“The SEC enforces the securities laws to protect the more than 66 million American households that have turned to the securities markets to invest in their futures—whether it’s starting a family, sending kids to college, saving for retirement, or attaining other financial goals.”

sec.gov

As explained on the first page of the SEC website, the main goal of the capital market is to allow every household in the world to reach its financial goal. In this blog, we are going to learn how to do that the best way possible. 

Here we go! 10-K is the most important form, here we can find all the information we need about a company, a sector, an industry and also about the whole market. 10-K is even a broad informative document that educates us about a wide range of topics. We can learn how to invest, techniques to value companies, and not only that we are reading about. Unfortunately, 10-K exists only for US- based companies. For foreign companies quoted on the US market, there is the 20-F form, a variant similar to 10-K.

The US is capitalism’s homeland, therefore it’s the best and advanced place to learn about the capital market. That doesn’t mean we have to invest only in the US, but through the US forms, we can learn how to invest and how a company works, in a reliable way. The most reliable place to find 10k filings is the EDGAR (Electronic Data Gathering, Analysis, and Retrieval system), powered by the US government security and exchange commission.

In this digital environment, we have a lot of choice where we can find financial forms, but EDGAR is the main source of information, the only place that you can trust. Then, in the second place, but sometimes less reliable, is the Investor Relations page of the company itself. 

…but what about 10-K. 

In the 10-K management talks about everything about the company, starting with detailed information about registered office addresses, the number of shares outstanding, the management discussions about: the company’s future, the idiosyncratic and systemic risks, detail about management key people, current and future investments. You can also find detailed financial information and any current or past lawsuit. 

Learning to invest? 

10-K helps you to understand the business but also tells you how the management defines the value of current and future investments, in quantitative and even in qualitative terms.

Other than that, management discusses geopolitical topics. You can easily throw away the newspapers, what you need to know about our world, it is readable on the 10-K of a great company that operates worldwide.

In other words, you are going to find the signal and what really counts. 

Understand the CEO 

In this document the CEO talks about the company, then you can understand what type of person is the person who administers your money, because this is the CEO work, decide how to invest your capital with the goal to earn the maximum return (capital allocation). There are some characteristics we can extrapolate from this filing about the CEO, for example, if s/he realizes the past promise and if s/he is honest and reliable about the company condition and future prospects. Obviously, you have to take her/his words with a grain of salt and skepticism, but is a good starting point to dig about her/his figure. The next step can be to go to youtube and view some interviews in order to give a face to the person we are going to give money to.

The first time I read a 10-K form, I thought it drew a very grim figure of the company, that’s good because it allowed us to take note of the risks. Investing is the art to face uncertainty and understand the risks and rewards of an investment decision, therefore a good management doesn’t hide the negative aspects of the business. 

Remember: any investment decision involves risks, it is our job to understand risks and create a basket of companies that through a deep understanding and a bit of diversification allow us to reduce those risks.

But what really matters is knowing the CEO and being sure about his honesty to convey all those risks. 

Competitors 

To understand the big picture, it is useful to also read competitors’ 10-k, this gives you the opportunity to better understand the sector and the risks. It’s important to have a competitive advantage over the competitors to thrive, the 10-k tells you what competitors are doing and the difference between the economics of the companies in the same sector. 

Scuttlebutt 

Scuttlebutt is an investing tool proposed by the famous investor Phil Fisher in the book “Common stock and uncommon profits”, this technique suggests a journalistic approach to investing. 

“It is amazing what an accurate picture of the relevant points of strength and weakness of each company in an industry can be obtained from a representative cross-section of the opinion of those who in one way or another are concerned with any particular company.”

Phil Fisher

10-K gives you the opportunity to extend your research far beyond the official source. 

Case point: I use google to do additional research while I dig into the filing of the company, for example: using google to search keywords or business stuff presented in the 10-K that we don’t understand. Checking the Wikipedia page of the company, biography of the key persons (CEO, CEO, Board of directors). Personally, I check even the family situation of the CEO.

Where has he worked in the past?

Lawsuits? Fraud?

Performance of the company where he had a key position?.

 Location of offices, factories, research institutes?

Information about the audit company (big four: Deloitte & Touche, Ernst & Young, KPMG, PricewaterhouseCoopers)

(ELI5: audit company reviews and validate the reliability of financials).

There are a ton of sites that give us more insight (e.g. Glassdoor, Alexa rank, interbrand.com …). It’s important to be digitally smart and to use all the tools  internet gives us to dig deeper. As I said, even watching a CEO interview on youtube is a good idea in order to better understand the key people of the company. As I explained in the past articles (10. Circle of competence), it’s better to select a company in your circle of competence, this gives you an advantage in your ability to conduct a scuttlebutt approach, you can analyze the business first hand through your experience regards the products and you can speak with other stakeholders involved (e.g. others customers, in the case of Facebook you can pay attention to what people around you do with much of their free time, scrolling Instagram like without a meaning) 

Financial statements 

Obviously, in the 10-K we also fund more numerical data that we are going to dig in the next chapters. Ok, but it’s long and boring. Do I really need to read all this stuff?  Yes, you must do it. I suggest you make a habit of reading 10-K every day. Instead of reading the last useless news in the newspaper or random fake news on Facebook, read a 10-K. This will help you understand the world and become wealthy in the meantime.

Remember: information is always distorted, your duty is to find the more reliable source and stick with it. 

“Although it’s easy to forget sometimes, a share is not a lottery ticket… it’s part-ownership of a business.”

Peter Lynch 

Then we have to understand the business in order to buy a share.  Finally a small piece of advice for all the beginner investors out there: don’t waste too much time reading books, start as soon as possible reading financial stuff and especially a 10-K. 

Following chapter 14. It’s a war

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Disclosure: I am/we are long Facebook. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.