Do You Read the Annual Letter to Shareholders?

financial report newspaper

This morning, the financial news is buzzing about the annual letter to shareholders from Jeff Bezos, Amazon’s (AMZN) founder.

Over my years in the investing field, I’ve scoured hundreds of annual reports and 10-Ks. And Bezos is one of the few execs who really works at communicating his strategy, failures, and successes in his annual report. In his recent letter, Bezos expounded upon his initiatives, discussing the importance of failing in order to later succeed. And he discussed two ideas—the Fire phone (a failure) and the Echo (a stunning success)—that happened at the same time.

He even includes a copy of every annual letter to shareholders that he has been writing for the last 23 years, so that Amazon’s shareholders can compare what he said in the past to this year’s comments.

And, as I have told the attendees of my many Money Show presentations, it’s that comparison that is the nuts and bolts of the annual report. It tells me a lot about the company’s management, including the clarity of their strategic plan, how well they are doing at following their plan and how honest they are being about what has worked and what hasn’t been successful.

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In all my years of looking at letters to shareholders, I have only seen two other managers who really took the time to share their thoughts on their company in this manner. One is Warren Buffett, whose letters are full of folksy ruminations about how well Berkshire Hathaway (BRK-B) did as well as the mistakes (which he personally owns) the company made.

The other was Stoney M. “Mit” Stubbs, the now-retired CEO of Frozen Food Express. Frozen Food Express is now a privately-held company, but many years ago, it was public. I was specializing in under the radar stocks as an analyst, and Mit’s trucking company came up on my radar as an ‘undiscovered’ stock and a well-run business. I went to Dallas to interview him, and he shared several of his annual reports—as well as his annual letters to shareholders—with me. And like Buffett, they were heartfelt, easy to read, and he took ownership of his misdirections, as well as his successes.

You see, the annual letter to shareholders is meant to be a review of the year and a look at the year ahead—a missive whereby a company really explains its strategy and its execution. It is usually signed by the chairperson and president and often is accompanied by a picture of the two looking like best friends. It is a statement of management’s position on relevant social issues and an expression of their plans for the company’s future.

And it is essential—as a shareholder—that you compare it with the prior year’s letter. And better yet, compare it to three to five years of letters, which should put major developments affecting the company’s shareholders into perspective. A good letter compares last year’s predictions with the current year’s results and explains the disappointments as well as the successes candidly.

Here are some key points to think about when you are reviewing these letters:

What to Look for in an Annual Letter to Shareholders

  • Be wary of euphemisms (such as “challenging” instead of “bad”), vague or qualified wording. Much of the meaning is between the lines. Do the explanations of successes and failures make sense to you?
  • Is the message geared to the long-term? Are there long-term plans in force?
  • In the current letter, do they mention how the plans they discussed in last year’s letter came to or did not come to fruition? And why?
  • Keep a list of the investment merits cited in the letter. During the coming months, does the CEO reference them in earnings releases, quarterly reports, newspaper interviews?
  • Do they own their failures?
  • Do you get the same underlying message throughout the report, or is the CEO’s message different from the message generated by the numbers in the Income Statement, Balance Sheet, and Statement of Cash Flows?

Bottom line, the numbers in the annual report and 10-K tell the story of how the company is faring, financially. But it’s the annual letter to shareholders that will give you a really good look at how the company is managed—both short-and long-term. Don’t skip it!

Nancy Zambell

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