Warren Buffett has been able to achieve remarkable returns for himself and his shareholders over the years by following one simple but powerful habit of reading and studying annual reports.
An annual report is a document that publicly traded companies issue every year to disclose information about their financial performance, operations, strategy, and outlook. It is a valuable source of information for investors who want to learn more about a company and its potential.
But not all annual reports are equally informative and transparent. Some are more comprehensive and candid than others. Some are more oriented toward promoting the company than reporting the truth. Some are more relevant and useful than others.
So, what does Warren Buffett look for in annual reports? And what would he like to see more of? In this video, we will explore some of the insights and principles that guide his analysis of annual reports and how he applies them to his investment decisions.
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Here are some insights from Warren Buffett’s own words:
● Buffett looks for reports that reveal the personality and mindset of the CEO and how they think about the business and its future. He wants to know what happened in the past year, what challenges and opportunities lie ahead, and how the CEO plans to deal with them. He wants to read a report that is honest, candid, and realistic. He does not want to read a report that is full of jargon, excuses, or projections that are too optimistic or pessimistic.
● Buffett looks for reports that provide information about the industry and the competitive landscape. He wants to know how the company is doing relative to its peers and what its market share, margins, and trends are. He wants to understand the industry backdrop against which the company operates and how it affects its performance. He does not want to read a report that is vague, incomplete, or misleading.
● Buffett looks for reports that are not sales documents but rather educational documents. He wants to learn something new from reading a report, not just hear what he already knows or what the company wants him to hear. He wants to see facts, figures, and analysis, not hype, fluff, and spin. He does not want to read a report that is biased, superficial, or unreliable.
● Buffett reads reports from other companies in the same industry as well as from different industries. He likes to broaden his knowledge and perspective by reading about various businesses and sectors. He believes that outside information is more useful than inside information when it comes to investing. He does not want to read a report that is isolated, outdated, or irrelevant.
● Buffett ignores reports from Wall Street analysts and brokers. He thinks they are biased, superficial, and unreliable. He prefers to do his own research and analysis based on primary sources such as annual reports. He does not want to read a report that is influenced by conflicts of interest, incentives, or agendas.
By following these guidelines, Warren Buffett has been able to find great companies at fair prices and hold them for the long term. He has also been able to avoid bad companies at cheap prices and short-term fads that often end up losing money.
By reading Annual Reports carefully and critically, Warren Buffett has been able to gain an edge over other investors who rely on second-hand opinions or superficial impressions.
Here are some practical examples of how Warren Buffett used annual reports to make his investing decisions:
● In 2011, Buffett invested $10.7 billion in IBM after reading its annual report and being impressed by its “road map” for future growth. He said he liked how the CEO explained his vision and strategy for the company and how he measured his progress.
● In 1988, Buffett started buying shares of Coca-Cola after reading its annual report and being convinced by its strong brand and customer loyalty. He said he liked how the company had a simple business model that was easy to understand and had a global appeal.
● In 1972, Buffett bought See’s Candies after reading its annual report and being attracted by its high profit margins and consistent earnings growth. He said he liked how the company had a loyal customer base that was willing to pay more for its products every year.
● In 1964, Buffett sold his shares of American Express after reading its annual report and being alarmed by its exposure to a fraud scandal involving salad oil. He said he liked how the company had a strong reputation and a diversified business, but he was not willing to take the risk of losing money due to the fraud.
Reading annual reports may not be the most exciting or glamorous activity, but it can be one of the most rewarding and profitable ones. It can help us gain valuable insights into the companies we invest in or are interested in investing in. It can help us understand the industry dynamics and the competitive advantages of the businesses we own or want to own. It can help us make better decisions and avoid costly mistakes.
As Warren Buffett once said, “Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest.” Reading annual reports is one of the best ways to build up our knowledge and compound our returns. It is one of the habits that made Warren Buffett one of the greatest investors of all time.
If you want to invest like Warren Buffett, you should start by reading like Warren Buffett.