Information Overload?

Julie Barnum, Global Director, Credit

Springtime. What a wonderful time of year. The tulips, daffodils, and azaleas are bursting with color, and so is my mailbox. It’s annual report season, and almost every day I get lovely slick, or not so slick, annual reports in the mail.

Some are printed on very fine paper – about the consistency of toilet paper. Others are printed on heavy glossy paper and have lots of photos showing the people that work at the company and the wonderful products they produce. What is the difference? The toilet paper companies are not doing so well. Have a look at AOL Time Warner’s thinly paged annual report – only a mere $100 billion of write-offs since the merger.

I happen to be one of those old fashioned investors that pick stocks individually. I still have the standard 401K that is invested in the magnanimous mutual funds, but my passion is for my little babies that I’ve picked myself. But it is getting to be more work all the time, and one reason is the information overload.

I wonder how many other investors are as frazzled as I am by the sheer amount of information. The other evening I performed a very unscientific experiment. I looked at 25 different annual reports and their accompanying proxies, and the total number of printed pages was 2,992! That’s an average of 119.68 pages per company! This does not even include 10Q’s and 8K’s, which probably add another 50 pages per company per year.

I do love to read, but a 300-page novel is much more interesting than the blah blah blah in these annual reports and proxy statements. Some even read like the Iraqi report to the weapons inspectors – a mere 17, 000 pages. How can an average investor or analyst consume and digest all this information?

My award this year goes to Bristol Myers Squibb’s annual report – a reasonable 61 pages with a proxy statement of 54 pages. What about the 217 pages in the amended 10K’s? My other winners this year were Novartis with a 158 page annual report while Home Depot only had 45 pages of glossy stuff.

Have we gone overboard in these statements? Yes. Why can’t a company tell you what they do, how they did financially, and what they think the prospects are for the future? Why barrage the analyst or the investor with so much minutia that one can’t see the forest for the trees? As an analyst, I know the juicy bits are in the footnotes, but almost 3,000 pages for 25 companies? I’d rather read a good Danielle Steel novel.

What can be done so the investing public has some faith in capitalism? Take out the boiler plate and speak plain English! Let the Chairman’s Statement really mean something and the Management Discussion and Analysis not repeat what’s in the notes. How about some accountability and honesty. Stop hiding behind accounting conventions and let us know how you have really done.

For example, consider Amerco’s (aka U-Haul) 2001 annual report. Hidden in the footnotes are numerous early warning signs. Amerco changed its depreciation method which increased net earnings by $3,088,000. This little accounting change increased earnings for the year a mere 62%. Interesting information is found in the notes.

Another clever trick is redoing cash flow. Forget about EBITDA, the magic charm word of Wall Street. Does EBITDA pay the bills, the bank, and the investors? Why does the market continue to use this measure of so-called cash flow when the figure itself is deceptive? When did EBIT become EBITDA? Adding back Depreciation and Amortization was the Street’s little trick in the 90’s to increase “cash flow” by duping investors and analysts into a false comfort zone about a firm’s earnings. It’s all there in the numbers – you just have to do some simple math to figure out where the cash came from and where it’s going.

I may be dreaming – but I still believe that most companies are really trying to make an honest buck and let their investors know how they did last year. As an analyst, I will always have a skeptical eye, and I will probably read most of the reports as my eye is trained to ignore most of the blah blah.

But to quote Berkshire Hathaway’s 2002 annual report, “To state things simply, we try to give you in the annual report the numbers and other information that really matter.” All done in a total of 78 pages, with 21 of them being a very informative and straightforward letter from Warren Buffet.

Now I have to sit down and make some hard choices – Bristol Myers Squibb or Danielle Steel?