Do you read all of the filings of a company you invest in?

[rukawa]

Taking ZINC as an example.  I worked a couple of years in a very similar industry.  I have seen extraordinarily complex feats of engineering go multiples over budget.  From a strictly qualitative perspective I would stay away from anything like that. 

 

I skimmed the thread on Zinc and my takeaway was that people were only investing in Zinc because Monish Pabrai was. In fact at the beginning people were pretty confused about why he was even doing it.

[rukawa]

A bunch of bullshit. You do not have an example to share.

 

That's a little harsh. Anyways I can think of examples, I was just hoping DYOW would give me more of them. Related party transactions comes to mind...where they give some loan to an executive with overly generous terms. Stock option grants where they lower the exercise price because the stock does badly. This all gives an indication that management is not to be trusted.

 

In the Multibagger speculative thread, valcont brought up the fact that the fulcrum debt on Bri-Chem had an interest rate of 21%. I probably would not have caught that. So my checklist would be:

 

1) Check terms of the debt, interest rate, maturity, convenants, currency of debt vs currency of revenue

2) Compensation, option grants and related party transactions.

 

Anyways to dyow I would say that if you are going to read all the disclosures you should be investing a great deal of time/money/effort into XBRL and much better visualizations. A good XBRL tool could show you all the related party transactions by date side by side or the MD&A by year on a single page. This would be order of magnitude more powerful than reading the disclosures as documents.

 

The disclosures will be much more powerful if you can compare them across multiple years and you have a search engine that can quickly find information. Technology is your friend.

[vinod1]

A bunch of bullshit. You do not have an example to share.

 

That's a little harsh. Anyways I can think of examples, I was just hoping DYOW would give me more of them. Related party transactions comes to mind...where they give some loan to an executive with overly generous terms. Stock option grants where they lower the exercise price because the stock does badly. This all gives an indication that management is not to be trusted.

 

In the Multibagger speculative thread, valcont brought up the fact that the fulcrum debt on Bri-Chem had an interest rate of 21%. I probably would not have caught that. So my checklist would be:

 

1) Check terms of the debt, interest rate, maturity, convenants, currency of debt vs currency of revenue

2) Compensation, option grants and related party transactions.

 

Anyways to dyow I would say that if you are going to read all the disclosures you should be investing a great deal of time/money/effort into XBRL and much better visualizations. A good XBRL tool could show you all the related party transactions by date side by side or the MD&A by year on a single page. This would be order of magnitude more powerful than reading the disclosures as documents.

 

The disclosures will be much more powerful if you can compare them across multiple years and you have a search engine that can quickly find information. Technology is your friend.

 

Come on! I was just trying to prod dyow to post an example to prove me wrong. Thank you for the examples.

 

dyow - I sincerely apologize. I am very curious to see any examples. Hope you can share some.

 

Vinod

[tede02]

Relating to examples, I always like to ask, "What investment mistakes could you have avoided by reading more SEC filings?"

 

For me (and I believe most people), far and away its the psychological errors and big picture misses that contribute to the vast majority of investment mistakes. 

[vinod1]

As others have mentioned, the degree to which you pay attention depends on the situation.

 

For example in Valeant, the proxy for one of the years talked about how the CEO specifically asked for a performance hurdle for a 60% increase in adjusted cash earnings or whatever they used to call their earnings. I thought it is one of the most useful pieces of info providing insight into the CEO's personality and how aggressive they are.

 

Vinod

[LC]

I used to request hard copies of 10Ks, read through them, and write in a sharpie on the cover the price I thought the company would transact for at arms-length, and then compare that price to market price.

 

My price was usually lower, which I guess means I was wrong or overly conservative. But even moreso, I realized how much information in the 10K was unneccessary, and how much good information is left out.

 

Like, the 10K will describe all the product lines. But you know how you really get an idea of what someone sells? Think like a buyer, check out their product page online and prices, and compare it to others. If you were a buyer, why would u buy from these guys? The 10K doesnt tell you that, but it is a much more informative exercise than reading 100 pgs of financial disclosure notes. Valeant will say, "Jublia has a revolutionary product, with pricing power above competitors and best-in-class sales and distribution systems, and revenue is therefore growing X%". Then you go online and say "well F$*K this, they're just charging $500 for toe cream"

 

Also, you can eliminate all the financial notes reading if you know management isn't sketchy. Your judge of character is 100x more important than financial disclosure details. For example, if you think the guys at Valeant are honest, then no amount of reading the financial disclosures will convince you otherwise, you will just find a justification for what they are doing.

