On value and information

My weekly comments are now available outside of the Sharescope paywall here:

If you’d like to read the most up to date analysis, you’ll need to subscribe to Sharepad

It is an irony in financial services, that frequently the best quality analysis is free.  For instance:

• Warren Buffett’s shareholder letters
• Dan McCrum’s analysis of the Wirecard fraud on FT Alphaville
• Or (for now at least) Marc Rubinstein’s Net Interest newsletter

The opposite holds true as well.  The most expensive analysis is often the most worthless:

• Merrill Lynch’s corporate finance advice to Sir Fred Goodwin “Yes, we think it is a jolly good idea for RBS to buy ABN Amro” –  Cost tens of millions of dollars, or $1 trillion dollars depending on how you measure the cost of bad advice.
• Any issuer paid rating on a triple AAA rated subprime security pre 2007.  Again this would have cost tens of thousands of dollars, or possibly billions of dollars depending on how you value the cost of poor “opinions”.
• Ernst & Young’s Audit “opinion” on Wirecard.
• Most “bulge bracket” sell side equity research notes, with the possible exception of Henry Blodget’s buy note on Amazon with $400 price target in the late 1990s.  Blodget later got into trouble with the SEC because he’d written in emails that companies he was promoting were “a piece of shit” as a poster child of everything that was wrong with equity research in the late 1990s.  In 2003 Blodget was charged with fraud, paid a $2m fine and agreed never to work as a sell side researcher again.   However, I think that you’ll agree, his original Amazon bullishness does stand the test of time rather well.

So I’m happy to make my older analysis available for free.  It is also the case that older information is seen as less valuable, and up to date worth paying a premium for.  For instance, if my analysis is worth following, you probably want to be one of the first to know what I’m positive on, and can trade ahead of others who are later to realise the value.

Infinite Loops

Makes sense on the surface.  But at a deeper level, perhaps not. For instance, Buffett’s analysis of goodwill may be out of date, but still relevant.  Or this interview by Jim O’Shaugnessy and Jamie Catherwood with Jim Chanos. Make sure you listen to end with the conversation about Waste Management in the 1980s acquiring capitally intensive businesses, writing down the value of the tangible assets, so that the balance sheet was top heavy with goodwill that was amortised over 40 years.  You could argue whether tangible assets should be written down over 3 years or 5 years, but 40 years (at the time goodwill was amortised over 40 years, it is now theoretically infinite, but subject to an annual impairment test) was certainly the wrong number! I suspect this may once again become relevant, given so many balance sheets are top heavy with intangible assets.  Intangible assets are hard to value, but nevertheless require expense to prevent them from becoming obsolete.  

– The podcast is called “Infinite Loops” because sometimes we get caught up in what feels like infinite loops when we try to figure things out.  Markets go up and down, research is presented and then refuted, and we wind up right back where we started.

Aside from listening to Jim’s podcast, I’m currently reading the fragments of Heraclitus.  Taleb has an idea that thinkers, ideas, analysis that is old but has stood the test of time (Lindy effect) is valuable and still relevant.  I would like to think my older analysis on this blog is still worth the trouble of reading.  Or the Sharepad analysis.

But if not, here is some Heraclitus for free:

“The people must fight in defence of the law as they would for their city walls”.  Fragment 53

“It is impossible to step twice into the same river, ever different waters are flowing.” Fragment 34

“According to Heraclitus, the Sibyl, with raving mouth, utters things without humour, without adornment, without perfume, and yet, thanks to the god, she reaches down a thousand years with her voice.” – 

I’ll leave you to think about the first two fragments, and why they have survived so long. The final statement is from Plutarch, On the Failure of Oracles at Delphi These Days to Use Verse, reporting what Heroclitus said second hand. He is the first known Greek writer to mention the Sibyl, a raving mad oracle, saying things that aren’t funny, or overwrought, or sweet sounding, and yet her voice “reaches down” a thousand years.  An infinite loop indeed.

Photo by Adrien Ledoux on Unsplash

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