Look Past Annual Reports for Perspective

 | Jun 10, 2013 | 3:00 PM EDT  | Comments
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When investing in a particular business, no two investors apply the same approach, or more importantly, the level of intensity.

A small percentage of people truly take the time to read a company's annual report or 10-K filing. It's no coincidence that the average length of an annual report has mushroomed over past couple decades, thanks to addition of regulatory requirements designed to protect the average investor.

Still, an annual report is a must to if you are a serious investor. But it is certainly possible to gather a lot of information otherwise, thanks to the Internet. That information can be useful and more efficient. I would argue that some of the best information relating to a business is found outside a company's annual or quarterly report.

My experience with Chipotle (CMG) is a perfect example. My first introduction to Chipotle many years ago was as a customer. I didn't realize until several months later that Chipotle was a public company. I indeed read the annual report and it was very insightful (Chipotle's annual report happens to be very good). The annual report plainly revealed the company's philosophy, the financials indicated a company with above attractive margins, and the company was clearly focused on adding more restaurants.

I was certainly intrigued by the company but it was my other efforts over the course of the next months and years that I really got to know the business in a way that no annual report alone could offer. Having a direct experience with Chipotle was invaluable. Wherever I went, lines were out the door. However, it was more than just visiting stores. In my various readings, I discovered a business truism that one would think foolish. Chipotle pays more for its food, yet generates higher net margins than any comparable restaurant company. Understanding how Chipotle can do this is the key to its success.

I try my best to employ a generalist approach when it comes to investment information. I read a lot, but more importantly I read a wide spectrum of information.

Without question, any investor needs to be reading all the relevant publications. This means not only the newspapers but the relevant magazines (Fortune, Forbes, BusinessWeek, Barron's, and The Economist). You don't have to read them from cover to cover, but go through them. A well-written magazine article will tell so much more about a company than any annual report. A good journalist is an excellent analyst for you.

For example, in today's RealMoney Columnist Conversations, I provided a link about a wonderful article relating to Costco (COST), with information you could not possibly get in an initial reading of the annual report.  

I don't want to come off as trying to make a pitch, but a good website is worth its weight in gold if you like the people behind it. If you are a fan of columnists at RealMoney, it is quite an impressive package to get all those insights in one spot. Non-finance related publications like The New Yorker can be very useful. What better way to gain insight about the healthcare industry than from a nationally-renowned doctor who is a staff writer?

Books can be very useful if you decide you really want to get to know a business. During the financial crisis, I read a couple of books about Goldman Sachs (GS) that were invaluable. Goldman's culture of success and attracting the best of best is ingrained in the fabric of that company. If you read a book like The Partnership by Charles Ellis, you would understand why that culture wasn't going away because of a financial crisis.

The big takeaway here is to develop an enjoyable way of learning that is not necessarily company specific. The broader you expand your information seeking efforts the better prepared you will be to evaluate an investment opportunity. It's that simple.

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