We are taking a break from our series on getting an edge in the market because of what we read in an article in the Wall Street Journal about Keith Richards, the Rolling Stones, the song “Street Fighting Man” and the creative process. Some people might look at us strangely but we have always considered equity analysis as at least partly a creative process, not unlike the creation of a song, or a piece of art. Therefore we occasionally refer to our job as being a “financial poet”. Sound unusual? It really isn’t. There are two parts to our job. The first is determining theoretical asset values using well-worn financial analytic tools.

In actuality, determining the intrinsic value of a company mathematically is what we need to know to become analysts in the first place.  We all know the tools and the language. We all know what questions to ask. We all know how to read financial statements. But there is so much more. What is that? Specifically it is the art of investing. That’s the second and equally crucial part of our job.

Yes, we feel financial analysis is an art and a creative process; not unlike Keith crafting music on his guitar. Most guitar players can bang out notes and play a song, but how many can do so with emotion, feeling and originality? The same is true with the financial analyst. Feeling and originality in our case is determining value. Value is different than valuation. Valuation is an empirical term that can be measured by standard formulas and measurements. Value is much more esoteric and often cannot be measured by mere accounting measures. Accounting measures are more backward looking. How do we look forward? This is where the art comes in.

Taking a forward look means determining future values, user tastes, and various other things that are unknown. It means we need to look at needs and how the need can potentially be fulfilled. This is also how we differ from entrepreneurs and business managers. Entrepreneurs and managers try to craft an idea and make a business out of it. Financial analysts look at many ideas from entrepreneurs and managers, especially in smaller companies, and attempt to determine which one is the most viable and will succeed as an investment.

The challenge is eliminating our biases. In that regard, we need to put ourselves into the mind of the person whose problem is being solved by that new product or service and then try to determine if it is an investable concept. For instance, how many people are there that will be motivated to act by that product or service? Would, say, a Chinese citizen react differently than an American to that product or service?  How about a younger person versus an older one? Analysts essentially have to leave our experiences, biases and beliefs at the door and look at the world from a different perspective in determining value.

Once we determine value, then can we open up our financial toolbox and determine valuation. Therefore we are not unlike Keith Richards (minus the chemicals). Keith had to learn the chords and notes before he could play the guitar. However, to make the guitar tell a story he needed to determine if a concept he had was worth pursuing. That takes art.

This will be the last Freezing Assets Shout Out until after the New Year. Happy Holidays everyone!!!