10K for life

I’m not sure if this is typical for other consultants, but I spend a lot of time reading through corporate annual and quarterly reports (called 10K’s and 10Q’s, respectively, after the SEC form names). These reports give lots of information, including a description of the business (useful for technology and biotech/pharma companies which can be difficult for the layperson to understand), snapshot of performance for the period that is reported, the relevant historical comparisons for current performance (e.g. the year before, the same quarter from the year before, etc.), and a list of risk factors for the business.

These reports are produced by public companies (and by some private companies, no doubt) for the benefit of investors who no doubt want to know exactly what they are investing in. But, I do also believe that the very process of making these reports is good for management as it forces them to think very hard about their strategy, their competitive environment, and their ability to execute.

This is why, despite scoffing when I first heard about a consultant at my firm who compiles an annual report for himself (complete with a letter to the shareholder — himself), I have recently started compiling these reports. Yes, I know this is incredibly nerdy, but hear me out. Four reasons why everyone should think about making personal annual and quarterly financial reports:

1. It forces you to track your finances regularly. The practice of having to make annual or quarterly or semiannual reports is impossible unless there is some effort made to regularly check your finances. This is good as it alerts you to irregularities (e.g. credit card fraud) and helps to make sure that you are sticking to your financial goals (e.g. save 10% of my income every month).
2. It lets you quickly see mistakes in your judgement. Hindsight is 20/20, but only if you look. By thinking about your past year, or quarter, or whatever period you decide to make these reports on, you are forced to think about what you could have done better. Only by routinely thinking about and being honest with yourself can you make better decisions in the future.
3. Have an idea of where your finances are going. This has been very helpful for me as I plan out big purchases (e.g. vacations, electronics, etc.) and think about how much of my savings to put into investments month-after-month.
4. It helps you plan for the future. This, in my mind, is the best and most important reason to do these financial reports. I made one for the 6 months since I graduated from college, and by tallying up my purchases and my income and my investments, I found that I was better off than I had thought I was. As a result, I am planning to increase the amount of money I invest in equities for this coming year. I also looked at my purchases and realized that, by making a few changes in what I buy for lunch, I could easily cut down my expenses by several percentage points.

It’s not necessary to copy the form that corporate annual reports come in, and it’s not necessary to do monthly reports or to make them especially pretty. What is important is to pick a schedule which sounds reasonable (I suggest every 3 months as a good balance between having to do it too often, and having to do it not often enough) and to pick a form which is reasonably easy to do but still forces you to write down your past track record and future plans (could even be scribbles on a notepad if that works for you).

Or if you’re more artistically inclined, you can do what Podravka, a Croatian food company, does which is make an annual report that is only readable after you bake it (hat tip: Eric).

But that’s just for extra credit…

The Election Saga Continues

It’s been about a month since my post just prior to the Iowa Caucus, and a number of fascinating things have happened. Just to re-cap:

• Huckabee and Obama win Iowa, with Romney and Edwards taking second.
• Romney takes Wyoming.
• Hillary cries (and wins), Huckabee lies (down), McCain sweeps in New Hampshire, and Bill Richardson bails out.
• Native son Romney takes Michigan; Dems apparently hate the state.
• Hillary “wins” Nevada, while Obama and Romney actually win. On the Democratic side, despite Hillary’s victory in the overall vote, Obama takes more delegates due to the nature of the caucus structure there, and Romney bails out of the sinking ship which was his South Carolina campaign to focus on capturing Nevada.
• Obama destroys the competition in South Carolina, McCain wins out over Huckabee, and the men with hot wives (Fred Thompson and Dennis Kucinich) drop out of the race.
• Clinton wins Florida and nobody cares, while McCain defeats Romney and becomes the party front-runner. Giuliani, who gambled on winning Florida, withdraws from the race, and John Edwards also pulls out.

So, what next? Four thoughts:

• Iowa was atypical. While I would not count Barack Obama out yet, Hillary Clinton’s successes and track record so far, combined with Mike Huckabee’s and John Edward’s inability to gain traction shows that Iowa’s results were quite atypical This just underscores that campaigns are won by “mainstream” celebrity candidates with well-funded organizations following conventional strategies. And, the political casualties thus far (Bill Richardson, Dennis Kucinich, John Edwards, Fred Thompson, and Rudy Giuliani) show that you can’t win on extreme positions (Huckabee, Kucinich, and Edwards) or unorthodox strategies (Thompson and Giuliani) or by blind faith that people will vote for you (all of the above).
• This is a conventional election, following conventional “political rules” and all the candidates should remember that if they intend to win. All the post-Iowa talk about how people “demand change” has not held up. There is no evidence that the top two candidates in either party stand for any radical change, nor do I find it convincing that the sight of Hillary’s tears were more important than her husband’s reputation and superior campaign organization. 
• “Celebrity endorsements” are probably irrelevant for party nomination. Much has been made of the fact that John Edwards has yet to endorse a candidate and that Giuliani and Schwarzenegger have endorsed John McCain. I believe, however, that these endorsements don’t carry much weight for two reasons. The most direct reason is that the few delegates these candidates control have no obligation to listen to the endorsement of their candidates. The second reason is that these delegates and those who actually vote in primaries and caucuses have probably already made up their minds on who they will support. I doubt that Schwarzenegger or Giuliani are going to convince any evangelicals to support McCain, and I think that those they could convince were probably already inclined to vote for McCain already. These endorsements will matter more during the general election, when they can motivate independents (in the case of moderates like Giuliani and Schwarzenegger) or the party base (in the case of less mainstream politicians like Edwards) for the cause.
• This is a race for delegates. People should focus less attention on winning states, and more attention on winning delegates. Although Hillary won the popular vote in Nevada, she lost the election for delegates to Obama. Although Romney has only won three states, prior to the Florida primary, had more delegates than any other contender. And, in the coming “super Tuesday” race where multiple states have primaries and caucuses on the same day, no campaign has the resources to try to win every state. What this means is that the candidates need a strong cross-country organization and a clear strategy for investing time and money only where it will deliver payoffs in delegate count. This is one reason that I believe Hillary will wind up with the party nomination (she has more delegates than Edwards and Obama combined), and the only reason that I believe that Mitt Romney is not out yet — what else do successful businessmen and consultants do but organize and create optimal investment strategies?