How to Read a 10-K in 20 Minutes (The Beginner Speedrun Checklist)

0:00Most people download a 10k and scroll for five minutes and inevitably quit because it's 100 pages of legal sounding suffering pain, you name it. It's just not cool. But there's a cheat code. And Andrew figured out this cheat code a long time ago and he won't share it with me. And I've been trying to decipher it since. So today we're going to talk about how you can speed run a 10k. And we're going to mainly talk about the only section, especially as a beginner, that you need to read. what questions you should be asking, what questions need to be answered, and I'm going to give you kind of a simple scorecard to make sure you got all the information you need out of it.

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2:47Stephen:You're tuned in to the Investing for Beginners podcast. Investing for Beginners podcast. The show for the long-term investor. We cut through the noise to focus on what works. Compounding, discipline, and the conviction to buy wonderful businesses and stick with them. Your path to financial freedom. Start now. And welcome back to the investing for beginners podcast. My name is Steven Morris and across from me is the amazing, the illustrious, the new father, Andrew sailor. And he's back and he's, you know, he's, we've already done one episode and he's got the cobwebs knocked off. Cause he was gone for like six months.

3:31So, you know, he should be cock lock ready to rock. Now you ready to go, Andrew? You ready to talk about some 10 K magic?

3:38Stephen:so i'm a three-time father now does that because you're you're one step above that so i haven't seen any benefit to becoming a three-time father yet but please tell me it's coming i think the only benefit to having like getting past like the first two kids is like nothing bothers you anymore nothing nothing embarrasses you but no i don't i don't know if there really is a benefit to a three-peat especially there is definitely no benefit to a four-peat so you know stop while you're ahead kidding if you're listening I love all four of you equally you're all amazing and I definitely don't have favorites wink wink Isabel anyway so today we're talking about the 10k and you know It's been a long time frustration, Andrew.

4:33When I watch you, you're screen sharing and you're going through a 10K. It's like, I don't know, you go into some cyborg mode, just tearing through the 10K. You're going through so fast. I can't even see where you're getting the numbers from. And I know a lot of that comes from just time and experience. but is there anything you would you you would if someone's new and maybe they've tried to look at a 10k and they're like nope screw this or they're just starting out like actually trying to read 10ks is there any like straight off the top advice before we get into like the actual practical steps of it that you would give a beginner yeah i would say there's some books

5:21Stephen:you don't read them like a book and i think a 10k would qualify like i would never take a dictionary and just say you know i'm gonna start at a and i'm gonna go all the way to z or yellow pages back in the day when we had those at 10k you don't have to read it front to back like you do a fiction book so don't try to do that because if you do i think it will drive you crazy so you're not you know you're not going to miss narrative or anything dire important to to your investment if you don't read every every paragraph uh you could but like it's just a risk you gotta take come on you can you can you can risk like missing one little detail in your in your if you start yeah you start knowing how to look and and um your chances of doing that are pretty small if you're there are there any key words you look for like when when you're going through like the business or anything like that is there any like key word that really stands out to you like kind of highlights itself as you're like skimming so this won't surprise you but i look for numbers numbers inside of paragraphs so like obviously you have numbers all scattered throughout the document but if there's numbers inside of paragraphs those to me could be like a little valuable gold underneath a rock they just need to unturn and you can get a lot of insight from that i know another uh keyword you look for is capital allocation that was actually what i was expecting you to say but numbers works too that that's a good little tidbit what exactly is a 10k can you like just define it for us real quick Yeah, so this is something if a stock trades on the NASDAQ or the NYSE, that means it's regulated by the SEC.

7:18Stephen:So they all have to file this 10k. If it's a foreign company, if they're going to trade on the NYSE, they have to do their version of that. So the reason for it is so that companies disclose the risks and present all the facts so that us as individual investors don't get swindled out of our money. I mean, a lot of us would probably get swindled at some point anyways, but the idea is to try to limit that as much as possible. And I think it's good to think about, like you talked in the last episode about how companies are machines, but they're also run with people inside of them. So just because maybe a company has a CEO with questionable morale, maybe he's delegated the 10K writing to somebody and they're more willing to disclose something that the CEO probably would never say.

8:15Stephen:And then you just have to look for that and that could maybe save you. so there's it's one of those things it's here to help us it's not here to beat us up and make us feel like we're on time out but uh just another way to try to level the playing field as much as can be possible for people like you and i yeah the the analogy i i came up with is think of it like a catholic confession uh the company is coming and saying forgive me investor for i have send and uh they're going to confess and disclose all the things that they've done with your money or want to do with your money so there are five basic i would say beginner areas you should read and to be perfectly transparent and honest the this was super easy for me to come up with because this is all I read.

