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Author Archives: Tom Brakke, CFA

The Power of Observation

2nd May, 2014 · Tom Brakke, CFA · Leave a comment
Tom Brakke, CFA

How do you process the torrent of information that comes your way as an investment decision maker? On April 29, Gregg Groechel of Inferential Focus gave a presentation to CFA Society Minnesota that challenged the attendees to see their information gathering and decision processes in a new way.

The talk was titled, “Identifying Meaning Versus Noise: Getting Past Biases and Seeing What is Actually There.” We all can agree that is a lofty goal.

Groechel, a Twin Cities charterholder, led the group through a series of exercises to show how hard it can be to put things into context. He used photographs to illustrate how background and foreground information can be difficult to separate – and how meaning can be obscured.

A couple of key questions from him: “How do you set up an intentional way of operating? How do you open up the organization [to process information effectively]?”

The mission of Inferential Focus (website; Twitter feed) is to “make sense of a changing world” for its clients, which include investment firms of all types, corporations, and governmental organizations. Groechel walked through some of the firm’s principles and its process.

What does the firm do? The start of the process involves intensive, far-reaching, and unusual reading. Unusual in the sense that most of the reading is done from paper (because the processing of the information is better in that form) and the Inferential Focus team is designed to look for information in a very specific way.

The members of the team are all generalists, reading across disciplines and avoiding the specialization that characterizes research efforts in most organizations. In addition, they are looking to glean specific kinds of information from the materials that are read.

The firm believes that there is a hierarchy of information, with events most important and then facts. What aren’t very important are opinions and commentaries. Groechel deconstructed an Economist article to show that a very large part of was made up of that relative fluff, with very few events and facts referenced.

Think about the typical investment report or presentation. A high percentage of the content is made up of opinion and prognostication. The percentage is even higher in many of the stories in the financial media.

Inferential Focus ignores that and focuses on what is actually happening, piecing together developments from an array of sources to observe a context through which it can help its clients see economic, political, social, and technological changes. It then communicates the ideas in written materials and in-person meetings.

To provide an example, Groechel distributed to the attendees one of the firm’s “packets,” a collection of the source material that it uses to support its observations and its communications with clients. In this case, the readings concerned China, specifically a variety of hurdles being erected by China to impede the success of foreign consumer brands while simultaneously buttressing the competitive position of its domestic firms.

It was a good example, in that the information came from a variety of different publications, was focused on facts and events, and pertained to a variety of companies. In considering the prospects for firms in China, most observers are either focused on their own narrow specialty (and making predictions in that regard) or speculating on the level of Chinese GDP (and assessing the prospects for firms in relation to that). Each approach, according to Groechel, is missing the essential context: There is a general headwind to most foreign consumer brand companies doing business in China that wasn’t there before. On balance, that is likely to make results worse than will otherwise be expected.

As investment professionals, we are immersed in information and our greatest challenge is in deploying our powers of observation in a differentiated and advantageous way to the benefit of our clients. Inferential Focus’ approach stands apart from that of most organizations, in that it is slower, more selective, more structured, and focused on identifying the big, important changes before others do.

Could it work for you? As Gregg Groechel said, this “consulting think tank looks at change through a different lens.” If nothing else, its divergent approach should make you think about how your own organization processes information and makes decisions.

 

Disclosure: I have known the Inferential Focus organization for thirty years. I have been a client and have also worked with the organization on some projects. Therefore, I have seen “the sausage being made” and have relationships with the principals of the firm. I have previously written about IF in a posting about a 1983 book that stemmed from its work (“The Tao Jones Averages,” long out of print but now available as an ebook) and in a piece that was inspired by an April 2013 IF report on applications of virtual reality that included a look at Oculus Rift, which was recently purchased by Facebook. (My essay focused on applications of the technology in the investment world.)

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Posted in Hot Topic Commentary |

Rebuilding Trust in the Financial System

9th January, 2014 · Tom Brakke, CFA · Leave a comment

 

Tom Brakke, CFA

The CEO of Barclays recently acknowledged the damage to the firm as a result of its transgressions and said:  “Trust is a very easy thing to lose, and a very hard thing to win back.  In my view it will take several years – probably five to ten – to rebuild trust in Barclays.”

Meanwhile, J.P. Morgan has been on a treadmill of settlements, resulting in tens of billions of dollars of costs to the firm (or, if you will, to its shareholders).  Once viewed as having skated through the financial crisis relatively unscathed, its reputation has been tarnished by subsequent revelations.

The list could go on but, given the performance of bank stocks over the last few years, you might ask, “Who cares?”  Many observers have come to the belief that the firms are specifically in the business of stepping over the legal and regulatory lines – and that fines and damaged reputations are just a cost of doing business for them.

Surveys show that trust “in the financial system” has collapsed over time.  But that “system” is very complex and involves a wide range of firms and professionals.  Those in research and asset management, for example, might feel that they have been tarred unfairly with the same brush as the banks.  But we are all in this together.

The natural governors on the investment banks are the large asset management firms.  But they have been missing in action – in fact, they tend to exacerbate destructive trends rather than impede them.  Consider the subprime mess.  Had there been a buyers’ strike when underwriting standards deteriorated, we wouldn’t have had much of a crisis.  An absence of buyers would have meant that the paper-making machines would have shut down well before reaching the level of insanity that was attained. Continue reading →

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Posted in Hot Topic Commentary, Local Charterholders | Tags: financial system, rebuilding trust |

Climate Change and Investment Analysis

24th October, 2013 · Tom Brakke, CFA · Leave a comment
Tom Brakke, CFA

When readers of the print edition of Bloomberg Markets received the November issue, they were confronted by bold letters on a red background that proclaimed, “The Risks Heat Up.”  A light blue circle provided visual contrast and more context: “Special Report:  Climate Change.”

The four items in the issue included a feature story (the subhead for which began, “As the risks grow on a hotter planet . . .”); a sidebar on how rising seas have affected agriculture in Vietnam; a look at the “laboratory” that is Alaska; and a graphic of the threats and opportunities around the world as a result of climate change.

Bring up climate change and you are sure to get immediate reactions from those on one side of the debate or another, although this is an issue where the political lines aren’t always predictable.  For analysts, however, the question should not be a political one, but a research-based one, dependent upon the facts to date, the scientific possibilities, scenario analyses, and educated estimates of probabilities.

Like it is with other investment endeavors, time horizon is very important here.  As a society, we should be considering the potential long-term impact of climate change and making the appropriate policy changes on that basis.  As investors, that societal horizon might seem too long for our purposes, the impacts too far away to be relevant.  But at some point, our analytical methods may need to be adjusted based upon the range of possible climate outcomes.  (Disclosure:  I wrote a piece on warming up the models of investment analysis in 2008.) Continue reading →

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Posted in Hot Topic Commentary |
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