I guess my key observation of other people with regard to Company Fundamental Analysis is that many are extremely focussed on one aspect of a business. Most typically, I find that people from an accounting background tend to get very stuck into the Accounts of the business - of course this is no bad thing - and if you have that skill, then it is extremely valuable.
I heard a good example of this ‘down in the Weeds’ focus and not thinking holistically about a business on Paul Scott’s audiocast the other day about the Mello Conference. The gist of it was that everyone he spoke to was raving about AO. (AO World) after a barnstorming performance by the CEO in a presentation. Paul then asked them the incisive question “what’s the valuation like?”…….blank faces all round.
This is also an example of ‘Anchoring’ - a psychological concept where our brains fixate on one or several aspects and totally blot out the rest. Be warned.
Think Holistically about Companies
Anyway, those are just unscientific observations and pretty irrelevant really - what is relevant is that maybe we should all put our brain power into thinking holistically about companies - from whichever particular discipline we have most career experience in or feel most comfortable with.
I like to think that my wide career experience and Business Studies degree help me look at things from all angles - Accounts, Sales, Marketing Communications, Marketing Strategy, Product Development, R&D, Production Management, Distribution, Human Resources, Legal and Commercial, Aftersales Support etc. Along with sub elements like Succession Planning, Admin Functions, Corporate Governance, Recruitment and Training, etc.
Maybe I suffer from self delusion? (course you do Wheelie, you’re barking mate).
We all need to recognise the risk of us retreating to what we know and we need to challenge our primitive brains to investigate all aspects of a business - not just our comfort zone.
Looking at a stock to assess its potential includes a huge amount of future gazing (futurology) - you have to make space for yourself to think holistically and in an unhurried and calm way. With all the hussle and bussle of life what with Jobs and Kids and Bosses and countless distractions, do you allow yourself calm and space to think? I bet you don’t.
I think many people almost believe (or maybe totally believe) that they can have Perfect Information (the Economists among you will get this reference), and to this end they try to dot ‘I’s’ and cross ‘T’s’ - and tie themselves in knots in the process.
We all need to take on board that we will never know everything there is to know about a company - and Insiders will always have an Edge over us (see my earlier Blog on ‘Do you have an Edge?’). This means we need to be realistic in our research - think in terms of the Pareto Principle - a sensible aim is to understand 80% of a Company in 20% of the time - the other 20% will be impossible in the main to achieve and you will waste 80% of the time messing about trying. In the meantime, you will miss the boat as your Target Stock rockets up.
As Warren Buffett says “It is far better to be roughly right than precisely wrong“.
Once we have studied a Company in a Holistic manner, we need to really figure out what is truly important. What are the Key Points? What factors are really going to drive the Share Price Up? What factors will drive it Down? What is ‘Signal’ and what is ‘Noise’?
This is probably the hardest bit - and it also introduces a risk of Anchoring if we focus too much on what we think is a Key Aspect and we are wrong - psychologically we can continue to focus on what we thought was important even though the facts contradict this. I know, I have done it. And probably will again !!
Maybe one way to deal with the prioritising is to write a list. Pick out the really key points from your research, and then put them into a list. Then go through them and try to create some sort of Priority Order - with the factors most likely to impact the share price at the top and working down. I do not do this myself but maybe I should. Hmmm, got me thinking.
Anyway, that will do for now, I hope this has helped you think about your own ways of working, remember, Get in the Chopper and keep out of the Weeds !!
Right, gotta dash out and Polish the WheelieCopter…..
‘til next time (Friday probably),