Episode #94: Michelle Leder, footnoted*, “There Are Some Companies That We Know Are Sort Of Bad Eggs”
Guest: Michelle Leder is an author, reporter, and SEC filings expert. She is also an entrepreneur, having started the research website, footnoted*, which focuses on the actionable details that really matter in the hundreds of thousands of pages that are filed with the SEC day in and day out. Leder and her team of analysts then start to build a mosaic based on multiple filings to provide insight that is typically three to six months ahead of the market.
Date Recorded: 2/15/18 | Run-Time: 50:03
Summary: We start with Michelle’s background. She was a business journalist – a self-professed “document geek.” She wrote the book Financial Fine Print: Uncovering a Company’s True Value and decided to launch a website as an accompaniment to the book. Here we are, 15 years later.
Meb asks Michelle to give an overview of what she’s looking for in the various filings. She tells us that changes are important. She doesn’t necessarily look closely at the numbers because it’s more about the language. Also, the forward-looking statements can be big. Michelle mentions an example of one that used a significant amount of extra language.
This dovetails into a discussion about the process – is it a keyword search or is there software? Michelle uses both, as keywords alone don’t always work. She gives the example of when Goldman Sachs was subpoenaed, the language used to describe it in the filings was something like “an invitation to respond to the DOJ.”
Meb asks for examples of red flag behavior in the filings. Michelle looks for unusual compensation or stock grant amounts. Also, lots of extra language used to describe earnings or adjusted EBITDA. She mentions a company called GT Advanced Technology, which used to be an Apple supplier. In one particular filing, they added new disclosure language, identifying their dependence on Apple, and their vulnerability if that relationship soured. Some time thereafter, Apple ended the relationship.
Next, Meb and Michelle discuss the “Friday Night Dump.” This is the 90 minutes after market close on Friday, when there’s no major trading. Companies tend to dump all their bad info here. Michelle mentions recent examples using Tesla and Wynn. But her most memorable disclosure dump was Chesapeake Energy, revealing it had paid over $12M for a map collection.
Meb asks if Michelle has ever been contacted by a company she’s profiled, trying to defend or explain itself. She mentions Dell. Apparently, the company once purchased a company from Dell’s own brother and something seemed a tad off. After Michelle covered it, Dell reached out to tell her she had gotten it all wrong.
This is a fun episode with plenty more in it – what sort of time commitment this would take the average investor… the atmospheric changes Michelle has seen in the last 10-15 years… the story of Meb stealing someone else’s disclosure language for his own blog but forgetting to remove the other company’s name…
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Links from the Episode:
- 0:50 – Welcome and introduction to Michelle, author of Financial Fine Print: Uncovering a Company’s True Value and Founder of footnoted*.
- 2:36 – Michelle’spath to where she is today
- 4:57 – Overview on filings and the information that Michelle is looking for when reading them
- 5:24 – Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports– Schilit & Perler
- 7:02 – Michelle’s process for determining what to look at
- 9:04 – Broad categories that Michelle focuses in on
- 10:38 – What tools are they using
- 12:51 – What are some of the regular red flags that she comes across in her research
- 17:41 – The Friday night dump of information
- 22:35 – Memorable disclosures
- 24:08 – Deep dive into Proxy filings with the SEC
- 26:30 – Michelle’s process for writing and publishing on the site
- 27:44 – PremosocialFootnotedFND (Premium)
- 28:49 – Extreme reactions to disclosures that Michelle writes about
- 30:45 – Do companies respond to content on the site
- 32:32 – Qwest CEO video
- 33:28 – Advice to retail investors who want to follow the SEC filings of companies they invest in
- 36:46 – Changes Michelle has seen over the last 10-15 years
- 40:40 – Interesting disclosures in the present day
- 42:15 – Does Twitter deserve points for creativity? (Premium)
- 45:34 – Finding positive in the filings too
- 47:38 – What does the future of her industry look
- 48:50 – How to follow Michelle – @footnoted, footnoted*, FootnotedFND(Premium feature)
Transcript of Episode 94:
Welcome Message: Welcome to “The Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the Co-Founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: Welcome, podcast listeners. Today we have an awesome, different kind of show for you, but it might just be one of our most actionable episodes ever. Our guest is an author, a reporter, and SEC filings expert. She runs a business that focuses on scouring the hundreds of thousands of pages that are filled with the SEC day in and day out, sniffing out the actionable details that really mattered to your portfolio. She’s author of the book
“Financial Fine Print” and the founder of footnoted*. Welcome, Michelle Leder.
Michelle: Hey, thanks for having me.
Meb: So, Michelle, as a former New Yorker, I mean, you’ve been in Los Angeles for how long now? Has it gone on 5, 10 years?
Michelle: Not quite 10. It’s five. I just punched my five-year card. It was actually…my anniversary was February 3rd.
Meb: That means you’re officially in Angelino now.
Michelle: I refer to highways the 2 or the 10 or, you know.
Meb: Four-O-five. Well, as someone who lives west of the 405 and lives in any neighbourhood in LA, you start to learn about the challenges of getting around this city but… So have you fully adapted at this point? I mean, have you figured out this city? Are you full transplant at this point?
Michelle: Oh, I wouldn’t quite go that far. I still…yeah. I mean, there’s things I like about it, like, I love, right now, I have the oranges, and the grapefruit are in season in my backyard, and I have to say I like being able to go out there in February and pick an orange and a grapefruit, you know, off a tree. Can’t do that in New York.
Meb: Found any good pizza yet?
Michelle: Not so much on the pizza, yeah. I have to say I haven’t found such great pizza yet. I keep trying.
