How do you read a company’s annual report?

It’s a question I often get.

The renowned value investor Mohnish Pabrai was recently asked that exact question in a YouTube video. Luckily for us, he answered.

This is obviously very valuable information, as he is a gifted value investor and any insight into how he invests is a gem of wisdom.

Most people think that “reading an annual report” boils down to calculating the intrinsic value of the company.

 Mohnish Pabrai’s approach shows that this is far from the most important thing.

Here are five things he looks at before even diving into the financial numbers.

1. He Checks If Any of the Gurus Have Invested in It

Mohnish Pabrai admits to copying other value investors shamelessly.

He considers himself to be a good “cloner”.

The first thing he does when he gets a curious about a company is to check who has already invested in it.

“Hopefully someone smarter than me already who owns shares in the company,” he says.

This is a funny statement, as I think it’s hard to find anyone more intelligent than Mohnish Pabrai.

You can check whether some of the big value investors have invested in a company at www.gurufocus.com, www.dataroma.com or www.whalewisdom.com.

2. He Reads the Writeups about the Company

If the large value investors have shown interest in the company, there are probably also writeups online.

You can look up other value investors thoughts on a company at www.seekingalpha.com or at

What do they say about the company? Do you agree with the analyses? These are good places to start forming an opinion

3. He Reads All the Shareholder Letters

At the beginning of an annual report (or sometimes as a separate document) you will find a letter from the management to the shareholders, also referred to as the shareholder letter.

In this letter, the director and/or chairman of the board gives a broad overview of the year that passed and talks about what they are working towards in the future.

It gives a great bird’s eye view of the company’s development and future.

Mohnish Pabrai’s assistant collects all the previous shareholder letters in a PDF file, and then he starts reading them chronologically. I imagine that he reads them from a print-out.

I know he has his assistant print out all emails in the morning. He doesn’t seem keen on reading off a screen.

What should you look out for?

First of all, it’s important that the letters are honest and understandable.

It’s important that these letters are not written by a PR agency, but written in the management’s own language.

How can you tell the difference? You can tell from the style.

Does it sound like something someone would actually say, or does it sound like clichés?

If the letters are not intelligible, it’s a blinking warning light.

Maybe they’re hiding something from the shareholders?

Management must communicate honestly and in simple and straightforward language.

Secondly, you should look at whether the management can keep its promises to the shareholders.

Mohnish Pabrai investigates how the management and the company have performed in relation to what they promise in the letters.

Here you have to remember that they don’t know the future. For instance, the companies knew nothing about coronavirus and shutdowns when they filed accounts before COVID-19.

4. He Reads a Transcript of Their Earnings Calls

Shortly after a report, management answers questions from investors and analysts. You can find this on the company’s website under investor relations, with the header webcast or earnings call.

Mohnish Pabrai reads the transcript of all the earnings calls. He doesn’t say, but again I imagine that he has his assistant collect all of them in a PDF and print them, so he can go through them chronologically.

He browses through the initial presentation – which is mostly management’s repetition of the financials – and pays more attention to the Q&A part.

What does management say about the future and how honest are they when answering questions?

Does management tend to overpromise and underdeliver? Or underpromise and overdeliver?

It says a lot about what you can expect in the future.

5. He Looks at the Company’s Proxies

Mohnish Pabrai recommends that you read the company’s proxy statements.

In the proxies you can find the shareholders’ proposals for changes. 

These documents give you an idea of whether the company operates in a shareholder-friendly way.

You can usually find the company’s proxy statements on the company’s own website on the investor relations page.

Sometimes you find them under “other announcements” and other times they call them “proxies”.

For the US companies, you can also look them up on SEC.gov as DEF14A and DEFa14A notices.

And Then?

Only then does Mohnish Pabrai dive into the annual report itself to look at risk and competition and run through the numbers.

You can read much more about what to look for in an annual report in my e-book Free Yourself.

There I show you, among other things, how you can work out whether the company is worth more or less than what it is traded for on the stock exchange.

Don’t forget to download my e-book Free Yourself where you’ll learn to invest as one of the best – super charge yourself through the plateaus. You can download it here.

I have heard many stories about how badly it can affect private investors and their families when stocks plunge.

I’ve heard of heart palpitations at night, of panic over selling stocks at the wrong time, and of marriages breaking up because of financial arguments.

It doesn’t have to be that way at all. Stock market investing should give you peace of mind, and you can easily remain calm even if the stocks fall.

But how?

The short answer is that you need to have a strategy. You need to trust yourself that you know what you’re doing.

“I have a strategy,” you might say.

Are you really sure? Take a look at these ten typical signs to see if you recognize yourself.

1. You Get Worried When Stocks Dive

How do you react when stocks in general take a nosedive? Or when one of the stocks in your portfolio plunges? Do you get nervous? Worried?