 

So these days I don't read the 10K, but I take a look at overall financials and breakdowns and do other digging to make sure I know (or think I know) how the company functions. At the end of the day you can usually distill the company into less than 10 pieces of information that are most important.

[maybe4less]

As others have mentioned, the degree to which you pay attention depends on the situation.

 

For example in Valeant, the proxy for one of the years talked about how the CEO specifically asked for a performance hurdle for a 60% increase in adjusted cash earnings or whatever they used to call their earnings. I thought it is one of the most useful pieces of info providing insight into the CEO's personality and how aggressive they are.

 

Vinod

 

Related party transactions and stuff about compensation like this example are the big ones. I think in a lot of ways the proxy statement is more important than reading everything in the 10-k.

[RichardGibbons]

1) Check terms of the debt, interest rate, maturity, convenants, currency of debt vs currency of revenue

2) Compensation, option grants and related party transactions.

 

In the spirit of continuing the list, I too care about these ones.  I also care about:

3) Concentration of revenue by customer

4) Terms of convertibles & preferreds (basically looking for anything where management or investors are incented to drive down the share price, like saying a preferred can be converted into enough common shares that its value will be $25.)

5) Distribution of revenue by product type or geography (looking for incongruences between what I believe is happening in the company, and what is happening in the company)

 

There's probably more, but I can't think of them now.  The checklist is a really good idea for this one, rukawa.

[dyow]

I understand that this is sort of a heterodox view, but I basically just glance at fillings, looking for one or two things that I've previously identified as being material to my thesis. For example, I am looking for revenue growth or indications that a company does, in fact, have enough liquidity to survive, etc. That is, I am looking for something specific to support or falsify a previously constructed thesis on drivers of value in the business and don't bother with other things. Curious how other people think, but I'll be damned before I read about Nike's currency hedges again.

 

I mostly do this.

 

You find things hidden in 10Ks, sometimes ludicrous things , things you don't expect and weren't looking for, that could make, break or make your thesis a lot more fuzzy. 

 

Great. Do you have examples...more is better.

 

No.

 

Examples or evidence won't change your mind, you will block it out and look for evidence that aligns with your view.

 

Unless you understand & acknowledge anchoring bias...

 

This is the hardest thing of them all. This is what Makes Buffett and George Soros great the lacking in path dependence. It is best to try and avoid it with a good process than to think you can have such power of clarity.

 

I agree with the bias statement.  I am biased as well.  One of the reasons i like looking at 10Ks is bc it forces you to reconsider your biases.  even less relevant information can spark something in your brain, a new thought process, that might help you look at the investment a different way (and maybe change the thesis). 

 

[dyow]

No.

 

Examples or evidence won't change your mind, you will block it out and look for evidence that aligns with your view.

 

You assume that my purpose was to put a burden of proof on you. But that wasn't it at all!!!!

 

I actually wanted you to give examples so I could make a checklist of things to check. In a way your right you would not have changed my point of view...there is no way I would ever read everything in disclosures. I have better and more important things to do with my life. I was hoping, though, that I could profit from the hard work you had already done and narrow things down to a few things to watch out for. After all isn't that what this board is all about...mutually profiting from the work of each other.

 

OK....honestly i dont consider myself smart enough to know what to look for i just read and read and try to find anything i can.  I don't have a checklist.  It is impossible to provide a checklist but here is a couple i noticed,

 

- going through past 10Ks and CCs and checking what management has said in the past (including "forecasts" in the 10K) and whether they followed through with it (i didn't appreciate this enough when i started investing, good management is super key).

 

- checking the financials and determining GAAP financials vs economic reality (example during the energy crash there was a stock with 35% short interest that everyone was convinced was going bk....the accounting made it look like they were losing tons of money but their cash flows were positive through the whole cycle, and they had tons of assets).  You had to deconstruct their I/S and B/S to get a good feel for what was going on (they had 2 different businesses)......and to do this you had to go through the 10K and separate out the two businesses that were lumped together in the financial statements.

