In my journeys around the asset management industry I sometimes come across fairly large ($2b in AUM or so), well respected asset managers with no marketing and no sales (or at least none that is in evidence).
These are firms that have found an audience for which there is no need to sell or market their services, ie. affinity marketing, and are not active in selling or marketing on a broader basis, ie. competing in the broader institutional marketplace.
The owners are fat and happy doing what they love doing - investing - and are not interested in growing or developing their business further. Their websites are atrocious, their resourcing levels low, and oftimes they have lots of family working in the business.
I can't imagine any (or many) of them are frauds. But they show the signs and have the capacity to carry out shenanigans if that is their predilection.
Showing posts with label red flags. Show all posts
Showing posts with label red flags. Show all posts
Wednesday, July 16, 2014
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, August 18, 2009
Red Flags In Surprising Places
I screen a lot looking for quality companies. Quality companies are not hard to identify. They are companies with above average growth rates, above average profitability, expanding margins, positive earnings surprises, low debt levels, high operating leverage, etc., etc..
I was watching William Black's presentation "The Great American Bank Robbery" and it reminded me of some thoughts. Namely, that the naive process of screening for "quality" companies often throws up a number of duds and dupes. These are companies that look good on paper, but are rotten beneath the surface. Black refers to red flags related to companies exhibiting huge growth rates, monster margins and always beating the number. He argues that the growth rates and the "always beat" are often hallmarks of an environment where bad ethics is driving out good ethics. The weapon of choice for white collar crime is accounting fraud. Sometimes, when it is too good to be true, it is too good to be true.
Foreign companies (especially Chinese companies) often exhibit these characteristics, so it is always buyer beware. However, the measure I have come across to cross reference the quality of a company is the level of short interest. The short guys (at least those who specialize in it and not necessarily the hedge guys who simply run long/short portfolios) always seem to sniff out accounting fraud, or a broken business model, or a company/industry in secular decline, or fads. They do their homework and have a healthy dose of skepticism.
Black, to his credit, also holds no punches when he calls the Big Four accounting firms and the credit rating agencies failures - ouch!
I was watching William Black's presentation "The Great American Bank Robbery" and it reminded me of some thoughts. Namely, that the naive process of screening for "quality" companies often throws up a number of duds and dupes. These are companies that look good on paper, but are rotten beneath the surface. Black refers to red flags related to companies exhibiting huge growth rates, monster margins and always beating the number. He argues that the growth rates and the "always beat" are often hallmarks of an environment where bad ethics is driving out good ethics. The weapon of choice for white collar crime is accounting fraud. Sometimes, when it is too good to be true, it is too good to be true.
Foreign companies (especially Chinese companies) often exhibit these characteristics, so it is always buyer beware. However, the measure I have come across to cross reference the quality of a company is the level of short interest. The short guys (at least those who specialize in it and not necessarily the hedge guys who simply run long/short portfolios) always seem to sniff out accounting fraud, or a broken business model, or a company/industry in secular decline, or fads. They do their homework and have a healthy dose of skepticism.
Black, to his credit, also holds no punches when he calls the Big Four accounting firms and the credit rating agencies failures - ouch!
Subscribe to:
Posts (Atom)