The Analyst's Code

In May of 1998, I didn’t have much experience yet. I had been a keen student of financial markets, but my practical experience was more in the world of commodity trading and hedging than equity investing. I was a first year MBA student at the University of Chicago (then called the GSB, now called Booth) and I was preparing to fly out with my wife and six-month-old baby boy to Hong Kong for a summer internship with Fidelity Investments.

As I implied, I was a bit of a stock market historian, but really didn’t know what I was talking about yet. In preparation for the summer, I wrote this piece I called “The Analyst’s Code”, and as I look back on it, I sure can see how I was wired back then, and how I am still wired to this day. Some of it will surely seem juvenile and naïve today, but I honestly believe that after 25+ years of investing experience, my views are essentially the same.

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‍There is no holy grail of investing. Any goal of discovering it will be a colossal waste of time. Strategies that work today may not work tomorrow, and tomorrow’s successful approaches may not work today. With your tactics, the best one can hope for is to make the market efficient over several short runs, as opposed to one long run.

‍In the obvious struggle to develop a consistent strategy, it is important to realize that the first order determinants of stock performance are not invariable. While earnings and cash flows ultimately drive share values, investors in one period may interpret that data quite differently than investors in another. The factors that drive these perceptions are both fundamental (i.e. earnings growth, returns on equity, interest rates, tax structure, et al), and behavioral (i.e. risk aversion, historical performance, crowd behavior, cognition of future wealth, et al). Accordingly, each of these determinants (and several others) find their own equilibrium in the short run. Hence,with a static focus, there are rarely extended periods of exploitable inefficiency.

‍However, I believe there are a few congruous ingredients to consistent, successful security analysis: Insight, Information, and Intuition. If an analyst or portfolio manager has “the three I’s”, it is unlikely that he or she will be bettered by competitors over those aforementioned interlocking short runs.

‍The analyst must be insightful, not only in knowing what is needed to determine the prospects for a particular company or industry, but how and where to find the necessary intelligence. A stock analyst should always ask “what three things would I most like to know about this company that no one else knows (rare) or is not focused on (less rare), and how can I find them out and objectively interpret them?”

‍Information is becoming cheaper and more accessible, and this paradigm will only accelerate with advances in technology. Thus, it will become more difficult for many to add value due to the increasing scarcity of proprietary information. In this environment, it is the “intelligence” on the margin that will separate good analysts from bad. A stock analyst should of course always ask “who might have the information I need?” but perhaps the more relevant question will be “is there information already in public hands that is being misinterpreted?”

‍Moreover, and possibly most importantly, marginal information will have no benefit unless one makes the correct interpretation of the newly acquired knowledge. It is this third critical piece that is essential to performing equal to or better than others. A stock analyst should always ask “would this information change the perception of others were they to learn it (or believe it), and what might be the consequence for share prices?”

‍That’s how I am thinking about things today, but I reserve the right to try to improve my process.

‍Andrew Dickson (May 1998)

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