When I was still a novice investor, I remembered feeling exuberant whenever the Annual Report of a company I own comes in through the post. Flipping the colourful, glossy pages of Duchenne smiles, well-posed directors and employees made me feel proud to be a co-owner of the enterprise. Never mind that the pictures only lasted through the first third of the publication and the rest is filled with ant-sized accounting gibberish.
Alas, nowadays in the name of caring for the environment, many companies opt to mail you a plastic CD instead, with a reply envelope stating if you DO want a physical book to be delivered (gasp!), write back to them.
It is hard to spark joy from a shiny circular thing, but I digress.
By the time you receive the Annual Report, it would have been several months since the preliminary annual results of the company had been announced. SGX has made it very convenient to retrieve the information, lest you forget whether it was 20 or 25 cents EPS last year.
So what grand purpose does the Annual Report still serve in the world of light-speed information at your fingertips today?
For a start, Annual Reports are a good way to get a handle on the qualitative aspects of a company - its directors and management. If you have five minutes to spare, I would suggest to spend it on checking out the Performance Review.
Why? You might ask.
A quick read through the segment should allow you to grasp how candid management is, in talking about the company's performance. Typically, you would get to know the achievements. What we ought to be paying attention to, are the problems:
- Has management been honest about why the foreign subsidiary is still bleeding cash?
- Did management simply attribute current year's losses to an economic downturn?
- Did management write matter-of-factly about the lawsuit a division was involved in?
You don't have to hear it from me. Hear it from legendary investor Warren Buffett. In Berkshire Hathaway's 1998 AGM, Buffett answered a shareholder's question on what he looks for when reading Annual Reports. (You can watch the video [here]. Fast forward to 1:30:00.)
Buffett said,
And as if to emphasize the importance of this point, Buffett added,
Even Buffett's right-hand man, Charlie Munger agrees with the observation:
The material may be as dry as your old school textbook. But if you ever find management honest enough with its missteps, capable enough to draft concrete plans to mitigate the failures, and steadfast enough to walk the talk, then the company will likely be in good hands.
And that five minutes before you dump the Annual Report would have given you the peace of mind.
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| Image by saralcassidy from Pixabay |
Alas, nowadays in the name of caring for the environment, many companies opt to mail you a plastic CD instead, with a reply envelope stating if you DO want a physical book to be delivered (gasp!), write back to them.
It is hard to spark joy from a shiny circular thing, but I digress.
By the time you receive the Annual Report, it would have been several months since the preliminary annual results of the company had been announced. SGX has made it very convenient to retrieve the information, lest you forget whether it was 20 or 25 cents EPS last year.
So what grand purpose does the Annual Report still serve in the world of light-speed information at your fingertips today?
For a start, Annual Reports are a good way to get a handle on the qualitative aspects of a company - its directors and management. If you have five minutes to spare, I would suggest to spend it on checking out the Performance Review.
Why? You might ask.
A quick read through the segment should allow you to grasp how candid management is, in talking about the company's performance. Typically, you would get to know the achievements. What we ought to be paying attention to, are the problems:
- Has management been honest about why the foreign subsidiary is still bleeding cash?
- Did management simply attribute current year's losses to an economic downturn?
- Did management write matter-of-factly about the lawsuit a division was involved in?
You don't have to hear it from me. Hear it from legendary investor Warren Buffett. In Berkshire Hathaway's 1998 AGM, Buffett answered a shareholder's question on what he looks for when reading Annual Reports. (You can watch the video [here]. Fast forward to 1:30:00.)
Buffett said,
"We see from that report whether the management is telling us about the things that we want to know about if we owned a hundred percent of the company. And when we find a management that does tell us about those things, and that is candid in the same way that a manager of a subsidiary would be candid with us, and talks in language that we can understand, it definitely improves our feeling about investing in such a business."
And as if to emphasize the importance of this point, Buffett added,
"And the reverse turns us off, to some extent. So if we read a bunch of public relations gobbledygook, you know, and we see lots of pictures and no facts, it has some effect on our attitude toward a business. We want to understand the business better when we get through with the annual report than when we picked it up. And that is not difficult for a management to do if they want to do it. [emphasis mine]"
Even Buffett's right-hand man, Charlie Munger agrees with the observation:
"If you've got a standardized bunch of popular jargon that looks like it came out of the same consulting firm, I do think it's a big turnoff. That's not to say that some of the consulting mantras aren't right. But I think there's a lot...that for a sort of candid, simple coherent prose...a lot to be said for it."
The material may be as dry as your old school textbook. But if you ever find management honest enough with its missteps, capable enough to draft concrete plans to mitigate the failures, and steadfast enough to walk the talk, then the company will likely be in good hands.
And that five minutes before you dump the Annual Report would have given you the peace of mind.
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