Island Investing: Where Research Should Begin

From my column in today’s Keys Weekly.

Q. How should I start learning about a company I might invest in?

A. Investors are fortunate that the SEC requires public companies to publish comprehensive financial information about themselves. Unfortunately, much of that information often looks like corporate propaganda. So while I’d suggest the first place you start learning about a company is by reading its annual report, it’s important to clarify the version I’m referring to.

To many investors, a company’s annual report is a color brochure full of pictures and platitudes that really don’t tell you anything at all. My advice? Throw that one out. Go find the company’s actual filings with the SEC instead.

All public company filings are available for free on the SEC’s “EDGAR” website. Go to then click on “Company Name.” Enter a company name, and then look for “Form 10-K.”

The 10-K is similar to the glossy annual report, only it goes into much further detail. It comes without the pictures and platitudes. It looks boring and staid because, well, it’s a government document. When it comes to investing, that’s a good thing.

A 10-K should be an investor’s first source of information about a company. It contains a detailed, objective description of almost everything you would want to know about a business, including product lines, divisions, technologies, patents, customer base, and more. You’ll find information about the markets the company operates in, any legal proceedings it’s involved in, and even management’s own analysis of past results and future plans. Companies write them, lawyers review them, and the accountants bless them.

Form 10-Ks also include a company’s financial reports – in greater detail, over a longer time period, and with more complete notes than in the glossy version. You’ll find a balance sheet, which captures a company’s financial position at a point in time; an income statement, which shows the company’s performance over a range of time; and a statement of cash flows, showing company activity and performance in cash terms.

We’ll get to each statement in my next columns. To really know a company, you’ve got to look at all three.

Cale Smith

About Cale Smith

Portfolio Manager at Islamorada Investment Management.
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4 Responses to Island Investing: Where Research Should Begin

  1. Jeff says:

    Are there any worthwhile shortcuts in terms of what sections should definitely be read and what mighted by safely skipped?

    Or perhaps what time of day to read them? I’ve tried reading them late at night in bed and have found them to be a more effective and lower-priced sleep aid than Ambien.


    • Cale Cale says:

      Probably a company-by-company decision on what sections should be skipped. Most companies, for instance, don’t have much going on in the Legal Proceedings section, but you wouldn’t want to skip that on the 10-K of the company that did. And notes to financials are always good to peruse…but you can get into Ambien territory when it comes to options, financial controls, fair value measurements, etc. Certain sections clearly deserve a lot more emphasis, and we’ll start talking about the financials next week. At least, to the extent we can cover them in a 350 word column…

  2. David says:

    Great info Cale!

    I also find it pretty helpful to use the RSS feeds from the EDGAR (SEC database) site for companies’ 10-K and Q reports. I quickly eliminate firms with “bad” balance sheets and other red flags, then look more in depth at the good ones to see if they’re worthy of more research. Obviously every industry will have different balance sheet characteristics (e.g. oil vs software company), so I always keep that in mind. But, I found it’s a decent initial screen.

    Just one of many ways to skin a cat…I mean find good companies to invest in. 😉

    • Cale Cale says:

      Yes, good point, David. I’ve got Edgar RSS feeds for each company we own (and some I’m watching) set up in Google Reader. Definitely easier to track.

      And don’t forget about the Spoke Fund crash course down here in May!