Meb: You know, there’s a Brooklyn transplant coming called, I think it’s Roberta’s, to somewhere on the west side that’s pretty awesome. And there’s one in your office. So when you come down your office, we’ll do another lunch hang out, and we’ll take you to this one that’s supposedly one of the best in LA.
All right, enough about pizza. Let’s get started. So give me a little background. Let’s go back in time. I don’t know that I know the answer of how you got to kind of where you are today. So maybe give us a little bit of what your path was to eventually starting your own company and footnoted*, and maybe describe in your words. Give us a little overview.
Michelle: Yeah, I mean, you know, I like to joke that everyone has a hobby, and mine seems to be reading SEC filings. So, you know, I started, you know, the first 10 years of my career I was a business journalist, working for different newspapers. And one of the things I like to say is I was smart enough to get out of daily journalism when I could still get out. Because, you know, right now it’s, of course, papers are really struggling and it’s really kind of sad to see what’s going on at different newspapers, especially here in LA at the LA Times. I mean, just, you know, every time you pick it up, it just seems like it’s worse and worse. Although, hopefully, the new owner will help with some things there. Who knows?
But, yeah, I spent the first 10 years working for different daily newspapers. I was always sort of a bit of a document geek. I always loved reading, you know, I mean, one of my early jobs was in Florida and just going to the courthouse and reading court records. And I would get some great stories out of that, just reading some of that stuff and trying to figure out what was going on there.
And, you know, SEC filings was one of my early things that I just like to read. I mean, they’re just publicly available. Nobody’s really paying much attention to them. And so I figured that person could be me. And so it is, and so I started, you know, I’ve been doing…it kind of grew out of my, you know, journalism, was doing this document reporting.
And then, eventually, I started a business out of it. It wasn’t quite that seamless, of course. When I first started the site, and I like to think of myself as almost a grandmother when it comes to financial blogs, which is how footnoted* really started because I started all the way back in 2003 when I wrote the book “Financial Fine Print.” So it was really just meant to be a part of the book, really, you know, continuing conversation related to the book. And I started the site, and 15 years later, we’re still plugging away, still reading SEC filings.
Meb: That’s the biggest compliment you can give a writer or an entrepreneur in general is, we often say, is just surviving. And if you think back to the…we were a little bit later vintage. I think I started writing the blog in, like, 2005 or ’06, but it’s a compliment to even still be around.
So, okay. So tell me a little bit about footnoted*. So let’s get started. So I’m a huge quant, but, you know, historically filings, and the accounting side, and everything else involved has been not something I focused as much on. I remember going back to college, though, and going through a security analysis class where we were looking through a lot of these filings and trying to find red flags. And I’m pretty sure the case study was Lucent Technologies. But a lot of it was based on the old book “Financial Shenanigans” by Schilit. And so give us maybe a quick broad overview on filings in general, but also what kind of information you’re looking for, and how did this kind of evolve of what are you writing about. And what are you looking for and what are you writing about in these filings?
Michelle: Yeah, I mean, so there’s a lot of, you know, there’s a couple of key filings that you wanna pay attention to that we tend to pay close attention to on the site. So, you know, right now, of course, you know, we’re kind of at the height of 10K season. Those filings are due on or around the first week in March. I think the date this year is, don’t quote me on it, but I think it’s, like, March 4th is when the filings are due. You know, they’re due 60 days after the end of the calendar year. And, of course, a lot of companies are on a calendar, you know, on a December 31st year. So I think the filing deadline this year is… Actually, I think it’s actually 6th of February because they count out holidays and stuff like that.
You’re seeing a lot of 10Ks right now. Yesterday, actually, Valentine’s Day, I should say, was actually the busiest day at the SEC for filings because you had all sorts of different filings coming in. You had a lot of 13X, which I know a lot of people pay attention to. Those are the disclosures that the large hedge funds update once a quarter. And those are due, you know, on or around the 14th…15th of the month. So you have a lot of those filings 45 days after the end of the quarter, I should say. So, actually, the EDGAR website crashed yesterday. It was so busy for filings that, you know, it crashed on Valentine’s Day.
Meb: That’s funny.
Michelle: Happy Valentine’s Day to the SEC.
Meb: All right. So take me through the process a little bit. Is there a certain universe of companies you’re looking at? Is it a certain watch list or are you kind of updating it at requests of investors and subscribers? Do you print all these suckers out and sit in your reclining chair by the fire and read these or you… What’s kind of the process for how you go through this? Because it seems to me like it would just be a massive amount of information. Talk to us a little bit about how you go about it.
Michelle: Yeah, well, not the fireplace. I sometimes sit out in the backyard, though, and, you know, read the filings. That’s the beauty of the LA weather. You know, I don’t print things out, you know. I think that would just be a giant waste of trees. I know some people, you know, some very smart people do print out actual filings and kind of mark them up and highlight them on everything. And, you know, I think that’s certainly a method, but I think that the way that I read filings, that would just be kind of lunacy. And it would, you know, really waste a lot of trees.
So what we’re looking at is, you know, it’s a little bit of both. I mean, there’s some companies that we know are sort of, let’s call them bad eggs, right? We just know that they tend to be more aggressive when it comes to the filings. It’s just some sort of leaned knowledge that we have based on, you know, having been doing this for 15 years now. And, you know, so there’s some companies that will pay a lot closer attention to. For example, it could be a company that we know to be sort of aggressive, it could be a company that we’ve written, that we flagged a lot recently, and so we want to make sure that we’re looking at every single one of their filings.
In general, we are looking at a lot of filings roughly, I would say, anything within the Russell 3000 is more or less fair game. We tend to draw a line at about $1 billion in market cap, although we will go below is for certain names and certain companies, of course. But we don’t tend to look at a lot of the filings for, like, you know, OTC companies. It’s very, very rare that will go like sub $250 million in market cap, for example.
