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The ‘almost’ truth

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Regular columnist Randeep Grewal scripts a few vignettes that highlight the importance of almost understanding.

Scene 1: The ‘almost’ doctor

The bar was heaving. Drinks flowed freely. Our eyes locked across the cocktails as our host made the introductions. The event was pre-Christmas drinks hosted by a major bank – and one of my brokers was keen to introduce me to a fellow healthcare analyst working for another fund. Given that analysts covering a sector tend to know each other, I was surprised and eager to meet someone I had not come across before.

She really did not wait for the formal introductions, but immediately gushed forth, telling me she was a physician covering the healthcare sector. My first impression was ‘Grief, she talks fast’. She treated pauses after words as inefficiencies she wished to eliminate; commas and fullstops were entirely optional places to pause – and she chose not to.

Intrigued at meeting a fellow medic who had moved to the financial markets I asked what she had specialised in. She told me she was ‘almost a doctor’. I assumed she meant that she had left before practising so I asked where she had read medicine.

It turned out that she had spent a year looking at the healthcare sector as an analyst. Her primary degree was entirely unrelated to medicine. More enquiry revealed that her area of knowledge was limited to healthcare insurers and pharmacy benefit managers. But she assured me that if I ever wanted to know anything about any healthcare stocks she was the go-to person to call.

I thanked her for the generosity of her offer and made my excuses. I did not burden the ‘almost doctor’ with my time at med-school or my years on hospital wards, or the years I had spent looking at healthcare stocks.

Scene 2: ‘almost’ hearing

Attending trade fairs is not a glamorous affair. However the Intersolar conference and exhibition in Germany is one of the better ones to attend. Several years ago one of our brokerage counterparties was kind enough to arrange meetings and make the arrangements for a group of buy-side analysts including myself.

One of the big debates at the time was how great demand would be in Italy (and indeed in Southern Europe as a whole) for solar panels the following year. As we visited various companies during the day this question naturally came up. Every company expressed a degree of caution.

Imagine my surprise the next morning when I woke to find that one of the brokerage’s US sell-side analysts who was on the trip had published overnight stating that ‘channel-checks’ at the Intersolar conference had confirmed his bullish stance. He specifically highlighted that Italy would achieve 1GW (=1000 MW) of solar panel demand the following year.

I asked the analyst, over breakfast, where he had got his 1GW number from and was told that it was what companies had reported the previous day. I reviewed my meeting notes (all contemporaneous and typed) of the previous day. The anticipated range for Italian demand quoted by multiple companies had been 300 – 500 MW. 

Later in the week I reviewed the analyst’s previous solar research and noted that he had had a consistently bullish outlook on the solar industry. 

Scene 3: ‘almost’ guidance

There is nothing more wonderful than a lazy balmy morning in Paris, wandering through the sun-bleached streets into an ancient café and sleepily reading the papers while sipping a slow strong coffee on a rickety wooden table once frequented by Hemingway, Gertrude Stein, F Scott Fitzgerald or TS Eliot.

Unfortunately I was sitting in a cramped office, in an anonymous building, on a miserable bleak winter morning, meeting the head of investor relations of a significant French technology company. It was early in my career, but we had made an investment in the company on the basis of obvious value – the company was cheap on virtually every parameter I looked at. Furthermore the industry it operated in was rapidly becoming consolidated and the company itself was going through a restructuring which was anticipated to generate significant savings.

This was however the fifth or sixth meeting I had had with the company over a number of quarters where the company had ‘missed’ its guidance.

Finally after an hour or so, the investor relations director turned to me and sombrely explained that the guidance given to the market each quarter was not actually an objective target but an ‘aspiration’.

I left the meeting despondent, and stepped into the winter drizzle; the dark foreboding clouds overhead mirrored my sentiments. 

Soon after we sold down our entire position. The company continued to put out ‘aspirational guidance’ and consistently missed.

Scene 4: ‘almost’ analyst

As an investor my interest is not in the earnings reported by a company but rather ‘investor earnings’, which in essence means making appropriate adjustments to the accounting numbers to give a fair representation of what is attributable to shareholders. 

Thus, I was particularly pleased to meet an analyst from a major bank who had just initiated on an industry I was familiar with. Her work had included a deep dive into the accounting and management. 

During our meeting she explained that the number one and number two players had given share options to management, in a single year, worth 80 per cent and 110 per cent of earnings. Furthermore, in one case the senior management lacked in-depth knowledge or background understanding in this particular highly complex science based industry.

