About Me

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Avram Fisher, Founder & Portfolio Manager of Long Cast Advisers, is a former equity analyst at CSFB and BMO covering industrials and business services. He has prior experience in private equity; as a corporate governance analyst; as a writer; reporter and private investigator; and as a lifeguard and busboy (I still clear plates when my kids don't). This blog is an open book of ideas about patient investing and about starting up a small-cap focused RIA. It is part decision-diary, part investment observations and part general musings. Nothing on this blog is a solicitation for business nor a recommendation to buy or sell securities. It is simply a way to organize and share thoughts with an expanding audience of independent, patient and talented small cap investors. www.longcastadvisers.com

Wednesday, August 15, 2012

Churning earnings with a robot

I was recently asked to consult with a company that converts bulk data into "narratives". For example, the company can take a baseball scorecard and it's robot will convert this into a news story about the baseball game.

A financial services client has engaged this company to use the robot to automate sell side earnings reports. The aim is to create reports that sound as if they were written by an equity research analyst, presumably so the client could market analysis on every company on the stock exchange. The company is looking for someone to help make the earnings reports sound more genuine.

All of this raises the question of the value of earnings reports.

Earnings season consumes an inordinate amount of time for sell side analysts. Companies report, sometimes several on the same day, and analysts  race to be the first to publish their notes, much of which was already presented in the press release, then call their clients telling them their views and perspectives. Earnings days are long and noisy and the reports feed the information needs of institutional and individual investors as well as the business / media complex that both reports on these things and reinforces their importance.

In the week leading up to earnings, the equity research associates prepare models and write templates for the reports. It is a busy time. So an automated note - to an associate - is something of a holy grail that would allow more time to improve a stock screen, manage a personal account, study for the CFA or buy crap online.

Ahead of one earnings season, I created an automated earnings note that did a reasonable job pulling numbers, rates of change and keywords from an excel file to create simple paragraphs like "Revenues were $180M, up 10% y/y and above our expectations. Revenues were driven by [fill in something management said on the conference call]. Gross profit was 10%, 180 bps above our expectations and up 40bps y/y. Profit was driven by [fill in something management said on the conference call]."

The system worked, but raised the question; if I can automate it, what value does it actually have?

We live in a time when capitalism, consumerism and technology have all converged to rapidly convert anything into a commodity. This goes equally for things like electronic goods, healthcare and information. But what retains value over time, will  - as always - be things that are rare, unusual and hard to replicate. In the case of the equity analyst, this includes hard to find information and perspective, on a company, an industry, a management or a strategy.

I haven't decided if I'm going to work with this company or not. On one hand, it would allow dumb banks to convert their research staffs into robots, further shed staff and reduce comp, but still provide "equity research". On the other hand, maybe it would allow analysts to focus on value added research like independent sources, useful and unique surveys, interesting correlations and industry perspective, all in a highly regulated environment that adds value and reduces risk for clients.

Either way, I would remind the robot that just as owning a knife doesn't turn anyone into a chef, so automated earnings reports would not turn it into a sell side analyst.

Tuesday, August 14, 2012

The analyst as philosopher and fisherman

A stock picker is a bit philosopher and a bit fisherman. A philosopher in respect to the search for "truth" (ie. value) and a fisherman in respect to finding value in a sea of stocks. 


Just as the rod does not make the fisherman, neither does a degree in finance, CAPM or excel make one a stock picker. It's easy to forget - in the age of "one size fits all" tools like CAPM - that value, truth and fishing are also highly personal. 


The philosophy behind CAPM is quite incredible and my disdain for it is not without recognition for what it aims to achieve; an objective definition of value. It tells the truth! ... not based on the "eye of the beholder" or a comparative valuation analysis or a historical study of multiples, but on the present value of future cash flows, discounted back at some rate. 


Just pretend CAPM isn't susceptible to changes in expectations, like what future cash flow looks like, and its a tool that works everywhere! 

Or not. 

In my opinion, the individual styles of value makes the markets much more fascinating. What investors will pay for growth or value, as a multiple of EBITDA, EPS, free cash flow, square feet, RevPAR, etc is all a private choice, based on comfort and expectations, and it changes over time. 

A detailed model is nice, and anyone can calculate odds with reasonable certainty but - I know this goes in the face of truth seekers everywhere - common sense, an understanding of management's strategy, a  few years of 10Q's, K's and proxy statements is more then sufficient for a stock picker to succeed. 

Except for one thing; every few years new technologies come around that disrupt the industry. ETF's and high frequency trading are doing to the stock picker what trawling and draglining has done to fisherman. 

In a proximate sense, HFT obviates fundamental methods and raises the cost of business for those who want to keep up and grow assets as quickly (get a bigger boat). 

For now, therefore, I think it's inevitable that stock pickers will lose market share to the index funds. 

But as the the pendulum swings towards undifferentiated buying, it might in fact put a premium on those stock pickers who stick to their knitting, deeply understand businesses and industries and know how to acquire them at low prices with low correlations to the overall market. 

In short, investors seeking differentiated ideas and differentiated returns will have to search a little harder for differentiated stewards of their hard earned capital.  


My long held philosophy - and many others' - is that the costs of buying shares of publicly traded companies will always be lower than the costs of replicating said businesses on my own so I make my business looking for other great businesses run by great managers doing interesting things profitably and I buy their shares when I think they are trading at reasonable prices, owning them as part of my own business, growing with them as they grow, keeping part of the cash flows or simply waiting for others to recognize the underlying value. 


It is a long term approach but it is my harbor and haven from the turbulence of undifferentiated programmatic trading and ETF indexing. 

It's hard to fish in a storm tossed sea but having a portfolio of great businesses run by great managers doing interesting things profitably and acquired at low valuations will be a steady boat through all conditions. 

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THIS IS NOT A SOLICITATION FOR BUSINESS OR A RECOMMENDATION TO BUY OR SELL SECURITIES.