 

- just to add another, a few weeks ago i read proxy statement (schedule 14A) for a company i owned, just bc i was bored.  The proxy statement showed exactly how mgmt was to be paid.....besides salary/options a very big chunk of what they would earn would be based on bonuses based on free cash flows generated and also the share price performance....which is essentially aligned with the interests of shareholders.  I already owned this co but decided to add more when i saw this, i already knew this but just reading it and seeing it gave me more confidence. 

 

- also rukawa brought up a good one with related party transactions....if anybody looks at cheniere energy they have a bunch of RPT transactions between parent and subs that provides a misleading picture if not backed out.

 

anyways there are more but if we start listing them all we will put the board to sleep.

 

[dyow]

I don't want to hijack this thread but here below is an example of something ludicrous. from the sears hometown 2015 10K. 

 

Sears and sears hometown are both controlled by the same person. Yet both companies are beefing with each other??  I would not have known without looking at the 10K, and nobody brought this up in the hometown thread, probably bc nobody looked at the 10K - i have not seen this pointed out anywhere on the web either.  I would consider this to be pretty material information hidden in the 10K

.

 

Several of our agreements with Sears Holdings, such as the Services Agreement, the Store License Agreements, the Trademark License Agreement, and the Merchandising Agreement, were agreed to in the context of a parent-subsidiary relationship and in the overall context of the Separation. Since the Separation a number of disputes have arisen with respect to these agreements. We are currently in negotiations with Sears Holdings regarding a number of disputes, which include the following, among others:

• our ability in accordance with the Merchandising Agreement to buy KCD Products from Sears Holdings at rates for Sears Holdings-supplied consumer warranties that result from negotiations required by the terms of the Merchandising Agreement;

• the extent to which we and Sears Holdings are sharing with each other vendor subsidies in accordance with the Merchandising Agreement;

• whether Sears Holdings owes SHO reimbursement for repair over-billings and mis-billings at our ORDCs;

• Sears Holdings' refusal to process some "SHO-unique" vendors and products;

• Sears Holdings' refusal to promptly perform IT development and enhancement projects requested by SHO in accordance

with the Services Agreement;

• Sears Holdings' refusal to permit searsoutlet.com to sell new in-box products sourced from SHO's Hometown Stores in

accordance with the Merchandising Agreement;

• Sears Holdings' unwillingness to enable us to pay directly Sears Holdings' vendors for merchandise that Sears Holdings

purchases for us;

• Our ability, and the ability of our dealers and franchisees, to make bulk sales of our merchandise;

• Sears Holdings' refusal to sell to us all of Sears Holdings' distressed, refurbished, and marked-out-of-stock merchandise

in accordance with the Merchandising Agreement;

Sears Holdings' refusal to enable web-to-store and store-to-home transaction capability at all of our locations in accordance with the Services Agreement;

• our ability to use our employees to perform all repairs at our ORDCs; and

• availability and allocation of merchandise and subsidies from Sears Holdings and from third-party suppliers;

 

 

Our rights to engage in our own online initiatives that would leverage www.sears.com, and our rights to engage on our own terms and conditions in our own online initiatives that would be independent of www.sears.com, are constrained by our agreements with Sears Holdings and by actions that Sears Holdings has taken that we believe are not in compliance with the Merchandising Agreement and the Services Agreements and as to which we have objected. We believe that these constraints and actions likely affected our ability to conduct, and grow, our online business in 2015 and, as a consequence, likely adversely affected our results of operations for our 2015 fiscal year. These adverse effects likely will increase over time. We have, for some time, been engaging in negotiations with Sears Holdings regarding the elimination of these constraints and the cessation of actions, but we are unable to determine the outcome of these negotiations.

