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New Tools of Your Trade

A career in financial services has been a wonderful place to be for the last 40 years. Powerful macrotrends like 40 years of falling interest rates, Moore’s law with the doubling of computing power every several years, the emergence of a sophisticated credit economy, a plethora of worldwide investable capital and an almost error-free infrastructure of dependable trading markets for stocks, bonds, commodities and hybrid securities made the period of my career one of the great transformative wealth creations in history.

Tools of the Trade

At the same time the tools for financial analysis also blossomed. My first handheld financial calculator, the Hewlett Packard 12C, was revolutionary because it allowed, for example, a college kid to compute investment returns on irregular cash flows while sitting in his cubicle having a coffee. Just my iPhone probably has more sophisticated financial tools, computing power and access to proprietary data than existed at entire brokerage firms in the late 1990’s.

Success in financial services was also predicated on your knowledge and mastery of financial tools like computers, spreadsheets, pivot tables and data management. Business school was typically a pre-requisite for advancing in this career. My law degree and my status as a partner in a business law firm where I had significant transactional experience allowed me to jump from law to finance as a manager of the M&A group for a regional securities firm. My path was rare, and I was lucky to get in the game just as it was starting.

In the 1980’s and 90’s Michael Blomberg had a monopoly on the hardware and software that powered trading and financial analysis. The personal computer ended that monopoly and trading information and financial analysis all started to germinate on your desktop powered by software from Microsoft like Excel and PowerPoint. The M&A industry thrived with the sudden ability to quickly customize proprietary financial analysis. The Excel spreadsheet led the revolution.

In the stock and bond markets this bespoke analytical capability spawned proprietary “buy side” and “sell side” investment research which, in turn, professionalized the process of capital formation so institutional investors could safely participate in public offerings of debt and equity securities.

Today the whole tool kit, the knowledge economy and the degreed participants are just beginning to understand they may soon be replaced by a by a bot. As a financial services firm if you are lucky enough to have proprietary data or information like JP Morgan, Fidelity, FactSet or Goldman Sachs you can create your own search bot that can help your customers make investment decisions. An institutional customer of Fidelity does not need an army of analysts to research investment performance. It will be able to search all products worldwide that fit its investment algorithms. I suspect there will be significantly fewer employees than existed in 2020.

The same will be true for stock picking. You will be able to ask artificial intelligence bots like Siri or Alexa to search for “all companies in the S&P 500 that have cash flow yields for the trailing 12 months that exceed 7.5%”. That will take about 30 seconds compared to hours of research in the real intelligence world. The bot can then populate a spreadsheet and highlight the outliers. There will be few real proprietary tools for gaining an edge in investment performance other than the quality of your data and the proficiency of your search bot.

What May Be The New Edge For Assessing Financial Performance

If you follow NFL Football you probably know the draft process relies on cognitive tests like S-2 which replaced the Wonderlic test. There was a recent disclosure that rookie phenom C. J. Stroud who was drafted second in the 2023 draft lost some of his draft appeal because he scored poorly on the “S-2”.  That did not dissuade The Houston Texans from taking him as the 2nd player drafted in 2022, but after his record-breaking rookie season there are probably a number of teams rethinking cognitive tests. As C.J. Stroud put it, “I don’t test well… I play football”.  In essence he is saying success in football is more than smarts, speed, vision and stamina. Maybe it is all about an intangible quality called leadership.

Tools For Testing Leadership

I have a friend who is a brilliant investor but reluctant to put any weight on meetings with management. She admits many of them are really great promoters and quite successful salesmen with the capacity to charm and fool even the most disciplined analysts. Maybe that is why the investment world is able to assign an ESG score for most public companies but not a leadership score?

While leadership may be hard to score, it may be more important to investment success than any other factor. Legendary CEOs of public companies like Warren Buffet are famous for their investment wisdom and track record.  However, in Warren Buffet’s case his shareholders benefited from his leadership and trustworthiness every time he negotiated an acquisition without a competitive process involving multiple bidders.

Reed Hastings, CEO of Netflix, sold vacuums door to door before college, joined the Marine Corps during college and then joined the Peace Corp. In his first CEO role at Pure Software, a company he founded, he asked his VC backers to fire him because he lacked the managerial skill to deal with rapid head count growth. When he founded Netflix in 1997 with a vision to compete with Blockbuster by replacing video stores with unlimited DVD-by-mail for a monthly subscription, he built a culture called “Freedom & Responsibility” where he quickly dismissed mediocre or non-conforming employees with generous severance. He created an internal culture guide that served as an employment screening tool to cull outliers before he hired them. He survived the dot com crash and won out over Blockbuster even though the equity analysts all thought he would fail.

How About A Leadership Score ?

The next frontier in stock picking may be assigning a leadership score. This is a human activity not something a bot can do, and it will not be error free, but it may be the last frontier for human input on which stocks to buy.  Right now sell side analysts are too concerned with relationships with the CEO to assign a low leadership score. In the coming world where distinctiveness may turn on demonstrating an investment skill other than financial analysis, maybe a CEO leadership score and a Management culture score will replace Environmental, Safety and Governance as a reason to own a publicly traded stock?

The above commentary is for informational purposes only.  Not intended as legal or investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments based on conditions at the time of writing and are subject to change without notice.

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records. Founder and chairman of CW Industrial Partners (originally CapitalWorks, LLC), he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CW Industrial Partners or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.