Years ago, I took a class on IPOs, where the professor (a Wall Street lawyer) said that if you ever actually read and believed the "risk factors" in a company's SEC filings, you'd never bother to invest. They're supposed to be the the absolute worst case scenarios, laid clean, so that any investor can't claim they were blindsided should everything go wrong. In fact, companies are often pushed to make the risk factors seem as scary as possible to avoid the possibility of a later lawsuit. However, as scary as you make them, that still doesn't mean that companies are doing a very good job figuring out what risks are really on the way. Joe Weisenthal does a nice job looking through a bunch of historical financial filings from companies as their market cap peaked to see if they accurately noted the biggest challenges to their business -- and found that they often do not note even the most obvious (in retrospect) challenges
. For example, the big newspaper chain McClatchy claimed that the biggest threat to its business in 2005 was the cost of newsprint, barely noting the impact of the internet on any newspaper's core business plan. And that's in 2005 -- not 1995, when it first should have been occurring to folks at newspapers that the internet represented both a threat and an opportunity. He also checked out Microsoft's filings, noting that the company has been incredibly slow to recognize that Google was a competitor in its risk factors listings.
Of course, this raises some interesting questions. Are these companies really missing these threats? Do they start out so small and grow so fast that companies really are taken by surprise? Is it only in hindsight that it seemed obvious? Or is it that the companies don't want to admit these emerging offerings are really threats until they absolutely have to? And... if that's the case, who are they trying to deny the threat to? Themselves? Or their investors? It may be a little of all of that -- but it stands to reason that the denial runs across the board -- and part of it may simply be that companies don't want to admit that these "upstarts" are threats because it could actually serve to legitimize the threat and even accelerate it. Either way, it should make you question just how useful the "risk factors" really are. Even when they're designed to be as conservative as possible, they may actually be used to hide
the real threat. Perhaps we need a more open sourced/Wikimedia approach to risk factors. I'd bet that in 2005, if you asked a bunch of knowledgeable folks about McClatchy's risk factors, they'd have named the internet ahead of newsprint costs.