Overview – Investment Analysis Starts With Getting the Right Information
Before starting any sort of investment analysis, an investor must first gather the appropriate materials and any other sources of relevant information.
An investor can have world-class analytical skills, but their analysis will not get very far if the information they’re working with is limited and/or low-quality.
Investors today take for granted just how much information they have readily available to them, but the problem some investors still face is that they don’t know where to obtain this information or what their options are when it comes to finding the information they want.
In this article, the different sources of investment information and where to obtain it will be covered. The consequences of prying too far and making investment moves using secret information, a practice called insider trading, will also be explored.
Annual & Quarterly Reports
The documents many investors use regularly in their analyses are the annual and quarterly reports.
A lot of information is tucked away in these reports, especially the annual report (for more on the annual report, please refer to this article), making these documents indispensable to almost any investor.
A corporation’s fiscal year is usually broken down into distinct quarters. It’s important to remember that a fiscal year isn’t necessarily the same as a calendar year.
What a company defines as a “quarter” depends on when their fiscal year starts. If a company’s fiscal year starts on October 1, then the first quarter would span from October to January of the following calendar year. This 4-month cycle would repeat until October 1 is reached, after which a new fiscal year begins.
Companies are free to decide when to release their quarterly reports (assuming it is within a reasonable time frame), but many companies choose to release their quarterly reports a few weeks after a quarter has ended.
The release of multiple quarterly reports from several companies in a short period of time is usually referred to as “earnings season”.
Annual reports are usually released in the following calendar year (e.g. 2020 annual reports are mostly going to be released sometime in 2021) and combines the results of all previous quarters as well as discussing many other elements of a company’s affairs (changes to the board of directors, accounting changes, legal proceedings, etc.)
Investors who choose to invest in Canadian and/or American companies are fortunate since they can access almost any publicly traded Canadian or American company’s annual and quarterly reports, as well as other documents such as proxy statements, very easily.
Both countries maintain databases where all of a publicly-traded company’s documents are archived. In Canada, this database is called SEDAR whereas the American counterpart is called EDGAR. Both services are free to use.
Of course, investors may choose to get annual and quarterly reports directly from a company, whether by accessing their website and finding the documents (usually under an “investor relations” or “investor” tab) or by contacting a company’s investor relations directly and requesting a physical copy of their reports.
Financial Newspapers and Websites/Apps
Chances are not all companies will report every day-to-day change in their financial condition – other than the quarterly and annual reports, companies will usually only report financial news if it’s of major importance (a merger, stock split, share buybacks, etc.)
Even if companies chose to provide daily updates on their financial status, an investor would need to, at minimum, visit all the websites of all companies they currently own (or plan to purchase in the future) every day just to stay abreast with any relevant developments.
Fortunately, investors don’t need to resort to such an extreme level of micromanagement.
Financial newspapers and websites/apps report the daily activity of the markets and individual companies, and almost all major financial news outlets report daily security prices and other metrics investors may need.
Newspapers, specifically physical copies, are still a popular form of media many investors read daily.
A few high-profile examples of individuals who read financial newspapers daily are Warren Buffett, JPMorgan Chase’s CEO Jamie Dimon, and co-founder of private equity firm The Carlyle Group David Rubenstein.
Newspapers contain a wealth of high-quality information, so it comes as little surprise that newspapers such as The Wall Street Journal, Financial Post, and The Economist continue to publish daily. Many of these esteemed newspapers, however, require investors to pay a subscription fee, usually on an annual or monthly basis.
Just as there are myriad financial newspapers to choose from, there are just as many options when it comes to using financial websites/apps.
Many allow users to tailor their news feeds, receiving information only from specific authors or about specific companies, eliminating the need to compile information about different companies on their own.
Not only that, but many websites/apps allow investors to track the prices of almost any security, whether it’s an ETF, common stock, or corporate bond. Securities of interest can be gathered in virtual portfolios known as “watchlists”, allowing investors to keep track of securities they may one day hope to buy.
Lots of websites/apps are free to use, although some premium features require users to pay a fee, usually in the form of an annual or monthly subscription.
Brokers and Analyst Reports
Some investors don’t need to look very far when gathering investment information, because chances are their brokers may provide a lot of the information they desire.
Just like many financial websites/apps, brokers allow investors to create watchlists to track securities of interest. In addition to reporting some basic information such as the security price, some brokers also provide a newsfeed for any pertinent information concerning a particular investment, as well as detailed valuation data such as historical P/E ratios, previous quarters’ earnings-per-share, and other ratios & metrics.
Some brokers also grant investors access to reports put together by analysts, specifically by chartered financial analysts (CFAs).
CFAs normally perform research in specific industries, covering certain companies in a given industry. Because they perform research professionally, the reports produced by these individuals are normally very high-quality and are a great supplement to investors.
However, remember that an investor should always perform their own analysis and arrive at their own conclusions.
Analyst reports are very high-quality, no doubt, but solely relying on the work of an analyst does not mean an investor no longer needs to perform their own due diligence.
Analyst reports can best be viewed as a supplement to an investor’s own work and to check if an investor overlooked any key points or forgot to account for certain pieces of data. These reports should never serve as a replacement for an investor’s own analysis.
