Dollar Scholar Asks: Will Reading Shareholder Reports Help Me Invest Smarter?

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For the past few months, every single second of my free time has been spent binging The Vampire Diaries. I devoted my nights and weekends to Damon, Stefan and Elena, watching as they hooked up, broke up, got back together, destroyed Mystic Falls, saved Mystic Falls, lost their memories, recovered their memories, drank blood, swore off drinking blood, drank more blood, et cetera.

When I finished the series, I was able to finally commence my favorite post-show ritual: stalking the stars’ Instagram pages. I’d resisted following the TVD cast because I was afraid of seeing a spoiler. But now the floodgates are open! I can scroll as much as I want, combing a decade’s worth of posts for clues about what was happening behind the scenes while the show was filming.

It’s similar to how I feel about companies’ shareholder reports and earnings calls. There’s so much information out there, and I can't help but get sucked in by the promise of finding some hints about what's going on behind the scenes.

Forget analyzing old Instagram captions to pinpoint the exact moment Nina Dobrev and Ian Somerhalder split — if corporate documents can give me tips to make more money, I should stalk to my heart's content. Right?

Actually, let’s consult someone whose brain hasn’t been turned to mush by the CW.

Should I read shareholder reports for my investments?

I emailed Michael J. Garry, founder of Yardley Wealth Management, to get the scoop. He told me that publicly traded companies release annual reports to shareholders “that usually look like glossy magazines.” Usually there’s a letter from the CEO, financial data from the last year, results of certain projects, research on the market, plans for the coming year and more.

“These reports can be very interesting and enlightening,” he says, pointing out that “people eagerly await Warren Buffett’s annual letter to shareholders in Berkshire Hathaway’s annual report.”

Annual reports sum up the state of the company, but I should be wary — their intent is to entice shareholders and “make themselves look good,” Garry adds. For more objective, detailed information, I may want to look at the document public companies are required to file with the Securities and Exchange Commission.

One of these is Form 10-K, an annual report Garry says contains detailed financial information “without the glossy photos.” Others include Form 10-Q, which gets submitted quarterly, and Form 8-K, which is triggered when certain events occur. The filings are available through EDGAR, the Electronic Data Gathering, Analysis and Retrieval system.

Reading these documents can be helpful, but it’s not something amateur investors like me generally need to spend time on, says Michael Becker, a chartered financial analyst with Hightower Wealth Advisors.

“In 99% of scenarios, you do not need to pay attention to those,” he says.

As an individual investor, perusing companies' financial documents for market clues isn't a wise endeavor, because I probably shouldn’t be putting a ton of money into individual stocks to begin with.

Experts typically recommend investing in low-cost index funds, which are baskets of different stocks or bonds that track a segment of the market, as opposed to stock picking. Index funds typically come with lower risk and more stable long-term performance than individual stocks.

“For someone who’s younger, who's just buying and holding index funds for a period of time, there’s nothing you’re going to learn in [annual reports] that would change the strategy you’ll have,” Becker says.

Though index funds are passively managed, there are actively managed funds guided by professionals whose entire goal is to try to outperform indexes over time. This is extremely difficult — the S&P Indices versus Active scorecard, which tracks the performance of actively managed funds against indexes, recently found that about 79% of fund managers underperformed the S&P 500 last year.

These are folks with resources beyond my wildest dreams, so that doesn’t bode well for me, a vampire-obsessed journalist who’s poking around on the SEC website largely out of curiosity.

There’s also a danger that being too informed could lead me to make unnecessary tweaks to my investing strategy. If I start getting too into the weeds, I may be tempted to start trying to time the market — and “that’s likely a losing battle,” Becker says.

But if I have my heart set on a specific company, Timothy Chubb, chief investment officer at the wealth advisory firm Girard, says it’s not a complete waste of time to do some basic homework.

I may want to check out the investor relations section of its website, for example, and look for company summary presentations or slide decks from recent conferences. I should get a feel for how the company makes money, what their market share looks like and what the industry dynamics are.

Transcripts of earnings calls can also be valuable in this regard. Though they may require a bit of background knowledge to decipher, these transcripts can help me understand market trends from a corporate perspective, as well as how a company’s business strategy may be changing from quarter to quarter. Sometimes, if the executives take questions from analysts or reporters, there are nuggets of economic insights, too.

I just need to take everything with a grain of salt.

“Be very discerning with where you get your information from,” Chubb says. “Filings and transcripts are great because it’s coming straight from the horse’s mouth. It’s not conjecture or opinion.”

The bottom line

There’s a ton of information out there. While it’s never a bad idea to learn more about where my money is going as a shareholder, I should probably stick to my long-term investing plan and avoid getting bogged down in annual reports.

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