The Analysis Problem

In “As You Like It” Shakespeare described life as a play in seven acts.  Starting from the infant (“mewling and puking in the nurse’s arms“)  through the school-boy, lover, soldier,  to the justice (“full of wise saws, and modern instances“),  onward to the rich and greedy Pantalone and finally old age and death.  The career play of an analyst is not quite so poetic (although mewling and puking sounds familiar) but is usually played out in stages nonetheless.

As first student and then practitioner, my play has been running for >25 years.  Whilst every analyst will have a different tale, I hope a quick summary of my experiences will provide a better understanding of what The Equity Toolkit is trying to achieve.  So far, I’ve identified four stages in my career play as an investor¹:

Results – Will Rogers Analysis

Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it.

Will Rogers


My first market experience began with a visit to a stockbroker to invest the savings from a summer vacation job.  With a few years Uni under my belt I ‘knowingly’ asked for a mix of blue chip and speculative ideas.  In return I was given a list of blue chip shares I was confidently told everybody owned and some speculative shares with great upside potential.  This was toward the middle of 1987 – not surprisingly by the end of that year there was not much left of my summer’s efforts.

I’m a slow learner, so when I joined a broking firm some years later it didn’t stop me from buying a stock I’d heard the analyst describe as “the only stock in the sector I can see doubling”.  No surprise –  it halved!  Clearly this approach of listening to the experts wasn’t working.  I needed the advice that Mark Spitznagel received from his mentor, the trader Everett Klipp:

“you’re not here to make money, you’re here to learn how to trade. If you could walk into the pit to make money, you wouldn’t even be in here. You’d be in a long line all the way down LaSalle Street, still waiting to get in.”

In order to make money, I needed to learn how to analyse.

Analysis – Ben Graham Analysis

We may express the dictum that the analyst’s conclusions must always rest upon the figures and upon established tests and standards. These figures alone are not sufficient; they may be completely vitiated by qualitative considerations of an opposite import … In the mathematical phrase a satisfactory statistical exhibit is a necessary though by no means a sufficient condition for a favourable decision by the analyst.

Ben Graham and David Dodd, Security Analysis


By the time I became an analyst in my own right, I’d done graduate and post graduate courses in finance and security analysis.  Even though I hadn’t read his books, I knew who Ben Graham was and I knew that numbers and value were the key.  So I set to work on my spreadsheets (a relatively recent addition to the analyst’s toolkit in those days) and churned out models with 20 year histories and well crafted DCF’s.  Recommendations flowed from my analysis – some of them were actually right.  But many others were wrong – spectacularly wrong.  Not just that, I had no way of reconciling my errors to my analysis – what was the spreadsheet missing?

If only I’d read Graham in the original, rather than the anecdotal.  Numbers were at the heart, but in Graham’s words were a “necessary though by no means a sufficient condition.”  What’s more, the founder of value investing  didn’t actually believe in valuation: “The essential point is that security analysis does not seek to determine exactly what is the intrinsic value of a given security.”

So I undertook what modern management speak would call a pivot – I went from spreadsheet evangelist to denier.  “The answer is not in the spreadsheet” became my new catch cry.

Application – Warren Buffet Analysis

Its far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Warren Buffet


I hadn’t read Graham, but I had, like all my peers, read Buffet. Quality was key.  Numbers and value were important, but needed a qualitative overlay.  More attention on industry structure, more consideration of management.   Industry contacts and real world due diligence were the new catch cry. When it came to the numbers, focus on accounting tricks – earnings quality became a mantra.

But this too had its problems.  For starters, I was a sector analyst covering a dozen stocks – quality at a reasonable price was often hard to find.  Further, my clients were relative, not absolute investors – an investing dance card with a set number of slots on it was fine for Buffet, but no way for me to make a career.  Further, Buffet had advantages that I didn’t have.  In addition to his intellect, he had a broader investment universe.  By virtue of his large capital position, he had the ability to influence the management outcomes at his investments and hence could take larger less diversified bets.  In short, there was both a conflict between the Buffet investment philosophy and my career as a broking analyst and a gap between this philosphy and my investment resources.

The conflict was easily fixed.  After 10 years in broking, I decided I’d had enough of making multi-year predictions and 30-40 phone calls on the same topic.  The gap is taking longer to rectify.

Framework – Spitznagel Analysis

The concept of a framework, as opposed to a formula, is an important one. Even Austrian Investing, rather than providing the precise instructions, is meant to be scaffolding for the roundabout process from which anyone’s degree of capitalistic investment can be better understood and gauged.

Mark Spitznagel, The Dao of Capital


When I left broking, I knew that something was wrong with the analysis I had been performing.   But as I said, I’m a slow learner and couldn’t quite work out what it was.  I then read Nassim Taleb’s Fooled By Randomness and things started to become clearer.  Not only did I need more tools, but I needed to develop a better framework on which to hang those tools.  As Spitznagel argues in his magical book, the Dao of Capital, I had to go backwards in order to go forwards.

For the last ten years, my analysis has focused on generating this framework.  Not just on acquiring tools, but in trying to integrate them.  This is what The Equity Toolkit is about – a framework for analysis.  Much like Spitznagel’s description of Austrian Investing, The Equity Toolkit is not designed to provide precise instructions, but to provide the scaffolding around which the reader can develop their own analysis framework.  It does this by taking the wisdom that has been generated by many others and trying to present it in a way that makes the framework clearer.

The ultimate objective is not to define what is right and wrong (although certain opinions will probably seep out).  Rather, to provide each reader with the ability to add tools to build their own framework.  A framework that is suited to each reader’s personal abilities, preferences, resources and objectives.  I’m still building and learning about my framework, I hope The Equity Toolkit helps you do the same.

1. In order to make these ideas easier to visualise and remember,  I’ve associated each of them with a personality.  This is obviously a dramatic simplification of what these personalities stand for, so the metaphor shouldn’t be taken too literally.