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Book Review: Investing Between The Lines

Note: This book review was originally published in the May 2016 edition of our premium newsletter Value Investing Almanack. To know more and subscribe, please click here.

When an investor starts investigating a business, the first thing he wants to know is if the business is strong and profitable? And he can usually find the answer from the company’s annual report by reading the numbers like net earnings, debt, cash flow, profitability ratios etc.

The next question is, how accurate or authentic those numbers are? Of course, they are verified by auditors. But even Enron and Satyam numbers were also certified by auditors. And both of them ended up as biggest accounting scandals.

As an investor, how do you know that the management is telling you the truth? And how does an honest CEO communicate with the shareholders in a manner which establishes trust?

Laura Rittenhouse, in her book Investing Between The Lines, attempts to answer the above questions. She offers clues to separate the facts from the fluff in annual reports and quarterly earnings calls. Rittenhouse had raised a red flag on Enron, much before it collapsed, noticing a discrepancy between the net income cited in its CEO letter and its audited financial statement, among other things.

Investing between the linesWarren Buffett, in his 2013 letter to investors, recommended Rittenhouse’s book. After reading this book Buffett commented, “Rittenhouse is still on the side of the angels.”

Buffett’s letters are considered gold standard in business communication. His usual letter contains more than ten thousand words. That’s almost five times longer than an average shareholder letter. But it’s not the quantity but the quality of communication which makes Buffett’s letters unparalleled. Needless to say, any other annual letter would pale in comparison to Berkshire’s.

In April 2002, not long after Enron scandal broke out, Buffett got an invite to speak at the Securities and Exchange Commission Roundtable on the topic – “How to Prevent Future Enrons.” His recommendation was simple: As the chief disclosure officer of a company, the CEO should write his own letter. He explained –

I look for someone who talks to me frankly and honestly about the business, the way a partner would. That’s a significant plus. If the CEO doesn’t write, it’s a black mark against them for one reason – they may not know their business very well. Plenty of CEOs don’t understand their business as well as a lot of people outside their business, or even the people who work for them. They do not want to be seen as they really are.

Put simply, when it comes to communicating with shareholders, words matter as much as numbers. If the communication from management reveals a culture like Enron then you can barely trust the numbers but if the words sound similar to Berkshire’s report, you can be sure of the authenticity of the reported facts.

So here are few ideas from the book which can help you decode the CEO communication.

Capital Stewardship

Companies that earn superior returns over time are focused on stewarding investor capital. Rittenhouse writes –

As an investor, your goal is to find businesses which are run by leaders who steward capital and are accountable for their words and actions. Capital Stewardship reveals whether a CEO’s actions are based on attitudes of being entrusted with or entitled to investor capital.

To ensure the presence of capital stewardship, one should look for clues related to following topics in shareholder letters and other executive communications –

  • Capital discipline – CEOs who are good capital allocators will typically offer commentary about “returns on investment (ROI),” “returns on invested capital (ROIC),” or “returns on assets (ROA).” The strength or weakness of a CEO’s capital discipline is also expressed in commentary about “book or market value.” While most CEOs and Chairmen in India would rarely talk about capital allocation in their annual report commentary, it’s great to see a few who do it in great detail (see top image on next page).
  • Cash and cash flow – Strong recurring cash flows are crucial for long-term sustainability of a business. Given its importance, investors might expect every shareholder letter to include commentary on operating and free cash flow. But most letters fail to report on this aspect. Most CEOs just pay a lip service to it. Look for CEOs who give importance to cash flows and have excelled in writing about cash flow. Also, look at a company’s balance sheet and cash flow financial statements to see if the cash flow numbers listed in those financial statements match the numbers in the communication.
  • Operating and financial goals – Meaningful financial goal statements indicate that a CEO is serious about efficient capital allocation. Instead of stating goals as platitudes, such as “our goal is to delight all our customers”, great CEOs provide meaningful context around quantifiable goal statements.

CEOs who publish meaningful financial and operating goals and focus on capital discipline, cash flow, and balance sheet management are exemplars of capital stewardship. Here’s an example from Piramal Enterprises’ annual report –
Piramal Annual report


Candour is the language of trust and it doesn’t just mean stating the truth. It means being authentic with your words. Candid communication is an antidote to the risk of self-deception for the CEO who misleads others in public may eventually mislead himself in private.

