's and he said he has been doing it for only a year.  People were suggesting that there are shortcuts for him, but there aren't. 

 

You have 25 years of reading Fairfax Annual Reports, so if you see Fairfax trading at a certain price, there is no need for you to flip through the annual report to decide if it's cheap.  For a new investor, it is absolutely imperative to read 10-Q's and 10-K's thoroughly.  Over time, they will build up a significant database of knowledge for various companies, that they will be able to access in a second when making investment decisions, but it takes time.  I read alot of 10-Q's and 10-K's, in particular for companies that are new (or newer) to me, but naturally I don't have to dig in as deeply for companies I know very well. 

 

So for those that have been at this for some time, yes you can be signficantly more efficient in your decision-making, but for newer investors...no shortcuts, otherwise you lose money!  But even for experienced investors, digging in through the financials is still very important.  Little disclosures such as derivatives, hedges, counterparty risk, legal actions, etc, suddenly show up for businesses you might have thought you know very well and were completely up to date on.  Preparation and research never hurt.  Cheers!

[coc]

My only general commentary on the research-light, coattail approach -- and this is not a criticism, you're doing what seems to work for you and that's most important -- is that I'm not sure how I'd feel when times got tough.

 

I'll use Moody's as an example. Let's say you bought it when Buffett bought it, and you knew enough to know that Moody's is an oligopolistic business, with inflation-protected pricing power, and an unlevered balance sheet; and more than anyone in the world, Warren Buffett was an expert in judging its valuation. He buys, you buy. For a while, it looks like a brilliant move, and you are happy with your approach.

 

Fast forward to today. How are you feeling about Moody's? There are all kinds of guru-type investors short the stock, lawsuits are circling the company, its business model might be impaired, and Buffett has sold some, but not all, of his position.

 

How about Berkowitz and Pfizer? Same deal - it was a huge position for him, he's holding joint conference calls with the CEO, and a year later, with the story basically unchanged (remember, he was publicly A-OK with the Wyeth deal), it's gone. What do you do when you wake up to that? How do you choose which stocks to coattail? What if you coattail their mistakes instead of their successes?

 

The difference between having Warren as an analyst and coat-tailing his public moves is that, when something unexpected happens, you can't ask him what to do. The initial selection may be entirely correct, but as the timeline stretches, trying to get in and out of it at the right time can be difficult... I'm just not sure I could control my emotions if I didn't have the facts.

 

But again, that's not really a criticism of the approach, but why I'm wary of it personally. Those of you who use it successfully may well have figured out how to avoid these types of issues.

 

[Guest Bronco]

Coattailing can get you killed.  Ackman with Target options, Lampert with S--T holdings, Buffett with COP.

 

The great thing is that the small investor can get in and out SO much easier than these titans. 

 

I like investing with the masters of the universe as much as anyone, however, we all know that doesn't absolve risk.

[Myth465]

I think the key word was "selective". If you dont know why you own something regardless of what you do (coattail, research, throw darts, prey) you may get killed because when / if it falls you will have no idea what to do or when to get out.

[Uccmal]

Oldschoolsting was asking about reading 10-K's and he said he has been doing it for only a year.  People were suggesting that there are shortcuts for him, but there aren't. 

 

You have 25 years of reading Fairfax Annual Reports,

 

 

No argument here.  Oldschool - read those reports :-). 

 

Point of contention - I have read 25 years of FFh reports since 1998.  NOt for 25 years  ;D

[Myth465]

Speaking of Gurus, now Kyle Bass is buying Citi.

 

I may have to dig in one of these days. He has been one of the most pessimistic guys I have come across.

 

http://www.cnbc.com/id/40214320

 

In fact, based on my reading of the statement, it appears as if Citigroup is now his largest single position Let's add some context..

 

Citi is becoming like MSFT. Everyone wants a piece.

[ERICOPOLY]

I think the key word was "selective". If you dont know why you own something regardless of what you do (coattail, research, throw darts, prey) you may get killed because when / if it falls you will have no idea what to do or when to get out.

 

Yes the key word was selective.

 

At (my prior employer) we interviewed software engineering candidates serially in a loop of about 5 people -- each interviewer had about 45 minutes alone with the candidate, then a brief summary was typed up for the next interviewer in the loop.  If the candidate progressed as far as the fifth person, then you could be certain that all the low level competency questions has been asked already.  So the fifth person didn't have to ask questions about whether or not the person could implement a searching algorithm -- he could instead focus on probing the candidate for personality, ambition, passion, fit, whatever.  

