I am often asked how I spend my time and how I go about researching companies for investment in our funds. I think many people have a vision about the daily schedule of an investment manager as one laced with constant action and extreme tension as you bark into phone lines demanding the purchase or sale of securities based on the latest scrap of news. I hate to disappoint you but my day to day investment activity is not anywhere close to that. While I find it exciting, I am sure that many of you would describe my daily activity as boring or perhaps worse. Of course, you should know that I am the kind of guy who thinks it’s cool to sign off on a text or BBM message with “the nerd” emoticon! No smiley faces for me.
While there is always an immense volume of reading to slog through, the real lifeblood of the investment analyst’s trade is reading annual reports and proxy circulars as well as any annual regulatory filings such as 10K’s. As most companies have calendar year ends, the period from the middle of February to the middle of April is especially busy. Of course, I read the reports of every company we own but in addition I try to read the reports of as many of their competitors as I can. Also, there are many companies that I would love to own if the entry price was more attractive. I try to keep up on those companies by reading as many of those annual reports as I can. It takes between one and two hours to do justice to an annual report and it is certainly true in investing that “the devil is in the details” I try to read everything in an annual report including the notes to the financial statements. Especially the notes to the financial statements!
So what am I looking for when I read an annual report? Quite simply, I attempt to apply the filters of our investment philosophy in assessing the merits of the business as I read through the report. Does the business have outstanding business economics? I am looking for things like high returns on shareholder capital, a high quality balance sheet, growing revenues, earnings and free cash flow over the long term. Does the business have honest and capable management? Of course this can’t be assessed solely by reading an annual report. But when I read through an annual report I am looking for things like share ownership by management and whether or not they treat you like a partner when they discuss the results and prospects for the business in the letter to shareholders. It is easy to get turned off when you get a bunch of syrup and platitudes tossed out in this letter. Developing knowledge about a company from reading its annual reports is cumulative. I can’t tell you how often I end up making an investment because I finally reached a tipping point after many years of study of a company’s annual reports.
The life of an investment analyst isn’t solely spent chained to a desk slavishly reading annual reports from dawn to dusk. A good analyst gets out of the office and tries to meet with the management teams at companies that are interesting. These meetings can take place in a variety of ways. Certainly, you often arrange a one on one meeting directly with the CFO or CEO of a company. I have done that many times over the course of my investment career. Other useful forums for meeting management are annual meetings or analyst days organized by the companies themselves. Regardless of whether a meeting takes place in a one on one setting or in some larger forum, I am just trying to glean all the insights and understanding I can about the nature of the business and the quality of its management team. Two other important forums that deserve special mention which are very useful in the life of an investment analyst are the Consumer Analyst Group of New York (CAGNY) conference and Consumer Group of Europe (CAGE) conference. These conferences feature back to back presentations by senior management of different companies followed by a question and answer period. I am usually able to hear presentations from 25 to 35 companies over a period of three or four days. As the names suggest, these conferences feature consumer companies like Coca-Cola, Unilever, Hershey and Kellogg’s. I find these formats very useful and time efficient to keep up to date on what is going on with companies in the consumer universe. Adding to the appeal is that I get to travel to warm places like Boca Raton, Florida and London, England in the dead of winter all in the name of investment research. Does the life of an Investment Analyst sound a little more exciting to you now?
So there you have it. The life of an Investment Analyst involves a steady diet of annual reports and regulatory filings topped off by lots of travel to meet with managements to learn as much as you can about what makes a business tick. Sorry, I have to sign off now. The Nestle annual report just came out.
“Above the Fray” is a regular blog written by Jeffrey Stacey, Chairman and CEO of Stacey Muirhead Capital Management Ltd., which discusses items of interest related to investing, finance and business. This is not a solicitation.