Judging Annual Reports

Comments on “Check a Firm’s Health in Its Annual Report,” by John Deysher, CFA, in the June 2021 AAII Journal:

No mention was made of key executives’ exorbitant salaries and stock options that dilute shareholder financial reward, as well as shareholder say in voting for approval of these same executives’ proposed pay model. The companies justify this by comparing their pay packages to those of overpaid executives of other companies.

Another factor to be considered is whether the CEO is making public political and social comments. And executives make bonus quotas even in losing years, which is a little odd. Both factors reflect these individuals’ bloated sense of self-worth and are not in shareholders’ interests.

Contrast this to Berkshire Hathaway’s view of compensation and preaching to the public. It reflects the company management’s view of shareholder intelligence as much as color photos of board members and executives and company photos in the carefully designed report, which tend to deflect attention from the bottom line of performance.
—Thomas C. from Illinois

I have also noticed that the glossier the report, the less shareholders are valued as owners. In my opinion, ‘profit’ is rapidly becoming an artifact of twisty, but legal, bookkeeping manipulation. The larger the business, the less useful stated profit becomes because of international currency exposure, and sometimes a plan of ‘hide the peanut’ by not pulling profit home from subsidiaries is widely used to manipulate regulatory reports.

A quick look at debt level (rising or not and why), cash flow (rising is good), consistently raising dividend payouts and stable amounts of cash on hand can give a quick picture of a business’ health. Then you should carefully read the chairman’s letter.
—Blaine W. from Washington

Changes to Convertibles

Comment on “Inside Convertible Bonds: An Attractive Risk/Return Tradeoff,” by Brian Haughey, CFA, FRM, CAIA, in the June 2021 AAII Journal:

Readers should be aware that new issuance can change the composition of convertibles and the indexes, mutual funds and ETFs that follow them. I sold most of a retirement fund position in the iShares Convertible Bond ETF (ICVT) after it was up 50% in 2020. By year end, three of the top four positions were convertibles issued by Tesla. The current yield on the ETF is just 0.99% as of June 15, 2021, quite low by historical standards.
—Gerald C. from Massachusetts

Measuring the Long Run

Comments on “How Long Is a Long Run?,” by Craig Israelsen, Ph.D., in the June 2021 AAII Journal:

Does this analysis take into account the possibility of a stock starting out small and ending up large, or vice versa? Are the categories set at the time of purchase?
—Peter V. from Washington

Craig Israelsen responds:
Peter, the analysis used performance based on indexes, not individual stocks. The S&P 500 index, for example, is always a large-cap index. The Russell 2000 index is always a small-cap index. When individual companies in the Russell 2000 become mid-cap or large-cap stocks, they are moved out of the index.

Improving Robo-Adviser Offerings

Comments on “Robo-Adviser 2021 Innovations and Performance Drivers,” by Ken Schapiro, in the June 2021 AAII Journal:

This was quite useful to me. I’m an older investor, and I had no idea of the range of robo-adviser services available, their costs or performance. This will give me a new avenue to approach my children about the importance of investing and knowledge.
—Gregory D. from Tennessee

I have investigated several robo-advisers offered by the investment firms where I have accounts with the goal of estimating comparative returns over comparable periods. The information is always buried deep, and when you get there, you will find that the majority of investment vehicles are in-house. No surprise here.

To me the question every financial adviser has to answer is, “What do I get for the money I give you?” What surprised me was that the data for out-of-house investment alternatives (that were being used as industry benchmarks) outperformed the in-house offerings selected for use in the robo-adviser accounts.

Fiduciary responsibility should mean that with knowledge of any alternative investment that achieves better net performance, there is a responsibility to use it over their own offerings.

My advice to them is: 1) Improve your offerings to beat your competitors, 2) lower your fees to align with your inferior product offerings, 3) get rid of the bottom 10% of fund managers, as Jack Welch did, or 4) sell your business to someone who can better manage the assets.
—Barry J. from Texas