Security Analysis: Chapter 3: Sources of Information

Please join me at the Security Analysis Book Club to read Security Analysis by Graham & Dodd, a must-read for anyone who is serious about value investing.

Chapter 3: Sources of Information.

It is impossible to discuss or even to list all the sources of information which the analyst may find it profitable to consult at one time or another in his work.

This chapter is useful in getting us to think about where to look for information (including some ideas that I've never thought of before), but some parts are outdated. I will include additional information sources as I see fit.

Unless otherwise indicated "Form ___" refers to SEC forms filed by companies and available via EDGAR. You may want to familiarize yourself with SEC form types and definitions, officially defined in this PDF file.

Data on the Terms of the Issue
Registration statements are the S-series forms - Form S-1 for most securities and S-4 for mergers and exchange offers. Form FWP, for Free Writing Prospectus, may also come in handy. If the issue is a private offering, the issuing firm should give you a prospectus to comply with SEC rules. For foreign issues, you should contact the firm and check with the local regulatory authorities or stock exchange (if it's a listed issue).

If you are analyzing a bond, ask for the indenture (or deed of trust). If you are analyzing the stock issues, ask for the charter (or articles of incorporation) and the by-laws.

Data on the Company
Report to Stockholders (Including Interim News Releases) Regulation FD means that all reports of a material event must be filed in Form 8-K (Current Reports). Earnings guidance (a dangerous game) or profit warnings are filed as Form 8-K. "Important" press releases, such as monthly sales data for consumer retail companies (a good place to see how the consumer/economy is doing) or pre-quarterly report announcements of quarterly results (I don't understand why companies spend time/money doing that), are filed as Form 8-K as well.

Weekly and monthly reports
Railroads and public utility companies usually publish detailed operational results on a monthly or weekly basis. These data are not filed as Form 8-K, but are usually available on the company's investor relations website (e.g. BNSF's weekly intermodal and carload unit reports).

Quarterly and annual reports
Quarterly reports are filed as Form 10-Q, or Form 10-QSB for small business issuers. Annual reports are filed as Form 10-K, or Form 10-KSB for small business issuers. There is also Form ARS for Annual Report to Security holders (i.e. the glossy report with lots of photo, for most companies).

Form 10-K contains much more information than Form 10-Q or ARS and should be read cover-to-cover. Form 10-Q, though containing less information, is useful for checking recent changes to the company's performance.

Annual reports (ARS) usually contain less information than Form 10-K, but "[it] frequently contains remarks—not always illuminating—by the president or the chairman of the board, relating to the past year’s results and to the future outlook", which may help you evaluate the management and the company's prospects.

Income account and balance sheet
Times have changed. I almost couldn't believe it, but back in Graham's days, companies tried to conceal their assets and earning powers. Nowadays, companies can't wait to inflate their assets and reported earnings!

Periodic Reports to Public Agencies
I don't have experience utilizing reports/filings companies make to public agencies, but Graham suggests looking at these filings for information that may be omitted from shareholder reports. I'm not sure what the regulations are now and whether public agency filings still have as much value as they did in Graham's days. Would anyone like to comment about this?

FYI: The "Interstate Commerce Commission" for researching railroad companies was abolished in 1995, with the remaining functions transferred to the "Surface Transportation Board".

Listing Applications, Registration Statements, and Prospectuses
As stated above, Form S-1 is used for registering most securities. You may also find companies using Form FWP, for Free Writing Prospectus. I don't think NYSE or other exchanges still have extensive listing applications that can be viewed by investors - at least there isn't any that I can find online.

Miscellaneous Official Reports
Graham suggests that we look at official reports issued by federal and state commissions, such as the Federal Trade Commission. These reports may contain information not disclosed anywhere else. I, for one, haven't thought about reading these official reports when analyzing companies. One question I have is: How do we know which reports contain information about the companies we're analyzing?

Statistical and Financial Publications
Standard & Poor's, Moody's, and Fitch publish stock and bond manuals. Now, we have Valueline, Bloomberg, Reuters, Morningstar, Google Finance, Yahoo Finance, MSN Money, and tons of other publications and services available to us, some of them free-of-charge. These publications and services should contain condensed and standardized data for us to analyze.

These publications and services are more useful to screen for potential bargains than as our one-stop research shop. There could be errors in their data, and some important information may no be expressed in their concise and standardized format. As Graham warns, we should always go back to read and analyze the original reports.

Request for Direct Information from the Company
Stockholders are owners of the company and the employer of the company's officers. As owners, we are entitled to ask questions and have them answered, unless doing so would be detrimental to the company.

Some investors are adament about interviewing the management before investing. Others say we shouldn't speak to the management because they are incentivized to convince us to buy. I think we should talk to the management if we have any specific questions, but we must be guard against being influenced by them.

Information Regarding the Industry
Industry-wide data are available from the Department of Commerce's Survey of Current Business. Other industry data may be published in trade journals or available from statistical services.

Usefulness of additional sources of information
Though some parts of this chapter is outdated, I think it's a good reminder that there are practically infinite amount of information and data out there that we can find, and some of them from not-so-obvious places. That said, individual investors like me have limited time and resources to obtain and analyze additional information, so I'm not sure how useful these additional sources of information might be for us.

If you have used these additional information, please let us know your experience and how useful do you find these information. If you can suggest other sources of information, please post them here! Thank you!

P.S. I have compiled a list of online resources that I may use from time to time. Please let me know any additional links that should be added. Thank you.

P.P.S. This post was featured in the Festival of Stocks #113 at Old School Value.