Investors have to read a lot of that kind of writing. The biggest category of such hard to read stuff is SEC reports. Investors need to be able to read 10-Ks, 10-Qs, 14As, S-1s, etc. Even in other countries you’ll be reading a lot of documents that are similarly written – even if they don’t follow the same format.
Writing like SEC reports is especially difficult to read because the author is not worrying about his audience. The writing is often “unvoiced”. It sounds like a computer or committee wrote it. There is no sense of a narrator. And no sense the words are directed at you. This makes the writing more difficult to read. If you aren’t used to reading such writing – and people who don’t work at certain jobs, will almost never come across writing this bad – you’ll have a hard time reading it.
Some people bring experience from other professions to their investment reading. For them, this stuff is easy. Lawyers and academics probably have the easiest time with SEC report writing because their fields also contain some questionably written material. The best academic writing – and I assume legal writing – can be very good. But the average writing is not. If you pick up any academic journal at random, it’s not easy to read. And that has nothing to do with the subject matter. Sentences are too long. The passive voice is used a lot. And repetition is used oddly throughout. This is one of the biggest problems you will come across in both academic papers and SEC reports – weird repetition.
What do I mean by weird repetition? Repetition by itself is not an impediment to understanding. In fact, it can help you understand something. But repetition needs to be used well or it won’t work at all. Good uses of repetition can be found in stories. You are probably most familiar with repetitive elements that work in things like fairy tales and movies. This repetition builds suspense and creates echoes. It makes the whole more meaningful by tying together the parts but letting you – the audience – put two and two together.
A lot of the bad written material you’ll need to read as an investor fails on this very count. It doesn’t take the audience into account. So, it never assumes you can put two and two together. It repeats things that have already been said. And it doesn’t say things even when a question naturally arises in your mind.
Let’s take an example. One area where you’ll notice a lack of info is “history of the deal” type sections (“background”) in merger documents. This is understandable. There may only be an official record of certain things. Nobody is being interviewed to create a complete document. And this isn’t fiction – so motives, etc. can’t be supplied to justify actions that aren’t explained.
When reading about how a merger was put together you will often read a series of dates when meetings were called, letters sent, lawyers hired, etc. But you won’t get much insight into the motives of the people who did these things. This may sound logical until you see it in print. If it were a magazine article, the author would at least guess at what the parties were thinking – he’d have to speculate – or explain he doesn’t know. Not so in an SEC report. The result can be a rather weird looking narrative.
Here is an example of the kind of reading you do all the time as an investor. It is not an egregious example. I’ve highlighted some problem areas:
“By letter dated June 30, 2010, the Investor Group submitted to the Board a revised, non-binding offer to acquire all of the outstanding Common Shares for $7.25 per share. In addition to the conditions of the previous offer, the Investor Group informed the Board that the revised offer was contingent on the Investor Group’s obtaining third-party financing on acceptable terms to fund all or a portion of the purchase price. No specific deadline for accepting the offer was provided. On July 1, 2010, the Investor Group filed a Schedule 13D amendment and Bancinsurance filed a Current Report on Form 8-K announcing this revised offer.”
Okay. Let’s stop here and discuss those three problem areas. This is not an article about how to better write reports. It’s about how to read them. But we need to know why they are hard to read. They are hard to read because they use unnatural phrasing – especially constructions that no human would use in actual speech.
Let’s start with “by letter dated”. This is – like a lot of what you’ll read – kind of a cop out. When was the letter written? When was it mailed? When was it received?
Why not write: “On July 30th, 2010 the investor group submitted a letter to the board of directors”. If it was submitted in August – and we really need to know when it was stamped – we can say that too. This construction is unnecessarily confusing. It reverses the way people actually speak and starts the sentence (and paragraph) with the means by which an offer was sent. You could choose to open with the party taking the action (“the investor group sent”), the party impacted by that action (“the board received”), the object we’re all interested in (“an offer was submitted”). Instead we open with means (“by letter dated”).
This isn’t a grammar issue. The problem with starting a sentence – and again, an entire paragraph – with such a dull description of means is that no reader can find the relevance here. If our eyes are skimming along the page we might be looking for: “the offer”, “the investor group”, or “the board”. We can’t possibly have had the idea of “letter dated” as some sort of phrase we were fishing for.
The next two problem phrases are typical of legal writing. The phrase “all or a portion” is used. What does that mean? Does it mean “some”? Does it mean they said we want “all” but we can do it even if we only get “a portion” but we can’t do it if we get none? Frankly, it sounds like a stock phrase that was in the letter and therefore is in this description of the background. It’s not clear to me if it had any meaning at all beyond being something you typically insert in an offer like that.
Some of this is a “voice” issue. Since no one seems to be telling us this story, they can’t help us interpret phrases they take wholesale from other documents. You’ll notice it’s easier to read reports when they focalize through a witness. So, when we are told that someone thought this and that and interpreted the meeting as meaning blah and the atmosphere as being yada yada and so on – that’s easier to read. In fact, the closer you get to eyewitness reports, the easier a document like this is to read. Again, that’s because they’re “voiced”. Imagine a novel with acceptable dialog and an incompetent narrator. You could still follow the story whenever it was limited to talk.
