Blog found 75 positive and negative remarks in $AGX's 10K annual report filed yesterday. See the… found 62 positive and negative remarks in $MNTX's 10K filed yesterday. See them highlighted… found 34 sections and 4 exhibits in $BLNC's 10K filed just now. Access them all or just rea… found 68 positive and 35 negative remarks in $HON's 10K filed on Friday 2/9: detected 86 positive remarks in $KMI's last 10K. See them highlighted in the full SEC filin…

Warren Buffett’s Best Investment – Read our 2017 Annual Letter. @billgates

Reuters: "U.S. stocks fell on Friday as the possibility of a $14 billion fine against Deutsche Bank weighed on big banks and investors"

@ReutersBiz: Oil prices fall as analysts say August price rally has been overblown

Silicon Valley's Audacious Plan to Create a New Stock Exchange via @technology

Exclusive: Suppliers question Tesla's goals for Model 3 output via @Reuters

For the first time, Berkshire Hathaway will live stream its annual shareholder meeting #BRKLiveStream

SEC mandates Exxon Mobil Corp must include a climate change resolution on its annual shareholder proxy via @Reuters

RT @Vintage_Value: The 4 Warren Buffett Stock Investing Principles -
RT @Vintage_Value: The 4 Warren Buffett Stock Investing Principles -

RT @CNNMoney: Federal regulators have fined @Lumosity $2 million for deceptive ads
RT @CNNMoney: Federal regulators have fined @Lumosity $2 million for deceptive ads

Loans to junk-rated companies could be a negative factor in fourth-quarter earnings for U.S. banks

See free intrinsic value calculations powered by Morningstar data -- check out… and click the M next to ticker symbol

@AP: Under new SEC rule, companies will have to reveal pay gap between CEOs and employees:

SEC Approves Tweeting by Startups to Test Investor Interest via @business

Get 10 years of financials on and choose stocks like Warren Buffett does via @BIYourMoney

@stephengandel: Etsy and Twitter are among the companies that SEC has questioned about how they account for sales.

RT @ReutersBiz: #Takata faces questions over air bag fix as recalls expand:
RT @ReutersBiz: #Takata faces questions over air bag fix as recalls expand:

Someone figured out how to make a dull SEC filing seem whimsical via @qz

@hendopolis: FT UK: US prosecutors charge British futures trader over 'flash crash' #tomorrowspaperstoday #BBCPapers…

@ReutersBiz: Volkswagen to develop budget SUVs, MPVs in China: exec

@SEC_Investor_Ed: Investors: be wary of fraudsters’ unauthorized use of SEC seal to sell scams. Learn more at h…

@CNNMoney: Where a kid can't be a kid…anymore. @ToysRUs' flagship store in Times Square is closing…

Stop paying for free information! - now features FREE 10k and 10q pdf downloads

@jimcramer: $HPQ credits $CSCO with a good q--wow!! so true...

RT @TheEconomist: Rolls-Royce, Britain's flagship engineering firm, hits turbulence
RT @TheEconomist: Rolls-Royce, Britain's flagship engineering firm, hits turbulence

@MarketWatch: Strong sales of Apple's new iPhones pushed the company close to rival Samsung as the world's top smartphone seller: http:/…

@CNBC CEO of Tootsie Roll passes away at 95 after running the company that makes 64M Tootsie Rolls a day for 53 years

@footnoted: New stats: There were 668,635 filings made to the SEC in 2014, a 2% increase over 2013.

From @jimcramer To start to pick individual stocks, you need to read the company's SEC filings
From @jimcramer To start to pick individual stocks, you need to read the company's SEC filings

@A_StevensonCNBC Great Cramer Remix: The secret to getting rich. helps to read SEC filings
@A_StevensonCNBC Great Cramer Remix: The secret to getting rich. helps to read SEC filings

Retailers earnings surprises show positive moves for JC Penney and Macys and negative surprises for Kohls and Walmart

@PalantirTech: Stopping insider trading, pump-and-dump, accounting fraud & more - SEC's newest enforcement weapon: powerful software htt…

@WarrenBuffett Inspired by you Mr Buffett, gives investors immediate free access to 10 years of 10k data

Concerns arise now that SEC allows start-ups to publicly raise money
Concerns arise now that SEC allows start-ups to publicly raise money

Microsoft CFO Peter Klein to leave the company to spend time with family. MSFT reports earnings above expected.

Microsoft CFO Peter Klein to leave the company to spend time with family. MSFT reports earnings above expected.