9:10So, I mean, I don't know if Andrew goes much deeper than this. He may. But the first section that I always hit up, because you know me, I like the story. I want to know about the business. I want to know what it is that should make me fall in love with them as a business, because if I don't love them as a business, they don't get my money. So, which I don't know. I don't know. Is that a bad way to look at it, Andrew? Or is that solid, normal? I don't even know. What kind of investor am I? I don't know. I just had like a midlife investor crisis live on air right now.

9:51Stephen:Well, I think it would just mean you have to buy less companies. Like you're not out there trying to buy every different company. Like my strategy is completely different. I'm looking at the entire playing field. You might just select a few that you are very confident in. So like we always say that it's probably annoying at this point, but it depends on what type of investor you want to be. Who are you? What do you want to be? Go find yourself. Definitely. So that's where I start, Andrew. I start with the business. I want to know what they sell. I want to know how they make their money. and this is a very important process for me because at the end of this if I can't explain to my wife or one of my kids what the company is and why it makes money I stop like right then right there I don't go any further because that obviously means this business is outside of my circle of competence or it's just too hard for me to analyze and so it's not even worth going through the rest of the process for me that doesn't work for me uh do you want to know why because you like numbers no no like this actually happened yesterday um we had something on youtube and they mentioned snowflake so my wife was like what's snowflake so i just i don't know myself but like i just start throwing jargon at her like data lakes and data center and she's just like never mind so like i can't ever explain anything to her because she i've been doing this so long that she just immediately it just takes a couple words and she's out so i i can't use the the business explanation i have to find a different test i mean i said that like metaphorically like i don't i don't i don't deep dive into general dynamics and then go explain to katie what they They are in.

11:51It's just, can I? And yes, I can explain those things. So, I mean, but that's definitely where I want to stop because I feel like if I go past, for me, if I go past that, it's just going to be wasting my time. if i can't understand the basics i'm definitely not going to understand the more complex stuff and so at that point i'm just wasting my time and i might as well just move on to something that is in my wheelhouse um that can potentially make me money um where where does the business uh side fall for you for me it's one would you say that you hit that like last

12:34Stephen:but it's it's pretty up there um i'm usually in there first there's a few companies like some of the tech companies will just throw so much jargon i almost get mad about it they're like oh have you we have these five product lines of cx9 3072 like some of those can be bad but for the most part yeah the business section is a really great place to be definitely and uh so from there I move on to risk factors. I want to know what's going to break the business above all else. I'm looking for anything that's a reoccurring theme, any new regulation that's going to be coming down. And so like if you're investing in things like OpenAI or some of these other AI companies, that's something you, in my opinion, you should be watching very heavily because right now, AI is not regulated.

13:31But as Evan and I were talking about a couple episodes ago, now that AI is starting to make its way into finances, the government's going to have to regulate it. They won't have a choice. And so that regulation is really going to impact AI, I think. So that's something you should be looking at. Customer concentration, where their customer base is, how their customer base acts is huge, how cyclical their company is, supply chain, pricing pressures, all those things. Cat was a great example of pricing pressure. You know, if John Deere or Case or some of these other big companies start manipulating price, Cat kind of has to follow, and that would be a good example of pricing pressure.

14:24What about you, Andrew? What do you look for in risk management? And how important is that to you?

14:33Stephen:Very important. I would underline what you said about look at the supply chain. That's a very, very big one. When we talk about what's a company's competitive advantage, how sustainable is it? How strong are they? These companies have relative power with each other. A company like Costco has the absolute power. All their suppliers basically have to do whatever Costco wants because they hold those keys. So understanding, to me, that's a huge unlock in understanding how an industry is working. It's okay, what is their supply chain? What is their relationship with the vendors? I mentioned last episode about Foot Locker.

15:16Stephen:Foot Locker depends so heavily on Nike. he had something like 59 % before the acquisition of Dix. So you can really get a sense of who's pulling the strings and that's all going to play an impact on your margins. It's going to play an impact on lots of things. And so supply chain is huge. The risk factors is tricky because there's a lot of the jargon in there that if you're just reading it for the first time, you're like, oh my goodness, this is so much information. but the more you read them, the more you'll start to recognize they all sound the same. And so what I look for in the risk factors is what's different from all the other 10Ks.

