Businessman reading documents © Getty Images

I wouldn't have noticed what was in Andrew's trash last weekend had he not called attention to it by saying he was embarrassed for me to see what he was tossing into the paper-recycling container at the town dump.

It was a big stack of annual reports and proxy reports, recognizable because they were still wrapped in the telltale black plastic that many brokerage firms use as envelopes for corporate paperwork. They were unopened.

"Every year it's the same," Andrew said. "I mean to read the annual reports and proxies but I don't have the time and I don't really know what to look for, and my broker is satisfied with what I own and would tell me if he felt we needed to make changes. . . . At some point, there's this big stack of paperwork cluttering up the house and I'm busy and I don't want to look at it anymore, so I just throw it all out. . . . I'd feel horrible if anything went really wrong with a stock, but it hasn't happened yet."

Andrew -- whose children I used to coach in youth sports -- expected me to say he was somehow a bad investor for failing to read the paperwork.

Sadly, he's pretty much the ordinary individual investor.

Studies on how many investors read paperwork show varied results, but most suggest that no more than 20 percent of the people getting the reports spend any time perusing them. As online distribution of corporate paperwork has increased, many investors spare themselves Andrew's trip to the dump, but they don't do much to take stock in the companies they own, despite some neat web-based features that often help investors find the information they want quickly and easily.

The problem is that corporate documents are, by design, increasingly dense and dull; companies are trying to make themselves look as good as they can while covering themselves on all liability issues.

Documents that are hundreds of pages long are commonplace, and even many investment pros who know what they should be looking for don't always do their due diligence.

If you simply ignore the issues, however, you are much more likely to focus on current events, and what has happened to the stock price lately becomes a dominant part of the decision-making process, which is the wrong focus for a long-term investor, who should be more worried about the condition of the company's financials than with what the market thinks of the firm right now.

David Trainer, president of New Constructs -- a Nashville-based research firm that dives into the documents and reads them from the footnotes up -- says it took him years to figure out how to properly read annual reports to where he doesn't miss anything, noting that with the models his firm uses it can't afford to overlook anything because "you never know, the one thing you miss could be the most important item in the filing."

The basic things an analyst like Trainer is looking for -- reserve and tax accounting are the easy stuff compared with "ESO Black-Scholes volatility assumptions" or "Level 3 asset valuations" -- are way beyond the scope of average investors.

But Andrew Morse of Hightower Advisors in New York notes that individuals typically don't need to go to that level, and can focus on a few elements, because "the remainder is for investment professionals or compulsive readers."

Ask 20 investment professionals the three or four things they wish every client would look at within corporate paperwork and you'll get so many suggestions on the "must-reads" that you, again, reach the level where looking at the reports becomes too much work. (In fact, that's what happened as I reported this piece.)

But if Andrew had stopped tossing the trash last weekend and had opened an annual report for a tutorial on what to look for, here's the quick-and-dirty version on what to take from annual reports with just a few minutes' reading:

1. The executive summary

Read the top dog's take on what's going on with the company. If the CEO is making excuses or talking in jargon and it makes your nerves jangle, take the hint. "You'd be surprised what you can come away with just by reading and feeling the tone of the letter," said Chuck Carlson, editor of The DRIP Investor newsletter and chief executive at Horizon Investment Services.

2. Debt levels, cash on hand, sales, operating profits

You don't have to be a sophisticated investor to know that a significant year-to-year increase in debt levels, or a big decline in sales and/or operating profits, is a bad sign (as is reduced cash on hand if there hasn't been an acquisition or special dividend). There can be sound explanations for any of these red-flag issues, but you'll only search for those justifications if you find those flags flying in the documents.

It's entirely possible for a company to see its stock price rising as sales, profits and cash-flow are declining, but if those conditions make you nervous -- and they should -- you don't want to be thinking everything is fine when Wall Street figures out that it's not.

3. A brief auditor's report filled with boilerplate

Look for a short note, with your only concern being that auditors say the statements "accurately represent the company's financial position." If management is changing auditors or disagreeing with its accountants, you should wonder if the numbers are trustworthy.

4. Proxy statements

They're included with most annual reports and if you're going to be a shareholder, voting is the right thing to do, even if you simply reaffirm that you trust management. That said, completing proxies maintains a relationship with the firm, reducing the chance that any "inactive account" someday gets sent over to state authorities. (If your brokerage firm or adviser votes proxies on your behalf, learn their policies; typically, with a few policy exceptions, they vote in line with management.)

In the end, you're doing enough analysis to have some control, and to maintain the courage of your convictions, rather than just riding along and hoping things turn out.

Tossing the papers unread and deleting the e-mail notifications gets rid of the clutter, but it won't help you decide if you need to be tossing a bad stock out of your portfolio.

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