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.