Overview – The Importance of Reading Can’t Be Overstated
Throughout my life, I’ve always loved to read. Whether it’s an article, pamphlets, textbooks, or manga (Japanese comics), written text has always been my favourite medium to learn about and absorb new information.
As investors, a lot of the information we need to make decisions comes from written text – annual reports, quarterly reports, press releases, etc.
Sure, an investor can listen to a podcast or watch videos to learn about the companies that interest them, but an investor cannot avoid written text forever.
With so many words to process, an investor surely wouldn’t want to miss an important detail because of insufficient reading skills.
Therefore, another skill investors must add (or at least seriously consider adding) to their ever-expanding skillset is the ability to read effectively.
Why Should an Investor Improve their Reading Skills?
At first, this proposition may sound a bit ludicrous: assuming investors are at least in their teens, shouldn’t all investors already have a reasonable level of literacy?
From what I’ve experienced, and as others can probably attest to, there is a difference between being literate and having a thorough understanding of what you’re reading.
For example, anyone can “read” legal documents. There may be some words that are foreign to non-attorneys, but for the most part, the other words presented in these documents are familiar. Although the words in a legal document are familiar, piecing them together and understanding the context is almost impossible for a layperson – only a trained attorney can fully understand and comprehend these documents.
The same thing can be observed for investment-related documents.
Anyone can “read” an annual or quarterly report, but an experienced investor can spend a bit over an hour reading an annual report and extract all the information they need, whereas a non-investor may spend hours poring over the document and still not understand what’s going on.
My point is that you can be the fastest reader in the world, but being able to read fas is irrelevant if you don’t know how to digest and make sense of the material.
Before picking up an annual report or any other investing-related document, an investor needs to have a very clear idea of how exactly they intend to break down the material they are about to go over.
Naturally, anyone who reads an annual report for the first time will most likely be overwhelmed and confused – I know I certainly felt that way.
With no pre-existing mental model to reference, an investor’s only option is to practice by reading more reports. As an investor gains more experience with these documents, over time they start to piece together the framework needed to effectively understand what they’re reading.
Over time, with continuous practice, reading an annual report becomes easier to do as you continue to build and improve your mental model on how to read and analyze them.
My Approach to Reading Investment Documents
Every investor has their own reading style, and by no means do I claim that my style is the best. My purpose here is to provide some inspiration to get you to think about how you can piece together your own reading style.
My focus here will be on annual and quarterly reports.
Before reading a single word, the very first question I ask myself is, “what exactly do I want to learn from this document?”
It’s tempting to say “everything”, but recall the 80/20 rule: 80% of the desired results/outcomes are attributed to just 20% of the effort/input.
In the context of reading investment documents, approximately 80% of the relevant information will come from approximately 20% of the document. This may sound ridiculous for a document that can easily exceed 100 pages, but I assure you that the 80/20 rule still applies.
Based on the annual reports I’ve read so far, these are the sections I consider the “20%”: the CEO’s message, the Business Overview section (usually the section immediately after the CEO’s message), risk factors, financial statements, and sometimes, the footnotes.
These sections usually answer most of the questions I have. If there are any other details I feel are important, I decide which other sections I may want to look at it, but this is done on a case-by-case basis. In my experience, I’ve only had to do this a handful of times.
If I decide that I will get more insight from the other 20% of missing information, I do not spend more time reading the annual report. The missing information I want is usually tucked away in an obscure location in the report, Instead, I usually refer to the analytical work of other people to help fill the remaining gaps.
My broker gives me access to reports conducted by Chartered Financial Analysts (i.e., people who are very knowledgeable in certain companies and, subsequently, the industry those companies operate in). These reports usually bring the percentage of relevant information I need to a bit over 90%.
With approximately 90% of the information known to me, I am usually comfortable making a decision.
Investors need to accept the reality that they will never make a decision with 100% knowledge. Not only is it virtually impossible to acquire 100% of the desired information, but I’ve learned that you don’t need to know everything in order to make a good investment decision.
Trying to gain 100% of the required knowledge to make a decision quickly brings investors face-to-face with diminishing returns. The extra effort is usually not worth the marginal increase in knowledge.
