How to Improve Your Fundamental Research Capabilities

Preface: I am not going to hold your hand and walk you through how to read a filing in this post. However, I will leave you with an actionable guideline on how to accomplish just that, some insight to how your mentality should be when you are doing this research, and the type of questions you should be asking yourself during it. Hope it helps.

Step 1: Stop pestering people "Will you teach me how to get better at research please, please???"

That really is step #1. Stop looking for a handout, you won't find one. The thing with fundamental research is this. It is LEARNED, not TAUGHT. I want to make that very clear, and you need to understand that first and foremost. By that I mean nobody is going to sit down with you and go over a step by step guide "Ok Johnny....here's what an S-1 is, write the definition down, and now lets go look at 3 examples of S-1s and their terms so you understand it better!" No. Not happening. That's not how you're going to learn this stuff. There's no DVD on it. There's no book about it. You teach it to yourself. And I'll explain how to do that in a few minutes, and how I personally did that. 

And also another thought...at least for me, I found that early on when I was going around asking for help, "hey what does this filing mean?" so on and so forth...I wasn't learning ANYTHING. If someone gave me the answer, I'd understand it for about an hour or two..and then it went right back out of my head again. You can't ask for these answers. You have to go get them. When you do your own digging and find your own answers, the information is MUCH more likely to stay with you in any lasting, meaningful manner. Having this information spoon fed to you is a very much band-aid, and an ineffective one at that. You''ll make little to no progress with this approach.

I want to debunk some myths about fundamental research quickly also. First off, this stuff is NOT rocket science. I often hear people saying "it's so complicated I don't even understand it or know where to begin." But I promise you, that really is not the case. You are either 1) very lazy and expecting something unrealistic in your pursuit of this knowledge or 2) you're just looking in the wrong places with the wrong approach. I'd like to give everyone the benefit of the doubt and assume the problem is #2, so that's the place I'm going to start from through the rest of this post. But you really need to tell yourself and go in with the mindset of  "This is not that complicated, and I can do this." - because its not, and you can. You just need the right approach. 

Often times if you're reading a filing of a sketchy company (our favorite kind), they're usually trying to hide stuff. So the filings will be long, with a lot of nonsense and "filler" verbal diarrhea to try and distract the reader from finding the real dirt they're looking for. That's part of the cat and mouse game. So you'll need to develop that skill of sifting through the bullshit, which just comes with time. But honestly at the end of the day, none of this is DIFFICULT, in the sense you don't need a PhD or an IQ of 190 to figure it out or get good at it. You just need to understand the game. And the fact that yes, this is indeed a game, and nothing more. If you've got a good head on your shoulders, a hunger and desire to figure it out, and a little bit of common sense, then you have all the tools you need to be a top tier researcher. The only thing standing in your way after that is time. A little bit of work, and time. 

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So without further ado, how the hell do you learn this crap and become fluent in Pig Latin? Two words that are going to be your absolute best friend on this journey: Reverse. Engineering. 

That's the process of being able to make sense of these filings and situations through examining past instances of other filings and situations. A process of working backwards to reach your desired goal. Let me elaborate. 

Here's how the exercise works. If you have dabbled in this stuff in the past, then you are probably a small cap short seller, and you are familiar with all of the "usual suspects" as I like to call them. The XGTIs, ETRMs, DRYS, SSHs, CYTRs, IDXGs, there's a million of them. What I want you to do, is go through all these names past chart history, and find the huge mover days, both up and down. For example, right now I'm looking at IDXGs chart. I pull it up and I say "Hey, 12/07/16 was the start of a massive 3 day move, what the hell was going on there?" So now I want to go into the filings and news, and look at everything that was produced around that date. What filings were released? What did they say? I can now dig through the filings, knowing ok, this was the start of a massive pump, and dump. What were the signs? How could I have seen this coming through these filings and PRs? You now have everything in front of you. All the fiilings, and the resulting price action from those filings. Time to just work backwards.

