Financial Investment: Stock Picking-the first thing you should do

Read Annual Reports...

What are annual reports?
They are the 10-K filings that every public company in the United States has to file with the Securities and Exchange Commission (SEC). 

Where can I find annual reports?
Here, they are available online for free.  Courtesy of your tax dollars.  There are sites that offer this info for a fee, don't encourage that economic behavior.

Why should I read annual reports?
It's what research analysts do.  It's what Warren Buffett does. It's what all investment professionals do. It gives you all the important info about the business.  If you read the annual reports first without anything else, you will help yourself make a non-biased valuation.

What should I look for when I'm reading?
You should first read the description of the business--you gotta know.  Look at the financial data.  How debt-laden is their balance sheet?  Is the company making a profit?  How are the cash flows?  Are revenues growing?  Where does the company do business?  Is the company facing major litigation?  I will warn you, there is a lot of useless garbage in these reports.  Try to pay attention to the information that is specific to the company.

How do I know that I'm reading truthful information?
The company will get sued if they are lying.

A cautionary tale:
One day I was thinking about buying Ford (F).  They were trading at an earnings multiple of 4 (really, really low).  I really wanted to buy it since this is very low, was bound to improve given Ford’s continued success, company positioning, and the importance of cars.  An earnings multiple of 8 would have doubled my share price even if earnings stayed flat.  However, as I read through the earnings report, I soon discovered that Ford’s earnings were especially high that year because 60% was from a refundable tax credit for that year only.  I also discovered that Ford didn’t seem to have an electric car as ready as the Chevy Volt, Prius, or Nissan Leaf.  By reading the annual report, I went from a Strong Buy to Not Buy.


Here's a quote from a guy who reads Annual Reports: "Some guys read Playboy.  Some guys watch ESPN all day.  I read Annual Reports."