It should be no secret to anyone that Warren Buffett (Trades, Portfolio) likes reading company filings. He famously got his start as an investor by reading Moody’s (MCO) manual of publicly listed U.S. companies cover to cover and making a shortlist of potential investment targets based off of his own research. Even now, reading company reports is one of his favourite ways of getting to know a business, in addition to talking to management.
He has said that his ideal type of report would be one that he would receive as a part-owner in a private business who has just returned from a year long vacation. Unfortunately, annual reports are often more like "sales pitches" that portray the company in an overly rosy light, as Buffett says.
Make sure to read up on the competition
Buffett believes that if you are invested in a business, it is your duty to know everything about its competition. Therefore, it’s not enough to just read the annual report of your business; you need to read all your competitors' filings too:
“I can’t understand how my company is doing, unless I understand what the other ones are doing. I want to have the perspective: in terms of market shares, of what is going on in the business, their margins, or the trend of margins, or other things that I can’t get otherwise. I can’t be an intelligent owner unless I know what all the other businesses in that industry are doing.”
The best thing about reading as many reports as possible is that the more you read, the easier it becomes to read more. You learn what to look for and which shortcuts to take. For reference, I wrote an article for GuruFocus a while back on how to efficiently read a 10-K.
Reports can tell you a lot about management
Buffett is also a great believer in simplicity. For instance, he believes that you shouldn’t invest in any business that you can’t explain to a layperson.
Similarly, he believes that company filings should be easy to understand and clearly written. Of course, the language of accounting can be tricky to parse at first, but it doesn’t need to be artificially more difficult. If you get the feeling that management is trying to obfuscate its reporting, that is usually not a good sign. As Buffett once said, “there’s never just one cockroach in the kitchen.”
Don’t believe everything you read
Buffett is a big skeptic in reading reports put out by Wall Street institutions because he thinks that analysts' vested interest interest in encouraging transaction volume makes them unreliable. Big institutions have a lot more reasons to be bullish than to be bearish because they get to rake in transaction fees, so even though you should absorb a lot of information from various sources, you need to be discerning as to what information you consume and what the goals of the source are.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Howard Marks: We Are In Uncharted Territory
- How Does David Einhorn Value Companies
- Seth Klarman: Areas of Opportunity, Part 2
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