Research Puzzle: "their language"

November 2, 2015

2 minute read

"their language"

Some stories seem to have fallen apart lately.

Valeant has gone from darling to deviant. The losses in the stock accelerated when light was shone on some questionable business relationships that hadn’t been disclosed by the company.

The Theranos tale has been tarnished too. An excellent column by James Stewart in the New York Times provides a summary of the rise of the Elizabeth Holmes mystique, another example of “the ageless power of a great story.” But now much of it has been called into question.

In response (according to Stewart), a spokesman for the Cleveland Clinic backpedaled from its embrace of the blood-testing firm, saying that information about Theranos on the Clinic’s website was “their language, not ours.”

That is a fitting description for the most common weakness in company and investment manager due diligence.

For example, if you cross out everything on a typical stock research report that could have been written by the subject company itself, you might be surprised at how little is left. In many cases, big chunks of text are copied exactly or paraphrased from company documents or presentations to make report preparation easier. The baseline narrative is set by the company.

The same thing is true for much of the due diligence on investment managers. I have seen reports from major organizations that have virtually nothing in them that didn’t come from a manager’s pitchbook. Philosophy, people, process, performance, etc. – all reported for the reader as if independently discovered, but really just a conveyance of the manager’s story.

If you can’t find the mess in an organization, if you can’t poke holes in the story, you haven’t gone deep enough. It’s always there. Your job is to find it and then value it in the context of everything else.

Their language and their stories can’t be accepted as is, or the governing process is not “due diligence,” but “analyst capture.”

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