Confessions of an “arm chair investor”
BeyondProxy,a blog I read frequently, had a big post about investing in Europe which seems to become more popular by the day.
What really caught my eye and made my somehow angry at first was the following quote:
Philip Best, Founding Partner, Argos Managers: “One of the things we really believe in is that there is too much investment that goes on from people who are basically just sitting behind a Bloomberg screen and who are doing arm chair investing. They are sitting there and they are waiting for ideas to come to them. And Marc [Saint John Webb] and I believe a great deal in getting out there. In getting out there and meeting companies and talking with managers and we spend a lot of time traveling around France. And “A” we like that and “B” that is what we think brings the most to the job…We try and read as much of the local press as we can. Whether it’s in France or the UK, Switzerland or whatever and also a bit of the trade press. Plus, it is classic value investor stuff. A lot of the ideas have come from this idea of ‘idea clumping.’ You know you find one cheap software company in Germany and suddenly you find a bunch of others.”
My first thought was. “Hey, a guy sitting at a desk behind the Bloomberg – that’s me….”. My second thought was: Hey some of the best (value-) investors are or were “Armchair investors”. Does Charly Munger travel around the world and visit companies ? How about Walter Schloss, Benjamin Graham and even the most succesful investor of all times, Warren Buffett himself ?
Warren Buffett is famous for his “idea generating” process: He just walks up the stairs in his house and reads all day, mostly newspapers and annual report. Ok, he doesn’t use Bloomberg to my knowledge. Clearly, once he has developed an idea he will talk to management in some form or the other, but at least for idea generating, he clearly doesn’t travel so much.
Taking this a whole step further, one could come up with several perspective if direct contact to companies and CEO’s is important.
1) Non public information
I think implicitly, this is what many people are thinking: If I talk directly to this guy and ask the right questions, I will get information no one els has. I think that for smaller companies this could actually be the case, especially if those companies get only very infrequent visits from investors or analysts. Interestingly, Asset Managers seem to be willing to pay big dollars for CEO access, a fact which seemed to have alerted at least the FSA in UK. According to the article, hedge funds seem to be willing to pay 10-20k for an interview slot to investment banks which organise those events.
2) Personal impressions
A second important aspect of personal meetings are clearly the judgement of character of the counterpart. Also, walking through a factory or visiting an office might yield insight into the “spirit” of a company.
3) Marketing instrument for active Asset Managers
In a time with ETFs, online brokerage accounts, internet etc., especially large asset managers have to come up with something that the normal investor cannot easily copy. Access to Top Management is clearly one such feature.
On the other hand, I see a couple of disadvantages as well. The two most important issue is that there is the danger of loosing objectivity. What do I mean with that ?
Have you ever wondered why Enron could become one of the most valuable firms in the US or Bernie Madoff could create a Ponzi scheme over more than 30 years ? The combination of a plausible story with a charismatic front guy is a very dangerous one.
In my opinion, this is not only related to frauds but also to many (too> expensive stocks. Clever companies try to create “equity stories” and many CEOs are actually brilliant actors. Meeting with such people creates the issue that your “fast” part of the brain jumps to conclusions before the “slow” analytical thinking process kicks in. If you already have the positive opinion, then you will involuntarily skew your analysis to the positive side.
Another issue is that people regularly overestimate how good they are in judging other people. It is a little bit like the famous example of car driver, where ususally 80-90% think of themselves as above average drivers. The same applies for the ability to judge other people. How many times do you here “oh, I am really bad in judging other people” ? Almost never and that is one of the main reasons why all those investment scandals happen and people buy into too expensive stocks.
This leads me back to the biggest advantage of a “pure” arm chair investor:
The likelihood of an objective, fact based investment decision is much higher for someone who restricts oneself to just the numbers and facts about a company. I think the famous Buffett quote “Invest in businesses any idiot could run, because someday one will” is actually the best argument for arm chair investing: Separating the pure facts from the people running the business is very essential. Clearly, Buffett factors in the “human” side in a second step, but one should clearly start with the analytical part first.
Also another famous Buffett quote strengthens this point: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” This also clearly contradicts investors who claim that management is the most important part of an analysis. JC Penney and Sears are very good current examples for this.
Finally, with modern media, a dedicated arm chair investor has many ways to gain insight into a company and management without travelling. For instance, I can find even for the smallest companies at least 2-3 interviews with the CEO on the web plus much more stuff if one invests some time. You can travel and ask the competition or you can search in dedicated specialist forums where practitioners discuss which software tool s better.
Summing it up:
There are clearly valid arguments why visiting companies and speaking with management could add value in an investment process if done wisely.
On the other hand, claiming a superior investment process just because an investor is hobnobbing a lot with CEOs is pure nonsense. A dedicated “armchair” investor has in my opinion at least the same chance as a “Pro” with access to management. The disadvantage of not having the direct “touch” and maybe some insider knowledge can be easily compensated by more objective decision-making and independent thinking.
