Avner Mandelman
Investment is war -- you try to take the other side's money while they try to take yours -- and stock analysis is commercial intelligence. And just as good military intelligence is crucial for winning at war, so is good stock intelligence mandatory for winning in stocks.
How can you judge if your stock intelligence is good enough? That's a key component of The Sleuth Investor. Just as in the production of military intelligence, good stock intelligence must have four key inputs: 1) Agents in the field.2) Agent-runners.
3) Back-office analysts.
4) Decision makers. If any of these four ingredients is missing throughout the process, you are likely to lose the market battle. Yet it is a curious fact that, just as in military intelligence, stock analysis is also often deficient in the first two functions. Intelligence agencies often have too many analysts with advanced degrees who try to guess what goes on in enemy territory on the basis of satellite pictures, without enough input from human agents. In the same way, too many stock analysts see themselves as stock scientists providing "opinions" based on SEC filings and logic to stock trigger-pullers, with hardly any exclusive human agents in the field. Why are human agents important? Because the best investment intelligence must have three important qualities to be any good: It must be true, it must be important, and it must be exclusive. If any part of this trinity is missing, the information is usually no good. Truth is often a question of source: Get your information from reliable sources --certainly not agents of the seller, such as corporate finance or PR flacks. Importance is a question of expertise: Brokerage reports are full of charts of irrelevant information that waste your time. How can you tell which facts are important? You must learn the company's business and find what is commonly called the business' "drivers." Only when you know the business can you know which information is worth spending your time on.
But what about exclusivity? This is hardest, but also perhaps the most crucial. Universal access to the Internet means that practically everyone has access to second-hand or "symbolic" information -- letters and numbers that someone else has collected and vetted and published.
Yet the assumption that you are so much smarter than anyone else, that you can extract more meaning out of this second-hand info, is a dangerous delusion, for two important reasons.
First, it is highly improbable to win against the entire world in financial poker played with open Internet cards. If you insist you can, please put your money in the market pot, and I'll be delighted to take it and hand it over to our clients.
But second and deeper, not all information is transmissible in symbolic form. Some information is always physical, and often it is the most crucial kind.
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