Tuesday, August 17, 2010

And Now for Something Completely Different

In the early part of the twenty-first century we all seem to lead time stressed lives. The press of business competes with the demands of ever increasing amounts of information that need to be absorbed. There never seems to enough time in the day to read everything that seems as if it might be important. So the question becomes, “How does one stay current with business thinking, or better yet, get ideas from some of the latest research?” Fortunately, technology has provided a solution.

Most people that work today spend significant time in commuting and this provides anywhere from thirty minutes to two hours a day when time is available to listen to podcasts. For those people who are not familiar with podcasts, they are electronic files that you can download to your computer, iphone and ipod and listen to anywhere, be it in the car or working out. There are an amazing variety of podcasts available, but here is a sampling of some of the better ones that that I have found that deal with business issues. Almost everything I list here is available through ITunes, and in the style of the ITunes store, I will sort them into Basics, Next Steps and Deep Cuts.

The Basics

HBR Ideacasts: Put together by the editors of the Harvard Business Review, I find this series particularly well done, with interesting topics that make me stop and think.

Freakonomics Radio: Produced by the authors of the Freakonomics books, these podcasts put an interesting spin on the dismal science.

Knowledge@Wharton Interviews: I’ve listened to relatively fewer of these as they have not been as well done as the HBR series, but there are occasional interesting interviews.

Wall Street Journal Editors Picks: Didn’t have time to read that interesting article in the Journal you saw at breakfast? You can usually get it here as the WSJ editors interview the authors of the article.

Next Steps

TED Talks: While not strictly speaking business podcasts, these speakers are engaging enough and knowledgeable enough on their subjects to get you thinking about things in a different light. Everyone engaged in business should occasionally be subject to new perspectives and these podcasts will give them to you.

BBC World Weekly with Gideon Rachman: A good way to get a non-U.S. perspective on the news events of the week, which often involve the world of business.

Stanford University Business Management: There are currently only 12 podcasts available in this series, but the ones available are quite good. (Stanford University also has a series on Business Leaders and Entrepreneurs which I have just begun listening to, which looks to be as good, but I haven’t heard enough to officially place it on the list.)

Deep Cuts

Yale Business & Management: Many of the podcasts in this series focus on very narrow topics, so you really have to hunt for what you think may be relevant to your situation, but when you find it, the speakers are quite good.

The Economist: Find the magazine too dense to read? Try the podcast.

The Bowery Boys History of New York: If you are going to deal with Wall Street, you need to understand New York and this delightful series gives you New York City history in bite-sized chunks.

And just to prove that it’s not all about business, here are some of my other favorites from my ipod.

A Prairie Home Companion’s News from Lake Wobegon: Comic genius (in a Midwestern sort of way) from Garrison Keillor.

The History of Rome: Want to know if the sex, sand and sandals in the HBO series are accurate? Listen to this podcast and catch up on your classical history.

Car Talk: Who doesn’t love Click and Clack, the Tappet brothers?

BBC In Our Time with Melvyn Bragg: Features erudite scholars being forced to speak in plain English about a variety of (sometimes) obscure topics.

Oxford Biographies: Catch up on your British history by hearing about people you’ve been told were important, but you don’t know why.

NPR Columns – Driveway Moments: Features the best human-interest stories from National Public Radio’s programming.

While everyone will have different tastes in what they want to listen to, the main point is that you don’t have to listen to that classical rock song for the 200th time, you can actually put your brain to use and learn something useful.

Thursday, August 12, 2010

Using Computers to Predict If a CEO is Lying

There is an interesting article in today’s Wall Street Journal discussing an academic paper by a couple of Stanford University Graduate School of Business professors. The article is entitled, “For Lying CEO’s, ‘Team’ Not ‘I’” and refers to a Paper entitled “Detecting Deceptive Conference Calls” available at http://www.gsb.stanford.edu/cldr/cgrp/documents/SSRN-id1572705.pdf. Obviously, for anyone involved in conference calls, either on the corporate or the investing side, this is required reading.