Meb: And so out of what you’re looking for, talk to me a little bit about the broad categories. Because I know you look at lots of things, whether it’s board and pay issues, or financial disclosure, maybe operational issues, probes, lawsuits, crises, all that good stuff. What’s kind of the main checklist of things that you’re going through in these filings and really looking for?
Michelle: You know, we like to look a lot. Obviously, the changes are important. So if a company, you know, it’s all really about the language. I think a lot of people often think that we’re looking at the numbers pretty intensively, but we actually don’t pay as close attention to the numbers. We’re looking at, really, the language that the companies are using to describe the numbers, hence the name footnoted*, right. We’re looking at the footnotes. So footnotes are usually language used to describe the numbers that they’re just, you know, that they’re explaining because the numbers can’t exactly speak for themselves.
And so, you know, we do a lot of that. And one of the things that we find is that, you know, changes, of course. I mean, I was looking at a company the other day, and one area that we spent a lot of time looking at is, like, the, especially at this time of year with earnings coming out, is the forward-looking statements. And so companies will put long amounts of language to explain their forward-looking statements. And so we like to look at the changes that the companies do there. So I can’t remember the name of the company right now, but one company we were looking at had a lot of extra language in there about their forward-looking statements. And that certainly prompted us to take a closer look at it.
Meb: Are you using, say software, to kind of compare prior versions? Are you doing keyword searches?
Michelle: Both. Both keyword searches and also software that allows you to compare, you know, changes easily. There’s any number of different systems that allow you to kind of closely look at what changes have been made, you know, whether it’s a black line version. I mean, there’s a number of different services that allow you to do that pretty easily. So we’re looking at that.
But we’re also looking at words, I mean…But, you know, as I like to talk about when I do presentations, language, especially, you know, the English language or really, quite frankly, any language, I’m not a linguist, per se, but language is very malleable. And so there’s a lot of different ways to say the same type of thing. And so, you know, one of the examples I’ve often given when I’ve done the presentation is, you know, if the company chooses to describe a different, you know…use a different word to describe something, and you’re only looking for word. Let’s say you’re looking for the word subpoena, and a company uses a different language, you’re not going to find that because the word subpoena is missing.
And so, you know, it’s actually kind of a funny situation, I believe it was Goldman Sachs a couple of years ago. Instead of using the word subpoena, they did something like, “We received an invitation to respond to the DOJ.” So, you know, an invitation to respond…
Michelle: …is not like, “Hey, can you make it to my 40th birthday party?” It’s not like an Evite, you know. If you get an invitation to respond to the DOJ, I’m pretty sure, now I’m not a lawyer, but I’m pretty sure that that’s not a voluntary situation that, you know, you can blow off if you don’t feel like it.
Meb: That’s like describing bankruptcy. You’re saying, “The bank invited us to pay some of our bills last month.” That’s funny.
Michelle: You have to remember that these filings, they’re written by lawyer. And, you know, I’m sure, not to, you know, say anything too negative about lawyers, but basically, you know, most lawyers are paid to massage with English language or whatever language they happen to be writing. I’m sure it’s not unique to, you know, English speaking, you know, lawyers. It’s basically meant to massage the language and make things look a little bit less innocuous, a little less serious, I guess, or a little more innocuous than they otherwise might be.
Meb: Give me maybe an example of some of the, you know…I mean, you’ve done this so many times, and there has to be just some hair pulling out, disclosures and crazy things. Maybe walk us through a couple examples of some things you’ve seen, or maybe suggestions on, you know, kind of what to look for when you’re saying, you know, it can be the absurd, it can be the egregious, it can be even anything that’s ever, you know, surprised you or just kind of… What’s a normal thing that pops out that you say, “Yup, red flag?”
Michelle: I mean, I think, you know, obviously, there’s a lot of different areas. So, I mean, you know, if you’re looking at compensation and you see unusual compensation or an unusual stock grant, that will jump out at me. If you see, you know, a lot of extra language to describe their earnings or you start seeing, like, adjusted EBITDA or, like, you know, what looks like a gymnastic routine to describe someone’s earnings.
You know, there was another company I was looking at the other day. It was like, “Well, we define adjusted EBITDA as this except, you know…” I mean, the list of exemptions that they were including, it was just like, “Okay, well, I would be a millionaire if I didn’t include my mortgage payment and, you know, my kids’ school and my kid, you know, the baseball practice.”
And, like, you know…I mean, it just seems like if you’re gonna deduct every single thing and not count that as an actual expense, or, you know, if you count it as an exceptional expense, then it just kind of raises questions about what is the point of the business…or not the point of the business, but, like, what…It just seems like unusual to me if you start deducting all sorts of different things that most people would consider to be a routine business expense. I mean, you know, rent is a routine business expense. Why was this company not counting rent?
Meb: On kind of the scale of reddest of red flags to kind of pink flags, which aren’t so bad, but, you know…I’m thinking from the investor’s standpoint on things that may move or drive a stock. What’s kind of like the worst things you see? Because, like, the board compensation or something, it may be something you’re like, “You know what, that’s unfortunate. I can’t believe he’s paying himself that.” But it may not determine the future of, you know, this company’s succeeding or not. From an investor’s standpoint, what are kind of some of the main really nasty things that that you put in the category of, like, this pretty bad?
Michelle: I mean, I think, like, when a company starts changing their risk factors pretty dramatically, that’s something that you wanna pay close attention to. I remember, you know, a company in particular, there was a company called GT Advanced Technology, and this was a couple of years ago, but, like, in August of…in their filing that they made in the queue, they were a big supplier to Apple. And the stock was going up because, of course, anything tied to Apple was doing well and probably still is. But this was a couple of years ago.