 

 

We have been taking action to reduce our dependence on Sears Holdings to enable us to take advantage of what we believe are lower costs from alternative vendors (for example reducing our reliance on KCD Products) and alternative service providers, for example with respect to IT infrastructure services and local delivery services. We have also been taking action to reduce our reliance on Sears Holdings by performing services ourselves , for example making repairs in our Outlet Repair and Distribution Centers ("ORDCs") using our own employees. We believe that we are entitled by the terms of the SHO-Sears Holdings Agreements to take all of these actions, and many similar actions, and we will continue to evaluate the actions that will enable us to reduce our costs by reducing our dependence on Sears Holdings. Sears Holdings has objected to several of the actions that we have taken, and Sears Holdings could object to, and could seek to block, actions that we could take in the future to reduce our reliance on Sears Holdings, each of which may have the effect of hampering or frustrating our efforts to reduce our costs and improve our results of operations.

 

[Uccmal]

I can give you a couple of examples from this board, niether of which I invested in where it would have been really beneficial to read the reports in great detail, especially the related party transactions:

 

Sandridge (under Ward), and Chesapeake (under Aubrey).  Ward was skimming from every successful hole drilled and Aubrey had an expensive collecting hobby financed by Chesapeake, as I recall.  Where there's smoke there's fire.

[dyow]

I understand that this is sort of a heterodox view, but I basically just glance at fillings, looking for one or two things that I've previously identified as being material to my thesis. For example, I am looking for revenue growth or indications that a company does, in fact, have enough liquidity to survive, etc. That is, I am looking for something specific to support or falsify a previously constructed thesis on drivers of value in the business and don't bother with other things. Curious how other people think, but I'll be damned before I read about Nike's currency hedges again.

 

I mostly do this.

 

You find things hidden in 10Ks, sometimes ludicrous things , things you don't expect and weren't looking for, that could make, break or make your thesis a lot more fuzzy. 

 

Great. Do you have examples...more is better.

 

No.

 

Examples or evidence won't change your mind, you will block it out and look for evidence that aligns with your view.

 

A bunch of bullshit. You do not have an example to share.

 

Edit: i don't mind getting called out.........he is right for all he knows i could be lying.  We need more confrontation on this board.  Better to get your feelings hurt than to lose your life savings on an investment mistake.   

[dyow]

 

Anyways to dyow I would say that if you are going to read all the disclosures you should be investing a great deal of time/money/effort into XBRL and much better visualizations. A good XBRL tool could show you all the related party transactions by date side by side or the MD&A by year on a single page. This would be order of magnitude more powerful than reading the disclosures as documents.

 

The disclosures will be much more powerful if you can compare them across multiple years and you have a search engine that can quickly find information. Technology is your friend.

 

I will look into this, thanks for the heads up!  My technology skills are horrendous.

[LC]

Here's a thought experiment: Imagine having to find an investment without using any company filings. How would you do it? Where would you look first? How accurate do you think you would be, versus if you had used all company filings.

 

Sometimes I think having all these filings at our fingertips makes us lazy and therefore ignore non-company sources of information that may be more important or insightful. 

[rukawa]

Here's a thought experiment: Imagine having to find an investment without using any company filings. How would you do it? Where would you look first? How accurate do you think you would be, versus if you had used all company filings.

 

Sometimes I think having all these filings at our fingertips makes us lazy and therefore ignore non-company sources of information that may be more important or insightful.

 

I don't fully trust non-company sources of info with the exception of market prices. Google gets market caps wrong. For instance, for this stock:

https://www.google.ca/finance?cid=89447611849247

 

Google own info says shares outstanding is 45.53 million and share price is 0.09. So mcap should be

 

45.527*0.09=4.097 million but Google reports 2.75 million.

 

I remember Packer reporting similar problems with Cap IQ and Bloomberg. Screener.co gets all kinds of things wrong and it sources its data from Thomson Reuters.

[Jurgis]

Here's a thought experiment: Imagine having to find an investment without using any company filings. How would you do it? Where would you look first? How accurate do you think you would be, versus if you had used all company filings.

 

I'd invest in BRK, FFH, Liberties.  8) How I would do valuation? Yeah, that's a problem, isn't it?

 

Here I assume that nobody has filings, so secondary sources (Google, M*, Bloomberg, CoBF posters) are not available either.

 

Without filings you don't even know sales, income (FCF), book value.

