One Industry Focus: Financials listener recently asked how investors should read 10-K and 10-Q filings by companies they're interested in. While you don't have to read every word of these 100-plus page documents, there are some parts that are particularly relevant to investors. In this segment, host Jason Moser and contributor Matt Frankel outline what's most important in these key filings.

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This video was recorded on June 3, 2019.

Jason Moser: We'll get that on the agenda. Well, let's take a turn over here to Twitter. We had a couple of questions that came in recently that you and I thought were really perfectly suited for this show. First up, we have Adil. Adil asks, "I wonder if you could do an episode on things to take note of and how to run through a 10-Q or 10-K to get the most out of it. I'm curious to hear how you guys do your thing and I'm sure it's a topic many other listeners would appreciate." Adil, I think that's a very good question! One of the things that we really stand for here at The Motley Fool is being able to help empower the individual investor to go do their own thing. You can find all of that information out there if you take a little time to do it. If you understand what you're looking for, and you can put together a little bit of a framework, you can become your own analyst in many cases.

So, Matt, why don't we start with you? When you're starting to look through a company's 10-Q or 10-K, what are some of the things that you do to get the most out of it?

Matt Frankel: I'll run through my top five. First, I want to make one distinction. A common misconception among investors is that the annual report and the 10-K are the same thing. They're not.

Moser: That's true.

Frankel: The annual report is the chairman's letter. It's about five or six pages long usually. It gives the state of the business. You see some nice, pretty graphs and stuff like that. The 10-K is the 100-plus pages of black and white that follows it.

Moser: That's the exciting stuff! That's the sexy reading for people like us!

Frankel: [laughs] It separates the casual investor from the educated investor, I'd say. So, step one, I would say read the annual report before you dive into the 10-K, because it's much more reader-friendly. I'd say 80% to 90% of what you need to know is in the annual report. You don't even really need the 10-K for most of it.

Having said that, I'll give you my top five. There's a bunch of different sections in the 10-K. Looking at it to give you an idea, Square's 10-K is 138 pages. It's not practical to read a 10-K for every company you're interested in. So just to narrow it down, the business description is usually about 10 pages long, but it's item one in a 10-K. It's very worthwhile to read, followed by the risk factors, which is the other part of item one. The business and its risk factors are two big, big things that every investor should read before buying a stock.

The section on legal proceedings is very telling, especially in the financial sector. I don't know any bank that doesn't have some type of legal exposure. The management discussion of the operations is my other big one to look at.

One that's not on most people's list, but I like to look at, is executive compensation -- I like to know a company's directors have the same interest as I do; that if I make money, they'll make money. Aligning our interests. I was looking through one company where the CEO only gets his full compensation package if the stock roughly doubled from current levels within a few years.

Right? And this was in the hundreds of millions that we're talking about. This is a big motivation in a lot of cases. And this is an outside-the-box thing to look at. This is buried toward the back of it. It's not usually in people's top few things to look at in a 10-K. But I always make a point to read that before I invest.

Moser: That's all very good stuff. What I will say, it's interesting, having been here for close to 10 years now, and ultimately, having served all of my time here on the investing team, and working as an investor to learn how to get better, one of the things we did -- we went through this program we have called the analyst development program. It was about 1 year and a half long, we did all sorts of things that really helped us not only learn to be good analysts, but good Foolish analysts. And a lot of it comes down to reading those SEC filings. The 10-Ks and 10-Qs are always helpful. The 10-K, which is once a year, 10-Qs are every quarter. Always helpful.

One thing we did in our analyst development class, we started this thing called the 10-K challenge, which ultimately was, we wanted to figure out a way to be able to look at a new company and determine as quickly as possible whether or not it's a company we wanted to continue looking at. As opposed to sinking all this time into research, and then having to deal with that sunk cost problem, trying to determine whether it's a company we needed to cut loose or not, we figured if we could give it one hour, comb through the 10-K to get a better idea of the business and whether it's one we really wanted to keep on learning more about, the 10-K challenge helped us do that. We would take literally one hour, and we would get a brief overview of the company, and like you said there, the description of the business, understanding how they make money. And then we would comb through not only that business description and how they make money, but the risks section as well, and any market data that they had, to get a better idea of the competitive landscape for the business, and anything that we might learn there. Ultimately, trying to answer the question, do we feel this is a good long-term business? Not just from the company perspective, but from the market's perspective in general? Is it a growing market opportunity that we're pursuing?

Trying to answer some of those very basic questions really helped us. It was a way to go through a lot of companies in a short period of time, and figure out whether they were companies we wanted to keep on researching, or whether it's a company we felt like we didn't understand and needed to go in the too-hard pile, or there were clearly things that we didn't like about it.

You also mentioned management compensation. I'll throw another SEC filing in there that you can look at to learn more about that stuff -- SEC form DEF 14A. That's a proxy statement that companies put out usually once a year. It has a lot of stuff in there regarding compensation, management, the boards and whatnot, governance. Another way to learn more about the company, as well.

Adil, I hope that helps. It's certainly a topic we could talk about for an entire show, but we won't do that.