The Sleuth Investor, by Avner Mandelman, is easily one of the best books on the method of investing that's been written recently--and I would put it in the top ten ever written. It shows how to discover exclusive information before other investors, or even insiders, do. And it shows how to profit from knowledge obtained in this manner accordingly.
"Exclusive information," Mandelman says, "resides in three physical attributes of a company, of which people are only one." The three, in descending order of importance, are:
1. People (the company's own, it's customers, and its suppliers)
2. Product (both the company's own, including services, and those it consumes as supplies, as well as competing products)
3. Plant (factories or offices where the work is done) and Periphery (everything else that impinges on the company from the outside, or that the company impinges on, and so leaves physical traces)
How to sleuth for information from these sources? Mandelman counts off the ways, and these are numurous. But a lot of them aren't very difficult to do, or time-consuming. Most involve simply picking up the phone and talking with a lot of people.
Do you want to know more about the source of the company's revenue stream--if not the product itself? An annual report won't help you nearly as much as having the product the company sells in your hands. How is the packaging? How long did it take to get to you? How were the sales force acting? Does it work? Is it worth the price? And so on.
As for the customers--one of the most crucial factors in future earnings--Mandelman advises looking at these people as, um, people. And talking to them. Why did they buy the product, or use the service? Would they do so again and, if so, why? Have they found the salesforce to be honest? What do they think about the other options, and why wouldn't or didn't they choose those instead? Can they afford the product and are they incentivized for buying it? Who makes the buy decision and how long of a wait is that? You get the point.
In asking questions like this across the different areas noted above, a sleuth investor will obtain lots of information about a company that simply can't be found in reports submitted to investors--and certainly not in the squiggly lines that appear on a stock chart.
The content alone is important, but also important is how it is delivered. The tone of voice of an upper level or lower level employee when s/he responds to a simple question asking how things are going is real information. While maybe not actionable in and of itself, taken together with the rest of one's sleuthing it can lead to some very good opportunities (either to go short or long an equity investment). Contrast the body language, tone of voice, eye movements and so on of Alan Schwartz (BSC's chief executive) and Bill Doyle (PotashCorp's CEO) in their recent CNBC appearances. They both were telling us something, pretty clearly in fact, and while not actionable in and of itself, this was important data to focus on.
We all share information when we talk (and sometimes when we don't) by our stance, our tone, our eyes, and so on. Although Mandelman doesn't use the analogy, possibly because gambling analogies are over-used, looking at the numbers alone is like sitting at a poker table where one purposefully ignores everything but what cards are dealt, and what cards are in one's hand. While he stresses the supreme importance of buying cheaply, and falls in the value investing category, he would have us to look at our opponent(s), talk to those who played against them before, and figure out their tells. The advantage over just looking at the cards is clear. And it goes to the person who does the extra work--in the market or at the table.
In conclusion, The Sleuth Investor is a modern and in my opinion much-improved version of the classic Common Stocks, Uncommon Investments. While many will be too lazy--or too deluded with EMT nonsense--to put in the same amount of time and focus into an investment as a field operative would in a target, those who do so will be much better off.
"Exclusive information," Mandelman says, "resides in three physical attributes of a company, of which people are only one." The three, in descending order of importance, are:
1. People (the company's own, it's customers, and its suppliers)
2. Product (both the company's own, including services, and those it consumes as supplies, as well as competing products)
3. Plant (factories or offices where the work is done) and Periphery (everything else that impinges on the company from the outside, or that the company impinges on, and so leaves physical traces)
How to sleuth for information from these sources? Mandelman counts off the ways, and these are numurous. But a lot of them aren't very difficult to do, or time-consuming. Most involve simply picking up the phone and talking with a lot of people.
Do you want to know more about the source of the company's revenue stream--if not the product itself? An annual report won't help you nearly as much as having the product the company sells in your hands. How is the packaging? How long did it take to get to you? How were the sales force acting? Does it work? Is it worth the price? And so on.
As for the customers--one of the most crucial factors in future earnings--Mandelman advises looking at these people as, um, people. And talking to them. Why did they buy the product, or use the service? Would they do so again and, if so, why? Have they found the salesforce to be honest? What do they think about the other options, and why wouldn't or didn't they choose those instead? Can they afford the product and are they incentivized for buying it? Who makes the buy decision and how long of a wait is that? You get the point.
In asking questions like this across the different areas noted above, a sleuth investor will obtain lots of information about a company that simply can't be found in reports submitted to investors--and certainly not in the squiggly lines that appear on a stock chart.
The content alone is important, but also important is how it is delivered. The tone of voice of an upper level or lower level employee when s/he responds to a simple question asking how things are going is real information. While maybe not actionable in and of itself, taken together with the rest of one's sleuthing it can lead to some very good opportunities (either to go short or long an equity investment). Contrast the body language, tone of voice, eye movements and so on of Alan Schwartz (BSC's chief executive) and Bill Doyle (PotashCorp's CEO) in their recent CNBC appearances. They both were telling us something, pretty clearly in fact, and while not actionable in and of itself, this was important data to focus on.
We all share information when we talk (and sometimes when we don't) by our stance, our tone, our eyes, and so on. Although Mandelman doesn't use the analogy, possibly because gambling analogies are over-used, looking at the numbers alone is like sitting at a poker table where one purposefully ignores everything but what cards are dealt, and what cards are in one's hand. While he stresses the supreme importance of buying cheaply, and falls in the value investing category, he would have us to look at our opponent(s), talk to those who played against them before, and figure out their tells. The advantage over just looking at the cards is clear. And it goes to the person who does the extra work--in the market or at the table.
In conclusion, The Sleuth Investor is a modern and in my opinion much-improved version of the classic Common Stocks, Uncommon Investments. While many will be too lazy--or too deluded with EMT nonsense--to put in the same amount of time and focus into an investment as a field operative would in a target, those who do so will be much better off.