15:58Stephen:So every 10K is going to talk about like we have cybersecurity risks or we have the threat of AI. Now, like every time there's a crisis and it always becomes the new risk factor for a time it was pandemic, we are exposed to macro disruptions from pandemics. It's like, okay, we can all skip past that. But you look for the things that are unique to this specific business, to this specific industry. I will be curious to see, talking about Apple again, I saw something, I think it was Wall Street Journal said the cost of memory for these iPhones went from something like$50 to like$200. And you're going to start to see those rolled out on the iPhone 18.

16:44Stephen:And so what does that do to the industry? And if there's industry headwinds for all smartphone makers, does that make Apple stand out even more? Because they are the premium. And so they'll look even better compared to weaker players? Or does it just completely decimate the entire industry. It's all stuff to watch and stuff that you can look at. Don't quote me on it, but I would guess if you looked at what does Apple say about their supply chain, probably something about memory chips is in there. And I know for a fact, semiconductors, but they will talk about what are the key pieces of our business that without these key pieces, our business can't run.

17:27Stephen:And you look for those things because as we all understand, if you've been in the market for a while, parts of the economy break, things change very rapidly, tariffs and shortages, those things all happen. So it's good to be on top of how those things affect your company because you can decide whether things are structural or temporary and then things of that nature. I'm excited to share our friends over at the Plink app released a major upgrade featuring a sleek new look, real-time insights, smoother trades, and tools that help you feel more confident with every move. Here's the bonus I think you'll love.

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19:43Stephen:terms apply cash app is a financial services platform now the bank banking services provided by cash apps bank partners bitcoin services provided by block inc brand for additional information see the bitcoin disclosures at cash.app slash legal slash podcast what's the best way to get started in the market download my ebook for free at stockmarketpdf.com yeah absolutely and i mean to sum it all up i would say risk factors are just management telling you what is coming that's either going to surprise them or hurt them um and that could be a a long long long the laundry wrist man long long long laundry rip i give up i quit andrew can you take it from here moving on to mdna i'm done anyway i'm kidding i'm kidding it's a long laundry list of things that it could possibly be And like Andrew said, I think that was like the main point is it's what you want to pay attention to is going to be very specific to that company.

20:51I mentioned AI and regulation like that is very, very specific. You may be looking at some sort of like gun manufacturer. Regulation would be very, very, very specific. And these are all things you want to look out for in those risk factors. So we're going to be moving on to in DNA, which stands for management discussions and analysis. And really what you're looking for here is they're going to be talking about revenue drivers. They're going to be talking about things that are going to change in their margin. They're talking about costs, cost of goods. They're going to be talking about segment performances.

21:34and you're going to look for clear explanations. And one of the things I've learned very, very quickly when I was reading this is sometimes some of these CEOs sound like they are running for president. Like it sounds very, very political. And it's like, I'm sure, and I know all of you know exactly what I'm talking about. a politician like they're like you know what is your stance on you know selling ice to eskimos in alaska um and they're they don't answer it like they give you a whole bunch of words and you're just like i still don't know how you feel about selling ice like what and so i mean i've noticed that some of these ceos they sound like that they they give you a whole lot of words and absolutely zero answers so that is the main thing i look for like the very first thing i look for is if i can catch them doing that because to me that to me that's a huge red flag because they're they're being dishonest to me um i don't know andrew is is that like a hot take or is that how all investors

22:46Stephen:feel i don't know how all investors feel i i think that's pretty spicy i think it's a really take yeah yeah like to me it's a huge turnoff man like if if if i feel like they're trying to be shady for a second like it's like well we'll see but it doesn't mean it's a no for me but it does mean like i'm going to watch you very carefully and i will not hesitate for a second to pull my money away if i start to get uncomfortable because i think you're you're trying to hide something and And I mean, like, you know, a great example, I don't know if it's a great example because I really don't know a lot about the company and I know what happened.

23:32But Enron, like a lot of investors lost their lunches in that. And it was all because of accounting magic and just a lot of fancy talk from leadership.

23:46Stephen:Yeah, it was a big black box. Nobody knew what was really going on. Definitely. And I don't, I do not want that to be me. I guess maybe I'm being super paranoid. I don't know. How do you look at it in DNA? Yeah. I look for, like you were saying, explanations on why numbers are moving like they are. If the numbers look good, I want to know why. Was it because we increased price? Was it because we had higher volume? We were able to sell more iPhones. those are the types of things that'll be in the mdna also to your point when things don't go well i've mentioned before on the podcast and so this can be a tool that you put in your kit for later if you want um i mentioned how i sold starbucks because in the mdna they would always say how um our operating we're having operating d leverage basically their margins or profit margins are lower.