And there was new language in there, risk factors, talking about how they were super dependent on Apple, and if things didn’t quite work out with Apple or the product wasn’t up to Apple’s standards or whatever, you know, things could go south, you know, pretty quickly. Obviously, I’m, you know, paraphrasing here, but there was a lot more, you know, language that was basically talking about what could potentially happen if things didn’t work out. And, you know, it was new language in that filing, and lo and behold, things did not work out with Apple, and the company wound up filing for bankruptcy a couple months later, you know. It was in October of, I believe, October of 2014 that they filed for bankruptcy.
And so at the time that we flagged it, the stock was trading at around $17 a share. And, you know, obviously, when they filed for bankruptcy, it went down to, you know, $0. So we think that, like, you know, basically, a rule of thumb is that there are no accidents and SEC filings. Why did this company all of a sudden increase the amount of disclosure in their risk factors? It’s because their attorneys who were advising them we’re probably saying, “Hey, if this thing with Apple doesn’t work out, then we’re gonna have to, you know, we really should warn investors about it.”
I mean, as, you know, Meb, there’s, like, you know, a very active plaintiff bar in this country, right? So a lot of this dance is basically between opposing lawyers. You know, when you think about an SEC filing, it’s the lawyers who are working on behalf of the company and what they feel they have to disclose. And then, you know, there’s a very active plaintiffs’ bar who is saying, “Hey, they didn’t disclose this properly, and so we’re gonna sue them over it.” So I think there’s, like, sort of a choreographed, a very carefully choreographed dance between the two groups of lawyers about if we disclose too much, that can, of course, lead to a lawsuit, but if we don’t disclose enough, that could also lead to a lawsuit.
Meb: Yeah, you know. For someone, you know, like myself who’s been an investment manager but writer for so long, I’ve come to take a little more appreciation for wordsmithing over the years because it plays a big impact. We spend a lot of time writing our SEC filings. And luckily, we’re surrounded by lots of wonderful lawyers that help us out. Because as an engineer quant, my wordsmithing is fairly horrendous.
So as people were kind of thinking about these filings, and you mentioned this consistency of this “Friday night dump”, so talk to me a little bit about the “Friday night dump”. And I wonder if there’s, like, a distribution of bad behaviour. If you could actually, like, historically look back at all your red flag filings, if any of them tend to group or incorporate the same sorts of tells. Like, explain to us a little bit about the “Friday night dump,” and maybe there’s something there.
Michelle: Yeah. So basically the “Friday night dump” is, you know, after 4 p.m. Eastern time on Friday, the markets close. But the SEC remains open for filings for another hour and a half. So that’s 90 minutes when companies can disclose things when there’s no, you know, trading going on, really. I mean, of course, there’s after markets or whatever. But there’s no real trading going on. And so companies tend to dump stuff that, you know, is unflattering or potentially problematic late on a Friday afternoon between 4:00 and 5:30.
And, actually, you know, even closer to 5:30, I mean, last week, for example, there was a filing by Tesla, an 8-K by Tesla, that we thought was kind of interesting where they were correcting something that Elon Musk had said. And that was filed at, like, 5:00, I think I’m gonna say 5:28. I mean, you can go back and look at it. But I’m sure it was not coincidental that that was filed then. And the way the wording was, “We needed to correct the record on something that was said during the conference call earlier in the week.” Well, you know, I forget when the conference call was, but they certainly could have come out and said it at another time, correcting the record earlier than late Friday at 5:29 p.m.
The same thing with a filing by Wynn. You know, I mean, of course, Wynn has been, you know, the casino when casinos had been in the news a lot for the, you know, “The Wall Street Journal” did a great job of breaking that story. And there was a filing by them talking about, you know, I don’t follow the company as closely, but it was, you know, a disclosure basically made at 5:29 p.m. About the long-standing argument between Steve and Elaine Wynn, which really prompted this whole thing in the beginning. So, you know, and about her ability, Elaine Wynn’s ability to sell the shares, and the agreement, and everything as a result of the divorce. And, you know, again, things like that, like, you see them, you know, I would say, like, especially after 5:15, you know. Even though we tend to pay close attention to all filings made after 4:00 p.m. On a Friday, the magic hour or the magic 15 minutes is really from 5:15 to 5:30.
And the beauty of the SEC EDGAR site, I mean, it’s, you know…EDGAR certainly has its limitations. But one of the nice things is it actually let you go down to the 10th of a second. So you can see when a filing is made at like 5:30 and 45, you know, tenths of a second, which is kind of funny to see. Because you really see the negative filings that are made, you know. There definitely is a correlation, you know, I am not a quant, but there’s definitely a correlation between, I’ve noticed, between the filings that are made late on a Friday afternoon and, you know, sort of negative information.
Meb: I wonder if at some point, like the amount that you’ve mentioned in the past, if these companies are, like, “All right, Michelle is gonna tweet about this if we do this again. So, actually, we’re gonna we’re gonna file for this at 6:00 in the morning or some other time that people aren’t around because we know she’ll be looking for it.” I imagine that might be the case.
But I was laughing when you’re giving the Tesla example because one of my favourite tweets, I don’t know who to attribute this to, but, you know, Elon has been pretty aggressive in his promises for Tesla production. And someone tweeted when the SpaceX recently sent out the Tesla into space. They said, “Is Elon gonna count this as a delivery?” which I was laughing at.
Michelle: You know, I’m looking at the filing right now. So, for example, it was actually made, I’m sorry, it was made at 5:14 and 26 tenths of a second. So not quite after 5:15, but close enough, on a Friday afternoon. And what they say is “Tesla is clarifying the following statement made by Elon Musk, you know, during Tesla’s fourth quarter in full year financial results conference call on February 7.” So why did it take them two days, almost three full days to correct the record on that? You know, was it coincidental that it was filed like, late on a Friday afternoon? I don’t think so.
