February 28, 2014

Accentuating the Negative

A number of years ago I participated in the management of over $500 million dollars in equity and fixed income for one of the largest companies in the world. Much of it 401k money and the rest was pension assets. The equity portion of my responsibility required me to read volumes of research and the result overall was often the same. Nearly every analysis I got my hands on was a buy, not stinker in the pot. It was at that time I decided to rely on my own research and analysis of every investment that I'd make going forward, and my position was simple, find the companies I admire and try to convince myself why I shouldn't buy them.
The practice started with my looking at companies from their fundamental perspective, however over the years I've followed the practices and methods of numerous analysts eventually arriving at my favorites, corporate governance, behavioral finance and technical analysis, that latter a research methodology thought by many as similar to voodoo. Why study the external theories in addition to those directly related to traditional balance sheet analysis (referred to as bottom-up research)? In balance sheet research the analysts will look for the handful of fundamental details offering a clue to a distressed or special situation such as a stock split , a spate of bad press or simply the strength implied by the balance sheet, such as strong cash inflows or low debt outstanding.  

I find the use of this means of analysis rich in value, however in the past few years accompanied by a constant stream of emotion laden news aimed at discrediting certain industries, more cynicism than attention is showered on company guidance, the statement that the management of a company provides occasionally offering an "estimate" of how they expect the company to perform in the future. I believe this leaves the investor stranded for accurate information. And while some resources attempt to avoid that conflict, they encourage another dilemma in the investment community, which is indecisive rhetoric. Consider the snap headline, or dazzling media lecture that goes something like this.

Moderator: "It rained today and some people are speculating that the world is coming to an end. Today were going to ask Thomas, an analyst from "X" company, who thinks we should run for cover, And Sarah, an analyst from "Y" Company, who sees plenty of sunshine on the horizon. You decide."

Thanks a lot!

There you have it, in my entire career I have rarely known guidance to propel or clobber a stock with such unruly volatility. And while the spoken word frequently fuels the drive to rely on the outlets that court public opinion it's because there is also much profit to be gained from presenting a company negatively and trumping existing positive fundamentals irrespective of some available information. Trouble is, it rarely works. In fact, the more I see this happening the more value I see in my study of the fluid rules of behavior. That of course, with a pinch of voodoo mixed in.

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