Author Archives: John Boylan, CFA

Personality Crisis

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Not long ago I had lunch with a friend and we discussed the Myers Briggs test (click here for a definition of the test). He mentioned to me that that he read somewhere that a majority of financial analysts were INTJ—surprisingly one of the rarest of the Myers Briggs 16 personality types (especially among women). For the record I am an INTJ. If you have never taken the test, here’s a link to a free analog version.

While psychological analysis is not the purpose of this post, there is something that has always driven me nuts about this industry. What upsets me is that there is an expectation that a stock market analyst must act a certain way to be successful. This has always surprised me. That’s likely because INTJs like me are among the most independent thinkers of the personality types in the Myers Briggs grid. This might explain why I think “Kiss Alive” is the best live album ever, but I digress…

Why do I feel this way? I am guessing it’s because that New York is the capital of our industry. Don’t get me wrong. I love New York. The Yankees and Giants are my second favorite teams (sorry Boston fans). Having said that, I believe there seems to be some expectation of a hyper aggressive personality type that might not manifest itself in people west of the Alleghenies. I realize that there has to be some degree of fighter pilot attitude amongst us as analysts, after all no one wants to look unintelligent when discussing the markets with clients. But then at the same time, I feel on occasion that we all can use a dose of Minnesota Nice. Oftentimes our worst mistakes come when we make a mistake and try to cover it up with bravado.

One of the best lessons I ever learned in this industry was in my first week on the job. One of the stocks my analyst and I were covering had an unexpected bad quarter. After doing our analysis, my analyst called up one of the biggest holders and started out the conversation with (and I am paraphrasing) “I was wrong on this stock. Here’s where I went wrong, and here’s what I think you should do now.” I was stunned by what came next. Instead of the client becoming angry he said “Thanks for the call. You are the only analyst who has called me on this name. I appreciate that.” Ever since that day I have tried to fess up to bad calls. It not always has been pleasant; and not all investors were as respectful as this one. However, I also found that rebuilding my credibility was much easier than those times I have tried to defend my decision aggressively.

Are Wall Street and Main Street on the Same Block?

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Back in 1972 after Nixon’s landslide re-election Pauline Kael, the film critic at the time for the New Yorker magazine allegedly quipped “I can’t believe Nixon won. I don’t know anyone who voted for him.” While it’s a matter of debate if she actually said this, the point is still clear—sometimes we let our own circumstances and biases cloud our interpretation of data.

For instance we were listening to one market prognosticator that said that he thought that we might be seeing a new level of frugality among consumers that we have not seen in several decades, which might explain some of the recent data and resulting market action. While we believe that the consumer is more cautious than in time’s past, we also think that the data has reflected consumer caution for a while. Why the discrepancy? In our observation since us investment types make our living in part off the performance of the market, sometimes we confuse a rising market with rising fortunes for Americans in general. Therefore it can be easy therefore to neglect data that contradicts our own personal experiences even though it might not reflect what the rest of the country is experiencing.

One such brief example may be comparing the New York Wall Street bonus average per employee to that of various income level increases in the United States. While the bonus of the average Wall Streeter has remained relatively strong as of late, the real median household income has not been as robust. While admittedly the latter is inflation adjusted, one gets the general idea. Plus we haven’t seen much of inflation the last several years. Plus GDP data has been arguably mundane the past few years.

NYC Wall Street Bonus Compensation, % of Total Compensation

2013nycsecuritiescompasperc

(Click above image to view larger graphic)

Real Median Household Income in the United States

fredgraph

Gross Domestic Product

fredgraph gdp

Therefore sometimes we investors might have to be cautious in interpreting a strong market with a strong consumer or a strong economy.

I Miss Earnings Season!!!

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If there is one thing I hate more than earnings season, it’s when it’s not earnings season. Why? Because then more often than not we investors, and especially the talking heads on the financial news networks, bloviate non-stop about macro data in between company quarterly reports. After this has gone on for several weeks, I actually find myself BEGGING for earnings season to start.

We feel this way because much of the discussions on these macro data points often end up as being so much noise. Take for instance the discussion on first quarter GDP. Most would agree it was lackluster, with a good percentage of analysts blaming the performance on the weather. Really? Earlier in the year we discussed that weather doesn’t really have much of an impact on retail sales. Additionally, if weather really does have a sizable impact on the economy, why was it not anticipated as estimates for the first quarter off by so much as the consensus was 1.5% with the actual tally being 0.9%? Conversely, when GDP is more than forecast, how come we never hear that absolutely great weather biased results upward? Our point is that when you have something as complex and organic as the US economy, it’s difficult to shrug off any result to just one factor.

Perhaps the bigger question is what comes first; unexpected GDP changes or unexpected corporate results changes? Usually in our observation GDP is fairly coincident as corporate earnings are an important part of the real economy. Sometimes we think of it as slightly lagging as we often hear from companies and their supply chains what they are seeing and expecting on Main Street before the official GDP data is released. For reference here’s one example, the S&P 500 revenues plotted against nominal GDP. We used this chart as we believe revenues are a better indicator of demand than earnings, which can be more influenced by accounting assumptions, cost controls, and changes in capital structure.

shoutout_earningsseason

However, we also think that one completely ignores these macro data points at their own peril. Macro data can help confirm or deny an investment thesis and there are plenty of quantitative and algorithmic strategies that can influence your positions, at least in the short-term. Our best use for them is to help confirm or deny existing theses we have on individual sectors or companies as some of our companies are influenced less by US macro data than others, e.g. large multi-national companies are less influenced by US data than, say, a small cap retail chain.

