Good research, good due diligence in general, means looking for
differential information and approaching the problem in different ways, says
Tom Brakke, CFA.
We were privileged to have Tom Brakke, CFA, stop by our offices in
New York City a few weeks ago. After a multi-hour meeting where many of us
talked about all sorts of things, I managed to wrangle Tom into a quick
the interview, I’ll say that if you don’t already follow Tom on Twitter or on his excellent blog, The Research Puzzle, then you are
probably missing out. He is a regular font of provocative thoughts, and that
can be one of the most useful things in the world. He has also written a number
of excellent posts for Inside Investing, including a thoughtful look at how you should consider cash and a post about the most
important question to ask about a projected rate of return.
CFA Institute: Tom, one of the
things that we’ve been talking with colleagues here about is all of the
barriers that exist and keep people from getting to the truth. How do you tell
if research is good in this climate? How do you piece through that?
Tom Brakke, CFA: That’s a very difficult question in terms of trying to ascertain
whether research is good. I think the first place I would start is that
research is not necessarily good in terms of if it’s formulaic. I would start
there. Let’s just put it in the broader brush of due diligence, for example, which
is what somebody, a research analyst for example, would be doing in terms of
preparing a research report is in essence doing due diligence of one kind or
another, and they’re trying to come to a conclusion.
If you’re doing due diligence, you can run through a checklist and
feel like you’ve done due diligence. But that’s a check list. It’s a pre-defined
way of thinking about the world. When you think about a research report or the
responsibilities of an analyst to do certain kinds of research, lots of times
it takes that same “check the box” approach.
I think good research, good due diligence in general, means
looking for differential information and approaching the problem in different
ways. When I think about good research, I want to see that somebody’s giving me
insight into the situation that I couldn’t have otherwise gotten.
Let’s just take written research, which we see most commonly from
sell side firms, for example. It’s remarkably similar in almost all respects
from firm to firm. You will see some differences. I would say focus on the
differences. Focus on the different theses that somebody might use, a different
approach they might take, the identification of the specific things that are
unique to their study.
When you pull out everything say in a research report or in a
communication from an analyst verbally or from a portfolio manager or anybody
that’s doing things, if you take out all of the stuff that’s the same and just
focus on what’s different, it’s a remarkably small amount of information. That’s
where you ought to start is with the differential information.
A lot of times, it’s very difficult to find that, to comb through,
to piece it. Because that’s not what, say a research report again. I don’t want
to focus just on reports in general. But that’s not what they lead with,
necessarily. You have to dig for it. You have to know what’s different.
The person communicating their research ideas, that’s the lead. To
get all of the extraneous material away and to get that differential
information requires doing things different than other people, just by
definition. I think that’s the major failing of doing research or a due
diligence process in general is basically following well-worn steps is not a
path to enlightenment, if you will.
In talking about the
differential information, you’ve hit on something else, which is the mechanics
of information transmission. You’re notable in that you have several different
pieces of media through which you transmit your thoughts.
Does the substance change at
all? How do you think about the way that you communicate yourself in social
media in the context of…Do you change the substance to fit the medium at all?
Or does the medium devalue the substance in any way?
Does the medium devalue the substance? In the eyes of some
viewers, perhaps it does. Perhaps they don’t think that if it’s available
online it can be value added. Obviously as somebody who produces information
online, I disagree with that.
But I know that
that’s a fairly common perception. In terms of what’s the right forum for a
particular idea, I’ve probably gone too far in the sense that I have three
different blogs that kind of do things. The original one, “The Research Puzzle” is about mostly
investment process, how the industry works. Second one, which is called “Pix,”
features charts, so there’s a visual aspect to it.
A pet project of
mine is to convey investment information more creatively in a visual fashion
than the industry typically does, which is the goal of that one. Then I’ve got
a third one that’s called “Pieces” that’s kind of a scrapbook of
different kinds of ideas. I also do a newsletter for institutional investors
that pass on information to them from others.
It’s a digest format that I think is of interest. Each of those
has a specific purpose so that the readers of those know what they’re getting
and selecting. Like I said, I probably went too far in putting things in too
many different places so that it might be harder for the reader trying to find
the body of my work to identify with it. To locate it, I should say.
I think that when I first started on Twitter, for example, a few
years ago, somebody recommended following me, “Because I had great, original
material and excellent links,” was what he said.
I go, “That’s pretty good. That’s exactly what I’ve been trying to
do.” It’s the originality. It’s the differentiation, as we just talked about,
that I focus on most in trying to convey information. That if people read me, I
want it to always be presented in a quality fashion of the communication as
good as it can possibly be because I think that matters. I think that’s important.
Secondly, that the thoughts that I convey are different than they
find at other places. That’s certainly the feedback that I get. Whether it’s
something that I write myself, the original material, or whether it’s something
I find and pass on, whether it’s via Twitter or via newsletter or in one of my
blogs. That I’m really trying to put into the discussion and the communication,
that I’m providing interesting things that aren’t found elsewhere.