This is Buffett’s Golden Rule of investor communications: communicate with your investors as you would wish them to communicate with you. The easiest way to test for candour is to invert the problem and test the absence of candour. And how do you test the absence of candour in an executive communication? Rittenhouse writes –

When Rittenhouse Rankings analyzes a shareholder letter, we start reading with a red pencil or pen in hand and use it to underline clichés such as “employees are our greatest assets,” “our future is bright,” “advancing momentum,” and “we aim to create share- holder value.” This kind of meaningless jargon and platitudes diminishes our understanding of the business and our trust in the leadership.

When we finish coding a communication, we look back at the pages. If we see more red than black ink on the pages, we put a company on probation. We dig further to examine the company’s accounting and its marketplace claims. This was certainly true of Enron, whose 2000 shareholder letter offered the following linguistic anesthesia:

“Our talented people, global presence, financial strength and massive market knowledge have created our sustainable and unique businesses. enronOnline will accelerate their growth. we plan to leverage all of these competitive advantages to create significant value for our shareholders.”

In one short paragraph, Enron introduced six popular CEO clichés: Talented people, Global presence, Market knowledge, Financial strength, Leverage competitive advantages, Significant value for our shareholders.

Each “competitive advantage” is an important business concept, but so many generalities are meaningless to the reader. Not only do these clichés fail to inspire trust, but they should cause a prudent investor to wonder what the company might be hiding.

Investors who read between the lines and look for the absence of candor can spot companies like this that may be headed for trouble.

Now, it’s not that the stuff CEOs write in their letters and other communication is difficult to understand. Sometimes it is written not to be understood.

Like, take a look at the extracts from the Chairman’s letter from Suzlon’s FY14 annual report. The flavour of English proves that a public relations firm wrote it and not the Chairman himself. And then, just check some of the terms used.

Suzlon AR

How many of the readers of this annual report would understand terms like “greens shoots”, “liability management”, “buoyancy”, “unlocking”, “rebalancing”, “non-core assets”?

When they can write “repayment of debt” or repayment of borrowings”, why do they write “liability management”? And what’s the deal with this term “non-core assets”? Aren’t all assets core to a company’s business? And if they are truly not that important, why do they find mention in a Chairman’s report?

Then, “rebalancing” is one of the most misused word you would hear from the CEO/Chairman of a company that has made blunders in the past and now wants to get back on track (that’s the meaning of rebalancing) to make more such blunders in the future (so, the rebalancing is perpetual).

The worst part is that you would never read a word “sorry” from such CEOs for the faux pas (oh sorry, read ‘mistake’) they committed in the past.

Most annual reports and other such financial disclosures are written not to inform readers but to protect the provider of the information.

That’s because most issuers of equities, debt, and other investment instruments are deeply afraid that if they wrote plainly, someone might actually understand what was at stake.

Not just companies, even the language financial advisors use can tell a lot about their real intentions. Arthur Levitt wrote this in an article in Wall Street Journal –

When someone has to tell you about the riskiness of a financial product, his or her impulse is always to dull the senses and reduce the likelihood of alarm. There’s a legal and psychological urge to keep people from knowing that the huge sums they are about to invest are subject to sudden disappearance, so that possibility is buried in an avalanche of impenetrable verbiage. The truth would be too shocking.

Imagine what would happen if an investment banker said or an IPO prospectus read: “You could lose your shirt if you buy this.”

Rittenhouse has coined an acronym for the absence of candor: FOG. It stands for “fact-deficient, obfuscating generalities.” Investors who find a fogged-over communication (presence of clichés, jargon, and hyperbole) need to ask: does the CEO not understand the business, or does he or she not want owners to understand it?

If you feel that you are not smart enough to understand what’s written in the annual letter, then don’t worry. It’s not a problem with you. It’s the management’s responsibility to write the letter in a manner which can easily be comprehended by an average reader.


To evaluate the quality of the management you don’t need special access to “insider” information. The secret is right in front of you ― in black and white ― in the words of every shareholder letter, annual report, and corporate correspondence you receive from the management. Once you learn how to read between the lines in the annual letter you can make an educated guess about management quality and their intentions.

Remember, analyzing words is as important as analyzing numbers.

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About the Author

Anshul Khare worked for 12+ years as a Software Architect. He is an avid learner and enjoys reading about human behaviour and multidisciplinary thinking. You can connect with Anshul on Twitter.


  1. IMHO, we should only focus on numbers and ignore the commentary by CEOs. Even the good commentary can be manufactured by ghost writers.

    When ever I focused on numbers, I got good returns (10 % per anum) in my stock market investments.

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