KPMG faces FBI probe - firm may have given insider information to stock traders and resigns as auditor of Herbalife

KPMG faces FBI probe - firm may have given insider information to stock traders and resigns as auditor of Herbalife asks if stocks are "too big to fail", a provocative look at govt interventions in the equity markets.

10-K Annual and 10-Q Quarterly Reports for OTCs

Did you know there are companies that trade over-the-counter (OTC) and are still required to file with the SEC? These companies trade on the OTCQB private exchange and are required to be current in their reporting obligations with the SEC which includes submitting 10-K annual and 10-Q quarterly reports. These reports are readily available on and should be reviewed carefully since there are no financial standards these companies need to meet in order to be traded on the OTCQB exchange. As a result, there is a likelihood that these companies may be undergoing financial hardship and could even be headed towards bankruptcy.

Companies that trade over-the-counter and are NOT required to file with the SEC can be found on the OTCQX and OTC Pink exchanges. These private exchanges are not regulated by the SEC so they "do not file periodic reports or audited financial statements with the SEC, making it very difficult for investors to find reliable, unbiased information about those companies".

Does the macroeconomic picture matter?

Two significant events in the history of modern nations occurred last week. One was the US Supreme Court upholding of the Accountable Care Act (ACA), essentially giving the constitutional go ahead to provide access to health care to all Americans with a penalty owed for those who refuse to pay. Another was the European Union’s decision to support Spain's troubled banking system. Should either of these affect the price you would be willing to pay for a grocery store business?

Our answer is no. The macroeconomic news is always fascinating and dramatic – but should not weigh on the individual assessment of how likely a business will prosper. Clearly, the view expressed in the last sentence is not supported by the majority of market participants as stock prices seesaw wildly throughout the day as these news stories are being reported. Our brains seem to be enthralled with new information--- we tend to overweight the importance of novel changes in our understanding of the world and often act on that information quickly. This is probably a helpful adaptation in a lot of situations but is devastatingly bad in equity investing.

But the truly great investors of the past century have highlighted that what is critically important is not the "news" but rather the "olds". Benjamin Graham stressed looking back over 10 years of financial statements and averaging earnings over long periods to prevent unrealistic assumptions. Warren Buffett cites reading through a decade worth of statements not just for the objective numbers but also to get a sense of how management responded to past crises. If we had to name one skill that distinguishes the great investor from the rest we'd suggest this: the ability to be consistent in analysis no matter what the current news reports or expert consensus is.

So instead of reading the news, let's read the olds.

Getting Great Value in Growth Stocks - Fred Martin's approach

The investor community frequently divides stock investments into two categories: "growth" and "value". The idea being that a "value" stock trades below a certain multiple of its earnings (15 is a number often used as the multiple that distinguishes value from growth stocks). A "growth" stock trades above that multiple.

However, this idea of dividing stocks into "growth" and "value" categories is not consistent with our prior discussions on the blog or with the thinking of many notable investors. In fact, all stock purchases that are truly investments require that the buyer pay less than the intrinsic value as determined by that buyer.

At the lower end of the range, in the "value" stock category, it seems much easier to quantify the intrinsic value. The reason for this is that the intrinsic value for most viable businesses is going to exceed the book value. If it is well below book value, the management could in theory sell of assets and return the value to the stockholders.

In Frederick K Martin's book Benjamin Graham and the Power of Growth Stocks the author suggests a way to appropriately value growth companies, those at the high end of the price to earnings range. Mr Martin's idea is based on a formula that Benjamin Graham presented and then revised in 1974. The approach outlined is as follows:

  1. Determine what your "hurdle rate" or desired rate of compound investment return (i.e. 8% annual return).
  2. Examine potential stock purchases.
  3. Create a 7 year detailed forecast of future earnings for the stocks you have interest in.
  4. Use Graham's intrinsic value formula (listed below) to calculate what the future 7 year intrinsic value will be of the company.
  5. If purchasing the company's stock today will lead to a projected intrinsic value that exceeds your hurdle rate, buy the stock.

Obviously, all of this is easier said than done, making growth stock investing much more challenging. There is a clear danger of overestimating future growth which could lead to inappropriately high valuations. However, the rewards of this approach are also much greater.

