If you want to be a real investor, you need to do basic groundwork. And the basics are very valuable and what many skip. Don't. It's where you find the gold, although gold isn't everywhere

Avoiding dross can be as important as finding nuggets. Much of what you need is available free.

As a do-it-yourself investor, especially a beginner, you do not need to 'invest' in tip sheets or investment newsletters to find the intelligence needed to make informed investment decisions.

You should start by using company investment material to your advantage.

What is most important is to take the time to examine all the information a company will provide on its investor website, including its specific investment announcements, like its half yearly and annual reports.

The biggest document a company will produce is the annual report. 

I love getting my hands on the hard copy, feels alive as a bound copy and usually visually appealing. But really, it is just as useful to read it online.

It is the innards that you are after. Here lies the gold.

The gold

Like reading philosophy, reading an annual report can, at first, seem rather daunting.

Do not relent. 

Begin with the easy stuff. 

This is the introduction from the Chairman and CEO (Chief Executive Officer).

Read what they are saying carefully, word-by-word and take notes and or highlight certain points of their discussion about the company that kind of ring a bell in your ears.

Ask yourself, Is there logic to the vocabulary? Are their words easily understood and to the point?

Are they excited about the business or somewhat defensive?

Can you gauge the truth clearly, like what their strategy has been over the last twelve months, and what they see as appropriate going forward?

Changes aren't the real issue, clarity of their strategic thinking is.

Are they implying or being very succinct? i.e. specific forecasts?

Do you get a sense of direction, a sense of comfort from their words?

Remember when you are reading you are actually applying your worldly knowledge (your human AI) to the picture and taking what you can from their points of discussion.  Do you like what you read?

Your understanding is most important.  For example, if you cannot fathom at all what the business is about then I suggest you read elsewhere, find another investment candidate company.

And what is the make up of the Board of Directors? Do they have broad industry experience, but add something further to the company than just governance?

Challenges are opportunities

Running a business is not all plain sailing and it might have been a difficult time for the company recently.  In such a situation, you will be searching for gems of information from these company stewards as to how they propose the company mitigates the challenges ahead?

What are they going to do to be successful, too survive and thrive in the new environment?

Here you must make common sense judgement calls, deciding whether to believe them or not. You have to have confidence in them to invest.

Expect their company review, whether the company is doing great or not, to have an element of conservatism. The latter might seem a bit harsh when a company is roaring ahead, but conservatism acts as an insurance policy to guide those at the top. Yes, you want an enthusiastic, can do CEO, but at the same time a chairman who sees the wood from the trees, who can glimpse reality as it is to keep the company safely sailing. You want their discussions to be in sync.

On the other hand, a company up against adversity will endeavor to shine a light on the road ahead. What truth is there in their statements? Or is it all just wishful thinking?

Rinse and repeat

Now I want you to do all of the above again. I mean go back to the prior year and read that earlier annual report, or go back further. By doing so your understanding of the company will take another leap forward as all of a sudden your mind will correlate the recent report with the past (this will be natural, clarity just being a function of your reading awareness). Thus you will be wiser (well I hope somewhat at least) as your view on the company will expand, be more deep. Yes, you are becoming an analyst. 

This is learning and a virtue in the world of investment decision making. But again this challenge in learning will take time. Only you will know if the time read has been worth it. Take your time letting all the information sink in before making a rash investment decision. Invariably you will have more questions a day or two later, so let the mind work subconsciously on the project.

Company introductions are always useful for your general knowledge and will help you heaps in understanding executive lingo and the plethora of variation from company to company.  It is why we invest, we are curious, wanting to absorb our minds in the thoughts of others through their words written. The Chairman and CEO have huge responsibilities in portraying their company in the most appropriate way.

Moments of investment clarity

A serendipity moment will be when these introductions resonate down into your soul. You will not always find it in the introduction, but is certainly a good starting place for a buying signal to appear. What is the piece of material information you consider extremely valuable? Or doesn’t the light switch on?

Here the uncertainty in your decision-making process is why you begin in small steps, because you have to piece all the information together. The more you read, the more annual reports you dedicate your evenings too, the better your judgment will become.

But I almost forgot, we have only just begun because a significant part of the annual report, actually the heart of it, is further ahead, the detailed financial information. This huge middle part of a report can be very tedious even for a veteran investor.

Without doubt you will need over time to become more accustomed to how to understand this dense and detailed, important company accounting information. I am not going to go into detail today, needless to say the introduction you have just read should give you some idea of the detail. 

In fact, good company introductions will really try to give you a condensed and easily understandable idea on the money matters.  

So, stop and see where your thinking on this matter lies after the CEO and Chairman comments.

Are you impressed? Are you all the more wiser and get a good whiff of the financials in easily understood terms?

I will come back to the financials in further articles ahead ...

So, let’s leave it there for the moment.  I know many of you will say hey Tony you’ve only just scratched the surface.  And you are right.  But for most the above homework, starting reading, will be enough to get going.  Rome wasn’t built in a day. Don’t worry I’ll be back next time to keep teaching you further.

So off you go, sit down read, take your time, re read (as I invariably do) and nourish your mind on possibly your next investment opportunity.

Tony Morgan has run a portfolio management business and an equity brokerage, both of which were purchased by Craig Investment Partners. He now runs a small family office that invests globally. Other articles in this series can be found here. And the profiles of all the NZX50 companies can be found here.