Investing Inception: The Minds of Management

Financial filings tell you exactly what concerns management. In order to have conviction, you need to trust management. What concerns management should concern you! A failure to mitigate risks will lead to reduced returns. Below is an example from Spotify. Daniel Ek is concerned about the below and so am I.

I use these filings is to look backwards and understand how management address these concerns. In the case of Spotify, they have taken action. A few examples would be the Joe Rogan deal, Megaphone/Ringer/Gimlet/Anchor acquisitions, launch of Marketplace, etc… Knowing what your risk factors are is one thing, solving for them is another. Own companies that accurately identify risk, then solve for it.

Another way to use these risk factors is to compare current risk factors to prior risk factors. Some are lifelong risks for companies, but others change as a company evolves over time. See below for Spotify’s risk factors from their first filing. You can track evolutions of companies by looking at the evolution of risk factors.

Square is another example of understanding a company through their risk factors. The below risk factor is always one of the first listed. Square is clearly a brand focused company, but they also have said exactly what they were going to do. Then Square did it. And Square will keep telling you their risks and plans for their risk factors.

When reviewing financial filings, risk factors jump out to me. The beauty of the risk factors are they apply to the past, present and future. You can understand what management has done to mitigate risk factors in the past, the actions they are taking now and the unsolved risk factors from the future.