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Josh Farkas

This post is by Josh Farkas, who wrote for the site in 2010. - Evan

Latest posts by Josh Farkas (see all)

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If you are thinking about buying nearly anything, you can go on-line and compare the attributes, warranties, and reviews of the product or service- apples to apples as they say.  Have you ever tried to do this with a share of stock in a company?  Tell me, is it a better investment to buy a share of stock in GE, or in Exxon?  Which company has made a higher return for its investors, Dunkin Donuts or Home Depot?  Even if you can’t answers these questions, you still have to make an investment decision regarding each contribution you make to your 401(k).  Do you do what most people do- people pick something and hope?  Now there is a better way.

In January of 2009 the Securities and Exchange Commission put out rules that went into effect this year that require companies to file “eXtensible Business Reporting Language” data, referred to as XBRL, with their financial reports.  The first round of companies has just started submitting data, so let’s take a moment to talk about the technology and its potential.

The XBRL data works like XML data tagging for the internet.  XML data tags each piece of text, so that once it is defined it can be manipulated but still be identifiable.  Think of it as a sticker that you put on a book that identifies it as your book.  You can loan the book to a friend, and even if that friend donates the book to a local library, the tag is carried with it so that you can pull it off the shelf and quickly identify it as your book.  XBRL tags define each financial number that a company reports.  So, once the definition for each number is standardized, you can compare the data to the data of other companies.  You can manipulate the data in financial models, and still identify not only what the number represents, but which company it pertains to.  With this information, anyone with some computer knowledge will be able to answer questions such as which company actually makes more money per dollar invested, and which company has performed better for the year.

There are a lot of other cool things that can come of XBRL as more and more companies are required to adopt the technology through the phase-in period, and as it develops further.  I particularly like comparing executive compensation numbers across companies.  It can be a very eye-opening perspective, especially when you overlay that with the company’s performance.  Another use that you might find interesting is to evaluate if you really want to hold a mutual fund or company’s stock in your 401(k).  You can additionally compare the financial information of multiple companies over a defined period, much like you look at a player’s history before the Fantasy Football draft to get an idea of how he might play this year.

If you’d like to check out a demonstration of how it works, click here for the SEC’s sample engine, here for a dead simple real-world example, or here for Bowne’s rendering engine that really lets you tweak the information and build charts for certain companies.

As I said, more data is becoming available on companies every day.  The SEC even has an XBRL RSS feed if you want to be notified as soon as new XBRL data becomes available.

The technology is still very young, but the potential for it is huge.  Stock is a commodity, so why can’t it be more like comparing flat-screen televisions or cars?  With XBRL and just a tiny bit of technological know-how, now it can be.

For a further description of how it works and what you can do with it in a pretty creative video format check out this video on YouTube.

XBRL in plain-English [JustSystems, via YouTube]