Meb: Are there any other kind of memorable disclosures or things you’ve noticed maybe in the past couple years, or ever if you have any particularly fond ones? But anything else that pops out in your head as good examples of just the crazy disclosures that these companies will make.
Michelle: Well, I mean, I think one of my favourite is actually kind of an oldie but it’s still a goodie was Chesapeake Energy, you know, disclosing that they had paid over $12 million for Aubrey McClendon’s map collection. I think is, you know, sort of a classic one, and it was buried. You know, in a proxy filing, a lot of times, you know, the proxies can be pretty interesting certainly for the compensation related information, but I think that the related party transactions are really the meat and the potatoes of proxy statements. I mean, even if you go back and you look at Enron, all of the disclosures were in the related party transactions. It was very hard to understand what exactly they were disclosing, but they were disclosing a lot of information about different related parties.
So I think, you know, that was certainly one of my favourite ones, was the Chesapeake one where they talked about how they had spent $12 million for this map collection, and they knew how much to pay for it because the person who had assembled the map collection for McClendon was the one who had appraised it. And so it was just sort of, like, you know…I mean, I think there’s like jujitsu moves that are, you know, less complicated. It’s some of these, you know, disclosures are just pretty…it’s just amazing. I mean, I just give the lawyers who write these things a lot of creativity points for doing this sort of thing.
Meb: As we’re thinking about it, I mean, I know you had referred to another part with proxies as the sexiest of the SEC filings. Maybe define proxies for listeners and give us a broad overview of why you think that’s so important?
Michelle: Yeah, well, I mean, proxies at the most basic level, of course, are an invitation to the annual meeting. So, you know, you as a shareholder…I mean, I own shares in any number, you know, probably I have, I don’t know, 20 or so positions, you know, I get invited to the annual meeting and I get asked to cast my vote. Of course, it’s not a real election in the sense that whoever wins gets a say because the company still has the right to basically, even if shareholders vote in favour something, it’s really the company’s decision on whether they choose to enact that or not so it’s not a real democracy in that sense.
But, you know, at the most basic level, a proxy is an invitation to the annual meeting, but proxies also include a lot of other information that can be very helpful. And, again, you know, I mean, I think obviously different people are gonna have different views about this. You know, there’s a lot of people who don’t read the filings, you know, and that’s fine. I’m not saying that you have to, but I think that, you know, if you own shares in something and you don’t want to wind up with a bad surprise one day, it does make sense to read the filings.
So the proxies will include information on compensation. I think that, you know, is helpful to know what the CEO, how they’re paying themselves. Is it mostly a cash position? Are they getting a lot of, you know, stock? I mean, what’s really going on there? I like to know what the directors are making because I think that directors can be very…learning what they’re making can be very telling. I mean, especially if a director is sitting on three or four different boards and they’re making, you know, $250,000 to $300,000 for each of those part-time jobs, you know, that’s something that I want to know about. I want to know that, you know, the Audit Committee is, you know, relatively solid because those are the people that sort of overlooking the numbers and trying to understand that.
And then I also like to look at the related party transactions because I think that those are, you know, again, as I said with the Enron example, and Chesapeake, and countless others, I think that those are, you know, often can be very important and really give you sort of insight into a company that you don’t get necessarily in other places.
Meb: And so how often, like, what’s the process of your writing and publishing? Is it kind of a consistent or are you doing, like, updates, is it a monthly thing, is it…What’s kind of the…how does it work?
Michelle: Well, unfortunately, I mean, we’re not providing as much free content as we used to when we started because the model just isn’t there. I mean, it’s not an ad-supported model. I guess if I wanted to just write about Apple and Tesla, maybe I could get some ads on that. But, you know, I think that, you know, we moved a number of years ago, we moved to a subscription-based model and decided that, you know, really, it’s a subscription-based model that’s designed for institutional investors. And so the amount of content that we’re providing, you know, sort of for free to the public has declined pretty dramatically just because I feel like the model really isn’t there for that. So we try to do what we can on Twitter.
We recently began experimenting of something on Twitter where we’re doing sort of a mini version of the “Friday night dump” through a paid Twitter feed. We partnered with the guys behind the Bespoke Investment, and they created sort of a paid-curated Twitter feed where we’re doing that. But the majority of the content that we’re providing these days is behind the law.
Meb: Yeah. And so real quick, the listeners can check out the Bespoke thing. It’s called Premo Social. It’s actually a pretty interesting idea. But that’s kind of what I meant, is, you know, this premium service you have. How often are you kind of writing these articles? Is it a monthly, is it a quarterly, is it a kind of updates to the subscribers, is it you do conference calls? How do you kind of deliver this content that you are researching?
Michelle: So a lot of it is based on the tickers that our subscribers are focused on, you know. For the most part, we let our subscribers and through their tickers, and so we pay close attention to those. And then we can, you know, deliver content, you know, via email if there’s a ticker match. So let’s say I have a client who has 30 tickers that they’re keeping an eye on. If we find something on one of those 30 tickers, they’ll get an email alert about that. You know, we also have the Premo thing, the “Friday night dump” on Premo that we’re doing. And we have newsletters. We basically have a summary newsletter that we send out on Sunday evenings before our markets, you know, we send it out, you know, relatively late on a Sunday so that it’s in their inbox. You know, they can look at it first thing Monday morning before the markets open.
