How To Research Stocks Like Warren Buffett

It's all about reading the 10-K. Here's how the goat does it.

When you buy a stock, you are buying a piece of a business. Before you buy a business, you need to fully understand what you are buying. This requires that you read the company’s 10-K report.

• What is a 10-K report?

• How do you access a company’s 10-K report?

• What is Buffett’s research process?

• Bonus: How long does Warren Buffett say it takes him to read a 10-K report?

What is a 10-K report?

The 10-K, or Form 10-K, is defined by the SEC below:

The annual report on Form 10-K provides a comprehensive overview of the company's business and financial condition and includes audited financial statements. Although similarly named, the annual report on Form 10-K is distinct from the “annual report to shareholders,” which a company must send to its shareholders when it holds an annual meeting to elect directors.

How can you access a company’s 10-K report(s)?

The best source is EDGAR, the U.S. Securities and Exchange Commission’s official database of company filings.

Step #1: Go to EDGAR using this link.

Step #2: Enter the name of the company you want to research.

Step #3: You need to filter by the type of document. Enter “10-K” to refine the results.

Step #4: Finally, click “Documents” and then select the 10-K. It is almost always the first item.

What is Buffett’s process for reading 10-Ks?

When we put together the list of every book Charlie Munger recommended at the Berkshire Hathaway annual shareholder meetings over the years, we came across non-book related quotes that we thought were worth sharing. This is one of them.

The following comes from a question-and-answer session at the 1996 Berkshire Hathaway shareholder meeting.

WARREN BUFFETT: What I’m trying to do as I read reports…I like to understand just generally what’s going on in all kinds of businesses. If we own stock in a company and in an industry, and there are eight other companies that are in the same industry, I want to own or be on the mailing list for the reports for the other eight, because I can’t understand how my company is doing unless I understand what the other eight are doing. 

Note: In 1996, the way to get the company’s 10-Ks was to be a shareholder so that you received a copy of the report in the mail each year.

I want to have the perspective of, in terms of market share, what’s going on in the business or their margins or the trend of margins, all kinds of things that I can’t get unless I know — I can’t be an intelligent owner of a business unless I know what all the other businesses in that industry are doing. And so, I try to get that information out of a report. 

If I’m thinking about investing in a specific company, I try to size up their business and the people that are running it. And over the years, I have found reading a lot of reports to be quite useful in terms of making business decisions at Berkshire. 

If we own all of a business, I want to own shares in all of the competitors just to keep track of what’s going on. And I want to be able to intelligently evaluate how our managers are doing that. And I can’t do that unless I know the industry backdrop against which they’re working. 

Let’s say you are thinking that Facebook is a good investment opportunity. In addition to reading Facebook’s latest 10-K report, you should read the Twitter, Pinterest and Snap reports. This is how you understand, as Buffett puts it, “the industry backdrop.”

WARREN BUFFETT: It’s amazing, you know, what — how well you can do in investing, really, with what I would call outside information. I find inside information — I’m not sure how useful that is. But outside information — there’s all kinds of information around, as to businesses. And you don’t have to understand all of them. You just have to understand the ones that you’re thinking about getting in. And you can do it, if you just — nobody will do it for you. 

You can’t read — in my view — you can’t read Wall Street reports and get anything out of them. You have to do it yourself and get your arms around it. I don’t think we’ve ever gotten an idea, you know, in 40 years from a Wall Street report. But we’ve gotten a lot of ideas from annual reports. 

The real ideas come from the 10-K reports.

CHARLIE MUNGER: What I find is that it takes a long time to read the annual report even if it’s a comparatively simple business, because if you really are trying to understand it, it’s not a bit easy. 

WARREN BUFFETT: Yeah. I would say that, on average, in a business we’re really interested in, even though we know what to skip, to some extent, and what to read, I mean, it’s going to be 45 minutes or an hour on a report. 

And if there are six or eight companies in the industry, that’s going to be six or eight hours, perhaps, and then their quarterlies and a lot of other — 

I mean, it — the way you learn about businesses is by absorbing information about them, thinking, deciding what counts and what doesn’t count, relating one thing to another. And, you know, that’s the job. 

And you can’t get that by looking at a bunch of little numbers on a chart bobbing up and down about a — or reading, you know, market commentary and periodicals or anything of the sort. That just won’t do it. You’ve got to understand the businesses. That’s where it all begins and ends. 

BONUS: How long does Warren Buffett take to read a 10-K report?

As the passage above details, Buffett says he spends “45 minutes or an hour on a report.” If it takes you longer, don’t be discouraged. As noted above, Charlie Munger says this is normal, even for him.

• “What I find is that it takes a long time to read the annual report even if it’s a comparatively simple business, because if you really are trying to understand it, it’s not a bit easy.” —Charlie Munger

You can watch the full exchange below:

The Key Lesson for Investors

It’s all about understanding the business. And if you want to understand the business, you have to read the 10-K. You should not even think about buying a stock without taking the time required to apply Buffett’s process.