If I can be successful at that, I can add value and it doesn’t really matter
whether it’s online and available for free or whether I’m providing things
directly to clients of mine that don’t otherwise appear. It doesn’t really
My purpose is to bring that information forth, to bring that
context, and to be creative about it and say, “Here’s something different that
people haven’t really been focusing on.” If I can do that in a quality fashion,
then I’m going to find readers that gain benefit from it, then I can hopefully
gain consulting clients, too.
It sounds like to you the
information has value regardless of the transmission mechanism.
Well, you can’t just send out information and say it has value.
There’s a curation aspect to it. That hopefully if I’m disseminating something,
no matter the forum, that people expect that I have…it’s not that I approve of
everything I send out, because sometimes I send out things that I think, for
example, are well written and interesting that I don’t agree with. I think
that’s part of it, too.
It’s not just I’m sending things out by people that agree with me
on something or other. The important thing is sending out good material and
getting people to think about important issues, whether I happen to agree with
them or not.
Now, if I’m writing an original piece, they’re going to know where
I’m coming from. But hopefully, you get the range of ideas that you’re
providing to people. That if you do that, they’re going to respect and
understand that and respond to the information that you give them.
In closing, we’ve been here at
CFA Institute offices for a couple of hours now talking about a wide range of
Yeah, all different sorts of things.
One of the things that comes
out is there are a wide variety of different sorts of investment management
firms. A piece that you wrote on your blog, the
letters to a young analyst, you talk about the notion of a special
place where an analyst can build a career. Similarly, those would ostensibly be
places where a client can build some wealth.
Exactly. I think they go together, by the way. That the kind of
place that can truly be a home for a young analyst or portfolio manager or any
other role within an investment organization goes with the kind of place that a
client can hopefully build up wealth. I think there’s a connection there.
What are some of the qualities,
besides client alignment? Do they have certain typefaces on their website?
[laughs] No. I think it’s a perspective on the long term goals of
what this business ought to be about. That you are delivering value over time,
and that you create value by building an organization, by building a team, by
thinking thoroughly about process. If you’ve read me, I write lots and lots
about investment process and investment decision making.
I’m kind of an evangelist for process, if you will. That doing
that well is very hard work, and it takes a long time. There’s a cumulative
effect of that. If you’re starting off a new firm, you’re not going to have
that instantaneously. But if you do it in the right way, you’ll have it
probably sooner than you think. People will recognize that both, prospective
employers and prospective clients.
For an established firm, it’s a little bit different. Because the
culture is the culture and it’s hard to change. It’s a lot easier to destroy a
culture than it is to create one. I’ve seen it happen. I think it’s very much
about the culture of understanding that it is a cooperative venture in the
sense that you’re there for a particular purpose.
The purpose is the client. What you’re trying to help the client
do. That is to build wealth over time.
We get into this culture of, it’s all other people’s money and we’re just
slinging it around and we’re extracting our free and our mission is to grow
assets and grow fees and that’s always defined ourselves.
As we discussed earlier, that’s why there’s a gulf between what
clients expect and what a lot of investment organizations are delivering. As an
industry and as a profession, we need to close that gulf. It is really about
managing that money as if it was our own, to make the right kinds of decisions,
to be willing and able to buck the pressures of the industry, which is perhaps
the hardest thing.
We talked about a number of these things earlier, about the
misaligned incentives a lot of times, the pressures in the industry, the
relative performance derbies and all the things that end up keeping us from
meeting the client’s objectives instead of helping us meet the client
If you’re an investment professional and you land in a place where
all of that is in the right perspective, not that you won’t have difficult
choices and hard issues to deal with and conflicts that you have to deal with.
But if you’re in a place where that’s being addressed in the right way as
opposed to just, let’s build this business and make a lot of money and fend for
ourselves instead of our clients, then that’s probably the core of it.
But there is a culture aspect to it that is, it’s soft, it’s hard
to get at. A lot of times, you’ll know it when you feel it, if you will. It’s
hard to see that prospectively as a young person entering the business, for
example. It’s really hard to see that. But if you see it and you feel it and
you get to be a part of it, one of the things I tried to reflect on and mention
in that last letter to the young analyst is that you might not realize how
special that is.
Somebody’s going to come and jangle some money in front of you and
try to entice you to leave. Sometimes you need to do that. Sometimes it’s the
right thing to do that. But if you don’t really appreciate for the uniqueness
of the situation that you might be in, you might not think as well about that
decision as you could.
That was really the point I was trying to make there. That if you
find a home in this business that’s a right kind of home, that’s really worth a
lot and you ought to value that opportunity appropriately.
© 2013 CFA Institute. First appeared in Inside
The views expressed in
this article are solely of the author and do not necessarily reflect the views