Value Library

The following is an excerpt from the ABC Perspective - April 2001 - Pg. 3

Research

Successful stock picking, I believe, is largely a function of serious research. But deep research is a tedious and at times an extremely difficult task. The fact is that stock research or the process of information gathering must often be carried out in a pains-taking and imperfect fashion since the data and corporate facts may not always be readily available or in proper, understandable form.

Stock selection, moreover, is neither the simple process of tossing a dart at the financial pages of a daily newspaper nor a whispered hot tip at a Saturday night cocktail party. Rather it involves serious analysis of literally peering under rocks, testing worst case scenarios, interviewing company executives and corporate competitors, etc. It involves intellect, investment discipline, patience and courage of one's convictions. Moreover with the considerable growth of the investment management industry, portfolio manager competition has become incredibly intense. As a result, quite often multi-million dollar investment decisions must be made in a compacted time period lest one's rivals discover earlier, a limited quantity hidden gem.

The research process, in effect, has evolved over the past few years into a highly condensed period of intense fact-finding via brokerage reports, internet, corporate interviews, etc. with the ultimate investment decision often made with less then complete information. Also with the plethora of media analyses of mutual fund performance, the research analyst is now under remarkable and growing pressures to perform in an increasingly competitive and hostile investment environment.

The ability to ferret out potentially profitable common share investment information is universal to any line of work. For instance, Marilyn Ferguson, in her publication, The Aquarian Conspiracy concluded:

"Detecting tendencies and patterns is a crucial skill. The more accurately we can get the picture from minimal information, the better equipped we are to survive. The ability to close a pattern with limited information enables the successful retailer or politician to detect trends, the diagnostician to name an illness, the therapist to see an unhealthy pattern."

Additionally this condensed research process is bringing out a lot of change to our industry. For instance as research analysts we are becoming extremely focussed, intense and impatient for information. The market demands this. We are also becoming testy, pressured for instant gratification and under intense scrutiny by a growing and very sophisticated 2001 investment clientele. Furthermore with the recent Nortel debacle, I believe that investors are going to rely more and more on hard-core fundamental research analysis.

While I consider these new research trends good for the longer-term prospects of our industry, I suspect that with the huge cash flows to be invested, the pressures for research analysts to perform will become even more exaggerated. The end result, I firmly believe, will be the increasing importance of serious fundamental analysis, investment common sense and discipline to the critically essential research process.

Irwin A. Michael, CFA