In Search Of Lasting Information Edges
The majority of modern investors can only get superior returns with a qualitative information edge.
This is the basic premise of The Contrarian Compounder. After decades of digitisation, quantitative information about markets and individual companies is plentiful. Hundreds of millions of dollars are spent every year trying to find “the right data point” that will unveil the next great investment.
Yet, the underlying assumption of this blog is that data and quantitative analysis are vastly overvalued for two key reasons.
First, people involved in the investment business tend to love numbers. After all, money is a number, and some degree of fascination with money is required to work in the industry. This means investment professionals are likely to overvalue data and numbers.
Second, and most importantly, I believe that most humans tend to underestimate or ignore the things they cannot measure. The annoying thing about qualitative insights is that 1) They cannot be reduced down to a number and 2) They typically cannot be turned into a repeatable formula.
Now, traditional qualitative investment analysis is certainly not a panacea. It’s typically focused on a particular company or industry, and tends to focus narrowly on the factors that will affect a company’s near-term earning prospects.
On this blog, we seek to produce insights that are 1) Unconventional, contrarian or overlooked and 2) Valuable
Let’s break down these two key characteristics.
- Any insight has to be unrecognised or disagreed with by a majority of market participants to be of any value. If it was widely recognised, it would already be priced in. This helps explain why data and numbers do not typically provide long-lasting information edges. Furthermore, even first-order qualitative insights about a particular company or industry are obvious and will be priced in. Only deeper, non-obvious and perhaps controversial qualitative insights are unlikely to be accounted for.
- My definition of a valuable insight is one that helps an investor more accurately determine the intrinsic value of a security, a group of securities or an entire market. Since the majority of a company’s value comes from its future cashflows, a valuable insight should give a framework, tool or principle which helps get a clearer picture of the future of a particular company, industry or market.
In other words, the type of qualitative analysis we conduct is by definition multidisciplinary. We take particular interest in the fields of psychology, biology and history, since these are the ones I am particularly well-versed. This doesn’t mean they’re the only relevant areas of study that can give investors an information edge.
