INVESTMENT DATA – LOOKING FOR OUR KEYS UNDER THE STREETLAMP

By Aakash Saxena & Jason Apollo Voss, CFA

At Deception And Truth Analysis (D.A.T.A.) we believe that investors are frequently like the proverbial drunk looking for their keys under the streetlamp; not because that is where they lost their keys, but because that is where the light is. What makes us say that?

What % of Financial Data is Contained in Numbers?

We have asked investment management audiences globally this question and repeatedly. Now we are going to ask you: What percentage of financial data is contained in numbers? To the right are your choices (answers are at the end of the blog post).

What did you guess? You likely guessed above 60%. At D.A.T.A. – with many of us having backgrounds in finance and investing – we all guessed above 60%, too. In fact, the average % of financial data contained in number guess from our audiences is 64.0%. But that was before we had the actual percentage of information contained in numbers, or what some call structured data.

A Shocking Truth

After an exhaustive review of the numerical content in all US companies’ annual 10(k) reports from 2006 through the end of 2021, the actual figure is just 1.7%. You probably thought, what, are you kidding? No, we are not.?

Yet, most investment pros are expending almost all of their intellectual firepower looking for alpha in that 1.7%. Let that sink in for a second, especially the difficulty of out-competing other investment managers by only systematically assessing such a narrow slice of information. Whoa. There are good reasons for this, including the fact that most of a finance pros’ formal education and techniques are all designed to assess that very narrow band of information.

It is true that numbers are outcomes and that a single number like ‘revenues’ represents the decisions and activities of many people within companies, as well as customer decisions. But given that numbers are outcomes, based on past decisions, shouldn’t we also evaluate the company?behaviors?that drove the decisions in the first place? It just so happens that the 98.3% of financial data that is text-based provides wonderful data that can be used to assess behavior.

This is our theory as to why our D.A.T.A. Score is predictive of future stock price returns, both negative and positive. If we understand the behavior of a person, we can better assess their decisions. We believe examining unstructured data in a scientific and systematic fashion is one of the leading edge techniques likely to improve investment management going forward.

Decisions that, ultimately become baked into outcomes/numbers. This is looking for your keys under the streetlamp and shining a bright light on the rest of the information landscape, too.

Importantly, we are not saying that 98.3% of the important information is contained in texts. We just don’t know that empirically. But what we are confident in saying is that there is more to understanding an investment than just assessing the numbers. This is especially true if you bring a scientific and systematic approach to understanding a firm’s behavior the way we do with our Deception And Truth Analysis (D.A.T.A.) Score.

Distribution of responses to our question:?What % of financial data is contained in numbers?

[Of interest to us is that no one has ever guessed the right answer, less than 10%]