What the professors did was interesting: they examined the Question and Answer sessions of 29,663 earnings conference call transcripts between 2003 and 2007 for language features that predict “deceptive” reporting of financial statements. (Note that they were smart enough to ignore the carefully scripted section of the call.) In the professors’ words, “Our primary assumption is that CEOs and CFOs know whether financial statements have been manipulated, and their spontaneous and (hopefully) unrehearsed narratives provide cues that can be used to identify lying or deceitful behavior.” They then compared their predictive results to whether or not there was a later material financial restatement. And what they found was that their methodology had correctly predicted between 50% – 65% of the conference calls as “deceptive” by virtue of their having later resulted in an earnings restatement.

For those of you who want (or need) to know what the linguistic hot buttons are, here are some of the things to watch out for:

  • CEOs that speak in terms of third person plural pronouns or impersonal pronouns are more likely to be deceptive. It seems in this case, honest CEOs tend to speak of I and me while dishonest CEOs prefer to refer to the company or team.
  • Expressing extreme positive emotions with words such as fantastic is more likely while making a deceptive claim.
  • Longer answers also are more likely to indicate that they are deceptive.
  • Lack of hesitation – if a CEO is quick off the mark, the authors hypothesize that the answer is more likely one that he has rehearsed and wishes to answer quickly and move on.
  • References to general knowledge such as “you know” also appear more frequently in deceptive responses.
  • Lack of mention of shareholder value or value creation are also tip offs.

It will be interesting to see if investors pick up on any of this while parsing conference call answers. The Q & A session is already the portion of the call that gets the most scrutiny, and this research will only help to bring more focus to the area.

Wednesday, August 4, 2010

Where Did You Say You Were Going?

I’ve said it before, but it bears saying again: investors buy a company’s stock because they believe they will receive a stream of cash flows in the future from the company. They only care about past performance of the company in so far as it gives them faith that the company will perform as they expect it to perform into the future. Analysts build their valuation models based upon future earnings, not past performance. So it’s surprising to me that companies don’t say more about what their plans are for the future – how they intend to make those future cash flows.

I would not want to make a general assertion about lack of forward looking information without any data, so I decided to do a quick sample of company presentations to see how much, on average, those presentations spoke to future plans. My search took me to the Internet to look for good examples of that staple of corporate communications, the PowerPoint slide show. If you go to investor conferences, almost every presenting company will accompany its speech with a slide deck illustrating their main points. What better way to quantify what companies are saying about their outlook for the future than by counting the number of slides they have shown to investors that contain points discussing the company’s future outlook. I thought it would be a relatively easy thing to go out and pull up the presentations of the various companies and analyze what I was interested in.

To my surprise, I found that it’s not quite so easy to go out on the Internet and find a representative sample of corporate investor presentations. In fact, what I found was that in a random sample of 20 large cap U. S. companies, only five companies (25%) posted their investor presentations from conferences. (I will admit that this is a small sample size, but you get what you pay for, and you’re getting this for free.)

In examining the presentations that I did find, it became obvious that companies were much more concerned with talking about past performance than future opportunity. My methodology was simple – I counted the total number of slides in a presentation and then counted the total number of slides that contained information concerning future operations. I tried to be overly generous in what I counted as a slide concerning the future, and any slide that had even a little bit of information about what a company intended to do going forward or the outlook for their products and markets was counted as being about the future.

What I found was that the percentage of forward looking slides in presentations ranged from a low of 6% to a high of 35%, with the average for all presentations being 20%. If we assume that the information being discussed generally follows in proportion to the slides in the presentation, this means that, on average, four-fifths of all information in presentations is about current or past activities. This is the equivalent of saying, “Not much new here; we’ll just make our money by continuing to do what we’ve always done”.

Now I will be the first to tell you that the bulk of all corporate profits come from continuing operations, but that doesn’t mean that those operations remain static. We operate in a dynamic economy - markets change; competitors react; new products are introduced; the economy impacts demand for the company’s products and services; and a host of other things mean that the future will not be the same as the past. Company presentations need to take these issues into account in order to give investors a clearer picture of where the company is headed.

In short, companies should spend a little bit more time and effort talking about where they’re going as opposed to where they have been. Because those future cash flows are a crucial component that investors use to value the stock.