Member Social with a Twist Notes: Using Social Networks like Twitter for Investment Research

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We recently held a member social at Lyons Pub on April 17 where we informally discussed if social networks such as Twitter serve a purpose for investment research and if so how is it used? Here are some of the key points that were gleaned from our discussion.

  • Twitter and other social networks work well if you follow a wide variety of opinions and markets.
    • You should attempt to follow a variety of investment worlds, such as equities, fixed income, alternative investments, and the like.
    • However, larger firms usually are not a good repository for information—it’s overly scripted and regulatory considerations dilutes the voice and therefore the impact.
  • Are social networks a serious part of the due diligence process or is it just a way to delineate short-term trends?
    • It actually does both, but where you often get good information are from the links various posters provide.
    • Others mentioned that it can be used to challenge your investment thesis and keep you from investing in something you will later regret.
  • Sites that do a good job of curating links and information were popular with the group.
  • Twitter and other social networking sites are great for timeliness of information.
    • It works for finding out about a security that is moving strongly, as Twitter usually has the information well before the mainstream press.
    • For example one person found out why a biotech stock was moving because of a publication in a relatively obscure German scientific journal that was referenced on Twitter.
  • Many people in the conversation watched how many followers a person or company has and look at the trend analysis—are they getting more or less followers. However be careful of sponsored sites (i.e. sponsored sites usually get revenue if you “follow” them or visit their site), they are not as useful and their trend analysis is less meaningful.
  • One person thought that it was interesting that more sell-side analysts follow Twitter closely, but often are not followed as much for their opinions themselves.
  • Regulatory issues with Twitter and others?
    • Legally one can talk about general investing issues but not anything specific, like opinions on companies—especially on the sell side. Investment managers need to be very careful to avoid advertising issues with their firms.
    • One could be tempted to use a pseudonym, but firms do check cell phones, computers, etc. Investment managers should assume that all correspondence and communication can be monitored by their compliance department or securities regulators.
    • Can people tweet about their participation as a patient in a clinical trial? This concept is being discussed legally. The concern being that a sponsor of a clinical trial would not want participants leaking information about the trial before the sponsor could publish or announce the results to the entire market or scientific community. Leaks of results could create insider trading issues.
    • The key is knowing if the person is being paid for this information or not
    • Social sites might be difficulty to regulate in practice.
    • Higher level executives usually know when they are in possession of material nonpublic information and know not to tip such information to parties who might trade or tip such information to others who might trade or engage in social media or chatroom commentary. Lower level employees of organizations might not know that they possess material nonpublic information and might not know that they have a duty not to disclose company information on social media sites.                             .
  • One person said there are some that use Twitter as a weapon against companies but many thought that at times it is easy to determine where those tweets are coming from, decreasing their impact.
  • There are even social network sites that have aggregated company estimates from users, such as estimize.com.
  • Someone mentioned that Twitter and other sites would be better for option investors as these sites do a good job in assessing volatility, which could translate into assessing option volatility.

Here’s a list of people and organizations that some follow on Twitter:

Stocktwits, Zerohedge, SeekingAlpha, NotableCalls, and here’s a good site listing interesting Twitter feeds.

 

Social Media Sites and Investing

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Twitter and other social media sites clearly have exploded in popularity, being the preferred method of communication for teenagers–even more than talking or sudden random acts of incredible drama. However, are social media sites such as Twitter good for investment research?

Certainly many think so as there are many websites that are specifically geared to the investment community, such as stocktwits.com, tweettrader.net, and SeekingAlpha.com. Additionally investors have used Twitter, Facebook, and other mainstream social media sites for years now. These sites and others have become so ubiquitous that the SEC has OK’d the use of social media sites for disclosure under Reg FD, if companies meet certain guidelines. Often times these social sites get news disseminated faster than traditional news outlets, which add to their appeal. Social media sites are also a great repository for usually anecdotal data on companies, people, events, etc. Therefore mainstream media sources have taken note and incorporated sites such as Twitter into their news services. For instance, last year Bloomberg incorporated tweets into its terminals so investors could see if companies they are interested in are trending strongly on Twitter.

However, is this investable data or just more noise? There are firms that have developed computer algorithms to track social media sites in order to help make investment decisions in real time. Not all have been successful, however.

The bigger question, in my opinion, is how should investors use the unstructured data these sites produce? There are a lot of impactful insights one can glean off of sites like Twitter, but do most investors have the time to peruse yards of data or have the millions of dollars likely needed to develop effective artificial intelligence algorithms? Probably not. Are Twitter and other social media sites something investors should totally ignore? Probably not, and sites like this are not exactly new to investing. Back in the day when people actually wore “The Rachel” haircut in force me and countless others would peruse stock chat boards, such as Yahoo’s, for data nuggets. Was this the primary basis of any of my investment decisions? No, but it did occasionally make me think of a stock differently than I otherwise would have and I continue to use sites like this as part of the due diligence process. This is especially true with small cap companies that have a limited amount of tweets and other data one has to wade through.

If you want to tell us your opinion live, join us at the CFA “Monthly Social with a Twist” this Thursday April 17 where we will be discussing social media and investing in an informal atmosphere. Click on this link for more information if you are interested in joining us.