Reflecting on the excellent interview @Strawmandid with John Addis from The Intelligent Investor on Monday (recording is up and worthwhile), I was thinking about the power of stories / narrative in analysing a company.

I wrote up the following to myself to explore my thinking on this about more and now sharing here in case it's useful.

Keen to hear thoughts from others on this - especially differences of opinion...

Cat and mouse games with management

In management interactions (incl through ASX announcements), analysts are trying to find out what’s really going on in a business. Especially the negative / bad stuff. This is why Buffett always wanted to know the bad news first.

Management are incentivised to tell a good story – to attract investors, capital, and generally raise the share price.

A rising share price means that you can raise capital on less dilutive terms, management and board look good, your holdings are worth more, your STI is worth more, your bosses are happy, analyst calls are fun, etc.

A falling share price means you can buy back shares on more favourable terms.

A share price is often seen as a proxy for business performance (you hear talking heads allude to this all the time).

But share price is really an indicator of sentiment plus underlying value (in the eye of the beholder of course) and this can be influenced by management telling & selling a good story.

So why would management present a rosy picture when reality will surely catch up – short term focus, they may not be there long term, hit KPI’s, feels good / easy option, believe their own BS, fake it until you make it / trying to outrun reality (this sometimes works in silicon valley).

So what to do about all of this?

Management are on the inside and have a perspective that analysts never will – so if management can be trusted, this is a huge insight for analysts that they would otherwise not have.

They need to be trusted to be capable operators, well connected, etc and to be honest in articulating reality to analysts.

Buy analysts and investors can be a cynical lot and some don’t even listen to management speak.

So if you can find management who are consistently insightful, trustworthy, and don’t avoid negative news you can make better estimates of what’s going on in a company and its valuation.

This is especially helpful when things do go bad and the share price reaction presents a potential opportunity.

How to apply this?

Use the Simon Kold method (https://www.redeye.se/podcast/investing-by-the-books/1043238/investing-by-the-books-63-simon-kold-on-the-hunt-for-great-companies) – go through old earnings call transcripts and look for what management say will happen when.

Then see if / when it does. Especially see if they are capable of telling negative news or if it’s always positive stories about the future and negative events to explain negative numbers.

This can take a day to go through old calls but can be a huge source of genuine insight.