Why I Prefer Primary Sources (#4)

I find enormous benefit from going directly to source documents (10k's, etc.), even though it's slower.

Investors today have a huge array of financial information at their fingertips. Everything from Bloomberg terminals that cost thousands of dollars a year to free accounts at Yahoo! Finance. These sources are great for a quick glance at company financials but they have their drawbacks. I prefer to look at primary sources: the original documents posted to the SEC website such as 10Ks, 10Qs, proxy statements, etc. Here’s why:

1. Nuance. The biggest drawback when it comes to standardized sources of information is just that - they’re standardized. When you look at original source information you get a better idea of the company itself. They might choose to use certain account headings that better reflect the underlying business or industry. Even the choice of what to put in the “other” category can tell you something about the management team and the level of disclosure they feel appropriate.

2. “Feel” / qualitative. Each company is different in how they present financial information. You can quickly get an idea for the feel of the business/management from what’s presented (or not presented). What accounts do management choose to highlight in the summary sections? Do the financials and footnotes flow in a logical fashion? Are the disclosures 25 pages long and clearly written by a legal team, or do you really feel like management is conveying useful information to owners? Are there ancillary tables, etc. that provide good backup or detail? You can usually get a sense of the “tone” of management in the discussion section of the footnotes, critical information that’s lost when looking only at the numbers stripped of context.

3. References. Going direct to financial statements has the benefit of quick reference. Just what is in that “other” category? Perhaps something jumps out at you and you want a quick explanation? The notes are right there. The downside to this is you only have a view into a few years - that’s where a longer-term analysis comes into play and where the standardized statements can add value. (I choose to “spread” my own statements so I can pick/choose what’s most meaningful.)

4. Accounting evolution. Looking at multiple periods means looking at multiple statements, which can be a chore. But it also opens up insights into how the financial statements have been presented over time. Have things largely remained the same, with consistent presentation? Are there period-over-period changes or different account headings from years past? Have certain accounts been consolidated with others as time has gone on?

5. Confidence in your own work. Don’t get me wrong, I use standardized data sources, such as Morningstar. But even the best data sources aren’t calibrated to each investor’s particular way of analyzing a business. One prime example is the return on invested capital. I like to look at tangible capital employed and adjust for excess cash/investments. That’s hard to do with standardized data. I’m looking at two companies right now for paid newsletter subscribers that have low ROICs presented on Morningstar but where the actual results are well into the double digits. You can’t get that if you don’t dig deeper and do your own work.

Sometimes I feel like a dinosaur for insisting on going directly to primary sources. Even though everything is right at my fingertips via company websites and the SEC, it still takes work to go through the statements and do the work necessary to understand the business. But in the end, it’s the only way I’m comfortable operating. As a business owner, I want as much primary source material as possible, even if it means going slower.

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