Where to Find Valuable Investment Information

Categories: Economics, Getting Help, Portfolio Management

One of the existential considerations for investors is: Where do I find valuable investment information on companies?

This question is so natural to the investment process that every single person in our business encounters it early in their career. But this encounter is usually charged with a bit of terror, too. Why? Because each of us recognizes that our business is fundamentally about understanding information, and yet there is a tsunami of investment data to sift through. How do we digest this information and turn it into mental nutrition? How do we extract the signal from the overwhelming noise? And, of course, there’s the perennial anxiety: What if I overlook something valuable that my competitors do not miss?

It turns out that the answer to this existential question takes a good deal longer to discover than it does for investors to recognize the puzzle. Deciphering an answer was the focus of our most recent CFA Institute Financial NewsBrief poll. Among the 536 respondents, the plurality (39%) said that the most helpful source of valuable investment information on companies comes from their financial statements. This answer is entirely understandable as the epicenter of the earthquake of information on a business originates within the company itself. All other data about a firm is derived from its own activities. Yet, companies have large economic incentives to appear alluring to investors. This self-serving flimflam means that each of us must be diligent in our analysis of financial statements. And, of course, regretfully, mistakes are sometimes made.

Consequently, many analysts look for bulletproofing as protection against a company’s financial statements. For about one in three of us, this protection comes courtesy of our professional analyst peers. Of this group, by a ratio of almost two to one (21% to 12%), poll respondents believe buy-side analysts protect against the financial fallacies of firms better than their sell-side counterparts. Again, I am guessing this preference has to do with an understanding of incentives and how they can push objective data into the realm of subjective opinion and appearances. Of course, there is more embedded in respondents’ answers than mere bulletproofing. Analysts also source information about a company’s competitors, the operating environment, management, channel checks, and so forth. Our peers can also be relied upon to poke holes in our own theses.


Where do you find the most valuable investment information on companies?

Where do you find the most valuable investment information on companies?


Some of us also seem to recognize that objectivity is difficult for buy-side analysts, too. For example, if they already own shares in the business, then they likely want your bid above the spread and at large volumes, in order to push up the share price. Thus, some respondents to the poll rely upon the advice proffered by financial blogs (9%). Obviously, as a writer for Enterprising Investor, this makes me smile. I hope that we count among the community that inspired this answer. Many bloggers strive to not only report the truth, but also to discover it through proper contextualization: placing a company’s investment information within the appropriate framework to reveal an essential understanding! Huzzah!

Perhaps surprisingly, the formal media — newspapers, television, and radio — rank only about as high as financial blogs, registering 10% combined among poll respondents. Maybe this is because the information tidal wave concerning companies and their operating environments is barely contextualized by the media. Instead, the facts are usually all that is provided. At best, a comparison to a prior quarter or a recent company-related newsworthy event will be mentioned (e.g., “since the new CEO took over,” “since the launch of their new product,” or “since the collapse of pricing in the industry”). What is usually missing is the preferred context of the investor digesting the media’s information, as well as a time horizon that jibes with the investor’s outlook. In other words, media information requires more work to make sense of.

Lastly, almost one in 10 poll participants opted for “other” as their preferred source of information. To fill this answer in with more substance, it would be fantastic if some of these respondents shared what some of these sources are in the comments section below. After all, we are all trying to answer the same question: Where do we find the most revealing and valuable investment information on companies. In the meantime, you may be interested to know that the finishing touches are being put on a first-of-its-kind Investment Idea Generation Guide. Look for it soon!

If you liked this post, don’t forget to subscribe to the Enterprising Investor.


All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Tags: ,

9 comments on “Where to Find Valuable Investment Information

  1. I was a bank analyst for a large investment manager for many years and thought I understood the business. Then I became a director on a bank board and realized how little I knew. There is no substitute for deep industry knowledge. Financial statements are abstractions of reality.

  2. Muhammad said:

    Hello Jason. Its always a pleasure to read your articles. I especially liked your article “how to be a research analyst”. Since I am in process of being a research analyst myself (failed Level 2 at the 10th band and just re-registered for the 2016 exam with even greater enthusiasm) i have a question for you regarding how to dig through all the information embedded in financial statements of listed companies.

