What You Can Learn From Shareholder Letters
A less-than-candid letter to shareholders could be a red flag.
Laura Rittenhouse is president of Rittenhouse Rankings, which ranks annual CEO letters to shareholders for candor. She’s the author of an upcoming book, Investing Between the Lines.
Why read a CEO’s letter to shareholders? The annual shareholder letter helps you decide whether a company’s financial statements are trustworthy. The letters offer an insider’s view of the corporate culture, and the quality of that culture influences decisions made throughout a company—such as when to count incoming and outgoing cash or how to book expenses. If the culture is one of honesty and trust, employees will likely be more forthright in their accounting judgments and the financial statements are more likely to be trusted. I’ve found a strong link between corporate candor and stock performance.
How can you determine all that from the letter? First, it’s important to know whether the CEO authored the letter. Then you must judge how candid the comments are. I award points for every mention of cash—cash flow, cash conversion rate, cash from operations—because that tells you something specific about the business. I deduct points for clichés—“looking forward to a bright future,” for example. That tells you absolutely nothing. After reading the letter, you should feel as though you’ve met with the CEO, who should have offered a balanced disclosure of the company’s successes and its problems.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Why are Berkshire Hathaway CEO Warren Buffett’s letters the gold standard? You can tell he wrote the letter. It’s personal. It’s specific. He talks about problems and takes responsibility for them—something most other CEOs don’t do. Buffett promises investors that he’ll communicate candidly because, he’s said, a CEO who misleads in public will eventually mislead himself in private.
What are some red flags? If you read the past few shareholder letters of MF Global, you’d have noticed that the CEO of the company changed three times in three years. Each year the letter reported on improving sales and net income, but failed to disclose per-share losses. That’s an unbalanced disclosure. If a letter reads like public-relations spin, it could indicate that the company is not prepared to communicate honestly with investors.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
-
Stock Market Today: Nasdaq Pops as Semiconductor Stocks Soar
The main indexes closed higher Monday after a bull call on Micron boosted several large-cap chipmakers.
By Karee Venema Published
-
Having Enough Money for Retirement Still a Top Concern, But Moods Are Changing
A new Gallup poll shows Americans are still concerned about having enough money for retirement, but there are some changes from last year.
By Alexandra Svokos Last updated
-
Warren Buffett Adores Apple as Much as Ever
Berkshire Hathaway trimmed its Apple stake because taxes are "likely" to go up "later."
By Dan Burrows Published
-
Six of the Worst Assets to Inherit
inheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
By David Rodeck Published
-
Warren Buffett Stocks: Analyzing The Berkshire Hathaway Portfolio
The Berkshire Hathaway portfolio is a diverse set of blue chips and some lesser-known growth bets. Here, we look at all stocks picked by Buffett and his lieutenants.
By Dan Burrows Published
-
403(b) Contribution Limits for 2024
retirement plans Teachers and nonprofit workers can contribute more to a 403(b) retirement plan in 2024 than they could in 2023.
By Jackie Stewart Published
-
SEP IRA Contribution Limits for 2024
SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 a year.
By Jackie Stewart Published
-
Roth IRA Contribution Limits for 2024
Roth IRAs Roth IRA contribution limits have gone up for 2024. Here's what you need to know.
By Jackie Stewart Published
-
SIMPLE IRA Contribution Limits for 2024
simple IRA The maximum amount workers at small businesses can contribute to a SIMPLE IRA increased by $500 for 2024.
By Jackie Stewart Published
-
457 Contribution Limits for 2024
retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
By Jackie Stewart Published