What Signs to Look Out for When Reading Shareholder Letters
Within Entrepreneur Network partner Phil Town's portfolio of Rule No. 1 investing rules, there are four principles that begin with "M" to follow. One of these rules is management. Warren Buffett calls the management behind your investments as equivalent to in-laws. Communication with the management that controls your money is crucial. One of the main forms which management uses to correspond with its investors is shareholder letters. In order to draw out the right tidbits from your management's communication, look for the following within shareholder letters:
- State of the company culture, according to adjustments in tone. If there is a fluctuation in how the shareholder letters come across, there may be something new (good or bad) happening at the company.
- Honesty and directness. Is your management being honest and direct overall in their letters? The letter should be straightforward and transparent -- not full of fluffy phrases -- about a current evaluation of the company.
- Look out for red flags. Language that communicates very little but attempts to reassure investors is often a sign that things are not going as well as expected.
- When looking at management, look for humility. Town talks about how a lack of humility will trickle down throughout the duration of their management. For some unique leaders, lacking humility can be replaced with passion and singularity of vision.
To hear more about deciphering shareholder letters, click the video.
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