Graham's formula:
Intrinsic Value per Share = Earnings Per Share x [8.5 + 2(growth rate)] x 4.4/yield on AAA corporate bonds on USA Today was graciously referenced Thursday by USA Today's financial markets reporter Matt Krantz. In his article "Ways to easily access a company's financial statements", Matt answers a reader's question about viewing company reports and references as a source for individual investors to view SEC filings:

"One free option for individual investors is The site is designed to be more familiar to individual investors and use a more standard method of navigation. Just go to the site and enter the symbol or name of a company. You can then select the type of report, 10-K (annual report) or 10-Q (quarterly report) you're interested in and the time frame."
Matt states that a large number of investors fail to do even the basics of researching their investments, like reviewing these financial statements and that part of the problem is that some investors aren't even aware that this information exists. Another part of the problem Matt states is that getting this information is too difficult for the individual investor as the user interface for the Securities and Exchange Commission EDGAR database is not user friendly.

We thank Matt for emphasizing the importance of reading company reports filed to the SEC and using as an example.

Is there a difference between stock investing and gambling?

At its core, purchasing a business involves taking risk on the future value of that business. There is no doubt that buying stock creates risk of potentially losing the money invested. One argument that is made is that this risk is similar to risk you take when betting on casino slot machines. So the argument goes, why not gamble – you’ll have more fun (and maybe get some free drinks along the way). This post will attempt to draw out the similarities and differences between stock investing and gambling, using roulette as an example.

Pure gambling on games of chance, such as roulette or lottery, involves placing bets on an outcome that is random. There should be no reason for the roulette wheel to choose a black versus red portion. There is no information that the roulette player can acquire that would affect the outcome. Therefore, the players select their bets randomly or perhaps based on superstitions that they have a lucky number.

In distinction to traditional roulette, value investing in stocks gives the player an opportunity to play a game where available information affects the outcomes to a significant degree. It is very unlikely that a poorly run business in a competitive business environment will do well. On the other hand, a great business trading well below its intrinsic value is very likely to well over a long period of time. The value investor can investigate financial statements and refrain from placing "bad” bets that are unlikely to pay off and concentrate his resources on what he believes to be reasonable or good bets.

In a sense, value investing is like playing roulette with the wheel loaded to avoid landing on a particular select few "bad” squares and be more likely to land on select few "good” squares. The value investor is able to use available information to avoid bad squares. If correctly played, this would suggest that success is inevitable for the value investor. The roulette player in a traditional roulette game has no advantage and is betting using only blind luck as his guide. Unfortunately, he also has a built-in disadvantage – his ultimate failure in holding on to his money is guaranteed.

But there are times when a stock investor may lose his advantages and transform himself for the poorer into a gambler. If the investor becomes focused on achieving returns over a short period of time, he stops caring about the underlying value of the business he is purchasing and becomes intensely focused on market fluctuations. The focus on "timing” the entry and exit points marks the change from investor to speculator. By ignoring the facts about what he is purchasing and focusing on only what others are willing to pay, the speculator is essentially gambling on future popularity of the stock.

Benjamin Graham notes that there can be intelligent speculation just as there is intelligent investing. However, it’s difficult to find any kind of historical record of consistently successful intelligent speculators.

Getting to Intrinsic Value

Let’s consider other ways of getting at intrinsic value of a business apart from book value.

This may become easier to illustrate with an example—take the example of wanting to buy your local grocery store.

If you were interested in buying your local grocery store, you would likely be interested in several different pieces of information. You probably would want to know if the store owned anything, such as the land under the store, how much inventory of goods the store had, and any debts the store was required to pay. All of this fits into the measurement of book value, which we can think of as the net worth (assets – liabilities) of the store. As mentioned in a previous post, some very notable investors have used book value as an estimate of intrinsic value.

However, as a prospective buyer of the store, you would also be very interested in knowing how much money would come to you if you owned the store. The primary economic reason to own a business is to have the right to receive the future earnings of the business. You would be interested in how much money the store generates by sales, and how much of the total amount of money was left after paying the costs such as buying the goods and paying employees. You would likely try to project how much money you could earn in future years if you owned the business. You might calculate how many years it would take for the business to generate the amount of money you would have to spend to buy the business. This would be the price/earnings ratio.

A grocery store that was generating profits would certainly be more appealing to you than one that could not generate profit and was causing the current store owner to put money into it. You would reasonably expect to pay more for a store that has proven its ability to generate large profits, especially if in you believe the store will continue to generate those large profits in the future. You could estimate the price you’d be willing to pay for owning the store on the basis of the store’s past and estimated future earnings.

Clearly, a business that can maintain or grow earnings is more valuable than a business that cannot. Yet, the book value does not reflect this at all. A money losing grocery store with no customers and poor chance of future sales could easily have exactly the same book value as a profitable grocery store that could generate stable profits for years to come.

