Fabrice Taylor, CFA, publishes the President's Club investment letter. His letter and The Globe and Mail have a distribution agreement. You can get a free copy here.
Forget spreadsheets, screening software and the Internet. If you want to be a better investor get to know that quaint 19th-century technology better known as the telephone.
It's amazing how few investors call a company these days. The vast majority of what you need to know is right there at the tip of your fingers.
But so many of us get lazy or overconfident or paralyzed by fear of rejection that we don't pick up the phone. That's a mistake, and one that I've learned the hard way.
Investing is a game of scarce advantages, yet an edge is difficult to come by in the stock market. You certainly don't get one by just reading financial statements. A million others are doing that. Ditto with screening tools. They're useful as a starting point but. again, they're not exclusive to you.
It's the same with the Internet. Any monkey can Google, so you're not going to get an edge by spending hours scouring the darkest corners of the Web.
The only thing that can give you an edge is making connections that few others have, or interpreting what sources say to you.
Some analysts often write about their "channel checks" by which they mean, for instance, that they have sources who can tell them that RIM is ordering far fewer parts, suggesting falling sales. That can work although I've seen it backfire when the company has in fact switched its supplier. Plus it's not easy for an average investor to call up a source at a component maker. Still, doing so can be useful.
Others will call up industry players to do their due diligence. Again, that can be valuable although clearly a competitor to the company you're inquiring about is not likely to be generous; he's going to badmouth his rival, however delicately, so treat it any such comments with a grain of salt.
The best source is often the chief executive of the company in question. No matter how much you read, how much time you spend, how elaborate your Excel model, you will never understand a business better than the CEO. Not only do they live and breath their work every day, and likely have for years, they also have information you don't have. What you look at – the latest results – are dated. He or she has real time and, in fact, advance data.
Now, obviously, you have to be careful talking to a CEO. The guy who runs a big company like a bank or a big oil producer makes probably less than one big decision a year and has very little impact on the business. He's also not going to talk to you. The head of a small company constantly raising money is also not to be relied on. He doesn't really know what's going to happen plus he can't afford to be particularly forthcoming when he's in financing mode.
But the CEO of a smaller firm that isn't looking for capital will often take calls from investors (you'd be surprised) and can be a fountain of useful insights if you know what questions to ask.
For example, one of my favourites is: "Who is the best analyst on your stock and why?" Very few investors will ask that, and certainly no analyst will. Yet the answer can tell you everything.
I asked the CEO of a company this question not long ago. He named an analyst, and when I asked why he said, "because he's the most bearish."
Does that sound like a sell signal to you? As it turned out, the company's stock dropped 20 per cent over the ensuing month on no news. That might be a coincidence, but it might not.
Another good question for a CEO who doesn't appear too promotional is whether it's a good time to attract a lot of investor attention. One chief executive said if I'd asked him that six months earlier he'd have said no, but felt that now was a good time. The stock is up sevenfold. Another CEO answered: "Well, the stock has done pretty well over the past year." Six weeks later a regulatory change cut the stock in half.
Coincidence? Maybe, but the more you pick up the phone, the more the coincidences will smile on you.
The point is, most CEOs want to tell you the truth and if you can find creative ways to get them to do that within the confines of the rules, then you'll have an edge.