How to Read, Understand, and Analyze a 10K Annual Report

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How to read a 10-K like a professional investor

If you want to be a great investor, you should like engaging with one of the essential tools in the trade: the 10-K. Warren Buffett has stated that he enjoys curling up with annual reports. Buffett said he "reads 500 pages every day" when asked how he became smarter. That's how, like compound interest, knowledge grows.

When I bought my first stock, I knew nothing about financial statements.

Despite graduating with an engineering degree, I was financially illiterate.

I didn't even know how to find a company's Balance Sheet.

Forget analyzing the numbers.

But, I did have one thing going for me: I was passionate about building wealth.

I wanted to achieve financial freedom as soon as possible.

That burning desire caused me to study money & finance intensely.

I devoured every book, blog, and podcast I could find about investing.

That led me to learn about the investing greats like Warren Buffett, Charlie Munger, and Peter Lynch.

As I studied these investors, one thing became clear:

All of them knew how to analyze financial statements.

• Each of them could look at a company's income statement, balance sheet, and cash flow statement and determine if the business was worth investing in.

• They could all look at the numbers and tell if a company had a moat.

• They all knew how to use simple ratios, such as Gross Margin, Debt to Equity, and Free Cash Flow conversion, to determine the quality of the business.

That's why, 20 years ago, I started to learn how to analyze financial statements.

I wanted to become a better investor.

• I no longer wanted to be dependent on the opinions of others to make investing decisions.

• I was tired of watching a stock I owned report earnings, fall hard, and have no idea why.

• I no longer wanted to be financially illiterate.

Slowly, over time, I learned how to find, read, and interpret financial statements.

• I learned how to analyze a company's numbers in just a few minutes.

• I discovered how to spot yellow & red flags in financial statements that told me to stay away.

• I learned how to use a few simple ratios to know if a company had a moat.

As Warren Buffett would say, I became fluent in "the language of business."

That, more than anything, has made me a better investor.

Over the last few years, I have taught a course on how to find, read, and interpret financial statements.

Teaching the course live was incredibly useful. We learned what worked and what didn't.

That feedback caused me to make countless improvements to the course.

All that effort was worth it. We've heard over and over again that students loved the course.

Jack called the course "Extremely informative."

Greg said it "EXCEEDED EXPECTATIONS and is absolutely worth the price of admission!"

James called it an "Exceptional course with great insights and a fabulous way to build a foundational understanding of financial statements."

Now that hundreds of students have battle-tested the course in the real world, we've made a big change to make it far more accessible.

I've turned my live, cohort-based course into a self-paced course.

This allows me to lower the price and ensure students can take the course in a time frame that fits their schedule.

It's the same material we teach in the live course, with the added bonus that I teach how Warren Buffett analyzes financial statements.

You'll learn how to:

• Analyze a Balance Sheet, Income Statement, and Cash Flow Statement so you can tell if a business is worth investing in

• Spot financial yellow & red flags so you can tell if a business is in trouble

• Use Warren Buffett's financial "rules of thumb" to tell if a business has a moat.

If you want to become a better investor, I know you'll love it.

Remember Warren Buffett's wise words:

"The best investment you can make is in yourself."

Accounting is the language of business.

The better you speak that language, the better you’ll be able to communicate with the locals.

Indeed, savvy fund managers regard 10-Ks as riddles or treasure hunts, relishing the opportunity to pore over even the tiniest footnotes.

Individual investors may not have the same experience as a fund manager who reviews hundreds of these documents each year. This course is intended to assist individual investors in determining what to look for when selecting companies for their portfolios and analyzing the outlook for their present stock holdings.

Finally, if you don't appreciate the type of in-depth research discussed here, you should think about whether investing in individual stocks is the best use of your time. If you don't enjoy reading 10-Ks, you're probably not going to be a great investor.

We all love it. It's a passion we have. After watching these videos and reading my short ebook that is attached here, you may feel the same!

Warren Buffett has famously said that he reads 500 pages a day.  Most of that reading is 10K filings of companies he is invested in or considering investing in.  It is only recently that we can set up a brokerage account and trade stocks with paying a commission.  That makes stock investing much more accessible to the average person.  The stock market is one of the best places to invest money for long-term growth and to create wealth. 

But it's important that we know about the companies we invest in if we want to make informed decisions and protect and grow our portfolio. 

Understanding how to read and decipher a 10K annual financial report is a critical skill set from becoming a knowledgable and capable investor.

• You will learn how to use financial statements and properly evaluate any firm's financial health, to instantly determine if a firm has a strong or weak balance sheet and evaluate profitability. You will know how to calculate financial ratios, and you will understand what the financial ratios mean and what to notice.

• Annual reports are marketing documents for investors that companies put out, which includes photos, a letter from the chair or CEO, and a summary financial overview.

• These reports are similar to 10-K reports that are submitted to the Securities and Exchange Commission (SEC), but the 10-K reports are longer and more detailed.

• When it comes to analyzing a 10-K annual report, the first place to start is to read Item 1, then Items 7 and 8.

• Potential investors should also read the risk factors section associated with the company, including litigation and customer-concentration.

• Learn how to read and understand the financial and strategic information detailed in a 10K.

• Make more informed investment decisions.

• The time to start is now!

The tax law is a series of incentives for entrepreneurs and investors.

The tax laws favor entrepreneurs and investors. That’s because entrepreneurs and investors generally put money into the economy to produce rather than consume.

But, paying taxes is less expensive than failing at business. Be sure to get educated before you begin.

Start acting like an entrepreneur or an investor. That means the first thing you need to do is to increase your financial intelligence by investing in financial education.

Keeping up reading annual reports is good not just for your investing skills but also for your career and intellectual skills. Of course, you could ignore the writing and read the financial statements, but you'll rob yourself of knowledge and wisdom.

Here's a summary of the key takeaways:

• Reading annual reports gives you a vital understanding of the company's strategic goals, operations, and company issues. You can capitalize on them at interviews and in your resumes.

• Continuing to read them, regardless of the motivation of the business cycle, will give you a competitive knowledge advantage when the market is ripe for buying.

• Reading annual reports gives you a broad understanding of all the businesses and industries in your circle of competence. This broad understanding increases your chances of making a good investment.

• Being a good investor is all about the process. You can only improve by getting feedback. Reading annual reports early and getting feedback later is the best way to improve your investing skills without putting any money in.

I encourage you to take this course. But if you decide not to, please take another class, or read a book.

To know what you don’t know is power. To ask and learn what you don’t know is a superpower.

Investing in learning makes you better at earning.