Warren Buffett says that you have to have a special mindset and character to be a good stock market investor. 

But the truth is that a good strategy gives you a calm mindset and changes your spontaneous emotional reactions. It’s one of those “which came first, the chicken or the egg” things.

2. You Wake Up With Heart Palpitations

You sometimes wake up in the middle of the night with a feeling of restlessness in your body because you worry about your future financial situation – even on days when nothing special happens in the market. You might even feel your heart pounding.

This is wrong. It shouldn’t feel like that.

Your investments should make you sleep soundly and dream like Scrooge McDuck – of flying steaks with banknotes as wings. Because you know that you will be really wealthy ten years out.

3. You Cannot Explain Your Choice of Stocks

You don’t really know why you choose one company over another.

You just force yourself to choose something. You have no criteria to help you sort through the selection.

Maybe it was something you heard about on a podcast or on a financial TV show or read on Twitter. Maybe it was something you read in the newspaper. Maybe it was something your neighbor said. Maybe you can’t even remember.

4. Your Portfolio is Geographically Unbalanced 

What does the geographical distribution look like in your portfolio? How many local companies are there? If you’re from a small country like Denmark or Portugal (my home country and adopted country), it shouldn’t be more than 10%.

Why not?

Because both countries are small and shouldn’t take up too much space either, because your portfolio would end up completely skewed.

If you’re from the US, it’s different, because it’s a dominant market with a lot of market leaders, but you should still make sure that you don’t have 100% in one country – even if it’s the US.

Just click and look at the geographical spread. There’s a page on your platform that does an analysis (just like an x-ray) and tells you what percent you’re invested in each region or country.

5. Your Portfolio Is Overweight in One Sector

Speaking of unbalanced. Have you had a look at the x-ray of which sectors you are invested in? A lot of people have a tendency to repeat themselves and their former choices or successes.

Let’s say you want to invest in green companies. A lot of newbies – in particular women – approach the stock market with the objective of only investing in green companies.

Well, careful that you don’t go unreasonably overweight in windmills and solar power.

Are you a former IT engineer? Careful you don’t go all-in on tech stuff.

You should invest within your field of competence… but don’t invest yourself into a narrow pocket of society either.

6. You Don’t Know What You’ve Invested In

Can you tell me spontaneously what you’ve invested in? No? Do you not know?

Ouch. That’s not good… but it’s very normal, actually.

Some people leave the important decisions entirely to others – maybe to the bank or the pension company. They hand over major life-changing choices to someone else and don’t even look at what’s really going on.

7. You Can’t Remember What You Invested In

Maybe you made the investment decisions yourself… but then you let go of the reins. And now you can’t remember what you bought shares in.

That’s not a viable solution either.

You need to keep your portfolio up-to-date and to check that everything is going as it should.

You should open every quarterly statement, every annual report, listen to the earnings call and follow the news about the company you are invested in.

In fact, you should follow your money like a sports fanatic follows their favorite soccer team. Be a bit interested, engaged and even excited about the journey of your investment.

8. You Check Your Portfolio Too Often

Are you constantly looking to see if stocks are rising or falling?

It’s the company you’re supposed to follow, not the stock itself.

This is a sign that you don’t trust the process.

You’re like a child boiling an egg for the first time and hovering over the pot waiting for the water to boil.

Relax. Have a strategy and trust it.

9. The Quality of Your Life Depends on the Stock Market’s Mood

When stocks fall, you don’t want to go out for a nice meal. You suddenly don’t feel you can afford it.

But on days when things are going well, you order champagne and oysters.

That may be an exaggeration, but the trend is there. You save on days when you feel uncertain about what the market is doing and feel free and prosperous when the stock market is having a party.

10. You’re Alone With Your Money and Investment Decisions

You have no community around your investment strategy because you don’t have a strategy to gather around.

Therefore, you have not found any peers you can discuss investment decisions with.

The first step to learning more and building a like-minded community by joining my free Facebook group Managing Money Freedom right here. 

Don’t forget to download my e-book Free Yourself where you’ll learn about the strategy I use which is value investing. You can download it here.

Sometimes when I run, I think about how much running and stock market investing have in common.

Actually, running is super simple. You just have to put one foot in front of the other. It’s an effective form of exercise, and you can probably add a decade to your life if you make it a regular habit.

Why do relatively few people put on their running shoes regularly? Why don’t we all run every morning? It’s so easy and healthy, and who doesn’t want to add a decade to their life?

Why do so many people declare they will run, start with gusto on an early misty January morning, and get injured only to give up and later declare they hate running?

It’s due to a kind of exuberance, impatience and lack of strategy or a good plan.

In that sense, running really has a lot in common with investing.