 

So, perhaps you still can buy BRK, FFH, Liberties based on past history of "good corporate performance". Perhaps you can buy GOOGL/MSFT on moat or growth. But you may be hugely overpaying (or underpaying).

 

Still, if no info existed, I'd guess people would buy based on past history and rough estimates (how many piano tuners are in Manhattan?  8) ).

 

Some people do that even now.  8)

[Uccmal]

Here's a thought experiment: Imagine having to find an investment without using any company filings. How would you do it? Where would you look first? How accurate do you think you would be, versus if you had used all company filings.

 

Sometimes I think having all these filings at our fingertips makes us lazy and therefore ignore non-company sources of information that may be more important or insightful.

 

I like this idea and will provide tangible examples, as long as I can use non-company public information. 

 

1) Bell Canada: Largest phone company and internet provider in Canada.  Has huge penetration, and raises its dividend regularly, and has for 100 years.  I am a customer and hate paying the huge phone bills but do so anyway.  I am also a shareholder.

 

2) Enbridge: One of largest nat. gas/oil pipers in NA.  Has raised dividend for 100 years, nearly every year.  Business protected by regulatory hurdles.  Nat. Gas will be used for heating and power generation for decades going forward.  Customer and shareholder. 

 

3) Canadian Banks: I, and everyone else in Canada are customers.  They are protected by regulations and agreements with government.  Before I buy anymore shares I want to see a mortgage correction. 

 

Its not that difficult.  What it really comes down to is market timing.  If one doesn't like market timing you can dollar cost average into moat companies and never read a single financial report. 

 

I am willing to bet that if one started investing in RY, and TD, at a rate of 1000 per month, in 15 years you will have outperformed the S&P by at least a small margin.  And this assumes riding through a housing crash in Canada, along the way. 

[rkbabang]

It depends on the company.  Here's two examples: The largest market cap company I own is AAPL and it would not be possible to go back and read every word of every filing on the SEC website for Apple.  This would take a very long time to say the least.  The smallest company I own is SYTE and I have read every filing since I've invested and read everything for a number of years back before investing.  I always read the annual reports and I try to read a lot of the quarterly financials for all of the companies I own every quarter, but I don't always find the time.  I ignore a lot of the other types of filings like insider trades and such especially for the large cap companies.

 

[oddballstocks]

Here's a thought experiment: Imagine having to find an investment without using any company filings. How would you do it? Where would you look first? How accurate do you think you would be, versus if you had used all company filings.

 

I'd invest in BRK, FFH, Liberties.  8) How I would do valuation? Yeah, that's a problem, isn't it?

 

Here I assume that nobody has filings, so secondary sources (Google, M*, Bloomberg, CoBF posters) are not available either.

 

Without filings you don't even know sales, income (FCF), book value.

 

So, perhaps you still can buy BRK, FFH, Liberties based on past history of "good corporate performance". Perhaps you can buy GOOGL/MSFT on moat or growth. But you may be hugely overpaying (or underpaying).

 

Still, if no info existed, I'd guess people would buy based on past history and rough estimates (how many piano tuners are in Manhattan?  8) ).

 

Some people do that even now.  8)

 

I have done this, it's challenging but you can find things.  You can find out a lot about a company with some creative searching and inquiries.  You can figure out sales, you can figure out growth, and then estimate margins.  I've done this with private and public companies.

 

Filings are a red herring, they focus investors on the wrong things.  If you started with a blank slate and were given a company and asked "would you invest?" The questions and how you'd find the answers are different than what's in the filings.  By the time you decided whether you wanted to invest the financials would be useful, but they wouldn't make or break the deal.

 

It's easy to be blinded because you have easily accessible numbers in front of you.  You can make assumptions based on the numbers and project your own reality from the numbers.  But that isn't reality.  Sometimes there are millions of moving parts, and investors get caught up trying to figure out all of the loose ends.

 

I came to a conclusion years ago that I'd like to stick to investments where there was a single or double fulcrum point.  That is the investment hinged on the answer to a single question, or two questions.  If a company is at 50% of book value it might be: is it worth 100%, and is it going out of business?  If I can say yes to the first and no to the second then I buy.  Does it matter if they're selling Persian rugs out of a semi, or selling telecom equipment..nope.  Boiling things down to a few easy to answer questions reduces the potential for errors.  Successful investing isn't finding winners, it's eliminating losers.  You will stumble onto winners, but a few losers will torpedo any hope of outperformance.