    You see I would like to understand how the Pakistani cement industry works and i would also like to gather all the information on all the main players within this industry. the purpose of this is that i am better able to analyse and value the players with in the industry. I just downloaded all the annual and quarterly reports of the top two players in the industry and am ready to go. So here’s my question.

    How do i go about digging into the financials of individual companies in the industry? What should i be looking at first and foremost? if you could kindly provide me with a list of to things to look through, id be most thankful.

    regards.
    Muhammad Rahim.

    • Hello Muhammad,

      You ask a great question, and I think your effort is a noble one and I guarantee that you will learn a lot! I will divulge a little bit of my secrets for such things : ) I confess have not read a Pakistani financial report before, but globally many are very similar in terms of what they disclose. If Pak statements are similar then I can help out : )

      First, until you get comfortable with the ins and outs of an industry, read the annual reports from the first word to the very last word. Pay attention to the risk factors disclosed by the company. How does this company discuss its risks as compared with its competitors? Next, pay attention to the discussion about how the company makes money. Does this make sense to you? One way to frame this conversation is to assume that the company has raised capital on the liabilities side of its balance sheet, usually either debt or equity. They then purchase assets with that money. With the assets in place they make a product to sell. Then they sell that product, when they do the analysis switches to the income statement/profit and loss statement with revenues generated by a sale. Then they begin deducting all of the expenses of doing business. All of this leads hopefully to profits, which then go back into the equity portion of the balance sheet. As you are reading the annual report there should be clarity about this entire process. If you have any unanswered questions then that is an indication to get more information from the company, if possible. If not possible, what are analysts saying about the part you do not understand? What are journalists saying about it (though, most journalists usually do not do much analytical work or ask hard questions).

      Once you have read these sections you have a qualitative appreciation for the business and can now turn your attention to the quantitative aspects, that is, the financial statements. Here you are looking to see if the numbers back up what management is claiming in its discussion of the business, as I wrote about above. Of course, of course, of course, read the financial statement footnotes!

      After all of this reading you are very likely to have a firm grasp of the industry. Then you have to decide if you like the industry, if you like a company or companies within the industry. If so, then you can engage in a valuation of the business.

      I hope this helps!

      Jason

      • Muhammad said:

        Thanks a lot for the quick response Jason. Your comment is most helpful as it has given me a birds eye view of the qualitative analysis process.

        I think that you explained the entire process of going from the balance sheet (financing) aspect to the P&L (earnings) aspect very well. Although most basic finance courses offer this frame work, however, i believe that I have not had anyone explain financial statement analysis from this point of view, other than you and I believe this gives me a great starting point. thank you!

        One more thing. As i was downloading the annual and quarterly reports i came across a document called the “Cost Audit Report” of a cement manufacturer. The report gives details of everything related to production, sales and cost of production. My question is would you recommend I go through this particular document before i move on to the Annual reports or vice versa? Thanks a lot in advance. 🙂

        P.S: Is it ok if i keep this post alive from time to time in order to discuss the issues that I may face on the practical front, from time to time.
        Given that im a beginner, it would be great to have an experienced analyst giving his guidance along the way. I promise to keep my questions short and to the point ofcourse! 🙂

        Regards,
        Muhammad.

  3. Jade said:

    Great article. As far as “other,” social media is an interesting source of information (surprising how much LinkedIn can tell you).

    Another interesting point that was raised in the comments is the filtering and dissecting of information. Questioning sources of information is, I believe, only scratching the surface of the real question: how does one identify, absorb and utilize key information. I recently had an intern working for me and one of the most challenging (and useful) parts of having him around was being forced to reassess and explain how I extracted and analyzed actionable information. Perhaps a good follow-up article to this might be tips on how to construct such a digestive framework, assuming little to no industry/analyst experience.

    Thanks for taking the time to write this article.

    Best,
    Jade

    • Hello Jade,

      I love that idea, it is an excellent suggestion. Portions of this are suggested by the series I did here on The Enterprising Investor entitled, “Skills That Separate You as an Investment Manager.” I also cover this territory in my own book, The Intuitive Investor. Also tangent to the question is the material in a forthcoming guide I authored here at CFA Institute, The Investment Idea Generation Guide. Look for it in the next month.

      Yours, in service,

      Jason

Leave a comment

Your email address will not be published. Required fields are marked *