Disclosure: The author of this post considers himself as a dedicated arm chair investor. The post maytherefore be not objective. Addditionally, the author doesn’t even own an arm chair.
value and opportunity 
Why dont you have a look at the most profitable arm chair company in the world – ekornes ?(eko-no)
he he he…thank you for the reminder. I will put them on my list…..
Great post, I agree, I don’t see flying around constantly meeting with management to be much of an advantage.
I disagree with the notion that a CEO is just a great sales and marketing professional. I believe people get this impression because CEO’s are great at what they do, managing people, and setting expectations. When you meet with a CEO who is comfortable with their role they will set the expectations for you. Almost by nature, people who rise to the top have great people skills, this is necessary to manage a company, and helps when talking to investors.
So many investors have shown that it’s possible to do well just by reading filings and investing differently than the market. Why complicate something simple?
My last thought on this is many managers are probably trying to justify their paycheck. People don’t feel great about themselves if they have nothing to do, so instead of making decisions and being patient they become hyperactive managers, watching the market every second and talking to management often.
I personally prefer to research companies after the market has closed, reading a report at night or on the weekend. I have no temptation to go out and buy shares, it would be impossible, I have to thoughtfully consider if I’d want shares, and at what price.
Hi Nate,
I agree, a CEO is not a total clown. A good CEO can make a difference, especially for smaller firm. Especially if he concentrates on the real important stuff and not trying to micro manage how you correctly pointd out.
Nevertheless, I think one can find out many things about CEOs without needing to speak to them.
Also reading reports after market close seems to be a very good idea Ideally like saturday or so to have another day to sleep over it…
mmi
I agree with your blog post and would like to add another concern. Company visits seem a horribly inefficient method if you compare the time that you are actually gathering information to the travelling time to and from the company sites. This assumes the information is actually valuable which we are already questioning here. I don’t believe one can effectively study financial filings, footnotes, etc in all their complexities while travelling around. Hence, the travelling time reduces the time spend studying these documents.
What if one of your portfolio companies issues a material and complex piece of information and you have a week of company visits ahead of you? To me, continuous travelling just doesn’t seem the right mode of operation for a portfolio manager.
I agree to Covacoro. It would be more interesting to talk to the most important employees, if you can get them to tell you what they really think.
Nice post again.
To become CEO … you need to be a good actor and sales person. What management does for the success of any business is often overestimated, what it can do to hurt the bottom line or the impact of wrong strategic decisions gets underestimated. So anyone who has worked in a mid to large cap enterprise knows, that if you want to know what’s going on, don’t talk to the top management …
Last but not least: You quote some ideas from Kahnemann (fast/slow thinking), which I also read before. Are you aware of a quite opposite school of thinking? Recommended reading: all 3 books from Gerd Gigerenzer – available in German and English. Especially “reckoning with risk” or the latest German book “Risiko – wie man die richtigen Entscheidungen trifft”.
Covacoro
Nice collection of armchair pictures!
Where is your Bloomberg terminal?
Actually, it could be a book title. “Armchair Investing – the man behind his Bloomberg terminal”
Great blog and post. ps Buffett has two t’s, not one.
Going out there for private information is somehow legal limbo. What if management gives you non-public information by accident?
Wouldn’t you no longer be allowed to trade the share anymore? I wouldn’t take that risk.
Anyhow: We should judge deeds greater than words. Who better to analyze deeds than the armchair investor?
Great post again, thank you a lot!
Reading this article I got reminded to an interview with a fond manager of a quite famous american value fond. (Templeton? I don’t know for shure). They said their headquarter is far out of everywhere, anything like Bahamas oder Cayman Islands or so.
Asked if beeing far away of financial centers like New York, London or such they answered: No, they don’t think so, in contrary. As value investors it is important beeing able to swim against a river of financial fashions. Inside financial centers quite often even the experts are inside a “bubble”, with the risk of following the same iinvestment “fashion styles”, running into the same traps.
They think living outside these bubbles opens them the chance to analyse with less bias toward common financial fashions.
There is a reason Warren Buffet do not live in New York but quite in the american outback. Who knows if his investment philosophy could have flourished that good by living inside a financial center.
I think the same can be said about distant “armchair investors”. Distant analysing is just one investment style, active investment with insider information etc. pp. is another investment style. Both have their advantages and their shortcomings.
But for people without great connections and money to “buy” CEO-meetings etc., the distant armstair-investment-style is much easier to realize.
For investment companies like argos, the “active investment style” may be the better choice. In the “Armchair style” they have strong competition from ingenios blogs as “value and opportunity”. 🙂
In the “active investment mode” the competition may be smaller, so they may see more advantages for their company.