During the First World War, then referred to simply as “the Great War”, battles were fought with boots on the ground. Despite the modest presence of air and sea, WWI became synonymous with artillery and trench warfare. The Great War would bear witness to the creation of the tank in 1916, which would play a peripheral role due to its slow speed, unreliability, and tactical limitations. This was long before the days of sophisticated machinery, cyber attacks, and drones.
As detailed in texts documenting the battles on the Western Front, infantrymen would commonly be separated by trenches with only a wide stretch of land between them. This area was referred to as “No Man’s Land”. Breaching the trench and running across No Man’s Land in an attempt to reach the opposite side was certain suicide. A stretch of dirt with no owner. One which claimed the lives of many men.
Most people’s association with the phrase stems from the war. But it originates from medieval English law, where no man’s land referred to an unclaimed or disputed ground. Today, it is often used to illustrate circumstances when you are stuck between a rock and a hard place. In the practical theory of pricing strategy, for example, the term is used to describe the inefficiency of neither pricing low to capture the largest segment nor pricing high to target customers with lower price elasticity. If you find yourself somewhere in the middle, you end up leaving money on the table with price-inelastic clients while simultaneously being less attractive to more price-sensitive consumers.
It’s an eloquent analogy that can be applied to a variety of circumstances. I happen to believe there is an investment no man’s land that traps many individual investors. This embodiment of no man’s land persists not because it is unavoidable, but because avoiding it demands a level of introspection few investors undertake.
I’ll dig deeper into what I mean by that shortly, but for now, it’s enough to characterise this no man’s land as follows. An individual investor who has decided to dedicate their time to picking stocks while performing only the most superficial of analysis.
Now, let’s take a quick segue back to 1960.
Superficial Analysis
In 1960, Philip Fisher penned a sequel to his famous book ‘Common Stocks and Uncommon Profits’. The sequel was titled ‘Paths to Wealth through Common Stocks’. I find it remarkable how, since this book was published, seven decades have passed, and an unfathomable volume of work has been added to the corpus of public investment "knowledge", yet 99% of it pales in comparison to the simple, enduring principles from Fisher.
It’s a surprisingly under-discussed book, considering how strong a sequel it was to Fisher’s better-known work. Examining its pages, you can see how influential it has been, spotting glimpses of books published decades later throughout its pages. In Chapter 4, Fisher details desirable traits when selecting advisory services. Many of these attributes translate to the individual who wishes to invest on their own accord. He categorises the work of an advisor into four buckets:
Seeing clients or prospective clients, talking to them on the telephone, or analysing clients’ individual investment lists.
Reading publicly available corporate financial statements, financial periodicals, or attending formal meetings of societies of security analysis.
Interviews or telephone conversations with corporate officials about their own company’s affairs.
Seeing or talking to informed people about matters of investment significance in companies other than their own, but with which they are familiar.
Fisher remarks that bucket number 2 is a superficial avocation. It’s the bare minimum an investor can do to become informed on a security, to which Fisher reminds the reader “it is knowing important facts before they are known to the financial community as a whole that is the greatest source of important profits or the avoidance of important loss”. A high level and superficial understanding of a business seldom leads to such foresight.
To elaborate his point, Fisher shares a story about a broker who approaches him with the intent to do business. He offers a sample of the reports, and so Fisher accepts one for a business he knows well, and one for which he does not know well.
“In this all-important matter of checking a prospective investment adviser’s sources of data, do not confuse quantity for quality. I am reminded of a rather amusing incident that occurred in my own office about a year ago. A representative of a sizable stock-broker investment-banking firm from another section of the country called upon me. He told me of the amazingly large number of security analysts his firm employed and of the number of extremely worthwhile special reports they made. I assured him that should they provide me with any ideas I could use he would not go unrewarded in regard to brokerage business.
He offered to leave me some of their reports: Only one was of a company about which I have rather thorough information. I selected this report and a few others each written by a different so-called specialist. I was totally unimpressed with the one on the company I already knew. It told about what anyone might know who occasionally called on the management and had a rather superficial knowledge of that company’s affairs. I then took another of these reports, one on a company of which I have little knowledge, and asked a friend in that company what he thought of it. He showed it to several of the company’s top officers. All agreed with him that it showed just about the degree of knowledge of the company that an outsider might have attained who had made a casual study of it and nothing more. It did not go beneath this surface at all. I decided I did not want to get involved with anyone in the investment business that seemed to be doing this sort of superficial work”.
- Philip Fisher, Paths to Wealth Through Common Stocks, 1960
To Fisher’s credit, much has changed since the 1960s. One of Fisher’s many contributions to the investment world is his popularisation of “scuttlebutt”, which is the practice of gathering firsthand primary information. Back in Fisher’s day, this would mean talking to insiders, suppliers, customers, and other stakeholders about the company under study. It also involved physically commuting most of the time. All in an effort to understand what is really going on beyond corporate filings and disclosure.
While all of the above is still highly valuable and relevant today, the methods of scuttlebutt available to the investor are much broader now than when Fisher wrote his seminal works. His first two books predate the advent of the Internet. It’s incredible the amount of information you can gather on a business or industry with a little bit of tenacity and a Wi-Fi connection.
What's more, there are now bulging backlogs of call transcripts conducted with these key stakeholders of publicly traded companies Fisher so highly regards, thanks to networks from vendors like Tegus, In Practice, and AlphaSense. The price of said services is exclusionary to regular individual investors. However, for institutions with larger wallets, or the enterprising individual, this data is widely available and offers a source of information that goes beyond the filings. That said, if you subscribe to the general efficiency of markets, all such findings will eventually become reflected in the quoted prices of common stocks.
Is Superficial Analysis Enough?
