Thursday, March 5, 2009

How to Use a Computer to Read Company Reports

It has come as somewhat of a shock to me, but I realized the other day that personal computers can actually perform some very useful roles when it comes to reviewing company SEC filings. This is welcome news to someone who labored through the early days of DOS based PCs where it felt like you spent more time trying to get the blasted things to work than you did in actually getting any productivity.  It’s nice to be getting some productivity payback, even if it is twenty years later.

I’ve found that when investors are following a company, what they care about are the changes that are happening on the margin, particularly as it compares with the same period in the prior year.  Companies, of course, are happy to tell them when good things are happening at the margin and will supply lots of reasons why smart management has made good things happen.  The bad things, however, either get buried in the fine print, or, more than likely, omitted.  It’s these omitted things that are toughest to spot.  After all, the previous period was a year ago and who can remember that far back?  I’m lucky if I can remember what I had for supper last night, so good luck spotting that omission. This is where reading the periodic filings of a company with the aid of a computer comes in really handy.

First, let me say that it really helps if you have a very large display monitor, or, better yet, dual screens.  I switched to dual monitors about two months ago and it feels as if I’m saving about 10% of my time because I no longer have to dig through and move around the multiple screens that I’m working on.  With a super-sized viewing area it is then easy to go the Securities and Exchange Commission’s website ( and search for the most recent filing by the company you’re interested in.  Once you’ve pulled that up, you then open a new window right next to it with the previous year’s filing for the same period in it.  So far, this is nothing you couldn’t do with paper on your desktop if you wanted to print out the documents and kill a lot of trees.  But now comes the cool part.  You can get the computer to search for the word or phrase you’re interested in.  Rather than parsing the document line by line to find out what’s missing, the computer can tell you exactly how many times a word or phrase was used in the company’s discussion.  Then you simply compare what you’ve found with the same search for the previous year’s filing.  If there is a big discrepancy, then a diligent investor will use it as a starting point to start asking questions. I’ve used this technique when writing some of my blog posts to look at the treatment of same store sales by Starbucks and the disclosure of the number of pharmacists working at CVS Drugstores (see Starbucks and Disclosure of Same Store Sales, December 5, 2008 and How to Read 10K and 10Q Reports, September 10, 2008).  My computer will tell me how many times the word or phrase is used in the document and take me right to the spot it’s used. 

 The system works because, by my estimates, 85% - 90% of the discussion material in the 10-K and 10-Q doesn’t change from period to period.  If you’ve ever sat in on a Disclosure Committee meeting, you know that the accountants and lawyers are trying to write the document by making as few changes as possible to the previous document.  Nobody has time to reinvent the wheel every quarter with a totally rewritten filing. So when they make a change, it’s usually because they have to make a revision due to changed circumstances.  Many times those changes, if they don’t favor the company, will get buried in the 10-Q or 10-K and it’s up to the intrepid investor to find them. 

And this is just the beginning of how computers can be used to analyze the textual discussion in company periodic reports.  Those of you who are intrigued by all of this should take a look at a site called Many Eyes ( to see how see how graphics can be used to analyze text and changes to text.

It’s a brave new world…

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