Even for pro investors, 10-Ks are a bit intimidating. Around 40 thousand words, on average. Trust me, no one is reading them all. And that’s a shame, because the info inside we all agree is important for making investment decisions. Just skipping to the income statement and balance sheet for companies you’re going to bet good money on is a big mistake. But what parts should you read? And why?
One particularly under loved section of an annual report is the ‘Risk Factors’. Yes, this section is full of boilerplate, and at first glance really doesn’t seem to shed much light on anything…full of legalize, signifying nothing. So, why should we read them? We asked a couple of pros that have been around a while for their thoughts:
First, Jason Voss, CFA, pointed us to this section in his book “The Intuitive Investor…”
“The Risk Factors section is investor gold. Why? Because the section is authored by the usually lawsuit-fearing legal departments of businesses. This means that they disclose actual information, not about returns potential, but about things that can go wrong. How often? Often enough that they care to put them in the report. It has been my experience that if a company identifies a risk then it has a good chance of kiboshing your shares eventually.”
And from Jack Ciesielski, long time publisher of The Analyst’s Accounting Observer
“Yes, the risk factors are usually volume-heavy and a lot of it may be what investors already know.
That said, I’ve found them useful in understanding say, nuances of how a shared asset between companies might be damaged by one party, or just how much rights can be exercised by a company over a brand name that it doesn’t fully own, or how legislation might impact the value of an asset negatively. I’m always interested in how concentrated the risks of a company may be in the fortunes of just a handful of customers (or just one), and sometimes the risk factors provide more details than the GAAP concentrations disclosures. Also, the discussions of competition and competitors are usually more interesting than the SEC-required disclosures.”
One thing Calcbench is great at is helping you dig through
the dark corners of SEC filings, making reading, searching, and comparing text
topics like Risk Factors so much easier than before. You can use our web
platform, our API, or even our Excel Add-in to quickly pull up disclosures by
topic. More about that here.