Confessions of a Former Analyst

When I was in grade school, I was a real tomboy. I cut my hair short and wore my brother’s hand-me-downs. I bullied other boys in my class and commandeered their Star Wars action figures. Strangers regularly referred to me as “little boy” and I swelled with pride.

When puberty hit, I could no longer hide that I was actually a girl but I never lost my tomboy roots. Even today, I am as comfortable in a group of men as a group of women and I think that ease has enabled me work well in male-centric professions. I straddle both sides of the fence.

I recently climbed over another fence, moving from an investment world to a corporate one. As an investor, I spent 17 years peering over that fence, fretting over what I didn’t know about the company that could lose money for our shareholders. The relationship between investors and companies is asymmetrical — all the information the investor needs to make a smart decision is held by the company but the company can’t (or sometimes won’t) divulge. An investor then develops a process of educated guessing which then she continually repeats and refines until her gains offset her losses. The trick to a successful investing career is creating a sustainable process.

I’ve spent 6 months on the other side of the fence as a CFO of a fast-growth tech company, and I’ve seen mounting evidence of where I went wrong as an investor. Not only has the company where I now work taught me a lot, but also so have CFO mentors at the companies that I used to invest in.

It’s humbling.

My investment track record was decent. I had multiple base hits, a few home runs and only one truly massive blow up. But now that I’m on the other side of the fence, I realized that I still had much to learn.

If I were investing today, here are three things I would change about my investment process to make it more sustainable and reduce the risk of asymmetrical information:

1) Invest in a strategy. As an investor, I spent a lot of time on complex financial modeling and valuation work, which often served as the genesis for an investment thesis. A typical approach would be to take a “broken” company and derive the company’s value if it got its act together. What I know now on the other side of the fence is that this approach was backwards; modeling work is of little use unless it is first rooted in the company’s stated strategy. If the company isn’t purposefully striving for it, then “it” is highly unlikely to happen. In my new role, my time is spent developing strategic initiatives. What I don’t do is set growth targets first and then retro-fit a strategy to it. If I were investing today, I would spend a lot less time on “wishful” modeling and more time analyzing if the company’s stated strategy is attractive enough to warrant the next leg of quantitative work. An investor who builds a model to match her own personal investment thesis is not aligned with the company’s reality; if the investment is successful, it will unlikely be for the reasons she thought and so she hasn’t created a sustainable process.

2) Invest in the entire management team. As an investor, I spent a lot of time with CEOs and CFOs and I regularly made investment decisions based on my assessment of their abilities. What know now on the other side of the fence is that a CEO is only as great as the operating executives underneath. In my new role, I joke that I don’t actually “do” anything tangible; instead, I spend my time with operating executives trying to help THEM do things. I’ve observed many of the CEOs & CFOs at other companies are in on the same joke. If I were investing today, I would go deeper into management beyond the CEO & CFO. Developing these relationships would help me learn if operating executives are aligned with the C-Suite and therefore if the company has a shot at achieving its goals.

3) Invest in something besides the current quarter. As an investor, I spent a lot of time inputting and analyzing quarterly earnings releases. I grew to view it as a waste of time. In my 17 years as an equity analyst covering as many as 40 companies in any given year, I remember just three times that I actually learned something “investment-paradigm-shifting” on an earnings release: KO in 2Q98, AMZN 1Q07 and GOOG 4Q07. What I know now on the other side of the fence is that my instinct was right; an investment thesis driven by a view on quarterly results is not aligned with how a company operates. In my new role, I help produce quarterly reports. Because the company is not publicly traded, quarterly stats are published in limited form externally; internally, very few employees are waiting for the results with bated breath. I’ve learned that this is also true of the public companies I covered before. Of course, investor relations, the C-Suite, and the most senior executives are laser-focused on the earnings event and its communication. But very little of the average company’s strategy is tuned to quarters and very few at the company are incented on the delivery of quarterly results except for commission based employees. If I were an investor today, I would find other signposts by which to mark a company’s progress. I am not an advocate of “long term investing” just for the sake of it; however, it is clear to me now that an investment process based on quarters is not a sustainable. It requires more luck than smarts. And luck always runs out.

Image credit: Original painting by Jacqueline Ditt on Etsy https://www.etsy.com/shop/universalarts