24:47Stephen:And they set it every year for like five years straight and had the exact same explanation. So when you read it for the first time, you're like, Oh, that sounds reasonable. You know, this sounds like, Oh, just you thought they'll get past this, but you go back in time and they've said it every single time. So you can use BamSec or a tool like that to search through and look at the different MDNAs back to back to back to back and see if they're using the exact same excuse over and over and over again and um to your point if they're doing something like that then you're you're like okay like you're you're not being dishonest but you're also not being honest so it makes you question where your money is for sure they're being a politician there that and that's like it's one of those things like i'm sure you're married i'm sure in your relationship or in your marriage, like you, you, you didn't lie, but you also didn't disclose.

25:46And like, I would imagine that if Kim is anything like Katie, like she was ticked and like, like I'm trying to be the politician. I'm like, but I didn't say, but I mean, it doesn't matter. It's still dishonest in my opinion. Anyway. um i would rather the bad news if we're hey we lost money because we lost uh you know uh whatever we lost um uh market market space to you know the google pixel phone so so we lost we lost to that or whatever it is you know we had to raise prices too much because semiconductors got too expensive because China's threatening Taiwan again or whatever. I don't care. Just tell me the truth.

26:38I would rather know that we lost money for a legitimate reason to hear your political spin. And that just leaves me with more questions than answers. And so now I'm uncomfortable and more than likely I will take my money elsewhere to a company. And I feel like I can trust. that's just me um to each their own i don't know but yeah that's that's definitely how i look at it so we've covered the business that's the first place i go um the next place i go are the risk factors so in the business i'm learning about um can you know just how they who they are how they make their money um and the risk factors i'm looking for anything that can disrupt them So in DNA, main thing I'm looking for are the reasons for the results that we have.

27:26The next place we go is Andrew's personal favorite, and that is the financial statement and the numbers. And this is really how you determine everything you've read up to this point. For me, it's like, OK, so I've read all this stuff and I go to the financials and I get to determine for myself everything they said was true. yeah do you have um parts of it that you try to highlight um what do you mean like when you look at financials um one of the one of the things i want to look for first is debt um i want to know how much debt they have compared to um how much revenue they're bringing in um i learned that lesson when we were digging deep into our favorite company to bash on sunrun um and just how insane the amount of debt they have um compared to how much they make like it's i made the joke it's like you're you're paying off a credit card with a credit card um it's insane um and so i learned i learned that lesson from that whole experience and it's like okay so i can tell a lot from just how much debt they're accuring and you know if they haven't told me what they're using it for then instant red flag and we got to go figure some stuff out yeah what about you what do you highlight yeah i highlight that um margins honestly i look at

29:07Stephen:fiscal and I use that to get the numbers picture before going deeper into using the 10k I like to use the 10k for filling out a DCF um but yeah you can use fiscal for that usually why do you prefer to use fiscal so you can actually visually see like in a chart

29:34Stephen:yeah and i don't have to like copy paste stuff or or i know i like to do that if i'm doing like roic but for very basic like profit margins or growth rate like i don't feel like i need to copy paste or go through the numbers as closely so i'd rather just have something really quick i and check so and do you start with that like that's where you start isn't it like you'll start in fiscal looking at their numbers and then once once you've determined like okay i'm satisfied with numbers then you go that's where you go and start to look at the business and all that stuff yeah so i mean you know reverse process work works the same i don't know i guess it's just way different because i don't know if it's like the side of our brain that we use if you're more analytical than i am um but i definitely am more story driven than i am number driven um and like i said the andrew like you know a company can have a really really bad year or we talked about crocs last um uh last episode i'm not mad about the hey dude thing they made a bad decision.

30:51Like that happens. Like now if they do it again, then now that, then that's when I'll start thinking, okay, maybe, maybe I need to sell this, but you know, I, the story to me is far more important than the raw numbers, because I've, I feel like if you, for me anyway, if I look at just the raw numbers um it becomes too black and white with no room for gray and i feel like a lot of stocks actually live in the gray i totally could be wrong and if i'm wrong you know send all your emails to andrew say they're at but um i mean that's just how i look at it i don't know if that's right or wrong or not.

31:41Stephen:It's weird just how different things have been in just a couple years time where I'm using a very similar process from a numbers perspective. And a couple years ago, maybe even last year, it was to a point where every stock was so expensive that the black and whiteness of the numbers was crippling because it was like there was no opportunities. But now that so many stocks have been beaten up this year, there's like, it's flashing green everywhere you look, that the numbers are no longer restricting. So it's just, it's weird to me that we've seen such a difference based on where the market has gone.