The major drawback to accessing information from brokers (and subsequently, analyst reports provided by brokers) is that investors normally must be a client first.
Non-Traditional Sources
Although annual reports, financial newspapers, and analyst reports are generally very reputable and high-quality sources of investment information, an investor should not expect to gain some sort of unfair advantage over others just from accessing these materials.
Almost every investor has access to the same publicly disclosed information – this is to prevent insider trading (more on this in the next section). However, some creative investors have found ways to gather information without relying solely on traditional sources.
Some investors like to do an “on the front lines” approach and study the day-to-day operations of a business at the consumer level, such as purchasing their products or availing of their services.
American investor and former fund manager at Fidelity Investments, Peter Lynch, is one of the proponents of this hands-on approach of gathering information – a classic example of this approach was when he decided to invest in Dunkin’ Donuts after being impressed with their coffee (of course, he went on to perform traditional security analysis to justify if Dunkin’ was indeed worthy of being an investment).
Other investors may go as far as interviewing previous employees, current employees, and even directly contacting management.
Of course, investors simply can’t enter a company’s premises on a day of their choosing then proceed to pick random employees to interview, nor will management be particularly jovial when investors ask them about specific bits of company information out of the blue.
This level of information gathering is normally reserved for institutional investors such as fund managers, but some well-connected retail investors may be able to find ways to talk to key individuals.
Aside: Securities Regulators – United States & Canada
The United States and Canada take slightly different approaches when it comes to regulating securities markets.
In the United States, the regulative body responsible for enforcing securities laws and regulating the securities industry is a federal agency called The U.S. Securities and Exchange Commission (SEC).
The SEC has the authority to impose legal requirements & standards on any publicly traded company operating in the U.S. securities market.
Canada takes a slightly different approach: instead of a federal agency overseeing securities market activity in the entire country, every province and territory has its own securities regulator (e.g. the Alberta Securities Commission and the Ontario Securities Commission).
These regulators are part of an umbrella organization called the Canadian Securities Administrators (CSA). The CSA is a collaboration between the provincial and territorial securities regulators, not a federal agency, and therefore does not have the same sweeping legal authority as the SEC.
Insider Trading: A Very Fine Line
Investors go to great lengths to gather as much high-quality information as they can. It’s safe to say that virtually every investor wants to ensure an investment they plan on purchasing will prove to be a wise decision, rewarding them handsomely in the future.
Therefore, it’s understandable that investors want to know as much as they possibly can about a prospect But what if an investor, or a group of investors, makes buy or sell decisions using important information that only they are aware of, and not the rest of the investing public?
Acting on non-public, important information for the purpose of financial gain through the securities markets is called Insider Trading, and it is a very serious crime.
The SEC defines insider trading as follows:
“Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, non-public information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.”
Notice that the SEC’s definition explicitly says “illegal” insider trading: this is because there is a distinction between legal and illegal insider trading. The SEC defines “insiders” as “officers, directors, major stockholders and employees of an entity whose securities are publicly traded.” The SEC goes on to elaborate of what being an insider entails:
“In general, an insider must not trade for personal gain in the securities of that entity if that person possesses material, non-public information about the entity. In addition, an insider who is aware of material, non-public information must not disclose such information to family, friends, business or social acquaintances, employees or independent contractors of the entity (unless such employees or independent contractors have a position within the entity giving them a clear right and need to know), and other third parties.”
The SEC does not ban company insiders from trading their own securities: CEOs, members of the board, and other executives of publicly traded companies usually hold securities (shares, convertible shares, options, DSUs) in their own companies, and are allowed to purchase or sell those securities – this is still a form of insider trading.
However, what makes it legal is that insiders must report these trades to the SEC, and those trades become part of the public record.
When an insider does not report their trades, knowing that they acted with information only they are aware of and with the purpose of personal gain, then that is grounds for legal consequences – individuals have served jail time and/or paid millions in penalties as a consequence of illegal insider trading.
Of course, what counts as “insider” investment information is not always clear. Does interviewing an employee who previously left count as insider information? What if an investor happens to chance upon information, not knowing it is an insider insight, and performs trades with that information in mind, without intentionally seeking to perform an illegal insider trade?
Like any other legal allegations, accused parties can take their case to court if they feel it is a legal battle worth fighting.
Canada’s lack of a federal securities agency means there is no universally accepted term for insider trading – the onus falls on provincial and territorial regulators to define it. However, it’s safe to assume that the definition for insider trading in Canada isn’t that far off from the one the SEC uses, with the consequences being just as severe.
Wrapping Up
Every investor needs access to high-quality investment information if they wish to perform thorough investment analysis.
Investors have many options when selecting sources of investment information: annual & quarterly reports, financial newspapers & websites/apps, analyst reports, or simply studying an enterprise’s product and/or service.
An investor must be careful not to pry too deep into a company’s information, lest they want to run the risk of performing an illegal insider trade.
Canada and the U.S. take different approaches when it comes to regulating securities markets, but both countries have very severe punishments for investors who trade using insider information without the intention of disclosing such trades.
