If you own any stock, in any company, then you have the opportunity to read shareholder letters. Actually, most companies make their shareholder letters public, so anyone can read shareholder letters if they are interested.
However, there are two types of people, in particular, that should be reading shareholder letters every year; those who invest in that particular company, and those wanting to become a smarter investor, whether or not they invest in that particular company.
The problem with the first group of people is that they oftentimes skip over the shareholder letter. They don’t realize how useful shareholder letters actually are.
But they contain critical information about the company’s current financial position, what the previous year has looked like, and what should happen in the coming year.
Keep reading to learn the importance of reading shareholder letters, so you know what’s actually going on with the company you are investing your money into.
Contents
So what is a shareholder letter? Shareholder letters are written by the top executives at any particular company. They are the people in charge of the company, and ultimately, the ones responsible for the current success of the company.
The shareholders are those who buy stocks in the company, helping to fund the growth of the company while enjoying a return on their investment.
Because large corporations cannot grow without a dedicated group of shareholders, it’s their responsibility to inform the shareholders how the company is actually doing.
This comes in the form of a letter, usually preceding the company’s annual report, which is freely shared with shareholders. The letter documents what has happened in the previous year, what is happening now, and what they are focusing on this coming year.
The letter explains the company’s current financial and market position and should provide you with confidence the company is worth continually investing in during the year to come.
There are tons of reasons why you should be reading shareholder letters, whether you are a current shareholder or not. Here are the top five reasons to start doing so.
1. Determine if the Company is Worth Investment
If you are currently researching which stocks to purchase for your portfolio, you first need to understand the businesses that the stocks represent. After all, stocks are only valuable because of what the company does on a daily basis.
When you have narrowed down a list of companies to potentially invest in, you need to compare and contrast the options to see if they are worth putting your money into. A good place to start is the shareholder letter.
In order to invest with confidence, you need an intimate understanding of each company you choose. Otherwise, you are investing blindly.
Shareholder letters describe what the company is currently doing and why. It will describe their processes along with their current goals and the plan to achieve those goals.
This information can go a long way into convincing you to either invest in the stock or pass it up.
2. Increase Financial Knowledge
If you are new to the world of business, finance, and investing, shareholder letters can provide you with education all on their own. There are so many business and financial concepts explained in these letters that it’s impossible not to learn something new every time you read one.
From retained earning to business taxes, and everything in between, it’s like you are getting an education from some of the top CEOs in the world.
Granted, if you aren’t well versed in financial jargon, much of it can fly over your head. However, it’s part of the learning process. Soon, you’ll understand the concepts that once seemed so foreign to you.
3. Learn About Key Company Changes
Corporate change is always taking place. If it wasn’t the company would crumble. As a shareholder, you have the right to know about important changes taking place in the organization before the general public does.
There are many different types of change you need to be informed of as a shareholder. This could include new business verticals or new markets that the company is pursuing.
Or it could include changes in personnel and leadership. For example, when Matthew Gline took over as CEO of Roivant, as the previous CEO, Vivek Ramaswamy transitioned to Executive Chairman.
While these changes obviously have the best interest of the company in mind, they are critical bits of information to investors. Many investors choose stocks to purchase based o current leadership. For example, people are often drawn to the success of Elon Musk as an individual and would invest in any company that had his name on it.
But if the leadership of the company changed, and Elon was no longer involved, it might lead some people to sell their shares. Or certain changes might lead current shareholders to purchase an even greater number of shares, as their confidence in the company increases.
Regardless, you need to know what is taking place in the inner workings of the companies you invest in.
4. Become a Smarter Investor
Want to know how to be a smart investor? Then you should probably read the content written specifically for investors.
Shareholders are investors. The shareholder letter is written specifically to this group of people providing funding to the company. So yes, the letter is meant to please you as an investor, as well as convince you to stay on board.
But it’s also full of information that can make you a better investor as a whole. Reading through these letters, you’ll learn what the CEO sees as important when analyzing the company.
You’ll discover what factors can truly affect company performance and ultimately drive stock price. Reading these letters will continue to develop your financial IQ, even if you are already very successful. You can never stop learning, especially when it comes to something like investing.
5. Learn About the CEO
Want to know how to read a shareholder letter? Know who is writing it. More often than not, it comes from the CEO.
Some CEOs make writing shareholder letters a top priority. Others don’t put nearly as much effort into it. Either way, you’ll learn a lot more about the person running the company.
CEOs that enjoy writing shareholder letters include legends like Warren Buffett and Jeff Bezos. In their letters, you can tell exactly who is writing it. It’s full of personality, and often times personal anecdotes that provide insight into their world.
Good CEOs, such as these two, are also quick to admit failures. And they don’t shrug them off or blame someone else, but they take full ownership of the mistakes that were made in the previous year.
And with this type of transparency, you can learn a lot about how the company is being managed, what the company’s vision and values are, and ultimately if it’s an organization that you want to continue pledging your support and your hard-earned dollars to.
So what shareholder letters should be reading? First and foremost, for any company that you invest in, you should be reading the shareholder letter. Every single year.
You need to stay up to date on current happenings in order to be an informed investor.
Other than that, Warren Buffet’s shareholder letter for Berkshire Hathaway is by and far the most popular and in-demand shareholder letter. If you’ve not read them before, you can read every letter online since 1977. Many people say that reading these letters each year is like getting an MBA.
Aside from the Buffet letters, Jeff Bezos’ letters for Amazon shareholders are another must-read. Jeff takes the time to craft the perfect shareholder letters, filled with stories and inspiration, along with the most important information. And since everyone patronizes Amazon, it’s worth reading about what Jeff and his company are up to next.
And the letters from JP Morgan are also really good. CEO Jamie Dimon shares a wealth of information related to banking and investing, which is worth the read considering that JP Morgan is always beating the S&P 500.
Aside from these corporations, consider reading the letters from any of the other companies that you patronize on a regular basis, regardless of whether or not you are a current investor.
Think of the department stores, grocery stores, automobile manufacturers, travel companies, and banks that you are loyal to.
Reading the letters from the CEO may make you an even more loyal customer. Or at least, they may convince you to invest in stock as well.
Wiser and Smarter
Now that you know what shareholder letters are, why you should read them, and which ones to consider reading first, it’s time to get after it. Visit each company’s website and find their latest letter, pour a hot cup of tea, and enjoy your Friday night like never before.
You’ll come out just a little bit smarter on the other side.
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