That is the beauty of this process. You've already got all the answers you need! How many times do you read a PR in the morning and say "well... I have no idea what that means or how the stock is going to react to this." - probably pretty often right? Well, when you are using this reverse engineering process, you already have all the answers to those questions. We already know that starting on 12/07/16, IDXG went absolutely buck wild and ran from 2 to 20. Now all that's left to do is read all literature, filings and PRs released around that time, and figure out the "why" from there. 

And this can be done for ALL run days, not just these massive ones like the IDXG December run I'm pointing out. Lets use a different example, and go through the type of questions you should be asking yourself. 

Now I'm looking at XGTIs chart. On 07/07/16, XGTI ran a coupe bucks, and closed on its highs. So you should be thinking "Wow, this was a strong move. What was PRd that day that led this thing to run and keep all of it's gains. Why wasn't it weak like these names usually are on run days?" Stuff like that. OR....on 12/19/16 XGTI ran again in a similar manner..but this time it gave back almost all gains...so this was very weak news. What was said in that PR on that day that caused this thing to be so weak and give everything back? Compare the two, the PR from 07/07 and 12/19, what was similar about them, what was different? Why do you think one closed on highs, and the other gave nearly all gains back? Were there any other filings in play around the time of the second PR that weren't for the first? Questions like that. It will require you to do some critical thinking and analysis, but again, none of it is all that difficult, it just takes some work. Tell yourself that from the start, and it will be easier to make progress and keep motivation.

Hopefully you're catching my drift. Find the big candles, up or down, and examine them. Where did the stock open, where did it close, (assess strong/weak), and then go dig through the news, already knowing the price action outcome, and try to marry the PR to why the action took place the way it did that day. This exercise won't always lead you to SEC filings, often times it's just a PR (well technically an 8-K filing usually) but I mean you won't always end up digging through Form 4s, Ds, 13Gs,  EFFECTS, S-1s (offerings) or 10-K/Qs (quarterly annual reports) all that. So this exercise will help not only in filing reading, but in general news interpretation as well. 

But often times, it will lead you into the filings. So my advice is this. Don't just generically start googling "how to read SEC filings" or "what is an S-1", you should be googling that stuff as it pops up in your reverse engineering, so it's relevant to the current piece of information that you're looking into at the time. So if you are in the middle of on of these, and you find a run day where ETRM dropped $3 and closed on its lows, and you see no PR that day, and the only thing you find is an S-1/A released? Then its time to google "What is an S-1", familiarize yourself, and then go digging into the ETRM S-1/A that you believe caused the huge drop that day. 

I hope this makes some sense guys. I'm not going to lie to you and say this is going to be easy, either. Because it's not. It's going to take a long time, and a hell of a lot of dedication and work. There is a reason so few people are good at it and have this knowledge. BUT....it is totally do-able. Like that 6 you've been eyeing at the bar all night, 8 beers later, totally do-able. I don't want you to think "well I'm not a genius so I'll never be able to do this" because that's just not the case. It is absolutely attainable by the average investor if you have the desire to make it happen. So don't get discouraged thinking you're not smart enough. You likely are.  

Its just like reading tape. It may not all make sense early on, and may just seem downright confusing, but as you just keep at it, it slowly starts to make more sense, just trust me on that one. 

And again...remember the beauty of this process is that you already have the answers. You can already see how the stock behaved on those past run days, now all you have to do is go read back and do some investigation work as to why. The days of  "I have no idea how to interpret this news" should be over, because you've already got the price action in front of you, now it's just time to work backwards and figure this stuff out. 

This is the way I learned how to read filings and interpret news. I TRULY believe this is by FAR the BEST way to do it. If you are not doing this...well, I'm not sure what you're doing, probably nothing. Complaining and asking others for help is probably what you're doing. So I would strongly suggest you give this reverse engineering method a shot, it was an invaluable tool for me, and taught me everything I know today. 

Good luck. 

- D