In this post, I want to highlight how simple yet important aspects of investment analysis are often overlooked— leading to flawed decisions. Let’s walk through two common examples.
1. Insider Ownership
Financial websites often provide data on insider ownership, but relying on these sources alone can be misleading. To get a more accurate picture, start with the “Security Ownership of Directors and Executive Officers” section in the proxy statement (Schedule 14A), which details how many shares each executive and director holds. However, this is just the starting point.
Equally important is the executive compensation section of the proxy. A strong indicator of shareholder alignment is when management and board members hold more equity than they receive in cash compensation.
But even that isn’t enough. Not all equity ownership is created equal. It’s critical to distinguish between shares that were personally purchased by insiders and those that were granted by the company. This distinction matters. I’ve reviewed numerous proxy statements where a CEO appears to hold a significant equity stake—yet none (or only some) of it was bought with personal funds. That’s not genuine alignment with shareholders.
To truly understand insider alignment with shareholders, analysts must dig deeper—cross-referencing the proxy with Form 4 filings and other disclosures. The key question is: Do insiders own more stock purchased with their own money than they’ve received in cash compensation?
2. Market Capitalization
Many investors begin their analysis with data from popular financial websites. While convenient, these platforms can provide figures that are outdated or incorrect. Market capitalization is an example—typically calculated as stock price multiplied by shares outstanding—but the share count used can be incorrect.
For an accurate figure, it’s essential to verify the current number of shares outstanding. The most reliable source is the cover page of the latest 10-K or 10-Q, which reflects the share count as of the filing date. While the balance sheet and footnotes can also provide this data, they often reflect the record date rather than the latest figures. The income statement, on the other hand, reports a weighted average share count over the reporting period, which is not suitable for market cap calculations. Occasionally, proxy statements may contain the most recent share count—particularly if filed after the latest 10-K or 10-Q.
Another oversight could be the exclusion of super-voting shares from market cap calculations. These shares carry economic value and should be included—but third-party sites can omit them.
Bottom line: Always refer to the most recent SEC filings or earnings call materials for share count and include all the relevant shares including any super-voting stock to calculate the current shares outstanding.
These two examples reinforce a broader principle: overreliance on third-party data can lead to inaccurate conclusions. I’ve made these mistakes myself earlier in my career. Investors are best served by going directly to source documents—SEC filings. In investing, like in marriage, look beyond the surface—verify the full profile, not just the highlights!
