Investment Notes #20: What is your Alpha?

In today’s post I share my thoughts on how we can get an edge in investment analysis and my recent experience visting several UK companies as well as my travel plans for June. Hope you enjoy this article.

There is an abundance of financial data available in seconds and clicks. Investors may never have a reason to leave their desks. Even AGMs are now held online. AI can also analyse earning transcripts, identifying subtle changes in management’s tone.

But there are issues, of course. If others commonly use AI, it will not provide that unique edge to help you form a differentiating view. In fact, more data can lead to a false sense of confidence in making the final decision. An analyst can subconsciously use AI to find facts confirming their original thesis.

The really serious issue is the short-term feature of any analysis based on raw data. Algorithms are great at telling us about current and near-term events, but they are still inferior to human judgment in making long-term calls.

Consider Buffett’s investment in Apple back in 2016. The consensus view was that Apple was mainly a hardware company, more cyclical and prone to fierce competition, putting pressure on returns on capital in the long run. Hence, the current earnings were not viewed as sustainable, and the stock traded on a single P/E.

Using all the available data on weekly sales across the world would have likely confirmed this view. And that was the correct view for many months. Until it was not.

I cannot imagine outsourcing critical questions to any AI agent, such as what the business will look like in 10-20 years.

What can help us get the correct answer to that question? Experience and knowledge of history can help. Knowing how similar businesses or sectors performed in the past can definitely help. This is why I like reading business biographies. Circumstances may change, but the underlying drivers are often the same.

However, there is another critical element of research. It was discussed by Phil Fisher, Peter Lynch and, more recently, by a lesser-known investor, Avner Mandelman. The former called it the Scuttlebutt method, while Lynch encouraged investors to look around and observe businesses in real life. Avner Mandelmand recommended that investors embrace sleuth tactics by gathering all relevant data using any legal method possible (e.g. walking around the company’s office, checking what car the CEO drives).

Real-world analysis, whether through direct conversations with management (competitors, customers, and suppliers) or site visits, mystery shopping, and other forms, can occasionally lead to invaluable findings, especially when combined with more traditional financial research.

Probably the best evidence of the value a trip to a company’s office can bring is Warren Buffett’s story of visiting the GEICO office in 1951, at just 21. Here is a direct quote from his 1995 shareholder letter:

For me, visiting the operations of smaller companies adds more value than attending AGMs of multibillion corporations. Small and mid-caps are not widely covered, so the opportunity to find an edge is better.

So far this year, I have visited operations of 5 UK-listed companies and met their executives and local teams. In April, I joined group trips to Restore plc and Transense Technologies, organised by SIGnet.

Last week, I attended AGMs of Trustpilot and Yu Group in London. In both meetings, there was just one other private shareholder (different each time), and we had an opportunity to ask the board and management questions directly. I cannot recommend this form of research enough.

I also visited Strix's showroom last week, where they presented their products (under the Billi brand) and kindly answered broader questions about the growth strategy.

I will share the most interesting findings with my Premium subscribers shortly.

If you are in London next week, there is a great opportunity to meet 50+ UK companies and investment funds at Mello2025, one of the biggest events for private investors in the UK. Guest speakers include legendary British investor Lord Lee (the first ISA millionaire), Christopher Mills (founder of Harwood Capital), and many others.

SIGnet kindly invited me to join a panel discussion on Transense and the broader UK stock market, so I will attend the event. There will be plenty of opportunities to meet other investors and exchange ideas.

If you plan to be there, feel free to get in touch.

If you have not bought the tickets yet, as an HVG subscriber, you can buy a 1-Day or 2-Day ticket with a 50% discount (please use HVGems50 code at the checkout, case-sensitive).

You can find more details below:

In two weeks, I am attending the Nordic Value conference for the first time this year. Unlike other conferences, every participant at this event must present their top idea to a group of about 35 other investors.

I will present at the CFA UK Annual Stock Slam event with three other speakers. The competition will take place in London on 16 June. You can find more details here.

We are organising a small meetup for the Hidden Value Gems subscribers at the end of June. We will meet in one of London’s pubs at 5.30-6 pm for an informal discussion of stocks, tools, markets and other topics. We plan to keep the group up to 15 guests. If you are interested, please reply for details.