Before you think this is some type of business opportunity, where you can make millions of dollars stuffing envelopes or selling some multi-level marketing product, keep reading.
Because it is NOT any of the above.
In fact, this might be the best year-end gift I can give you.
I’m going to show you how reading can make you a lot of money on Wall Street. You can gain a very sustainable edge on other investors… because hardly any of them read annual reports anymore.
Before I show you how to do this, I want to share with you what a 22-year-old young man was doing before he became a household name.
Flipping Through Manuals
Right after he graduated from Columbia Business School in 1951, a young Warren Buffett used to leaf through Moody’s industrial, banks and finance, and public utilities manuals to find investment opportunities.
That’s where he read about an insurance company with earnings per share of $21 in 1949 and $29 in 1950.
The funny thing about this company was that with earnings that good, it still only traded between $4 and $13. In other words, the stock was trading at less than half the earnings per share.
In 2002, Buffett invested $455 million into a company called PetroChina (NYSE: PTR) — Asia’s largest oil company. How did he decide to invest close to half a billion dollars? Buffett said:
I sat there in my office and read the annual report, which fortunately was in English, and I decided it was a very good company. I sat there and said to myself this company is worth about $100 billion and is trading for about $35 billion.
Reading that annual report resulted in $3.5 billion in profit by the time Buffett sold his stake in PetroChina in 2007.
Not Only for Billionaires
As the housing bubble was starting to deflate, one company, which I had done extensive research on, continued to trade lower.
Fairfax Financial (OTC: FRFHF), a holding company that owns insurance companies, was run by an outstanding manager, had a strong balance sheet, and was pretty much insulated from the housing bubble.
In March 2007, it was trading for $238 share, but had fallen to $180 by early August — a decline of 24%.
Fairfax’s decline didn’t make any sense at all!
While the stock market was falling, and the housing bubble was beginning to burst, Fairfax’s stock should’ve been rising… not declining.
How did I know that?
Simple: I read it in the company’s 2006 annual report.
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Prem Watsa was very bearish on the stock market and housing market and made bets that would pay off big time if those markets fell.
More than two years before the greatest economic disaster since the Great Depression, he wrote:
With about half our equity exposure hedged against the S&P 500, our investment of $276 million in credit default swaps, and approximately 78% of our investment portfolios consisting of government bonds and cash, we feel that we have effectively protected our investment portfolios from a potential financial market disaster.
In plain English, he told you that his stock position was hedged against declines, they had a bet that the housing market would fall (credit default swaps), and most of their investment portfolios were in cash.
You didn’t need to be a rocket scientist to figure out that the market’s pain would be Fairfax’s profit.
That’s why, when Fairfax’s stock price was falling in the summer of 2007, I began buying.
I went back to the annual report and read about their bearish bets, convinced now more than ever that Mr. Market got this one totally wrong.
I continued to buy Fairfax stock and averaged my position out in the $190 range.
By the end of November, the shares were trading at $300 per share — a gain of 67% in just a few months.
It was one of the quickest and easiest trades I had ever made, as Mr. Market adjusted the share price to account for Fairfax’s gains.
In total, Fairfax bet $341 million that the housing market would go bust, and by mid-February 2008, that investment was up almost seven-fold… to $2.1 billion.
My gift to you is one that will pay off to you more than 10-fold… if you just follow it.
Right before you buy a stock, read the company’s annual report. That’s it.
By doing so, you will have a huge advantage over other investors that don’t take the time to read.
There are diamonds that can easily be found in the report… but they still need someone to go and pick them up.
All my best, Charles Mizrahi Twitter: @IWPeditor Charles cut his chops on the trading floor of the New York Futures Exchange before moving on to become a wildly successful money manager on Wall Street. And with more than 35 years of recommending stocks under his belt, Charles has knocked the cover off the ball, compiling an amazing record of success and posting gain after gain for his loyal readers. He is the editor of Park Avenue Investment Club and the Insider Alert newsletters. Charles is also the author of the highly acclaimed book, Getting Started in Value Investing.
