Over the last twenty years, technology and the internet has made financial information and secondary research a click-a-way for almost every investor. Today more than ever, investors need to focus on qualitative analysis, scuttlebutt, and field based research to gain an advantage. At our MicroCap Leadership Summit, value investor Paul Lountzis gave a great presentation on acquiring differential insights, those unique strategic insights that bring the numbers to life.
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If you enjoyed this presentation, you will also find value in these:
Interview with Paul Lountzis: Investing & Scuttlebutt Research
The Art of Interviewing Management
Book Review: The Sleuth Investor by Avner Mandelman
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In my opinion, Paul’s presentation offers the art of investing at its best:
• emphasis on quality securities
• a strategy that allows an investor to buy on major weakness
• in order to buy on weakness an investor needs to know more than the market, and the interview process he describes accomplishes that
putting aside a personal bias which I know is based on my own personal inclinations (a desire for yield), I’d offer these thoughts on where Paul’s process differs from my own:
• qualitative versus quantitative — saying qualitative is more valuable than quantitative because qualitative is easy, more widely employed and thus doesn’t offer the investor an advantage over others may de-emphasize the value of an indepth knowledge of understanding financial statement trends and their value in assessing competitive advantage
• the value of telephone versus in person interviews — you can do 100 phone interviews in the time it takes to do one in person interview, and while the value of an in person is way, way higher (as Paul says), my experience is that you can do 100 phone calls/interviews in the time it takes to do one in person interview (if you include traveling time). If you call 100 people, you get useful information from 10, really interesting information from 1-2 and 3 more can confirm the accuracy and value of the 2 best. So roughly five worthwhile interviews out of 100.
Some categories of those with in-depth knowledge of a company (major investors, ethical managements which are kind of rare) can be very forthcoming over the phone. Ex-directors, ex-senior management are much more likely to be forthcoming in person.
Of course if an investor’s objective is to build long term relationships with potential information sources, nothing works as well as in person (Gabelli, at least at one time, used to describe it as belly-to-belly) which I have always thought of as amusing.
Thank you for your very thoughtful comments Rod. The only comment I have on your excellent piece is that both quantitative and qualitative are very important. It begins with a deep understanding of the quantitiative (financials) and then the qualitative is dove tailed on top of the numbers to bring them to life and help an investor better understand the future prospects by doing the field research to deeply study the competitive dynamics, moat, etc. I would not say that the qualitative is more important than the numbers but an important addition to a deep understanding of the numbers and better help an investor determine if those competitive advantages reflected in very attractive historical financials are sustainable and repeatable in the future. Also, true deep qualitative work is not easier and not widely practiced in my experience. I welcome your thoughts. Best, Paul.
Paul, I agree completely. As a young analyst in my twenties I focused on deeply undervalued acquisition candidates and my portfolio was very volatile — lots of losers with a few big winners. At that time I came across an interview of Warren Buffett when he was a young money manager in Omaha and I recall reading that Buffett and the interviewer walked through the downtown area, with Buffett commenting frequently on the capital turnover and margins of the businesses they strolled by. That may have been from Adam Smith’s The Money Game. That got me looking into financial statement trend analysis, basically breaking return on capital (or return on equity in the case of financial companies) into its constituent components, and then studying what the trends in those components indicated about a company’s competitive position and prospects.
I’ve found that very valuable in my analysis, including both avoiding disasters and finding companies undergoing fundamental positive change. The one area it doesn’t work well is in cyclical companies, even in cyclical companies with a competitive advantage, which is often a production cost (or low cost producer) advantage, because the stock values of those companies tend to recover way before published financial statements reflect improvement.
On the other hand, the frequent criticism of investing based on financial statement trend analysis is that it is like driving looking in the rear view mirror. There is some validity to that criticism I think, but it does work particularly well in the kind of companies you (and the Buffett of yesteryear) invest in — companies with low or no debt and strong growth (including often dividend growth) with minimal capital expenditure. Those are the cream of the crop in US companies — like investing in the future earnings of the top 2% of MIT graduates — and buying them on weakness, in particular weakness in the broad averages, may be the best way to make lots of money in the market over time, although nothing is easy in investing, and there will be losing years following that strategy.
Thank you for your thoughtful comments. I would enjoy speaking with you. Please email me your contact information at [email protected]. and i will email you mine so that we may speak by phone. I am looking forward to speaking with you. Have a great week and Best Regards, Paul.
It would be great to connect.
My email, [email protected].