Do you really need to read company accounts?

28th Mar '14 by PhilHofGrowYourDough

6 comments 14662 reads

A deliberately provocative title.

I've posted before indicating that I'm time poor with respect to share research. I don't have time or if I'm honest the interest to pour over company accounts. That's why I love Stockopedia as I believe it enables me to select cracking stocks with limited research.

So this might seem a bit shocking to some (sacraligious even) but to be perfectly frank this is how I select stocks ...

I run my screens
I then look at key metrics of the screened stocks (good eps growth, low peg, low pegr, increasing fy1/2 eps upgrades and low psr when compared to industry peers. If there's no growth i'll also look for good value, but still requiring fy1/2 upgrades and low psr)
I look at the trend and momentum of the stock.
If any pass these tests I'll look at the last two company reports scanning for positive and negative news (as per Naked Trader)
If all looks good I'll buy.

I don't go near the accounts and to be honest I might not even have a clear idea of the product the company is selling. Some reading this will be spitting their tea/coffee/brandy over their ipads at that last comment. I know and I'm prepared to acknowledge my weaknesses and I'm prepared to pay to my strengths. So I can't make sense of the accounts and I don't really want to be able to and if I did research a companies products I'd probably convince myself that I understood the business when in all likelihood I probably wouldn't (confirmation bias) so what's the point. I have better things to spend my time on.

I maintain notional stop losses and exit a stock on a change of trend/prolonged lack of momentum or on bad news.

Things that defend me against dodgy accounts and dodgy companies are my screening parameters. So I rely on Altman and Beneish scores, plus I only select stocks whose net debt < 3 x operating profits. Here's my base screen (http://www.stockopedia.com/screens/base-screen-14839/) that I fork for different scenarios.

These rules would have helped you avoid Kromek (LON:KMK) that disappointed today and I believe it would keep your hard earnt cash away from…

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Ben Hobson

28th Mar '14

There are plenty out there who agree with you on this. Frankly, sound rules and intelligent diversification will protect a portfolio from any single stock that does have a disaster. There are the 'hunters' who would think your statements sacrilege, but the 'farmers' out there will always agree with you. Ben Graham for one, Joel Greenblatt another. It's a good team backing you !

DLG12

Very sensible and very pragmatic comments. Fully agree with what you say although I have not always acted accordingly and usually to my cost, Kromek a point in case albeit a small holding. The full 'truth' is never always just in the accounts anyway. Otherwise this would be a very easy game.

cig

Where do you think the EPS, PEG, altman scores, net debt, etc come from? Broker estimates are also projections of accounting numbers, the input of which is published accounts. I don't think you can say you're not looking at the accounts, you're just looking at them indirectly via tools that process the numbers to a form that you find more convenient than the raw data.

A real non-accounting strategy would for example look only at the price (e.g. technical analysis) or only at the product (fundamental market analysis) and ignore completely accounting-derived information.

PhilHofGrowYourDough

Thanks for all of your comments so far.

Cig of course the data is derived from the accounts. However the argument that is frequently made here is that you should a) understand the product b) read the actual accounts (not just the data derived from it). Sorry if it diminishes the skills and knowledge of those with accountancy backgrounds but I just don't feel it is necessary to be able to read the accounts. This has in my humble opinion huge benefits for the wider investing community.

Mark Carter

Impressive performance. I'm green with envy! I like the diversification of sectors. Some funds that one can see on Stockopedia are sector-biased in the extreme (which basically means oil and gas), which seems kinda crazy to me.

Thanks Mark. I tend to deploy the bargepole with miners and oil stocks but I will entertain pick and shovel providers such as Spectrum ASA (OSL:SPU) (surveys) and Awilco Drilling (OSL:AWDR) (drilling rigs). It's also a shame that the funds here don't handle dividends as Awilco Drilling (OSL:AWDR) is currently yielding a delicious 21%.

Do you really need to read company accounts?

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PhilHofGrowYourDough

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