 

Most of my holdings are small companies.  I read most of the annual reports.  But there is a lot of boilerplate I skim or skip.  When looking at a new investment I look for a few known areas of landmines before committing to reading something cover to cover.  Cover to cover is the biggest waste of time if you don't know if landmines exist.  I'd rather skip to known bad areas before reading 45 pages to discover it.  But then again I'm not trying to read 500 pgs a day.  I guess if I were then I'd mindlessly read from start to finish as well. 

 

[Jurgis]

Filings are a red herring, they focus investors on the wrong things.  If you started with a blank slate and were given a company and asked "would you invest?" The questions and how you'd find the answers are different than what's in the filings.  By the time you decided whether you wanted to invest the financials would be useful, but they wouldn't make or break the deal.

 

./bow Sensei!

 

8)

 

[Uccmal]

"Boiling things down to a few easy to answer questions reduces the potential for errors.  Successful investing isn't finding winners, it's eliminating losers.  You will stumble onto winners, but a few losers will torpedo any hope of outperformance."

 

That says alot. 

 

One of my biggest all time losers was Rimm right when the iphone was gaining traction.  Reading the filings and knowing they had cash on the balance sheet, and x amount of subscriber growth told me nothing about the reality of the situation.  I needed to only take off my RIMM coloured glasses and look around to see where things were headed.  Managed not to buy Apple at the same time. 

[abyli]

"Boiling things down to a few easy to answer questions reduces the potential for errors.  Successful investing isn't finding winners, it's eliminating losers.  You will stumble onto winners, but a few losers will torpedo any hope of outperformance."

 

That says alot. 

 

One of my biggest all time losers was Rimm right when the iphone was gaining traction.  Reading the filings and knowing they had cash on the balance sheet, and x amount of subscriber growth told me nothing about the reality of the situation.  I needed to only take off my RIMM coloured glasses and look around to see where things were headed.  Managed not to buy Apple at the same time.

 

I guess it all depends on your style of investing. Investing is all about knowing the businesses and management team in and out. When you feel you really "know" the company, sec filings are useless; if you do not "know" the company, sec filings are useless. Know the company means you know the business, know how the CEO thinks, how do the management team make decisions, how is the company's culture, the business model, etc., you can pretty much guestimate what the company looks like in 5-10 years. Sec filings are the results, what we need to look for is the cause of the results. To me, sec filings is the place to get the numbers.

[LC]

Thanks nate and uccmal - you guys fleshed out the idea I had, in ways I could not.

 

I think your posts are two sides of the same coin:

 

The financials can 100% be red herrings. The financials can look great, or terrible, but the things uccmal mentioned are the REAL drivers of the investment success/failure. If the filings for RBC are sub-par compared to another (less protected) bank somewhere else, you may be tempted to drop RBC. But if you start by ignoring the financials and look at the business environment, then you can realize well maybe I am not getting the juiced up returns of the bank of greece for a few years, but RBC is still a superior investment because I am going to be raking in an increased cashfow for decades.

[Jurgis]

The financials can 100% be red herrings. The financials can look great, or terrible, but the things uccmal mentioned are the REAL drivers of the investment success/failure. If the filings for RBC are sub-par compared to another (less protected) bank somewhere else, you may be tempted to drop RBC. But if you start by ignoring the financials and look at the business environment, then you can realize well maybe I am not getting the juiced up returns of the bank of greece for a few years, but RBC is still a superior investment because I am going to be raking in an increased cashfow for decades.

 

But will you?

 

Buying MSFT (who survived and thrived business-wise) in 2000 was very hazardous to your returns.

 

Maybe your argument is that RBC is never overvalued (ha) or that if we look at decades buying at overvalued price does not matter (not really true, MSFT or even SP500 at 2000 top was not a good investment for decade+).

 

Maybe the argument is that if you average over time, you'll end up OK. That's tougher to refute. But I am not sure it's true either.

 

OTOH, yes, if a company has a great business and a long runway, then current expensive price might not matter. If it can outrun the handicap.