 

I'm saying that I can do the same thing for investments.  I can treat potential investments as interview candidates and I can be that fifth person.  I won't have to ask the truly low level nuts and bolts questions if I have a great team pre-screening the candidates.  So instead of whipping through the financials exhaustively, I can instead think about the macro or whether I like the business, how it makes money (high level explanation) -- often this means pulling the power point presentations off of the company websites rather than wading through their financial reports.

 

That fifth interviewer may not have ever been a competent engineer himself -- more like a career manager in many cases.  So he simply would not benefit from doing the entire loop himself -- in fact it would most likely lead to poor results.  In my case, I'm not a competent enough screener of the financials to consider another approach (entirely on my own for example).  Less mistakes ultimately get made if I stick to that fifth man position.  But I only buy if I convince myself that I really understand why the investment kicks ass -- or at least if I'm really convinced.  Ultimately, I buy a lot of stuff that I sell soon afterward because once I own a big position I ultimately get nervous and lots of questions hit my mind -- if I can't answer them I sell out until I feel more comfortable (happened a few times this year actually).

 

We still made some bad hires of course (at my previous employer).

 

 

 

 

 

[ERICOPOLY]

Coattailing can get you killed.  Ackman with Target options, Lampert with S--T holdings, Buffett with COP.

 

I know, but just remember they bought those investments despite doing original research.  Original research can avoid a certain class of mistakes (greatly improving your chances), but it's the thinking outside of the numbers that avoids the problems with the stocks mentioned above.  I remember Watsa staying clear of oil back when Buffett was buying COP -- it was the kind of mistake that could only be avoided from up at 10,000 feet looking down, not from being down on the ground counting the oil in the balance sheet.  The problem with COP was a macro thing ultimately -- could a coat-tailer have avoided the problem by reading and analyzing all of COP's financials?

 

 

 

[Myth465]

I agree with Ericopoly.

 

Its an informed bet. You are either wrong or right. You can research and research and research but its going to hinge on 1 - 3 things, and may hinge on a black swan situation that no one could see coming (BP). Get to know the business, make your calculation, ensure you have a MOS, size your bet, and get on with it. When I have been wrong its typically something very obvious (KSP debt duh), hours of research wouldnt have matter. I can say the same for most Guru errors, its usually something extremely obvious. We simple made the wrong call / key assumption.

 

I was able to dismiss most of those investments and 90% of the Guru Investments I see with relatively few filters (I dont like the business, dont like the macro, cant understand the business, its too big, dont like Management, wont give me the proper returns for the capital.....). My goal is to try to improve my big picture high level decisions.

 

Once you get to know the business, you need to go into a cold dark room and really think about where its going over the next 10 years. If you get that right, everything else should work out as long as you dont buy at nose bleed prices.

[Guest Bronco]

I wrote an article in march 2008 - is citi the next enron?

 

Lampert was buying Citi. Be careful throwing around guru.

 

 

[oldschoolsting]

Thanks again, everyone.  To be clear, my number one goal at this stage in my life is to learn the trade of analyzing businesses and securities.  My instinct is that a thorough approach is what I need, but I do want to be as efficient as possible (time is scarce).  It would probably be more valuable for me to spend my time analyzing an something that I don't invest in and learning a ton than finding something that is a potential investment and but not learning anything new.  Finding somewhere to put my money is just icing on the cake right now.

[twacowfca]

It's interesting how much respect Ackman attracts for his rigorous research, while at the same time his largest holding is Citigroup -- a pick that gets little respect from others that do independent research because "it's too much of a black box and can't be understood".

 

A Martian would not be unreasonable to say that Ackman thinks Citigroup is the best financials investment out there (in his weight class) -- why else would he make it his only financial holding?

 

(not that it matters but Citigroup is my #2 holding -- and what I do isn't exactly research... more like selective coat-tailing).

 

 

 

That's what's worked best for us, but we take it to a lower level.  Much lower!  Meaning we wait for a pick from a tip top guru to tank and then see if we can understand the company, the situation and the probabilities of different possible outcomes.  If so, we may sometimes then jump in with both feet.

 

  Right now we're starting to accumulate something that's large, but not very liquid.  Something that could become a ten bagger in a couple of months -- or a zero.  You'll never guess what it is, so don't ask.  We'll let the cat out of the bag when we get enough.  It's very easy to understand, but not without having a good macro view.  It's one of those can't see the woods for the trees things.  We'll be the envy of the board or  have egg all over our face.  ::)