In this way, book value fails in a critical way to distinguish quality of business. Book value (if calculated to only include tangible assets) can give a potential "floor" to how low a business is worth. After all, if the store had such poor earnings power that it was not worth operating, its assets could be sold and the money returned to the owner. In this way, tangible book value can represent an estimate of the liquidation value. However, for a good profitable business, tangible book value should usually underestimate the intrinsic value – reflecting that intrinsic value is created by the earnings power of the business.

Great businesses distinguish themselves from mediocre or poor businesses by their abilities to generate earnings for their owners. The ideal business has a durable competitive advantage-- some key ingredient to prevent another business from taking away its customers and profits. A great business with a durable competitive advantage that can maintain and grow earnings certainly has a higher intrinsic value than a business that lacks that ability.

However, we now come to the paradox of getting to intrinsic value. While book value is relatively easy to calculate, it can only give us a very rough (and typically low) approximation of intrinsic value. Estimating future earnings and assessing the ability of the business to maintain and grow earnings gets us closer to the true intrinsic value—but forecasts of future earnings are often wrong. Determining ability of a business to maintain and grow earnings is subjective and imprecise.

So, determination of intrinsic value remains an educated guess rather than an exact calculation.
Next Up - Is there a difference between stock investing and gambling?

Risk Factors

10-K annual reports contain a wealth of information for investors but because of these reports can average 100 pages in length, recommends readers focus on sections such as the Risk Factors. The risk factors are written by executive management members including the CEO and divulge very candidly the various issues that their company faces. For instance, Oracle's 2011 annual 10-K filing to the SEC reveals that their "stock price could become more volatile and your investment could lose value" (page 32). Another example of a risk factor is from LinkedIn’s first 10-K annual report where it is written that they "expect [their] operating results to fluctuate...which may result in a decline in [their] stock price..." (page 19).

Of course these individual statements do not absolutely determine the price of a company’s stock but these pieces of information should give investors the direction they need to make an informed decision on their investments.

"Price is what you pay, value is what you get."

This quote is attributed to Warren Buffet and neatly sums up a distinction between the view point of the value investor versus those who believe that markets set accurate prices. Benjamin Graham, one of the founders of the modern value investing philosophy, wrote an article in a magazine that advised women to buy stocks the same way they purchase groceries, rather than the way they purchase perfumes.

The central idea is that the market does not always generate prices that are in line with the value received on purchasing the security. Rather than buying based on hype and advertisement (as perhaps a person might buy a perfume), a purchase decision should reflect a clear assessment of value (as perhaps a person might buy groceries).

So, buyers of stock should pay close attention to what they are getting for their money. The leaders of value investing believe that there is an "intrinsic value" of a business that a buyer can estimate. In their view, the price a smart buyer pays for a piece of the business should be below what the estimated intrinsic value is. By paying below the intrinsic value, we could say that a stock buyer has a built-in "margin of safety".

Graham is widely credited with developing the margin of safety concept for investing. He implies that the tangible book value (the total sum of the assets owned by the company) was a way to approximate intrinsic value. In his book The Intelligent Investor, he suggests in his recommendations for common stock purchases that buyers "limit themselves to issues not selling far above their tangible-asset value". This would seem to acknowledge that intrinsic value and book value are related and that intrinsic value is generally higher than book value.

In his annual reports, Warren Buffett always lists the annual change in Berkshire Hathaway’s book value/share and compares this to the annual change in the S&P 500 Index. In a real sense, he measures his own success based on how well Berkshire Hathaway increases its book value rather than the stock price of Berkshire Hathaway. Although he also has commented that, over the long run, price will track book value.

The late Walter Schloss-- the most faithful of Graham’s disciples of value investing-- reportedly invested in stocks trading well below book value. He is reported to have compounded investments for his partners at an annual rate of 16% over 50 years – a stunning accomplishment. A nice summary of his viewpoint is in this link

Idea Edge Industries, Inc. brings you the NEW blog

This space will be used for posting general advice about stock investment philosophy, investing basics, financial statements, Securities and Exchange Commission, 10-K annual report review, 10-Q quarterly report review and the like.

Our hope is that readers find this information both informative and profitable. Our target audience is the beginner and moderately experienced investor. It might also be helpful for a seasoned investor who wants to refresh himself on the basics.

The age we live in has been called "age of information” or "age of communication” can sometimes seem like the "age of excessive information being poorly communicated”.

This can seem particularly true when trying to read a financial statement. It is typical of anyone reading a 10-k annual financial statement for the first (or 100th) time to feel overwhelmed by the sheer number of words, tables of numbers, and footnotes. Yet these documents hold the keys to being a successful investor in the modern age. We aim to demystify these filings and help you use to get a real sense of the value of a publicly traded company.