Investment research: a process from filings to compliant expert calls

Investment research is the work of deciding whether a security or a company is worth owning at its price. A sound process moves from a written thesis, to secondary sources such as filings and industry data, to primary research with customers, suppliers, competitors and former employees, and back to the thesis. Primary research can show you things the filings do not. It is also where the legal risk sits, because a conversation can stray into material nonpublic information (MNPI) that you are not allowed to trade on.

This guide covers the process and the practical rules for keeping expert calls on the right side of that line. It is general information, not legal advice. If you work at a fund or firm, its compliance policies come first.

Start with a thesis you can test

Write down, in two or three sentences, why the investment could work and what would prove you wrong. For example: "Restaurant operators are switching point-of-sale systems faster than analysts expect, and Company X is winning most of those switches." Each part of that sentence is a question research can answer. Without it, reading more filings rarely changes a decision.

Secondary research: what is already public

For a U.S. public company, the annual report on Form 10-K and quarterly reports on Form 10-Q are the starting point. Investor.gov explains what each part contains (Investor.gov):

• Item 1, Business: products, services, markets, competition and regulation. A good place to learn how the company makes money.
• Item 1A, Risk Factors: the most significant risks, which companies generally list in order of importance.
• Item 7, MD&A: management's own explanation of results, trends and uncertainties.
• Item 8, Financial Statements: the audited statements, notes and auditor's report. Investor.gov suggests looking closely at any qualified opinion or disclosed material weakness.

All 10-Ks and 10-Qs are free on the SEC's EDGAR website. Investor.gov notes that the SEC sets disclosure requirements but does not vouch for the accuracy of a filing; the company's CEO and CFO certify it. Read competitors' filings too, along with earnings call transcripts, trade publications and industry data. Secondary market research lists more public sources, and industry research describes a one-week plan for learning an unfamiliar sector.

Primary research: talk to the people around the company

Filings tell you what the company says. Primary research tells you what its customers, suppliers and competitors see. The CFA Institute's guidance on material nonpublic information describes this as normal analyst work: analysts reach beyond the company itself to customers, contractors, suppliers and competitors to build the most complete picture (CFA Institute Standard II(A)).

Useful sources include:

• Customers who chose, stayed with or left the product, and why.
• Competitors' salespeople who win and lose deals against it.
• Suppliers and channel partners who see order patterns across the industry.
• Former employees who can explain how the business works, as long as they do not share confidential information from their former employer.

In the restaurant example, conversations with five or six restaurant operators who recently changed point-of-sale systems would test the first half of the thesis directly.

Know what counts as MNPI

Investor.gov defines illegal insider trading as buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material nonpublic information. Violations can include tipping others and trading by the person tipped (Investor.gov).

The CFA Institute standard explains the two parts:

• Material means disclosure would probably affect the price, or reasonable investors would want to know it before deciding. Its examples include earnings, mergers and acquisitions, regulatory approvals, the gain or loss of a major contract, management changes and product trial results. The source's reliability matters: factual information from an insider about a new contract is likely material, while speculation by a competitor about the same contract is less likely to be.
• Nonpublic means not yet made available to the market in general. Information shared with a room of analysts, or in a members-only online group, is not necessarily public.

The same standard describes the mosaic theory: an analyst may combine public information with pieces of nonmaterial nonpublic information, such as opinions from customers and retailers, and act on the conclusion, even if that conclusion would have been material had the company disclosed it directly. It recommends saving and documenting your research so you can show how you reached a conclusion.

Run compliant expert calls

The CFA standard says investment professionals may pay outside experts for insight, but they remain responsible for not requesting or acting on confidential information. It notes that expert networks often have both sides sign agreements about MNPI, and that even with those agreements, if an expert shares MNPI, you may not act on it until it becomes public.

Two of the CFA Institute's own examples show the line. An analyst who speaks to cancer treatment experts to understand the latest therapies, without asking for or receiving information such as preliminary trial results, is using expert calls appropriately. An analyst who hears from the scientist leading a company's product tests that results are disappointing, and passes that on to colleagues at his fund, which then trades, has violated the standard, and cannot rely on the agreements the expert signed.

Practical rules that follow:

1. Choose experts whose knowledge is about the industry, not the confidential plans of the company you are researching. Be especially careful with current employees of the company and its close partners.
2. Open every call with the boundary. Tell the expert you do not want confidential information about any current or former employer, or about unannounced results, deals or approvals.
3. Ask about patterns, not secrets. "How do restaurants decide when to replace their POS system?" is safe ground. "What is Company X's churn this quarter?" is not.
4. Stop the call if MNPI comes up, write down what happened, and tell your compliance team if you have one. Do not trade on it.
5. Keep notes of every call as part of your research record.

What to do when an expert cannot share confidential information covers how to keep a conversation useful within those limits.

Update the thesis and decide

After each round of research, go back to the thesis. Which parts were confirmed, which were contradicted and which are still open? A thesis that has survived conversations with people who would know is worth more than one supported only by a model. When experts disagree, what to do when experts disagree explains how to weigh their views.

Your next step

Write your thesis in two sentences and list the three facts that would change your mind. Check which ones public filings can answer. For the rest, list the roles of people who would see those facts in their day-to-day work.

Instant Expert can find people who match a description such as "owners of multi-location restaurants who changed POS systems in the last year." You review who it finds, it sends your invitations and you pay for each call that gets booked. Screening for conflicts and following your firm's compliance rules remain your job. The directory pages for sales professionals in restaurants and finance professionals in restaurants are one place to start. For managed compliance workflows, compare expert network companies.