"Our favorite holding period is forever."
– Warren Buffett
Stock research has changed considerably since I got my first finance job in 1996. My core task in those early days was clipping articles (with scissors) relevant to the firm’s positions from newspapers and trade magazines. I'd make copies and hand out packets to the portfolio managers before 8:00am.
What really catapulted my career? I knew how to use The Internet.
While much has changed since then, the questions below should be top of mind for anyone with skin in the game.
- Do you short stocks, or hate short sellers?
- Is patience a virtue or a vice when it comes to investing?
- When your position goes against you, do you worry you’ve missed something, or think that everyone else is wrong?
- If your stock thesis is based on company specific fundamentals, how important are your feelings about the quality of a company, the management team, or the prospects of a product?
- A trading algorithm doesn’t have feelings about the quality of stocks it trades, but does the guy or gal with the P&L anchored to the results have feelings?
Converting an analog process to a digital one quickly turned into applying the technique to collecting data and leveraging myself into company research. Being even slightly ahead of the curve can be a big advantage.
A senior PM at my first firm used to repeat the Buffett-like adage “I want to own stock in a company where I wouldn’t care if the stock market closed tomorrow.” Today, that would be considered #oldschool.
I probably wrote it down and it may still be true in some unlit corner of the global market, but since I first heard those words, the gentleman who said them has passed away; reading a physical newspaper has become anachronistic; and the firm where I got my start has ceased to exist. Meanwhile the velocity and volume of data has grown [insert hyperbole here]. Things change, although the answers to the questions at the top of this note remain.
Fundamental analysis is already extremely difficult but made harder by volatility that is just as likely to ignore your diligent research as make you look like a genius. The simplicity of Full Cycle Investing and applying the Quads can take a fundamental analysis to new heights, but one’s ego must make a fresh low.
In today's Charts of the Day below, we first show that the year over year percentage change in Real GDP has little to no effect of the Quantity Index for Health Care Personal Consumption Expenditure, a decent proxy for utilization. However, when we look at the sequential change, or through the lens of the Quads, the relationship tightens dramatically. Slowing or accelerating is all that matters.
We can further isolate the style factors that matter most for the environment we are in. For Health Care in Quad 4, a high short interest, high debt, low multiple stock with a negative revision trend is a toxic cocktail. Stocks with low short interest, high multiples, low debt and a positive revision cycle outperform. We can’t yet forecast a revision cycle with an algorithm (we are working on it), but a revision trend is as good as useless unless you respect the Quads.
Fundamental analysts tend to dismiss market volatility as noise, especially when it disagrees with their positioning, much like the Portfolio Manager who didn’t care if the stock market closed. Knowing the details of a company is critical to durable success, but it can often consume your focus, so much so that you miss the forest you are standing in.
It is only from the vantage point of the Quads where we can descend into the particulars of our individual stocks, study the details of the company model, and come to terms with the question “is this company accelerating or decelerating?” We love the positive revision cycle in front of THC, but the evidence has only been partial thus far while the high debt and low multiple factors have dominated the shares.
Our short in DXCM has been nearly as problematic. We continue to expect the emergence of a negative revision cycle in 2H19, but for now shares carry a reasonably low short interest, estimates have been in the grips of a positive revision cycle, and it carries a top quartile multiple. Will either of these names turn our way? Are we missing something? For now, the right answer to keep asking questions, and for now the Quads have control.