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
Just as in the production of military intelligence, good stock intelligence must have four key inputs:
1) Agents in the field.
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
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.
You see, people emit and receive information directly through five senses, not just indirectly via words and numbers. A raised eyebrow and a twisted mouth can drastically change the meaning of the CEO's words, "I think sales will be good." Or the fact his entire team rolled their eyes when he said this. Or how about the fact that the CFO subscribes to the magazine
? Or that his car carries the license plate "CRTV ACT"?
These are relevant facts you never get by perusing the Internet, SEC documents or exponential moving averages. These are physical facts you can get only through sleuthing.
To be a stock sleuth, you must first view a company as a work-group aiming to get customers' checks, not just as its SEC filings, price history and accounting figures -- though of course you must know all these. Its stock merely serves as a piece of this work group.
If the work done by the group is good, better or cheaper than that of other work-groups, the customers will send more checks, and that stock will rise. If the work done is bad or worse than the competitors', the stock will fall. Therefore, to find out if your stock is likely to rise, you should talk to the check-senders and ask them how many checks they intend to send. Right?
Yet you'd be surprised how few investors -- even those who spend millions -- leave the house or the office to meet customers of the company whose stock they buy. In fact, very few investors gather primary physical information at all. The good news, however, is that if you do, you can take the stay-at-home's money easily.
How? Here is a "hypothetical" anecdote:
In June, rumors spread in Toronto that
, the second-largest microchip producer (after Intel), might buy ATI, the graphic-chip maker. Opinions raged pro and con as both sides explained why it made sense and why it didn't. Dozens of analysts spent megawatts of energy analyzing the potential combination. The logical conclusion was that the transaction did not make sense and therefore would not happen.
There was only one hitch: No one (or practically no one) bothered to verify physically what was taking place. In theory, if one did, one could have seen the top three AMD acquisition honchos arriving one late afternoon at the Markham, Ontario, headquarters of ATI, and ensconcing themselves within. Such physical evidence trumped all "analysis" that happened only inside the skulls of those who never bothered to bestir themselves to stand watch over ATI's headquarters or pay students (say) $15 an hour to do so, with photographs of AMD's top people in one hand, cell phone in the other.
Please note: Because the execs were visible (in theory, yes) from across the road, the info thus gleaned was public. Why didn't most analysts do so? Because for 99% of them it never crossed their minds that information can be physical.
What other physical facts can you look for?
How about the fact that a company's receiving clerks have been bowling a lot lately, because shipments have been slow?
Or that the president's secretary has taken a three-week vacation for the first time in two years, for a similar reason, while the stock still sells at a P/E of 32? Or that the parking lot is half empty, because of no visitors?
Very few investors sleuth for such physical info, and even fewer recognize its worth. Most stick to published numbers and written reports. They may occasionally talk to management, yes, but the greatest source of information is often well down the corporate ladder, both in the company and among its customers. Or simply in watching the physical movement of people or products.
And because so few do it, those stock sleuths who do this on top of doing regular analysis can take stock scientists' money with ease, and so can you.
Avner Mandelman is founder and CEO of Giraffe Capital Corp. A recognized investing expert, Mandelman spends much of his time sleuthing companies throughout North America. He writes a biweekly column for the Globe & Mail of Toronto and his articles have appeared in Barron's. Mandelman is also the author of the prize-winning story collection, "Talking to the Enemy."