Primary Sources
Consulting primary sources represents table stakes for intelligent investors and responsible citizens.
If you listen to investing podcasts frequently, many talking points seem to be repeated ad nauseam.
Most professional investors speak endlessly about how their research process digs deep below obvious statistical data to gain differentiated insights. In a highly competitive world, it is not easy to know more than other market participants who are playing the same game. Despite the seemingly insane gyrations of markets, it is crazy to assume that your competitors are stupid. Most professional investors are intelligent, highly educated, driven, and extremely motivated to earn returns in excess of market averages.
Warren Buffett often speaks about how a good investor should assign himself a “story” to research and use the methods of investigative journalism as part of the process. A good investigative journalist is skeptical of “obvious” facts and experience often breeds a healthy cynicism regarding human motives. The same should be true for investors, but sometimes it seems as if many investors base their decisions on social media chatter and newspaper summaries.
We can see clear evidence of a certain naïveté when stock prices gyrate wildly after earnings are released. One of my pet peeves is that most companies feel a need to release an earnings press release prior to filing quarterly or annual reports. Press releases provide only a summary of earnings and usually highlight whatever “adjusted” earnings figures that management wants investors to focus on. Since full financial statements, along with notes to the financial statements, are not available, investors must make inferences regarding many important factors. Matters get even worse when managements release slide decks to be referred to during earnings calls which are often nothing more than gaslighting propaganda.
Since newspaper accounts of earnings must be published within hours of a company’s release, journalists can only refer to the press release and earnings call when attempting to summarize the situation. However, even if full quarterly or annual reports are available simultaneously, it is simply unrealistic to expect a reporter for the Wall Street Journal or Financial Times to read dozens or hundreds of pages of material prior to their deadline. While the leading newspapers often do publish longer form articles focusing on specific developments at a company, their coverage of earnings is next to useless for intelligent investors.
The unfortunate reality is that investors who are not willing to go to primary sources when researching a company are better off buying index funds. The need to go to primary sources continues after an investment decision has been made. Some attention is required for each company that is in one’s portfolio on at least a quarterly basis. The time demands can add up quickly. The “maintenance” needs for a typical 20 stock portfolio might require anywhere from one to two weeks of full time effort on a quarterly basis, and perhaps even more time when annual reports are released. This represents table stakes for professionals but can be difficult for individual investors busy with their careers in other fields.
What counts as a primary source?
Quarterly reports on Form 10-Q and annual reports on Form 10-K represent the bare minimum. In addition, investors should be reading proxy statements on a regular basis to keep track of how management and the board performs over time. Most proxy statements make for torturous reading, full of virtue signaling, excessively fancy graphics, and self-congratulatory rhetoric, but they must be read anyway. Several years of these reports must be read prior to making an initial investment. Press releases, for all of their limitations, also represent a primary source in the sense that we should study how management communicates with investors over time, with particular focus on narratives that conveniently change, metrics that are altered or dropped, and similar red flags. The same is true for conference call transcripts.
It is not logical to invest in any company without repeating this process for all of its key competitors. How can an intelligent investor evaluate a company in isolation from its competitors? It is surprising how many investors seem to form strong opinions about their holdings but have no real insight into competitors. In addition to reading the primary sources published by competitors, it is useful to consult industry publications that report statistics. For example, industry associations such as The Association of American Railroads provide useful data on all companies in an industry. While articles published by such associations are not primary sources, they usually offer much more insight than can be found in financial newspapers.
The need to go to primary sources extends well beyond investing. It is an essential skill to have in order to be an informed citizen, especially at a time when the mainstream media has lost a great deal of credibility. The problem is that there is no replacement for the mainstream media that provides information in a convenient and easily accessible package for busy people.
Elon Musk has positioned X/Twitter as an alternate source of information and he deserves credit for restoring free speech on his platform. However, there will always be a tremendous amount of noise and nonsense on any social media platform. Community Notes and similar features that allow crowdsourced “fact checking” are useful but hardly foolproof when it comes to making serious decisions, either as an investor or as a citizen. In addition, social media algorithms tend to serve up content to users based on their inferred interests which often makes a feed more like an echo chamber than a real debate.
Fortunately, it is possible to consult primary sources as a citizen just as we can as investors. If a court ruling is released, anyone can read the ruling with the judge’s reasoning rather than rely on journalists or random social media users. If a CPI report is released, there is no reason not to go to the actual press release on the Bureau of Labor Statistics website rather than read the Wall Street Journal’s coverage. The same applies to executive orders signed by the President and legislation introduced in Congress. In recent months, I have often found that going to the primary source on political matters led me to a totally different conclusion than my original “gut reaction” based on a Wall Street Journal article or chatter on social media.
Many people will claim that it takes too much time to consult primary sources.
It boils down to priorities.
Most of us are reading nearly constantly on our smartphones. In fact, it is likely that Americans have never read more words per day. The problem is that the words we read in text messages and social media posts are next to useless when it comes to being informed citizens, and in many cases, the algorithmic models make us much dumber by delivering material that only pounds in our preconceived ideas. While there is no upside if our fellow citizens become dumber given this sad state of affairs, there is potential upside for investors who consult primary sources while their competitors are reacting to mere chatter!
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