Investing Advice

How to Read

A recent study has found that women are twice as likely as men to study a company’s annual report before investing in a company. Why don’t most men bother looking at it before they jump into a stock? Maybe for the same reason they hate to stop and ask for directions.

Don’t just glance at the balance sheet and say “wow, they’ve sure got a lot of debt!”. Don’t just look at the income statement and say “wow, sales are going up!”. As investors have found in a big way this past year, net income can be easily manipulated.

Read the footnotes. The dirty secrets, by law, must at least be mentioned in the footnotes. For instance, a company can extend the number of years of depreciation on major assets (lowering current expenses) resulting in an increase in earnings. This sleight of hand would be revealed in the “summary of significant accounting policies”.

Also, stock options can be expensive for shareholders (due to both dilution of shares and these shares awarded to employees are from treasury stock usually bought at market prices), and not reflected in earnings. The company must disclose in a footnote what earnings would have been, if options had been factored into the net earnings calculation.

In the 1990’s, 350 S&P 500 companies increased their bottom line by a total of $20 billion by showing pension plan surpluses as earnings. In fact, such “earnings” to the tune of $1.3 billion, made up 13% of GE’s year 2000 profit!

Check out the annual report filed with the SEC, called a 10K. It will be a bit different then what is provided to shareholders, and must conform to general accepted accounting principles, or GAAP.

This SEC report may also have additional statements to cover their backside, like this real one from an internet company: “we have a history of losses and expect to continue to incur significant losses, and we may never be profitable.

Here’s another amazing story reported with an SEC filing

JDS Uniphase, quarter ending June 2001, reported a huge loss because they were writing off $44.8 billion in “good will”. This is more money than what GM, Ford, Sony, or Boeing are worth, and what did JDS Uniphase have to say about it?

Quoting CEO Josef Straus “the company has just been through an exciting and challenging 12 months”. It was then explained that these billions represented companies that JDS had bought, paying billions of dollars, which turned out to be worthless. These “mistakes” really weren’t mistakes, because they wouldn’t have been able to buy the worthless companies in the first place, if they hadn’t paid more than they were worth. I’m glad we have such high-paid, smart people running these big businesses.

I’m sure that shareholders felt a whole lot better after hearing this explanation of why their stock, which had been trading at $131, would drop to $2.12.

Other Stock Market Basics Topics:

  1. Stock Market Investing – the Right Way
  2. More Stock Marketing Investing
  3. How to Pick Winning Stocks
  4. The Golden Rule of Investing
  5. Avoid Psychological Traps to Have Successful Investing
  6. Changes in Stock Values Can Be Big Numbers
  7. How to Invest Smart
  8. Stock Advice - Important Selling Rules
  9. Poor Stock Buying Decisions
  10. Market Indicators
  11. Stock Market Cycles
  12. When a bear stock market may not be a bear market
  13. Stock Index Futures
  14. Four Things that Affect Stock Valuation
  15. What is a P/E ratio?
  16. Value Investing
  17. Cheap Stocks
  18. What is a Financial Statement?
  19. Analyzing Financial Statements
  20. Stock Market Tip - Red Flags to Look For When Investing?
  21. The Annual Report – How to Read
  22. Stock Market Analysts – Stock Market Advice and Tips

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