Filling in the gaps from annual reports
Just as history offers a warped and incomplete view of the past, an annual report provides a warped view of a business.
History is the process of ascribing a plausible narrative to the timeline of mankind. It's aided by the collection of fossils and artefacts like books and ancient tools that have survived long enough to be studied.
But there are problems. One is that historical accounts of events are written by people; and people have vested interests, biases and inaccurate information. Another is that the information collected is often incomplete or sparse; an arrowhead here or a skull there might be all you have to work with.
It makes for sweeping generalisations; how can one capture the rich tapestry of cultures, tastes and behaviours within a society based on what's on television today, let alone an ancient inscription?
So history is a narrative that's often more reliant on imagination than evidence. What did happen and what we think happened are not the same thing. In a similar way, a company's accounts and filings are a snapshot of a company's finances at a certain point in time - historical artefacts of sorts. And they're susceptible to the same challenges: the information is presented through the lens of management which has a vested interest; it's incomplete, or even inaccurate; and even at the best of times it only describes a business's finances rather than the business itself.
This is why it's so important for investors to do their own sleuthing. Phil Fisher explained the importance of collecting 'scuttlebutt' from a company's management, customers, suppliers and other stakeholders in his famous 1958 book Common Stocks and Uncommon Profits.
The dissemination of corporate information happened, er, rather differently back then and a more modern and accessible view can be obtained from Peter Lynch's One Up on Wall Street, which focuses on using what you already know to beat the professionals.
At one point Lynch reminisces about summoning chief executives to his office as the star manager of Fidelity's Magellan fund in the 1980s, before adding: 'On the other hand, I can't imagine anything that's useful to know that the amateur investor can't find out. All the pertinent facts are there waiting to be picked up.'
Most of these pertinent facts, he says, are in the annual reports, but what you can't get from the annual reports, you can get from your broker, by calling or visiting the company or by 'kicking the tyres'.
With the broker, the trick, he says, is to be firm - you are the customer after all. With the company, the key is to be polite, constructive and demonstrate that you've already done some research. Also, if you're a shareholder, then say so. According to Lynch, 'Many companies would welcome a chance to exchange views with the owner of 100 shares from Topeka'.
Lynch also talks about the importance of picking up information from talking to people, although generally at a more mundane level than Fisher. One of his most successful investments was in La Quinta Inns, which was mentioned to him by someone at a rival Holiday Inn and another was in Hanes, the maker of L'Eggs hosiery, which was a tip he received from his wife.
I often hear conflict amongst investors about the merits of talking with management, employees or competitors. But I rarely hear enough conflict about the merits of spending a day fixed to your desk. Companies don't exist purely on paper. Company's don't even exist at all - except in a purely imaginative sense. What we're really talking about is a collection of individuals, technology and assets combining towards a common purpose. And to understand that, we need to assess the people, systems, processes and economies that come together to shape it.
It's hard to capture that in 100 pages of glossy paper.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free
Join the Conversation...
There are comments posted so far.