Here are three of the things I’ve learned from running that I think you can transfer to stock market investing.

1. Start Small

The first mistake is wanting too much too fast.

When planning your first experience, be careful at the beginning. Put in too many kilometers during your first few weeks, and you’ll end up with an injury and drop it completely.

When I’ve had to start up again after an injury or pregnancy, I’ve followed the New York Road Runners’ running plan, and it always surprises me how easy it is. In the first week, you just run for one minute at a time with a two-minute break, for a total of twenty minutes.

The next week, you run for two minutes with a one-minute break in between. Then three minutes the following week, and so forth until you run a total of twenty minutes without any pauses.

But really, one minute.  That’s all you have to run in the beginning – and you slowly build up from there.

Some beginners eagerly jump into half an hour of nonstop running on their first go. They come back red in the face and with their heart thumping in their throat – and they did not enjoy it.

The lesson: You have to start small. One minute at a time. Without overexerting yourself. The same applies to buying shares. You should start small until you have more experience and feel comfortable. I call it “dipping your toe” in the stock. You simply buy shares for a thousand euros or dollars – or even less if that amount makes you nervous. Start at a pace where it feels easy-peasy.

2. Set a Moderate Pace

It could also be that you start with too intense a pace in a specific run and end up having to stop halfway due to a pain in your knee or a leg cramp.

It is so important to rein yourself in and start out at a calm and moderate pace.

I’ve run different races – half marathons and a marathon earlier in my life. I remember how it took a lot of effort to exercise self-discipline at the starting line. When you hear the starting pistol, the balloons go up, people are cheering, and you get excited and hyper. The adrenaline wants you to sprint. Maybe you even want to show off to friends and family (and yourself). Don’t. I’ve noticed one common rule: it’s those who manage to start calmly who reach the finish line. It’s always like that.

Lesson:

The same is true in stocks. You should go for a reasonable return – not something that sounds too fantastic. Those investors who think they’re just going to double their wealth in a few months end up running into huge setbacks on meme shares, crypto or some weird scam – maybe even with borrowed money.

Aim for a stable annual return of 10-15 %, and never invest more than you can afford to lose without it affecting your family.

3. Compounding Is Magic

We talk a lot about compounding in investing.

Einstein called it the 8th wonder of the world. But why is that?

Until you see a real-life example of what compounding means, you probably don’t understand how amazing it really is.

The first time I really got it was in my running training.

When training for a longer run, there’s a rule that you shouldn’t increase your number of weekly kilometers by more than 10% a week.

Let’s say you start out with 30 kilometers per week.

When you’re training for a big race, that’s nothing, and at first it feels like you’re getting nowhere by adding 10%.

It feels like you will NEVER run a marathon. During your first week, what you really feel like doing is getting up and running 30 kilometers on a single run and running 5 times a week.

It feels like walking on too short a leash to only run five kilometers at a time.

But just look at what happens over time if you add 10%.

For the first several weeks, you only add 3-4 kilometers a week.

Week 1: 33

Week 2: 36

Week 3: 40

Week 4: 44

Week 5: 48

Week 6: 53

Week 7: 58

Week 8: 64

Week 9: 71

Week 10: 78

Week 11: 86

Week 12: 94

Week 13:  104

Week 14: 114

Week 15: 125

Week 16: 138

Week 17:  152

Week 18: 167

Week 19: 183

Week 20: 202

Week 21: 222

 But already in week 9 you add seven kilometers and go from 64 to 71 km.

In week 21, you add 20 kilometers per week. Well, hallelujah!

After all, those 20 kilometers are close to what you started out being able to run per week. You go from 202 to 222 kilometers in week nine.

Every time I start a new running training, it amazes me how slow it feels at the beginning – and how it explodes later on. It’s called exponential growth, and you really feel it on a physical level when you’re counting your steps.

Lesson: That’s the magic of compound interest. It will feel slow at first – but with a steady pace and steady returns, it’ll really pick up after some time. This is also called the snowball effect. The most important thing in investing is not to lose money and end up behind where you started – which of course in the world of running would be equivalent to getting an injury and having to start all over again.

Have a Plan and a Coach

It’s fine to jog five kilometers a few times a week.

It will keep you healthy. I have done this for long periods, and it’s solid exercise.

But if you want to improve your performance, you need to have a plan for how you want to train for your race.

It pays to invest in a few running books, join a running club and maybe even hire a coach.

The most important thing is that you get the knowledge you need so you don’t make mistakes and get running injuries, for example by adding too many kilometers too quickly.

The same goes for investment. Knowledge and help make you a better investor.

Choose a strategy, make a plan and follow it – and get help.

In my e-book Free Yourself, you can learn much more about my strategy as a value investor. You can download it here.