To summarise Fisher’s point, it is not enough to conduct superficial levels of analysis and expect an extraordinary return. Within reason, everybody pays the same entrance fee to the stock market, which in modern times is so low that it may be considered ‘non-material’.
So while this level of superficial analysis likely puts an investor in a better position than those who invest purely on vibes, I don’t believe the separation between the two is great. But like all things in life, it’s a balance.
You can spend 10 minutes or 100 hours studying a company, but there comes a point when additional superficial research exhibits diminishing returns.
To repeat Fisher.
“It is knowing important facts before they are known to the financial community as a whole that is the greatest source of important profits or the avoidance of important loss”.
I think part of this is what makes small cap investing so appealing to some. They are less covered and have lower institutional eyes bearing down on them. As such, it may take less to “know” the important facts before the broader market, and those important facts may not be as challenging to draw out.
Some investments require putting 2 and 2 together to make 4. There is a structural trend in X, and this company focuses on X better than anyone. Others might require a few more steps to get to 4. In the large cap space, more eyes means more people would have added the 2+2 before you, so it’s “priced in”.
Now, this obviously ignores price. I am reminded here of Warren Buffett’s quip about it being better to acquire a wonderful company at a fair price than a fair one at a wonderful price. For the sake of argument and narrative, I am purposefully ignoring the copious number of other variables one must consider in the process of acquiring investments.
Yet, I put this to you, the reader. Is a superficial level of analysis, as Fisher details it to be, enough to truly understand if a company is “wonderful”? Furthermore, is it enough to know the difference between a “wonderful” and “fair” price?
The Spectrum
In my mind, there is a spectrum of individual investors. It’s not all-encompassing by any means. To the far left is the index fund investor, who is content with buying passive funds, earning a market return, and nothing more. To the centre-left is the closeted stock picker. They are primarily invested in funds, but still have an itch to pick stocks. To the centre-right are average stock pickers. They are less likely to own funds and focus their efforts entirely on individual issues. They go beyond the superficial analysis, but fall short from a performance perspective due to a variety of considerations, including but not limited to: poor temperament, inexperience, negative habits, overtrading, and so on.
To the far right are successful stock pickers who invest considerable time in the pursuit of stock picking and whose performance more than compensates for the time and patience spent. In the centre is the superficial stock picker: what I refer to as no man’s land. It’s an investor who picks individual stocks, but does so in a way that is largely concerned with the type of superficial analysis discussed earlier. For this work, they expect a market-beating return, but will often be disappointed. They think they are on the right of the spectrum.
I think there is money to be made in all buckets. Some require more of a helping hand from luck than others. In particular, the “No Man’s Land” bucket.
Sadly, luck is not a reliable long-term strategy.
Each bucket has its benefits. Each constituent of said buckets will have their own rationale for choosing to invest in such a way. Index investors may value their time and be more interested in making a reasonable return than dedicating hours of their week to something they feel they have no advantage in, or perhaps no passion for. Some people eat, sleep, and breathe stock picking and are willing to dedicate vast portions of their life to sharpening their skills.
I’ll share my own reflections on my journey across this spectrum and where I feel I land today. When I was 18 years of age and had dusted off The Intelligent Investor for the first time, I aspired to be on the far right of this spectrum. The Dunning-Kruger curve afflicts us all, and so I soon realised how naive that aspiration was, at least in the near term. After a decade or so of investing in single stocks, I found myself drifting leftwards.
I believe at one stage I would have fallen into the “Average Stock Pickers” bracket. I truly spent a significant portion of my time and mental capacity researching stocks. Going beyond the filings. The returns were okay, but not really worth the time I was putting in. As I matured, entered the world of work, landed more serious and time-consuming jobs in my career, my free time waned. At one point I was firmly in No Man’s Land. No longer able to commit as much time, my level of research shifted into autopilot, which was mostly superficial in nature.
I was conducting the bare minimum of work. Reading 10-Ks, filings, transcripts, news, external sources, jotting down my assumptions and thesis, challenging the thesis whenever the opportunity presented itself, attempting to ascribe what I felt was a fair value to each rock I turned over. Even today, this is the extent of the work I do, and I take my sweet time. I seldom pay attention during earnings season, often reading the documents several days or weeks after the event. Ironically, I am confident this is more than the majority of investors will undertake. Yet at the same time, it’s table stakes for serious investors.
Over time my allocation to funds (~38% at the time of writing) has grown. I think my strongest traits are temperament, patience, and the ability to withstand volatility and noise. The mental side of investing. On the contrary, I don’t see myself as an especially gifted security analyst. What's more, while my passion for finance & investing is as strong as ever, I don’t have the hunger to pursue investing as much more than what I do today. It’s not something I feel the desire to eat, sleep, and breathe.
Do this for long enough, and you develop (hopefully) a sense of appreciation for how difficult it is to outperform, and how much focus, time, and attention are required. I have realised that I don’t really care all that much about investing styles, maximising returns, and chasing the ebbs and flows of the market’s sentiment or preference for particular sectors and industries.
Upon reflection, what I value most are the following. My time. Earning a suitable return on my investment. The continuous learning and mental challenge that turning over rocks provides. Being able to sleep well at night. Investing in businesses I understand well and have a high degree of confidence in.
As such, today I identify more as a closeted stock picker. It’s a passion of mine, but not a large facet of my personality. Not something I see myself pursuing as a primary source of income. This may change over the years. I detest speaking in certainties. But for now, I am content with the fact I crossed the No Man’s Land and still have all my limbs intact.
As a parting word, the provocative amongst us may describe the closeted stock picker as role-playing as an investor. I’ve heard this sentiment expressed numerous times. Most often by investors whose self-worth is deeply intertwined with their stock picking ability. To that, I will leave you with a favourite quote of mine, “We don't see things as they are, we see them as we are”.
Thanks for reading,
Conor