Equity research is viewed as a highly intellectual occupation that combines a forensic approach to accounting and an ability to explain complex business models in a simple elegant manner. And it is. Ferreting around in the notes to the accounts, or cross examining executives to get to the kernel of what drives a business can be deeply satisfying. In the same way the detailed knowledge a sector analyst has of his business can be quite awesome.
The problem is stuff happens that isn’t in the accounts or part of a competitor’s business plan. Nassim Taleb took a whole book to explain the phenomenon of “Black Swans”. Donald Rumsfeld captured the concept in one phrase when he described the “unknown unknowns” that can so disrupt life. A global view of the supply and demand for oil and a huge spreadsheet forecasting BP’s cash flow was made instantly irrelevant when its Macondo 252 well blew up in the Gulf of Mexico last year. The shares went from 655p to 302p and the company cut its dividend. An explosion on a platform that is drilling into flammable hydrocarbons at great depth and pressure is not really a Black Swan event. It is a dangerous operation and capable of going badly wrong. It is a tribute to the industry that it happens so rarely.
Hiccups such as these are not rare. The bank crisis of 2008 was perhaps exceptional but few analysts forecast it and even fewer managers sold all their bank shares in anticipation. Even those that did still got caught in the market turmoil and suffered along with those who held on. That just reminds us that over 90% of the variability of portfolio returns comes from the asset class and not stock selection as Brinson and others proved in the seminal paper of 1986.
Even though people like picking stocks the reality is that for most managers it is a rather unproductive game. No one would have favoured Royal Dutch Shell B (LON:RDSB) over BP because it was “safer”. Indeed, Shell itself came very close to a similar incident in the North Sea later in the year. In the same way trying to choose between Glaxosmithkline (LON:GSK) and Astrazeneca (LON:AZN) or…
What is the difference between "blue collar" and "white collar" equity research?
Should such blatant plugging of a writer's own business be allowed, or should this sort of advertising at least be charged for? "This new breed of process driven, or asset allocation strategy funds, such as The Munro Fund..... might be seen by some as eating the lunch of the traditional portfolio manager" Shouldn't the connection between the writer and the business plugged at least be specfically disclosed openly in the article itself (not a page or two away)?
