“First-level thinkers look for simple formulas and easy answers. Second-level thinkers know that success in investing is the antithesis of simple…Your thinking has to be better than that of others…you must find an edge they don’t have. You must think of something they haven’t thought of, see things they miss or bring insight they don’t possess.” – Howard Marks
At Prospector Partners, we utilize regulatory filings and alternative data in addition to traditional SEC/GAAP filings and statements. This is especially the case when it comes to the bank sector as we make use of call reports filed to the FDIC and financial statements filed to the Federal Reserve.
If you are willing to invest the time and energy (along with learning how to interpret them), regulatory filings can reveal a trove of valuable information. Many investors, especially generalists, do not make adequate use of non-traditional filings in the investment process. We utilize regulatory filings for greater insight into the balance sheet, the branch footprint, M&A potential, and the income statement.
Balance Sheet Detectives
Loan Type Detail:
Your typical 10-K, 10-Q, or investor presentation provides limited insight into the loan book. By relying on traditional filings alone, an investor may believe a loan book is of average or low risk. Using regulatory statements, we occasionally discover exposure to higher-risk loan categories. As a result, we avoid investing in banks which are above our desired risk profile. While high risk loan books produce attractive returns in good times, they are a leading cause of large and permanent loss when the credit environment turns.
Solely utilizing SEC statements, an investor can overlook these key risk exposures. Meanwhile, the bank in question may be holding large amounts of credit derivatives, opaque financial instruments, and off-balance sheet holdings/commitments…
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Download our recent Whitepaper: Statutory Data: A Look Under the Hood of an Insurance Company. Available here.