Meb: And so it’s interesting to think about. So have you ever seen a disclosure or just an announcement that just, solo by itself, would kind of cause you, and I don’t know if you’re trading any of these names or its clients only, but do you think they would call, like, that single disclosure would be, like, you have to short this company. That’s the most ridiculous. And is that often or is it more just kind of brush strokes of, “Hey, these guys have some ridiculous compensation. That’s a, you know, 1X against them,” and, “Hey, they did this weird transaction. That’s another X.” How often is it that it’s kind of, like, a one-off “Boom, this is a haymaker,” that, like, “This thing is going down.”
Michelle: I would say that that’s very rare. I mean, honestly, you know, I think back to, like, that GT Advanced Technology, I mean, I could probably count the number of examples where you saw something that was just so crazy egregious, and lo and behold, it went to, you know, bankruptcy.
I mean, I can think of another example a number of years ago with American Airlines did something similar where they, you know, warned about something and was a precursor to what happened. You know, of course, I mean, look the markets have been going up now for what, you know, almost 10 years. And, you know, you have…you know, even when you see negative information, it doesn’t necessarily mean that the stock is going to go that way. So sometimes, you know, you see something negative and doesn’t seem like anyone really cares or pays attention to it. There’s certainly a lot of short sellers who would tell you that these days. I mean, my friend, you know, Herb Greenberg, for example, would, you know, talk to you about that.
Meb: I was just laughing as I’m seeing about this, I said, “Maybe a good new business line for you will be footnoted* crypto, and you can read all of the terrible ICO announcements and say, ‘This literally just a whitepaper. Why are you guys giving this person or organisation $1 billion dollars.'” So when you’re ready to launch that, let me know.
Meb: I’ll be your first subscriber. Has this ever happened or maybe it happens all the time? And I know most of the research is firewalled, but even going back in the day when you’re writing a little more publicly or tweeting, how often other companies reach out? And, you know, either just say, “Hey, you’re wrong,” or threatened litigation, or what. Is that is that a pretty common occurrence or no?
Michelle: You know, I would that, again, very, very few times I would say. One situation I remember her sticks out, which was Dell quite a number of years ago. I was reading a related party transaction that had something to do with Michael Dell, you know, Dell, the company buying a company from Michael Dell’s brother and paying what seemed like an unusual amount of money for it. You know, when you read the footnotes sort of, you know, it seemed like kind of a convoluted deal. And I remember that time, you know, Dell Computer reaching out to me and saying, “You got this all wrong.”
But I really can’t think of a lot of other examples where that happens, you know. Either the companies aren’t paying attention to what I’m writing. I’m certainly not overwhelmed with my self-importance to think that companies are obsessing over what I’m writing, or they know that, hopefully, my reputation is solid enough that I write from the SEC filings. I don’t traffic in innuendo. I don’t, you know…I mean, there’s a lot of things that a lot of people, for example, who are writing about Tesla, I don’t really get involved in that. I just, you know, right from the filing. You know, I don’t really get into his personality, or what he’s promised or not promised, or blah blah blah. I will just write, “This what the filing said.”
Meb: And there’s also probably another element, which is usually when they’re disclosing these shady things, they probably don’t want to bring any more attention to it than they already had, which if they engage you, then they’re kind of admitting this shadiness. I was laughing as we were getting ready for this interview. I was watching some old videos you had done. And there was a great one which was kind of near dear to my heart because I grew up partially in Colorado where the Quest CEO was using…
Michelle: Oh, that.
Meb: Can you mention that one real quick? I was laughing at that this week.
Michelle: Yeah, was that where the former CEO, when he was hired, he got his as part of his deal, and he got his high school, his daughter, who was going to high school at the time, had access to the private jet to fly back and forth between San Francisco and Denver. And I just remember thinking like, aren’t there airlines that provide that route that a high school kid, you know, doesn’t need to do that. I don’t know if that’s what you were specifically mentioning but…
Meb: Yeah, it was. I was laughing at it. That’s funny.
Michelle: You know, I mean, when I went to high school, I took, like, you know, I grew up in Brooklyn. I took, you know, a city bus. I certainly didn’t have access to the Gulf Stream to get me back to high school.
Meb: That’s funny. So talk to me about a little bit of, like, practical. So there’s probably a lot of people listening this. I would be terrible in your job, by the way, and it would be kind of my nightmare, like I would be awful at this. But if a listener, let’s say they said, “You know what, I’ve got my 10 holdings. I’ve had these forever. I want to track…” What sort of time commitment we talking about? So, you know, kind of per stock per year. Is it you’re looking at like an hour a year, is it like five hours? How does this work?
Michelle: I mean, I would say, like, you know, depending on how…a lot of it is how quickly you read and how good you are, you know…obviously, with anything, you get better with time. I mean, I feel like I still learn things about SEC filings all the time, and I’ve been doing this now for, you know, 15 years, reading documents pretty closely. So, you know, I would say that, you know, maybe five hours a year per stock. Because the 10-K is gonna take you, you know, somewhere between an hour and two hours if you really, you know, skim it carefully. It could take you probably two hours to do. And then the individual 10-Qs, you know, let’s say somewhere between, like, you know, 45 minutes, do three of those. Proxy statements should take you about a half hour. Yeah, I’d say I guess about five hours. You know, then, obviously, the miscellaneous 8-Ks, you know.
But one of the examples you mentioned, Quest, just now, one of the examples I like to tell in how I really got into this early on was that I had bought some shares of Quest Communications and, you know, I think I had spent, like, $5,000, which, you know, 20 years ago was very real money to me. And, you know, I watched as the stock went up and up, and then all of a sudden that went down.