At the end of a long meeting I asked her what her top picks were. She told me it was the number one and number two players. I must have looked surprised because she quickly explained that if she did not recommend the number one and number two players they would ‘cut’ her off. Without ‘access’ she would not be able to cover the companies and so not work as an analyst.

Helping clients (investors) make money did not seem to figure in her abacus. 

Scene 5: ‘almost’ conservative

The chairman sat across the table from my colleague and me. He slammed the table as he explained the startup business he represented had the ‘most conservative business plan’ of any company he had ever been involved in. Given he had been in the world of commerce for nearly three decades and helped create at least two world leading businesses, his words had a certain degree of authority.

After an expensive due diligence process involving lawyers and accountants in a number of countries, we invested. Part of the attraction was a seven-figure (and possibly even bigger) contract with a major company.

A month after the investment closed the chairman was back in our office. He told us the company would miss its numbers, that he had had no responsibility for the projections (they had apparently been put together by the CEO) and, given it was a startup, we should not have relied on the projections anyway.

Within months the ‘contract’ had vanished and the company closed down.

‘Almost trust but always verify’

All the above vignettes are based on real experiences. Lying is a strong word to use. It implies an intent to deceive. On many occasions I have found people do not have an explicit intent to deceive but rather confuse fact and fantasy, conjecture, beliefs and wishful thinking with reality, or interpret data through the lens of their own biases.

Sometimes they make statements with a degree of certainty, authority and gravitas, which belies their lack of underlying knowledge, analysis or certainty. This is particularly a phenomenon with young CEOs at startups, but can also contaminate experienced executives.

On some occasions managements and analysts speak to please rather than to inform. It is particularly amusing when the same individual makes contradictory statements during the same meeting merely because he is seeking to please his audience – this is clearly not a viable long term strategy.

Others hear only what they want to, and their public reports and statements are based on private motivations often driven by the apprehension of job loss, the appetite for bonuses and the anticipation of promotion.

Over the years I have found it useful to vaccinate myself from such challenges in a number of ways. Firstly I make contemporaneous notes – and regularly refer back to them. 

Secondly I try to separate out fact from conjecture, truth from belief and actuality from presumption. Sometimes this requires going through every sentence in a conversation, statement, transcript or presentation and simply classifying each assertion as fact or not. Of course many statements cannot be easily classified as one or the other, but the process helps hone them down and provides a focus for further work.

Thirdly it is important to consider the motivation of the speaker or the presenter. Is their motivation to help me as an investor or is it something else.

Ronald Regan’s famous motto (“Trust but verify”) ought perhaps to be the keystone of any analyst’s process but perhaps modified to ‘almost trust but always verify’. Most of the content of most meetings or reports is accurate – but almost is not the same as ‘all’.

Brexit – the ‘almost’ plan

The recent Brexit campaign has been fascinating. The political fallout has been dramatic. 

Out of interest, using the process discussed above, I tried to distinguish between fact and wishful thinking of the various campaigns. However it was remarkable how hard it was to actually pin down what was a campaign claim as opposed to an assertion by an individual.

One claim that specifically stuck in my mind was during the last major televised debate where Boris Johnson highlighted that the UK now exports more cars than ever. One has to wonder if he had noticed the brand names on the sides of the factories and where the capital allocation decisions are made. 

Of course politicians being economical with facts is nothing new. Yet the speed with which a number of leading Brexiteers distanced themselves after the result from some of the high profile claims associated with the Brexit campaign was stunning – for instance the claim that the UK sends GBP350 million per week to Europe and this money could be given to the NHS (it turned out this was a gross figure, the net being significantly less and nor is it all earmarked for the NHS) or whether immigration would drop significantly.

Even more shocking was that one senior politician in the running for Prime Minister appeared to have substantially overstated her previous experience just like the ‘almost’ doctor.

Of course political events impinge on economics and hence can be a major influence on investment decisions. As events relating to Brexit play out, it will be interesting to see what claims were ‘aspirations’, what was said to please the audience as opposed to being fact based, where politicians (and indeed voters) heard what they wanted, and what was conjecture as opposed to being based on careful analysis and planning.

The potentially profound impact of Brexit on the investment environment in the UK and global economy means that the same rigour needs to be taken by analysts projecting the economy as with equity investing. And the US Presidential race could yet bring up even more uncertainties.

This could be a year where politics, economics and investing hinges on the difference between certainty and ‘almost’… 

 


Randeep Grewal (pictured) is a portfolio manager for the Trium Multi-Strategy Fund. This article is written in a personal capacity; the views and opinions are those of the author and do not necessarily reflect those of Trium.
 

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