Given Scott is on a well-deserved vacation in the complete wilderness that is the Yukon, and is obviously not able to write his normal daily blog, I thought I would attempt to step up and write a few. (We also will not be hosting our regular weekly webinar this week nor next).
My role at High Rock, among other things, is to do some macro research (largely nighttime reading for me), manage the portfolios and the risk and to do all of the bottom-up, fundamental research that we base our individual security selection on for bonds, stocks, convertibles and any preferred shares.
Today I thought I would describe our Research Process that we base our investment decisions on. At High Rock, we view our research as paramount to our collective success. We don't just buy securities...we believe that our hard work, experience and education in security analysis and our years of experience in actually trading/investing for a living help us succeed. So today I will broadly explain our research process.
We start with a blend of Top-Down and Bottom-Up Research. We attempt to get the "big picture" right first and then do the bottom-up individual security research. For example, we had a macro view in Feb/16 that oil (and other commodities had bottomed and wanted to get long energy securities. We then did our micro research and picked not only the right companies but the right securities (stocks then bonds).
Top-Down/Macro - this type of research is the "big picture". It involves analyzing central bank moves, currencies, commodities, interest rates/government bonds, economic statistics, etc. Scott is primarily responsible for guiding our Macro view of the world but I obviously spend a fair bit of time on it as well.
Bottom-Up/Micro/Fundamental - this is the detailed analysis we perform on each company we invest in. We run excel file models on our portfolio companies and keep the models up-to-date at least on each quarterly financial report by each company. This could be seen as a combination of financial statement analysis and accounting. More on this tomorrow. I do all of our bottom-up.micro/fundamental research.
A brief explanation of our process from the info-graphic below:
Idea Generation - this comes through reading the press, sell-side analyst research reports and most importantly, our business associates/contacts (doesn't hurt that we share office space with the Smartest Guys on Bay St).
Excel File - if we are serious enough, we open a new excel file. Every portfolio company has an excel file/model. (Ask your current Advisor to show you his/her own, proprietary research models...)
Notes - we then get up to speed on the company, the industry etc. This tab contains the quarterly conference call notes, any discussions we had with the management team news, etc
Cash Flow - the most important tab is our analysis of the company's cash flow. More on this tomorrow
Covenants - pre-2008, equity analysts never even looked at credit facilities and bonds and the covenants that were in place. Today, most do. We sure do as one needs to know what limitations the company is under at all times
Operations - depends on the company but they all sell or produce something so best to keep track each quarter
Relative Value/Valuation - tricky for sure and as much art as science but we look at similar company's valuations on different metrics
Org Chart - want to know which legal entity issued the bonds or stock. We prefer to be as close to the operating assets as possible
Decisions - then we make our buy/sell decisions based on all of this research
So there you have the meat on the bones of our Research Process. It is well-defined and works for us (and our clients). It is a lot of work (especially during reporting season) as I have excel file models on about 50 different companies but it is extremely important work to perform.
I once worked with some individuals who's idea of "doing research" was simply reading sell-side (banks) equity analyst research reports! Really? No real research done. We do look at equity analyst reports but more to see what they are forecasting and if they are too optimistic or not optimistic enough...our goal is to be ahead of them because they publish their research and Advisors regurgitate what the Analyst says so it does create "flows" in a stock. Sell-side analysts are also rather conflicted because the companies they report on are Investment Banking clients of the bank (another story).
To invest without doing this in-depth research is probably more like gambling than investing.