And then I, you know, really started on this whole thing. You know, if you go back to the book, I mean, I kind of talked about all of the things that I could have found if I had just spent the time reading Quest SEC filings. You know, I could have prevented, you know, myself from losing that $5,000 that I lost. And since I wasn’t, you know…I felt like it could have taken me, you know, maybe about five hours to do that. And since I wasn’t making $1,000 an hour then, you know, it was certainly time that could have been well-spent.
Meb: I think this kind of related but tangential, you know, with this recent, you know, there’s been a lot of very minor recent market gyrations, but they’ve caused some major issues for some funds. And I think it’s a good suggestion for people in general on the investment side who invest in these ETFs or ETNs or mutual funds to actually read the prospectus. Because in many of these, you learn things, and, like, there was this volatility ETN or ETF that I don’t even know how its structured. But if it went down 80%, it was liquidating. And how many investors actually read that perspective? Probably zero. But it’s funny because we often talk about investing side that there’s studies that show that people spend more time shopping for a TV than they do planning their retirement. And so it’s the same.
We see so many examples in these prospectuses, we said, “Why would anyone ever invest in that fund? That’s crazy.” But people, you know, in many cases are lazy, right? They wanna kinda wing it. So same thing applies to the investing side as well.
So you’ve been doing this for a while. Talk to me a little bit about the changes you’ve seen over the last 10, 15 years? And so, parsley, I’m referring to corporate governance, so our companies. You know, over the past 10, 15 years, are they more or less likely to sweep stuff under the rug, have been there various reform laws that have been enacted? Are they working? What’s kind of like…what’s changed over the past 15 years, if anything?
Michelle: You know, I think that, you know, there’s certainly companies that are, you know…You see trends of course, you know, about disclosure. I mean, you know, like…So a lot of these companies use the same, you know…there’s this probably, like, you know, 20 or so law firms that focus on, you know, writing the SEC filings. Of course, there’s more, but let’s say most of the big companies are using, you know, similar offers. And so, you know, they’ll…like, you know, law firm 1 will say, “Hey, how are you handling cybersecurity disclosure this year?” You know, and maybe we should do something, you know, similar.
So, I mean, I think that, you know, there’s a lot of like repetition. I mean, you know, if you talk to any lawyers or you know any lawyers, they’re not reinventing the wheel on a regular basis, right? They’re taking, you know, they’re cutting and pasting a lot of stuff that they’ve, you know, previously disclosed. Even if you do, in your own personal, you look at the subscription agreement, a lot of it is…it’s not pristine language. It’s all been written before and just kind of cut and paste it.
So I think that, you know, you have…you know, in terms of how, it’s changed it’s obviously, you see, you know, some companies trying to disclose. You know, it depends on what the SEC is really focused on enforcing. For a while, it seemed like the SEC, you know, was really focusing on, you know, companies that were not properly disclosing related party transactions. And so you saw companies try to respond to that.
Certainly after, you know, Dodd-Frank, you saw some more disclosures related to that. You know, when I first started doing this, it was, like, Sarbanes-Oxley was new, so you started seeing…you know, that was, you know, there were disclosures and response to that. So it kind of seems like it comes in waves. I definitely, obviously, without getting too political, the current SEC regulatory apparatus tends to be more focused on what regulations can we cut, and so I think that companies are tending to respond to that now. Whereas maybe a couple of years ago, there was a lot of focus on Dodd-Frank in what the regulations were in that, and so you saw companies responding to that.
But that’s funny because it happens a lot. You know, we have a lot of buddies or ETF issuers that say, “Hey, we’re just gonna go copy Blackrock’s filing because they pay millions of dollars in legal so we’ll just edit it and move on.” It kind of makes sense. That’s funny. I had forgotten about that.
So I was kind of thinking about winding this down because we can only keep you for so long. What if you think about today, 2018…and I know you probably can’t give too much because this your paid service. This is what you do for a living. Is there anything that’s kind of popped out in the last few months, or any companies in general that are kinda…been some interesting disclosures or related things you can mention? And if you can’t, that’s fine too. But anything in the last little while that’s been interesting?
Michelle: You know, one of the things we found a couple months ago that we thought was interesting, you know, we’re always looking for companies that are making up new metrics. So the numbers themselves, remember, when a company announces whatever earnings or whatever it wants to put out there they make it seem like it’s sort of this how it’s always done. But, you know, we’re always looking for these new metrics that companies use.
And so one of the things that we thought was kind of interesting was looking at Twitter, for example. About a year or so ago, they started, instead of talking about…and they use monthly active users, which is something, you know, a well-defined metric that, you know, companies use. They started talking about DAUs. And, you know, normally that definition is, you know, Daily Active Users, but Twitter was defining it somewhat different. And they were saying Daily Active Usage.
Now think about that. What is the difference between usage and users? So, like, those are the types of things that, you know…it might seem like, you know, it’s…you know, we wrote a piece, you know, does Twitter deserve points for creativity? And we put that, you know, that was something that we did, you know, for our paid subscribers. And, you know, where we think is kind of interesting there is, you know, of course, you know, it’s one of those ways that, like, companies massage language that we think is worth paying closer attention to. So, you know, as it turns out, Twitter is the only company that uses Daily Active Usage. You know, there are other companies that use Daily Active Users, although, I think, you know, what we see is the most common metric is, you know, the monthly active, is the MAUs.
And this may be getting into the weeds a little bit too much for the folks who are listening to the podcast or not, but it’s that type of subtle change that I think is sort of the footnoted* bread and butter, is asking the question, “Why is a company changing the metric? And what are they gaining from that? And what’s going on there?” And that’s what we think is, you know, sort of where our service really shines, I guess.
