For Investors -- March 12, 2022

Updates

March 21, 2022: a great example of what I'm talking about -- activist investor Engine No. 1.

• not one person on this team seems to have much of a resume;
• now, after disrupting XOM, urges more Permian production.

Original Post 

I've been having a friendly discussion with a reader with regard to the importance of reading and understanding financial statements when investing.

The reader suggests those who invest without reading and understanding financial statements are gamblers, not investors. 

At one time I would have agreed.

My best example why reading and understanding financial statements are fairly worthless these days:

Years ago I made my first significant investment in Exxon for our older daughter's portfolio. At the time she was in middle school or thereabouts, I suppose, and I was quite excited about my investment. The next day, the Exxon Valdez ran aground off the coast of Alaska and the rest is history.

Second example: 

OXY: anyone reading OXY's financial statement at the time Vicki Hollub flew to Omaha to meet with Warren Buffett would have sold OXY. The rest is history.

Third example:

In 1984, once could have bought AAPL for pennies, okay, maybe a few dollars, but looking at its financial statement would have never predicted where Apple, Inc, is today.

Today, while looking for something else, I ran across an old, old story with regard to one of my best mentors ever in the US military. 

He retired and went on to be a CEO of at least one, if not two more healthcare companies after he left the USAF. He has since "completely" retired as far as I know, although he probably still sits on at least one, if not several boards. I was curios how his the last company for which he was CEO was doing. I had never heard of the company. It does not look like it is doing particularly well, except maybe for the CEO and the board of directors. I did not go to the financial statements; I went to the "About Us" to see who the composition of the board of directors and read their bios. There were about twenty folks on the board. Not one of the bios impressed me. But this really, really stood out: this was a healthcare company and not one person on the board was a physician. I believer there may have been two individuals that had degrees in nursing. 

I am absolutely convinced that knowing the makeup of the board of directors is much more important than than reading and understanding the financial statements. 

Short term, geopolitical events and the economic environment will play a much bigger role than either financial statements and the board composition, but long term, the business model, the business plan, and the board are most important when deciding when and where to invest. 

Final example: if anyone has read and understood Berkshire Hathaway's financial statements for the past twenty years, that person is a much better person than I. As far as being a better investor, I do not know.

My bet is that the individual who has never read the BRK financial statement but has consistently invested, in good times and in bad, in BRK for the past twenty years has done much better than the individual who did would not invest in BRK unless having read the financial statement first.