At a question and answer session, Warren Buffett explained what he looks for in annual reports and what he would like to see added:
“The main thing that they can’t mandate in annual reports; that I really like to have — I like to know as much as I can about the person that’s running it and how they think about the business and what’s really going on in the business. In other words, I would like to have a report that would be identical
to what — if I owned half of a company but was away for a year, and I had a partner who owned the other half — when I came back, that he would tell me about what had taken place during the past year and what he foresaw coming up and all of that.” – Warren Buffett
“That is what I think the purpose of the report is, now, the SEC mandates a lot of information, and some of that is helpful. But there’s an intent behind the report. I mean, if it’s a sales document, I’m less interested. I don’t see any way to mandate what I’m talking about. But that’s the kind of report I’m looking for. What I’m trying to do as I read reports, I like to understand just generally what’s going on in all kinds of businesses. If we own stock in a company and in an industry, and there are eight other companies that are in the same industry, I want to own or be on the mailing list for the reports for the other eight because I can’t understand how my company is doing unless I understand what the other eight are doing.” – Warren Buffett
“I want to have the perspective of, in terms of market share, what’s going on in the business or their margins or the trend of margins, all kinds of things that I can’t get unless I know. I can’t be an intelligent owner of a business unless I know what all the other businesses in that industry are doing. And so, I try to get that information out of a report. If I’m thinking about investing in a specific company, I try to size up their business and the people that are running it.” – Warren Buffett
“And over the years, I have found reading a lot of reports to be quite useful in terms of making business decisions at Berkshire. If we own all of a business, I want to own shares in all of the competitors just to keep track of what’s going on. And I want to be able to intelligently evaluate how our managers are doing that. And I can’t do that unless I know the industry backdrop against which they’re working.” – Warren Buffett
“It’s amazing, you know, how well you can do in investing, really, with what I would call outside information. I find inside information — I’m not sure how useful that is. But outside information — there’s all kinds of information around, as to businesses. And you don’t have to understand all of them. You just have to understand the ones that you’re thinking about getting in. And you can do it, if you just — nobody will do it for you.” – Warren Buffett
“In my view — you can’t read Wall Street reports and get anything out of them. You have to do it yourself and get your arms around it. I don’t think we’ve ever gotten an idea in 40 years from a Wall Street report. But we’ve gotten a lot of ideas from annual reports.” – Warren Buffett
Charlie Munger added his opinion about the topic of annual reports at the same meeting:
“What I find is that it takes a long time to read the annual report even if it’s a comparatively simple business, because if you really are trying to understand it, it’s not a bit easy.”
Warren Buffett continued: “Yeah. I would say that, on average, in a business, we’re really interested in, even though we know what to skip, to some extent, and what to read, I mean, it’s going to be 45 minutes or an hour on a report. And if there are six or eight companies in the industry, that’s going to be six or eight hours, perhaps, and then their quarterlies and a lot of others. I mean, the way you learn about businesses is by absorbing information about them, thinking, deciding what counts and what doesn’t count, relating one thing to another. And, you know, that’s the job. And you can’t get that by looking at a bunch of little numbers on a chart bobbing up and down, or reading, you know, market commentary and periodicals or anything of the sort. That just won’t do it. You’ve got to understand the businesses. That’s where it all begins and ends.”[1]
Key Takeaways
Warren Buffett’s approach to evaluating annual reports has been shaped by years of experience and a steadfast focus on long-term investing principles. He can gain a comprehensive understanding of a company’s financial health and growth prospects by analyzing key aspects such as management’s discussion and analysis, financial statements, and footnotes.
He advises investors always to remember that the ultimate goal is to uncover companies with durable competitive advantages, or “economic moats,” that can maintain or expand their market share over time. Investors can identify potential market winners by concentrating on those that exhibit strong, consistent earnings power.
Buffett advises investors to remember patience is a virtue in the investing world. While acting on the latest trends and market fluctuations can be tempting, He has found that a disciplined, long-term approach often yields the best results. So, as you delve into annual reports, consider how the business you’re considering will fare not just in the coming months but over the next decade or more.
By adopting these principles and staying true to a value-investing mindset, investors can become more informed and confident. Annual reports are invaluable in this journey, providing information to guide decisions. People can uncover the hidden gems within their pages with practice and persistence and build a robust, successful investment portfolio. Annual reports are Buffett’s number one investment tool.