The 13 Steps to Investing Foolishly
Step 8: Get Financial Information

Selecting stocks on your own, without the safety net of an index fund, can be scary. But it can also be fun and very, very rewarding. You'll need to learn what kinds of companies to seek out, and then you'll have to evaluate them, to make sure they're moving in the right direction and are worthy of your trust.

Gather Information

No right-minded Fool (and what other kind is there, really?) would think of investing in a company based merely on cocktail-party chatter, a broker's recommendation, or even a discussion board overflowing with exuberance. Even if the company is one you've discovered on your own, you shouldn't just run out and buy shares of its stock. First, get your hands on the company's financial information, and get to know the situation thoroughly.

To start, call the company you're interested in, ask for the "Investor Relations" department, and request an "investor information packet." A full packet contains the following, all of which you want and should ask for:

• The Annual Report (most recent)
• The 10-K (most recent)
• The 10-Q (most recent)
• Press releases (all recent ones)
• Analysts' reports (any available up-to-date ones)

By the way -- are you wondering what all this is going to cost you? Nothing more than a holiday bottle of wine for your postal carrier who'll be delivering all the packets you order. These packets are free!

But hey, let's face it -- you're online. Nowadays, the Internet is really the place to do the best research. You can get a substantial amount of this information online. You can acquire all recent SEC filings, including company 10-Ks and 10-Qs, without ever leaving your keyboard. All you need to know is a company's ticker symbol to acquire news, financial snapshots, and estimates of future earnings. Whoops, maybe we're getting ahead of ourselves with that kind of talk. Sorry. Keep reading and we'll explain.

Learn About the Company

You've got the company's information packet. Let's have a look. The first thing you'll want to do is scan everything in order to get a sense of the company's mission, its products, its attitude, and its prospects. There are three main financial statements included:

• The Income Statement (or Statement of Operations)
• The Balance Sheet
• The Statement of Cash Flows

The easiest of the three is the income statement, which shows how much money the company made over the last year and its profit margins. Next up is the balance sheet, revealing how much cash, inventories, and debt the company has. The third and most complex piece is the statement of cash flows, revealing how much money the company is really making as it works through operations, makes investments, and borrows money.

When studying a company's financial statements, you should be able to determine how quickly sales are growing, how the company is financing its growth, whether it has taken on too much debt, how efficiently it's collecting its accounts receivable, how much profit it's making on its products and services, and all kinds of fascinating things like that.

You should also be paying attention to trends, to see if the firm's financial health is improving or declining. And finally, it's best to compare companies with their industry peers to see how they stack up.

These financial statements will also appear in the 10-Q and 10-K reports. The 10-K is issued once a year, along with the annual report, while 10-Qs are issued three times a year, at the end of the intervening quarters.

The 10-Q summarizes the company's quarterly performance. The 10-K is dedicated to a company's financials, not its story, and thus includes information you simply won't find in most annual reports, like insider stock holdings and brief biographies of the management team. The latter is of extreme interest to a Fool. We love to read about how the company chairman filed for personal bankruptcy in 1989, or graduated from our college.

Press releases are an even more frequent source of information on your company, and should be read and followed by hands-on investors. Those who prefer to keep up less frequently with their stocks can usually safely ignore press releases, and just catch the quarterly reports. Of course, this works much better with safer, bigger companies. If you own volatile small-cap growth stocks that move radically based on every new piece of information, it behooves you to plug into these things. Do keep in mind, of course, that press releases in general tend to put a positive spin on news, since they're issued by the company itself.

Analyst Reports

Most companies have been examined and analyzed by one or more financial analysts. These professionals, most often employees of brokerage houses, will write reports that include the analyst's opinion of the stock, as well as estimates of future earnings and other prognostications. This information is public. Assuming the company whose financial packet you've received has an analyst following it, one of these reports might be included in the packet. (If not, the company will provide you with analyst names and phone numbers, so you can call and make your own request.) Reading analyst reports can be a truly useful exercise.

For a Fool, some of the most valuable information in the report are the estimated earnings per share figures. (The better reports print estimates quarter-by-quarter.) By matching the analyst's quarterly estimates against the quarterly earnings announcements as they come out, investors can determine whether a business and its profits per share are meeting, exceeding, or underperforming analysts' expectations.

We at The Motley Fool love getting our hands on analyst reports, recognizing that analysts know a fair amount about how to evaluate a particular company's prospects for growth. Hey, it's their full-time job. And, while we don't accept every assertion made by any analyst, we think that confronting their analyses is a key ingredient to sharpening our understanding of the story of our companies.

Foolish Research Reports

In response to this situation, we at The Motley Fool are now providing an alternative to the analyst reports of Wall Street. Through our popular monthly Internet Report, our year-end Industry Focus, and our stock research reports, the Fool is producing research that is free of inside-the-Street code words (such as "Hold," which really means "Sell Now"). If you're interested in trying out some money-back-if-you're-not-satisfied Foolish research, check out what we offer.

Misinformation

We'd be remiss if we didn't mention one thing you may encounter in your quest for financial information -- and that is the "hot tip." The hot tip has many guises. It can appear as investment "information" or a "can't-miss opportunity" or "the chance to invest in a company that will revolutionize the industry." The pitch can take place on the Internet, in print, on the phone, or at a party. It may even take form on a discussion board.

We have one rule of thumb for such so-called "information": do your own research and make your own independent investment decisions. Never make an investment decision based on one of these hot tips. (For some advice on spotting investment scams, we've put together a primer on Securities Fraud: How to Avoid the Cons.)

Once you've gathered the information that you truly need, we'll show you what to do with it.

Next Step: Evaluating Businesses »

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