How to Read a 10-K

by Geoff Gannon


A blog I read, valueprax, reviewed How to Read a Book. I had never read the book before. So I thought I would give it a try. It is – of course – mostly about reading books. And while investors read a lot (in fact, that’s most of what they do) it rarely comes in book form.

Still, a lot of what you’ll find in How to Read a Book can help with reading 10-Ks, S-1s, investor presentations, earnings call transcripts, annual letters, newspaper articles, trade journals, etc.

I think this quote sums up the problem new investors have:

Most of us are addicted to non-active reading. The outstanding fault of the non-active or undemanding reader is his inattention to words, and his consequent failure to come to terms with the author.

SEC reports are not known for being communicative. But in most cases where someone emails me asking about a part of a 10-K they do not understand – the answer can be found in the same 10-K. You just have to read the footnotes, understand how the income statement and cash flow statement and balance sheet relate, and know whether the company is using GAAP or IFRS. With the internet, you don’t even need to know all the actual norms of GAAP and IFRS – since you can always just google “IFRS biological assets” if you’re confused.

This sounds like a lot to keep straight. But if you come to every 10-K armed with a pen, a pad of paper, a highlighter, and a calculator – it’s so much easier. When I see something out of the ordinary I just scrawl “Depreciating too fast?”, “Why did marketing expense double?”, “When was building bought?”, etc. right in the margin.

It is easy to miss the relevance of depreciation method, useful life, residual value, etc. in a depreciation footnote if you read it the way you would read a newspaper article, novel, etc. Most people read most things passively.

Read the 10-K actively.

A depreciation footnote takes on a whole new meaning when you are looking through the 10-K specifically making calculations based on questions you came up with yourself about depreciation. You now read it in the context that matters to you.

Here’s one other great piece of advice from How to Read a Book. Just read the whole thing straight through first. It’s amazing how few people read a 10-K twice. If you’ve ever seen a movie straight through twice – within the same week or so – you’ll realize you missed a lot the first time through. Popular movies are not made to be dense or difficult to understand. But I don’t think there’s anyone who can see even a very superficial seeming movie twice in the same week and not find something in the rewatch they missed the first time through.

Why?

Context. The best context in which to analyze something is to already be familiar with it. The first time you see something you’re seeing it. The second time you see something you’re analyzing it.

If you feel like you’re not getting enough out of 10-Ks, try to read a 10-K a day. And try to read it twice. Read it once without worrying about whether you understand it. Then read it the second time with you pen and paper and highlighter and calculator.

You will always find something you missed the first time.

And yes, it’s much easier to read your 100th 10-K than your first 10-K. They are a genre. It’s a pretty dry genre. But it’s still a genre. And you’ll be pretty genre savvy by the time you reach your hundred and first 10-K.

Talk to Geoff