Me: You know, I think that’s an interesting takeaway. Because so much of this, to me, is it’s not necessarily just the one disclosure or sentence that kinda, you know, stands out, says, “Oh, my God. We have to go short Twitter now because of this.” But it’s more of the accumulation of knowledge. It’s almost like a quilt of all these different patches of pieces of info and that, you know, certain companies are more apt to be a little bit shady and kind of take liberty, and other companies, you know, tend to not be. Is that kind of how you think about it as well? Is that a good characterization?
Michelle: Yeah, absolutely. I mean, I think that if they’re really is, quite frankly, Meb, it is a mosaic. And so, you know, you had asked me earlier, is there ever, like, sort of a screaming red flag that you see that, like “Oh, my god you got to get out of the stock right away or you got a short the stock,” usually by the time it’s that, you know, that situation, there’s been signals all along. I mean, you know, look at the Kodak disclosure that, all of sudden, they were jumping, you had talked about, the ICO space. You know, what was it about? A month ago Kodak decided that they were jumping into ICO, into, you know, doing that. Was that an example of something to, like, get the hell out of Kodak? I don’t know. Or what about, like, the 20 things that happened leading up to that? You never know, really, you know, when a stock goes down.
You know, I think that, you know, unlike…There’s a lot of people who will say, like, “I called this right. And, you know, I’m so smart and I called this right.” The bottom line is that, you know, hindsight is always 20/20. So, like, you know, even with, you know, the GTAT example I can point to, I can say like, “Okay, we saw that.” And, you know, two months later the company filed for bankruptcy. But, you know, hindsight is always 20/20.
Meb: Yeah, you know, it just reminds me. We look at a lot of investment strategies and funds. And certainly some…we used to write about F-Squared back in the day, and their lawyers maybe take it down or ask politely to take it down. But it was the same sort of thing where the weight of the evidence kept stacking up. And, you know, you never know for certain on some of these. I tend to give them benefit of doubt. But you start to see one shady thing, then another shady thing, and another, and it’s interesting because it’s kind of that collection or some of the parts that ends up giving you the full story.
Michelle, do you, and I don’t know if this question is gonna apply to you because usually it’s an investment manager on this podcast, but we always ask people if you can think back, and this could this could be childhood, it could be good, it could be bad, what’s been your most memorable investment on your own? And if there hasn’t been one since you’re more of a writer than a PM, you can give a most memorable disclosure. But feel free to take the question either way.
Meb: You know, I like to…one of the things I like to look at, and I’ve always been fascinated by this is looking at some of the signals that you see in filings that, you know, perhaps…you know, a lot of what I look at is sort of on the negative side. But sometimes you can find some positive signals in the filings too. And so, every now and then, I’ll switch hats, and I like to look at, you know, to see are there some disclosures that, you know, maybe impact a stock in a positive way. You know, there’s just the number of examples that come to mind. And I really, my investing is probably small time compared to some of the other folks you’ve interviewed. It’s really just, you know, my retirement portfolio. I’m not doing it for anyone else, you know. And even, you know, my kids’ college fund, I’m doing that sort of in a 529 where I don’t have direct control over it, you know, just kind of picking the year type of thing.
So I think that, you know, you know nothing is really coming, like a particular stock or anything, is coming to mind. But I think that, you know, it’s always good to challenge your mind and challenge your brain to look…you know, if you’re reading the filings anyway, you know, and in general, I do read it for negative things, sometimes it’s interesting to look for positive things too.
Meb: Interesting. How often does that happen?
Michelle: You know, it happens with some regularity. I mean, you know, we always think of, like, the filings being where companies go to hide different things. But, you know, sometimes you can pick up on something that is, you know, that they’re not actively touting, that, you know, actually impacts the stock in a positive way.
Meb: Probably in the Wednesday noon of filing, not Friday night. Not Friday night. Well, one last question that kind of popped in mind. As you look forward, you know, a lot of what you do is inside your brain, from experience, you know, and as more and more of the world is getting automated in words like big data and AI, you know, do you foresee kind of your role over the next 5, 10 years? Are there gonna be some sort of augmented software or concepts you think that will play a role? Do you think this will kind of be something that, you know, you’ll continue on in the same fashion, or are you thinking about any changes to the process at all?
Michelle: You know, I mean, I’ve looked at AI to a certain extent. I think the problem that you have is, like, you really need to train AI pretty carefully. I mean, I’d love to figure out a way to, like, basically take what’s inside my brain and kind of merge that with, you know, really smart programming. So I could definitely see, you know…I guess the short answer is I can definitely see an ability to automate it more, but I think that, you know, as long as lawyers are involved in writing the filings, you’re gonna need, you know, humans to actually read and try to interpret what the lawyers are saying.
Meb: Michelle, this has been so much fun. Where can people follow all your various offerings, writings, tweets, etc.?
Michelle: Yeah, I mean, you know, you can obviously…the footnoted* Twitter feed. We do do stuff, you know, on that. You know, not as active on the website as we used to be in providing free content, but we still do. You know, you can sign up on footnoted.com for our, you know, updates when we do provide them. You know, Twitter I would say is more active. And then if you’re interested in checking out our “Friday night dump”, you can, you know, look at that. It’s called footnotedFND for “Friday night dump”.
Michelle: And that’s a paid service, so on the Premo site.
Meb: Well, good. Look, thanks for taking so much for the time to join us today. As a thank you, we’ll have to go explore some LA pizza when you get a chance.
Michelle: Yup, sounds great.
Meb: Awesome. Listeners, thanks for taking the time to listen. We welcome feedback, questions for the mailbag at firstname.lastname@example.org. As a reminder, you can always find the show notes and other episodes at mebfaber.com/podcast. Subscribe to the show on iTunes. If you’re enjoying it, hating it, please leave a review. Let Jeff and I know how we’re doing. Thanks for listening, friends, and good investing.