How To Read Annual Reports (Part 3)

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How To Read Annual Reports (Part 3)

With the numerous education books out there, I realise none actually teaches someone on how to read an Annual Report. This question struck me when I was teaching a friend on how to go about investing. We can break the investment process down into 3 steps. One, you have an idea. Two, you analyse it. Three, you decide whether to buy the stock. The hard part came when I was trying to teach the analysing part, which mainly consist of dissecting the Annual Report.

Every company is different. Other than telling them to read the Annual Report, what else is there to be said?

Read it more than once

It may seem rather duh that we should be reading an Annual Report more than once. However, what I meant is to read the whole thing straight through first. Reason being, by reading it straight through first, it forms the context in the next few reads. We have somewhat of an idea what the story is about before we start dissecting the nitty-gritty that we are interested in.

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Of course, reading it more than twice is recommended as practice makes perfect. We will always miss something the first few times. After reading countless of Annual Reports, we would realise that there are certain few areas to zoom in to, saving us a lot more time.

Read it actively

One thing I believe in reading is that it should be done actively not passively. Armed with a pen and highlighter, we should be actively taking notes when reading an Annual Report. Notes such as ‘why did net profits drop so much’, ‘why is management taking on so much debt’ or ‘segment revenue breakdown’ should be jotted down by the side.

While the objective is always to buy undervalued companies, we have to understand the company and why it is trading at such cheap valuations. Understanding why net profits dropped significantly may give us some idea of the downward trending stock price. Furthermore, through reading countless of Annual Reports, by jotting down these notes, it would allow us to see similarities and differences between companies in the same industry. Key advantages that a company may possess or management seems to be hiding something is identified this way.

Final Words

Undoubtedly, everyone has their own style. My method may not work for everyone, however, I believe it is a good starting point. I have seen some dissecting every detail, right down to the english used in the corporate governance act, I kid you not.

One thing certain is that reading your 100th Annual Report is easier than your 1st Annual Report. An Annual Report is like a book with its own plot and climax. Boring as it may seem, one has got to better learn to love it if they wish to be a better investor. Often, I would load up Annual Reports dating back 10 years on my iPad to accompany me on the plane trip to read.

I developed my passion for investment management especially equity research at a relatively young age. My investment journey began when I was 20, at a point in time where markets were still recovering from the Global Financial Crisis. My portfolio started from money I saved over the past years and through working during the holidays. I was fortunate to have a good friend with common investing mentality to began my journey towards value investing. To date, we still research and invest in companies together, discussing valuations and potential risks of a company. To date, I manage a fund with a value investing style. Positions are decided upon via a bottom-up approach or smart speculation (a term I came up with when buying a stock for quick profit due to a mismatch in prices in the market due to takeovers/selling of a subsidiary or associate). Apart from managing my own portfolio, I enjoy sharing my research with family and friends, seeking their opinions and views towards the stock. Reading Economics in London, I constantly keep up with the financial news in Singapore & Hong Kong. Despite my busy schedule, it has not stopped me from enjoying other aspects of life. I enjoy a variety of activities in whatever free time I may have – endurance running, marathons, traveling, fine dining, whiskey appreciation, fashion. Lastly, I enjoy meeting new people, discussing ideas and gaining new perspectives towards issues in the world.
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