Dear Friend,
You know the old saying – sometimes the best investments are the ones you don’t make.
Think about it. How many times have you been tempted to jump on the latest investing “fad” – or chase a seemingly “hot” company – only to find out later that if you’d gotten in you’d have been wiped out?
Many times in your investing career – and especially in turbulent markets – the best thing you can do is avoid mistakes.
This isn’t just true for you and I – it applies to everyone…even a legendary investor like Warren Buffett.
Here’s what Buffett had to say about this important lesson in Saturday’s Wall Street Journal.
“I bought my first stock in 1942, and this roller coaster surpassed anything that I’ve seen,” says the 79-year-old investor. “We didn’t do all the smartest things. We didn’t do anything really dumb.”
Now – as you might expect…Warren Buffett didn’t avoid making “dumb” mistakes just by accident.
Instead, he used a simple – yet incredibly powerful – tool that has helped him avoid disastrous mistakes time and time again.
Later in the WSJ story, Buffett casually revealed this “tool” – and I’m happy to share it with you today because I agree that it’s vitally important to making sound investment decisions.
It’s a tool that everyone has access to – yet few take the time to put it to use.
Maybe it’s because this tool isn’t “sexy” enough – or maybe because it just seems like so much common sense.
But either way – if it’s good enough for Buffett…it’s good enough for me.
What is this powerful tool?
Here’s how the WSJ article describes it…
On March 28, 2008, Mr. Buffett, Berkshire’s chairman, took a call from Richard Fuld, then head of Lehman Brothers Holdings Inc. Mr. Fuld wanted to know whether Mr. Buffett would inject about $4 billion into the investment bank to stanch losses.
That night, in his offices in Omaha, Neb., Mr. Buffett pored over Lehman’s annual financial report. On the cover, he jotted down the numbers of pages where he found troubling information. When he was done, the cover was dotted with numbers. He didn’t bite. Six months later, Lehman filed for bankruptcy protection.
Annual Reports: The Powerful – Yet Overlooked –Investment Tool that Can Help You Identify Great Opportunities…and Avoid Mistakes!
So there you have it…
Warren Buffett uses annual reports. I think you should too.
And the beauty of it is…you can use annual reports to not only avoid making “dumb” mistakes…but also to identify great opportunities.
In 1951, after Buffett graduated from Columbia Business School, he used to leaf through Moody’s industrial, banks and finance, and public utilities manuals in order to find investment opportunities.
That’s where he read about an insurance company with earnings per share of $21 in 1949 and $29 in 1950. The funny thing about this company was that with earnings that good it still only traded between $4 and $13.
In other words the stock was trading at less than half the earnings per share.
In 2002 Buffett invested $455 million into a company called PetroChina – Asia’s largest oil company — how did he decide to invest close to half a billion dollars? Buffett said,
I sat there in my office and read the annual report, which fortunately was in English, and I decided it was a very good company. I sat there and said to myself this company is worth about $100 billion and is trading for about $35 billion.
Reading that annual report resulted in $3.5 billion in profit by the time Buffett sold his stake in PetroChina in 2007.
You’ll be light years ahead of other investors if you take time to read the annual reports hitting your mailbox right now.
I’ll bet you dollars to doughnuts you can’t find two investing friends who’ve actually read the annual reports of the stocks they own.
Most investors decide to buy a stock based on the headlines in the media. They’re playing a game of what’s hot and what’s not with their lifesavings and letting journalists decide what is worth investing in.
It’s no wonder so many people lose money in the stock market over the long term.
What Buffett Looks for in Annual Reports That You Should Too
Not everything in an annual report is worth reading. Like Buffett, you should focus on two areas:
FIRST, read the letter to shareholders. Simply put, the CEO’s annual report letter is written to you the shareholder to inform you of what’s happened in the past year.
• Does management keep it simple? You should never put your money into a business you can’t understand so it’s critical that the management explains their business to you clearly and simply.
Be wary of complicated financial models or a tendency to be vague about fundamental business issues.
• Is management honest? Everyone makes mistakes but you wouldn’t believe it if you read a lot of letters to shareholders. Great leaders and managers admit and take responsibility for the mistakes they make with the business.
Personally, I like to count how many times a CEO gives praise to others and if he uses self-effacing humor, as those are each hallmarks of good leadership.
• Does the company want to build value, or build an empire? Expansion for the sake of expansion is a dangerous game. You want to know your money is invested with managers who are interested in increasing profits and the fundamental value of the business.
Beware any CEO obsessed with expansion for the sake of expansion – let him play with someone else’s money.
• Is management focused on its teammates? If a CEO constantly takes credit for everything good that happened over the past year take it as a warning sign. You don’t want your money behind a CEO who needs to be the bride at every wedding or the corpse at every funeral. CEO’s should be focused on building value not personal glorification.
• Is management focused on serving customers? Customers are the business and a good sign the company as a whole is focused on the customer is if the CEO frames his decisions based on how it will serve the customer.
SECOND, read the financials to make sure no one is pulling the wool over your eyes. Too many annual reports start out like advertisements as the company tries to put a great spin on what they’re doing. They read more like marketing materials than honest reports of the business.
The real story of what actually happening in a business is in their numbers at the back of the report – the 10-K.
The 10-K is a report filed by the company at the end of their fiscal year with the Securities and Exchange Commission. It goes into much greater detail about the business…the risk factors it faces…legal proceedings…and executive compensation.
If I ever have trouble understanding what the company does after reading about the business…I know this company is outside my field of competence. And – as Buffett demonstrated with his notations of “troubling information” – you can easily see just how many red flags are associated with a company when reading about it.
You can learn a tremendous amount about a company – without ever leaving the comfort of your living room – simply by examining its annual report.
How You Can Put Warren Buffett’s Most Valuable Tools to
Work For Yourself…FREE of Charge!
Each month – in my Hidden Values Alert advisory letter – I provide two thoroughly researched “extreme value” recommendations that are based on the principles used by Warren Buffett himself.
But rather than just tell you about my Hidden Values Alert – I’d rather show you…with a FREE ISSUE.
I’d like to show you – FREE of charge – a handful of financially strong companies that are priced at a discount and simple to understand.
Each month – in my Hidden Values Alert advisory letter – I provide two thoroughly researched “extreme value” recommendations.
But rather than just tell you about my Hidden Values Alert – I’d rather let you see for yourself…with a FREE ISSUE.
So right now – for a limited time – I’m offering you a no-risk, FREE trial to Hidden Values Alert …my highly successful advisory service that serves as the Ultimate Insider’s Guide to Value Investing.
Click on the link below to claim your FREE 30-Day PREVIEW of Hidden Values Alert. Then you can decide if the service is right for you before you ever pay so much as a dime.
No gimmicks…no catches…and no tricks.
Just click here now to claim your 100% RISK-FREE trial subscription to Hidden Values Alert-and get immediate access to my complete list of open recommendations.
Sincerely,
Charles Mizrahi, Editor
Hidden Values Alert
P.S. The only companies who make it into my Hidden Values Alert portfolio are great businesses trading at deep discounts – companies whose annual reports I’ve examined thoroughly. I’d like you to try my wealth-building service RISK-FREE with this special 30-day FREE preview.Click here to begin your journey right now!
This post was originally sent on 12/13/09 to the Hidden Values Alert email list