Every blow up avoided improves the performance of your portfolio.
Management faces crushing pressure to make things appear better than they are.
Management tortures the numbers to "beat by a penny" and to keep the Wall St analyst predators and their dreaded downgrades at bay.
Aggressive accounting may not be illegal, but its chicanery. Sooner or later, hard and long aggressive accounting can try to entomb the bodies, they rise like zombies, until the company misses huge and the zombies suck management brains and investor profits through stock downgrades and selling.
The job is to analyze earnings quality.
The book may place revenue recognition and inventory management next, but every part of the financials connects with another. "Earnings" is the financial picture as a whole.
Rising days sales outstanding or days sales in inventory may be the two great single indicators of trouble in the next quarter or several.
Showing posts with label quality of management. Show all posts
Showing posts with label quality of management. Show all posts
Wednesday, July 2, 2014
Quant Achilles Heel
Some quants systems no doubt focus on either one vector or one factor. Some are no doubt multi-factor. While the truly ambitious are no doubt seeking a unified theory of the markets, ie. try and incorporate all known anomalies.
Such a system would incorporate small cap bias, momentum bias, quality bias, value bias, broad diversification, red flags.
It is the red flags area where short sellers focus. Myriad changes reflected in a firm's accounts may point to warning signs. You can model those and you can model management quality (based on history), but identifying frauds or accounting shenanigans is an incredibly subjective endeavor when the data points you are working with are inconclusive (and they are always inconclusive).
I guess that is why "fundamental based", qualititative oriented investors are now getting caught with their hands in the cookie jar, ie. insider trading. Finding and getting an edge is extremely difficult.
On a side note. I am amazed when I look at so-called small and micro caps where the marketing material of managers in the space talk about inefficiencies due to lack of coverage, that the stocks are generally fairly valued. Now fairly valued is in the eye of the beholder, but there are few glaring mis-valuations from what I can see across the whole spectrum.
Now back to the quants achilles heel. The rigidity of their systems (whether is a static set of criteria or pattern recognition algorithms) or the backward looking nature of the learning systems mean that quants will always miss the nuance of something and/or miss the change in environment because they lack cognitive awareness. And they will never catch the subjective dimensions of not trusting management that comes from a visceral gut feeling.
Such a system would incorporate small cap bias, momentum bias, quality bias, value bias, broad diversification, red flags.
It is the red flags area where short sellers focus. Myriad changes reflected in a firm's accounts may point to warning signs. You can model those and you can model management quality (based on history), but identifying frauds or accounting shenanigans is an incredibly subjective endeavor when the data points you are working with are inconclusive (and they are always inconclusive).
I guess that is why "fundamental based", qualititative oriented investors are now getting caught with their hands in the cookie jar, ie. insider trading. Finding and getting an edge is extremely difficult.
On a side note. I am amazed when I look at so-called small and micro caps where the marketing material of managers in the space talk about inefficiencies due to lack of coverage, that the stocks are generally fairly valued. Now fairly valued is in the eye of the beholder, but there are few glaring mis-valuations from what I can see across the whole spectrum.
Now back to the quants achilles heel. The rigidity of their systems (whether is a static set of criteria or pattern recognition algorithms) or the backward looking nature of the learning systems mean that quants will always miss the nuance of something and/or miss the change in environment because they lack cognitive awareness. And they will never catch the subjective dimensions of not trusting management that comes from a visceral gut feeling.
Tuesday, March 25, 2014
The Art of Short Selling - Preface
The analytical methods of great short sellers are characterized by prodigious analysis attentive to (1) the quality of earnings, (2) quality of assets, (3) and, quality of management.
You are looking for a bad business run by incompetent managers.
The years 1991 to 1993 decimated the population of short sellers. Those years saw the ascendancy of mutual funds, of momentum investing, and of the short squeeze.
(sounds eerily like 2012-2014 with ETFs, momentum investing, and short squeezes)
The simplest techniques work year in and year out - rising inventories, and insider selling.
You are looking for a bad business run by incompetent managers.
The years 1991 to 1993 decimated the population of short sellers. Those years saw the ascendancy of mutual funds, of momentum investing, and of the short squeeze.
(sounds eerily like 2012-2014 with ETFs, momentum investing, and short squeezes)
The simplest techniques work year in and year out - rising inventories, and insider selling.
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