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david armstrong

Editor's Letter: November 2016

Anyone can predict the future

In this issue we take the gamble of predicting the future and reveal our Ten to Watch, an attempt to flag a few individuals who are worth keeping on your radar in the year ahead because we think they’ll make some waves. The group might seem a hodgepodge. But they broadly personify two themes running through the financial services industry: The death of stock picking and the rise of the machine. 

That sounds like an ominous tag line for a movie set in a dystopian future. While I won’t predict anything that dire, it seems inarguable that managing a portfolio of individual securities is destined to be about as useful an endeavor as professional stamp collecting; passive strategies, based on aggregated information from slices of the market and automatically allocated to you via algorithms based on your own risk profile, are both cheaper and better for your long-term health. The future belongs to model portfolio strategists and automated asset allocators, not the individual stock picker.

I won’t argue. But I feel a tinge of nostalgia. The days of looking at individual companies with a “bottom-up” fundamental approach, ripping apart balance sheets, reading the fine print in the 10-Ks, finding trends in trailing twelve month price-earnings ratios—it almost seems quaint.

I’m reminded of one of my first editors in business journalism. Far from being the stereotypical grizzled veteran, he was a lifetime business journalist with a completely unrelated degree from an Ivy League college; he was the smartest guy in any room (balanced out by a sometimes astonishing social awkwardness) and had an amazing ability to quickly zero in on whatever crucial information was missing or contradiction left unaddressed when portfolio managers or corporate executives tried to explain their strategies in our magazine.

His favorite tool: The printed edition of Valueline’s equity research. The three-ring binders of individual stock research accumulated and overtook the bookshelf behind his desk; the most recent editions were always open in front of him. He could dissect trends in a firm’s earnings multiples, ascertain when its account receivables were running higher than the value of its inventory, and when reporters would come to him with slightly different data from the company, he would press us to call the chief financial officers and demand an explanation for their loose definitions of things like free cash flow or EBITDA. Those metrics were fairly easily “massaged” by the companies and ours was the last line of defense—or so it seemed at the time. 

Pouring over those infrequently published Valueline pages, it’s like he was ensconced in amber. We had access to far more data—Bloomberg terminals, dozens of market websites updated in real time, reams of investment bank research flowing into our inboxes —yet when he reached behind him, pulled down a binder of Valueline reports, we knew we were about to be schooled—human judgment finding the truth in the face of copious data.  

While the demands of business journalism clearly didn’t favor the financial equivalent of the “slow food” approach of his generation, the lessons were valuable. Numbers are sometimes wrong, data is messy and the computer can’t know when it is being lied to. Worse, given that we are investing in indexes and not companies, it may not even matter.

David Armstrong


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