Wednesday, September 11, 2013

US Version of Research Alpha

My research and investment methodology focuses on people, structure and valuation. I call it Research Alpha because it emphasizes factors that most analysts do not pay much attention to.

It can be lonely doing this as my methodology is not popular.  There are not many people to compare notes with.  Many investors don't believe or understand it. The majority of investors likely never thought about it.  

So it is nice to read an article that does a good job of articulating an investment focus that is close to mine.  It was written by Kristina Salen who is an ex-Fidelity/Oppenheimer/Merrill Lynch analyst.

According to the article, the author left finance and is now CFO of an interesting web-based business called  The article looks at her previous investment role from the perspective of someone who is now on the other side of the fence.

The article I'm referring to was posted on the author's Linked-In website recently.  I became aware of it through the very good Quartz daily email.

The article seems like a US-centric version of my strategy.  In it, she notes three things that she learned about investing: strategy is important, people are important, and that forecasting quarterly earnings is mostly a waste of time.

The three factors she writes about are not one-for-one with my focus on people, structure and valuation; but they seem close enough to my past writings on Research Alpha and the importance of people to warrant a blog posting.

We agree on people.  Business is about people. They make all capital allocation and management decisions.  Understanding their background, their relationships and their past decisions can help investors determine if they are good or bad at allocating capital and managing a company.

We also agree that spending time on quarterly earnings is not very important.  I think of short-term earnings forecasts and what goes into them as Research Beta. There are many analysts making forecasts and these are quickly reflected in stock prices.  Trying to guesstimate next quarter's earnings feeds our emotional need for short-term results, but real wealth rarely comes quickly.

Where we differ is strategy.  Strategy is important, but to me structure is more important in emerging markets.  

By analyzing a conglomerate's structure one can identify the scope for leakages from a listed company into an unlisted entity owned by the same controlling shareholder(s). Minority shareholders get shafted if earnings, funds and management time and focus are transferred to other group owned companies.   

Strategy is likely more important in developed countries. In emerging markets the focus is on catching-up and transplanting business models, products and services that have already been successful. 

This brings up what I believe is the biggest difference of investing in the US and the rest of the world.  The difference is ownership structure.  In the US companies are primarily a single entity that has a distributed shareholding base.  They are typically not part of a conglomerate or 'group' as is the case in most of the rest of the world.  

Most investors don't look at the entire conglomerate and don't spend enough time looking at who owns and runs the entire business group.  I think this is a mistake. 

I've never heard of Kristina before I read the Quartz email.  Her article is insightful, well written and I'd encourage readers of this blog post to also read it.  

I'd also like to thank her for writing it.  My work is a little less lonely knowing that others look at the world somewhat similar to myself.  

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