Unlocking the Secrets of Annual Report Reading
Written on
Chapter 1: Introduction to Annual Reports
One evening, I found myself torn between watching comedy videos on YouTube and diving into annual reports. After a demanding day at work, the allure of YouTube was strong. Yet, a nagging question lingered: "Is this job leading me to wealth? Do I truly enjoy it?"
The temptation to tap the YouTube app was palpable, but I knew that investing time in reading annual reports would be far more beneficial. I turned to Google for resources on the S&P 500 and opened a PDF reader to explore the first few lines. Initially, the text was clear, but soon it became a blur as fatigue set in. Within moments, I found myself dozing off on the couch, only to be jolted awake by my toddler’s voice, exclaiming, "Wake up, Daddy!"
This wake-up call prompted me to try again. However, my eyes were unwilling to cooperate. I decided to set the app aside and engage with my child, realizing that perhaps that was the best use of my time.
Section 1.1: Learning from Professionals
While I’m a data analyst rather than a financial analyst, I’ve often wondered how some individuals can dedicate hours to reading annual reports. Seeking answers, I learned that a colleague of mine had once worked as an investment banker. Although investment bankers and financial analysts have different roles, I saw my colleague as a model for professional investing.
His work ethic is remarkable; he is perpetually engaged in some task, even during vacations. He possesses an impressive ability to discuss and enhance any business process—a hallmark of investment bankers. However, what stood out most was his exceptional proficiency in Excel. While I consider myself skilled in data analysis, his capabilities were on an entirely different level. His fingers danced across the keyboard, transforming mundane datasets into vibrant graphs in mere minutes, all without needing Python.
Subsection 1.1.1: Combining Excel Skills with Annual Reports
As I contemplated the connection between Excel and reading annual reports, I realized the thought of manually recording numbers from financial statements seemed tedious, especially with platforms like Morningstar available. However, my interest piqued while reading "The Essays of Warren Buffett," particularly his idea of "look-through earnings," which emphasizes understanding the earnings from a company's investments. This insight made me consider whether tracking the earnings of a company's investments would be worthwhile, especially since such information is often buried in the footnotes.
Section 1.2: Engaging with Annual Reports
On another night, I once again faced the choice between YouTube and the annual report. This time, I was determined to test a hypothesis. I settled in, illuminated by the glow of my tablet, and prepared to dive into the annual report with Excel open on my phone.
Instead of starting with the business overview, I jumped directly to the financial statements and then to the footnotes. My focus shifted to segment reporting data while I diligently recorded numbers. This process engaged my mind, akin to reading a captivating novel. Ultimately, although I didn’t uncover a promising company, I felt invested in the exploration. When data seemed off, I referred to the accounting policies, and when I needed additional context, I examined previous years. The entire experience was surprisingly gratifying.
Takeaways
Here are some strategies to enhance your engagement with annual reports:
- Flexibility in Tools: You don’t have to use Excel specifically. Google Sheets or even pen and paper can work just as well.
- Focus on Footnotes: Instead of recording easily accessible financial statement data, concentrate on footnote information, which is less readily available. I like to track segment data that contributes to operating earnings to understand the bottom line better.
- Longitudinal Data: Aim to collect data over several years—ten years is ideal—to identify trends and policy changes that may warrant further investigation.
- Skip Initial Explanations: At first glance, bypass business descriptions and management analyses; these sections are often more beneficial when the footnotes don’t provide clarity.
- Stay Within Your Expertise: Recognize the limits of your understanding. Just because you identify trends doesn’t mean you grasp their implications—remember, correlation does not imply causation.
Subscribe to DDIntel for insightful analyses and resources to elevate your investing knowledge.