I don’t spend hours on end reading one report because I know precisely what it is I’m looking for before ever reading a single word. At most, I spend a bit over an hour (or, sometimes, a couple of hours) going through an annual report.
My Approach when Reading Specific Sections
Now that I’ve shared what sections I look at when reading an annual report, I will now share how exactly I read these sections.
This is a trait developed over time and with lots of practice: I do not subvocalize. That is, I do not say each word I read aloud, neither verbally nor in my head (internal speech).
When some people read, they like to verbally say (or at least whisper) the words they are reading. This kills your reading speed because you can only read as fast as you can talk. This will greatly increase the amount of time you spend reading a section, and subsequently an entire document.
Now, I am not suggesting that you try to read as fast as possible. My point is, I’m sure that most people would agree that they don’t want to spend more time reading than they absolutely need to, especially with very heavy documents such as annual reports.
If you subvocalize as you read, you must learn to stop. Subvocalization is great if you are just learning how to read, but I’m assuming most investors are not young children.
Second, I do not read every single line. I use a technique known as “block reading”. Put another way, I do not focus on every single word on every single line, I “bunch” together a block of text and focus on only a few key words.
An everyday example of this is reading road signs. If you are travelling at 100 km/h on the highway and see a road sign, chances are you can understand the entire sign without focusing on every single word.
Most CEO’s messages are broken down into several sections or paragraphs. Those sections or paragraphs are the “blocks”, and in each block I only focus on some key words.
For example, imagine a CEO saying this in their report: “In the first quarter of 2020, ABC Corporation reported a revenue increase of $1,000,000, up 10% from the first quarter in 2019”.
I would read this as “In the first quarter of 2020, ABC Corporation reported a revenue increase of $1,000,000, up 10% from the first quarter in 2019”.
Of course, block reading cannot always be applied effectively. Some documents are written as monoliths – that is, a huge block of text with no easily identifiable breaks.
Not only that, but there are instances where an investor may want to read a section line by line. When I come across a risk factor I have never seen before, I take the time to read it carefully and to make sure I understand its importance.
Finally, I do not backtrack. If I miss a word, I do not go back and re-read what I missed.
Backtracking can also kill your reading speed if you need to go back and re-read every word you missed because it ruins your reading flow. Imagine going for a run and having to run backwards every few minutes – that’s essentially what backtracking does to your reading.
When I miss a word, most of the time the following sentences usually fill in the rest of the context for me. I only backtrack if I absolutely feel the need to.
Practice, Practice, Practice – Then Practice Some More
It’s easy to say, “focus on certain sections”, “don’t subvocalize”, and “don’t backtrack”, but I was only able to master these skills through old-fashioned practice.
Mastering these skills does not happen over the course of one week, one month, or even one year. This takes time to fully master. Thankfully, there are lots of different ways for investors to sharpen their reading skills.
I practice daily by reading news articles on my phone. Even if the topic is not of interest to me, I read as many articles as I can in the morning to keep my reading skills in top shape. By reading news articles across different topics, I’m able to improve my ability to be able to extract the necessary information I need, regardless of what it is I’m reading.
Not only that, but I also read one book every two weeks and read finance and investment research articles from institutions such as Bank of America, UBS, and Harvard Business Review. Mixing up your reading material will help you adapt your skills to different types of material.
Whatever form of practice you plan to take, the important thing is you do so consistently. You cannot hope to become a better reader if you only hone your reading skills every now and then – doing a little bit of practice every day quickly adds up, that’s why consistency is so powerful.
Once you master these skills, you will constantly be patting yourself on the back. Going over annual reports, quarterly reports, and other investment documents becomes less of a hassle as you spend less time reading, but you’re still able to extract all the relevant information you need.
Wrapping Up
An investor will eventually have to read some sort of document if they wish to gain high-quality information about prospective investments.
Most people have adequate literacy skills, but literacy is not the same as having a full understanding of what you’re reading. You can’t just give any random person an annual report and expect them to extract the same level of insight as an experienced investor.
By learning how to read effectively, not only will you save yourself lots of time, but strong reading skills can also bring your analysis to the next level by picking up on details you previously may have missed, all because you spent the time and effort improving your reading skills.
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