5
Jan
2016

Thinking styles: words and numbers

Financial Statements contain words and numbers. And most people focus on the numbers, because that is where they think the information is and the certainty lies. I once went to a “milk round” presentation at a large accountancy firm, and they gave everyone an example of a company’s Annual Report & Accounts. We were told to read them and see what we could find out.
After 5 minutes the accountant hosting asked people to put their hand up if they had look at profits and revenue. Maybe half the hands went up. They then asked who had looked at the cashflow statement and the balance sheet. Most hands went down, but some stayed up. And the Partner said those were the sort of people who would make good accountants.
I hadn’t looked at either. And curiosity overcame my fear of humiliation. So I put my hand up and pointed out that I had just started reading the document from the start, to see what management had said. He looked at me in disdain, and said

“perhaps you are not cut out to be an accountant.”

Though he turned out to be right about my career, I found this attitude odd at the time. Now, post Enron and the collapse of Arthur Andersen, I think it just shows the arrogance and self-regard the accountancy profession held themselves in. Accounting numbers are only estimates (and at times very optimistic estimates) and can be manipulated. Accountants should know this.
The idea that there is nothing of interest in words, and that only numbers matter spills over to degrees. Physics, engineering and economics are seen as “useful” “hard” subjects; but history, literature and philosophy are “useless” “soft” subjects. No one seems to ask why, despite the fact that the society was full of physicists and engineers, the Soviet Union collapsed.
I can’t help thinking the answer is to do with a talk I attended called “Logic in Georgia”. I was attracted by the rather paradoxical title, having spent some time in Tbilisi, Georgia didn’t strike me as a particularly logical country.

The talk was on the development of mathematical logic in Soviet times to modern day. Dr Nick Bezhanishvili, who gave the talk, pointed out that though the state was keen to encourage applied mathematicians, authorities were deeply suspicious of pure mathematics. When I asked why, he suggested it was because pure mathematics was full of personalities like Kurt Goedel (who pointed out a logical inconsistency in the US Constitution in his visa application interview) and GH Hardy and Bertrand Russell. Hardy once told Russell he was glad to prove anything.

“If I could prove by logic that you would die in 5 minutes, I should be sorry you were going to die, but my sorrow would be very much mitigated by pleasure in the proof.”

On reflection Russell found that he agreed. These aren’t the sort of people the Soviet Union wanted to encourage!
My experience is that there are rather too many people who believe numeracy (being good with numbers) is the same as being analytical (being able to take apart arguments to their logical, sometimes unpalatable conclusion). Pure mathematics, which is very much about the latter, has the annoying tendency of appearing useless until it becomes useful. And numeracy has an annoying habit of becoming tainted by human frailty (remember the over 100 phDs that HSBC / Household employed to do their risk modelling?) so that it supports the answer everyone wants to hear.

 

Hence I like to read very analytically what management say about the companies they are running, to take apart and look for signs of inconsistency and incoherence in the text. And I like to buy companies where the management don’t stick to the standard PR style but show their idiosyncratic thinking styles through their commentary.
I particularly like the “Chairman’s Preamble” by Tom Kirby at Games Workshop. Which is rather fun, as you would expect from a company that makes miniature figures for adolescent boys.

“The Great Master Plan continues: cutting costs, becoming more efficient, providing excellent returns on capital and paying dividends. We do not set out to pay dividends, we set out to run an efficient company that uses money wisely. We know we are doing that well when we have more money than we need; this becomes your dividend.” 

He then footnotes his comments to point out that no miniature has been made redundant, and no army is unwelcome.

But I also bought Burford Capital. This is a company run by lawyers, so the written style is very different. Burford, which provides litigation finance to companies, a sort of “no win, no fee” lawyer for companies rather than individuals, doesn’t know either. Litigation is fundamentally uncertain, so Burford hopes to make returns on a probalistic basis though it has to try to account for the court cases using Fair Value accounting on its balance sheet. And they do their best to explain the uncertainty in the text.
As they say in their 2011 Annual Report

“Litigation is also inherently unpredictable – except that, as we often say to litigants, it usually costs more and takes longer than predicted. As a result of that unpredictability, there is a tendency for our financial results purely from single case outcomes to be lumpy.”

The accounting style is obviously open to abuse, there is no certainty in the numbers. But the text gives some comfort because they really do try to explain the business to their investors. The points that litigation is unpredictable except that i) it usually costs more ii) takes longer than predicted seemed to me a very elegant way of dissecting the business model, not with numbers, but with words.  I’ve never met a poor lawyer, and as long as our interests are aligned I’m be happy to invest.

In my experience I have found that people who have not studied the “hard” subjects, actually tend to be more analytical thinkers. Two of the best books on the financial crisis were written by someone who studied History of Art (Michael Lewis, The Big Short) and someone who did her PhD in social anthropology in Tajikistan (Gillian Tett, Fools Gold).  Although mathematics is seen as a “hard” “useful” subject this wasn’t always the case. During WWII British mathematicians had to pretend to be physicists so that they could be recruited for analytical work. GH Hardy was rather proud of the uselessness of his specialism. In A Mathematician’s Apology, published in 1940, he wrote

“Real mathematics has no effect on war. No one has yet discovered any warlike purpose to be served by the theory of numbers.”

He might have been a great analytical thinker, but he should have remember that the history of mathematics shows that “pure” has an annoying way of becoming useful knowledge. I suspect Alan Turing, the code cracker and now the subject of two Hollywood biopics (“The Imitation Game” and “Enigma”) would have disagreed with Hardy. And when Clifford Locks applied number theory to Public Key Encryption at GCHQ, he thus proved the mathematician wrong.  I wonder if Hardy’s sorrow would have been mitigated by the pleasure in the proof.

The Life of Bertrand Russell, Ronald Clark.
A History of Western Philosophy, Bertrand Russell.
The Formula that Wouldn’t Die, Sharon Betsch McGrane.
The Code Book, Simon Singh

1 Response

  1. Brilliant post Bruce and I couldn’t agree more. In my industry, pharmaceuticals, and speciality, digital and social media, it becomes very apparent how things can get taken in the wrong direction if one relies on numbers. Many pharmaceutical (and other) companies held back from social media due to a lack of ROI data – not understanding that the value in social media often starts in the “softer” side of things such as building up relationships and extending the reach and impact of conversations, both of which can be hard to substantiate in solid numbers.

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