This last point “and Bancinsurance filed” is a quibble. But it illustrates a broader point. We have two separate parties taking two separate actions. This is a two verb sentence really. And yet it appears – without any punctuation beyond the date – as a single sentence. No one talks this way. And very few people would ever dream of writing this way. A subject taking an action is literally inserted – without punctuation – into the dead center of the sentence.
While I’m sure you can get over this last sentence, it does illustrate a point. You’ll sometimes find truly bizarre writing like that. It’s hard to explain why any writer would ever think to create a sentence like that. It’s easy to write as two sentences. And, if you really wanted to write it as one sentence, you need to take a moment to think about the exact relationship between the parties and those similar – but not quite identical – actions.
This is what you are up against when reading the kind of writing you need to read as an investor. Again, that’s not an egregious example. I could find much worse. That’s not even close to the worst paragraph in that document. And that’s not the worst document I’ve read. This is typical of what you’ll be reading.
So, how can you read it?
Well, you always read with:
· A pen
· A notepad
· A highlighter
· A calculator
Many people omit the last item. In this modern age, we all have calculators on phones and computers and – it doesn’t matter, you’ll take the lazy way out and not do the calculation. The purpose of having a calculator open at your side when reading a 10-K is to force you to do quick “scribble” math for things you wouldn’t otherwise check.
What is that in sales per square feet?
What is the percentage increase?
So their market share – by unit volume – is probably something like?
The price per pound is?
And so on. These are very quick calculations you’ll do – often in the margins – if you have a calculator. If you don’t, you won’t.
Names of companies, people, products, etc. are important. Nouns are important. Official stuff may not be important. This is a problem with SEC reports. A company may break itself down in ways that aren’t helpful to understanding it. You often have to accept the official way they divvy up operations and also map out the way you would think of the company.
The pen is for asking yourself questions. You’ll have a lot.
The highlighter is for highlighting key phrases. Mostly facts. This is very important in SEC reports. Unlike books, articles, etc. reports tend to be as likely to hide key facts in the middle of paragraphs as to have them nicely organized for you in chapter headings that appear in the table of contents.
This brings me to other reading – often equally bad – that you’ll need to do as an investor. You may end up reading some academic journals. With few exceptions, these journal articles are not well written.
One of the first things you want to do when reading a journal article is find the cited works. When reading a non-fiction book you’ll use an index. Many articles are uninteresting takes on interesting subjects. You can usually find a series of 5 to 10 good articles, people, etc. that appear in the citations or are indexed. These may be better reads.
If you disagreed with the author – and thought he was an idiot – you obviously want to start with the stuff he cited most negatively. If he explains why some article has dumb ideas in it – and you thought this fellow pretty dumb himself – then you obviously start with what he hates most.
This idea of reading around a topic – form a few different angles – is key. The way you’ll get better at reading SEC reports is by focusing on areas where you can read about something like 3 to 5 direct competitors all at once. Sometimes they don’t have to be direct. For example, they could be doing the same exact thing in different regions.
Don’t read about big companies at first. Start with small company 10-Ks. They go into more concrete details. If you were to read Microsoft’s 10-K without a background in smaller company 10-Ks (or a lot of prior knowledge about Microsoft) it would be too abstract for you. The whole thing is presented at too much of a macro level. You’re reading a description of a conglomerate rather than a company.
So always try to assemble about half a dozen sources on the same subject. Read them all in pretty fast succession.
One last tip. It’s critical to know how fast you read – I’m going to guess you read no slower than 250 words a minute and no faster than 500 words a minute, but go ahead and time yourself.
The reason a lot of people don’t pick up a 10-K in the first place is that they have no idea how long it’ll take to read. So, create an Excel file. Call it “past successes” or something like that. Enter the time you started reading a 10-K. Then sit down and read the 10-K in one sitting with your pen, calculator, highlighter, notepad, etc.
Then record the end time. And figure out how long it took. Record this in the Excel file. Do this for at least your first dozen or so 10-K reads.
Once you’ve accumulated a dozen such little victories, you can easily see how long it really takes to read a 10-K and that – however unpleasant – it’s actually doable.
It’s understandable when someone doesn’t want to start a 10-K. I’ve read a lot of 10-Ks. And I can still relate to that feeling. It’s called inertia. Nobody wants to read the first page of something they know is going to be awful.
But midway through you should feel confident you can finish the thing. If you find yourself quitting in the middle of a 10-K – that’s a bigger problem. You’re most likely either bored or overwhelmed.
Always finish. A good reading session is one where you’ve read something. Not necessarily read it well. But always read it. You can’t always control how well you read something. You can always control whether you finish reading it. So always set the bar that high: read it all the way through.
You may find that a 10-K that made no sense when you first read it makes perfect sense once you’ve read the 10-Ks of all its competitors.
Tomorrow I’ll talk about reading that isn’t quite as tough a slog.
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