The interpretation of macro-economic, political and social issues or the analysis of company specific data – is one a more valuable approach to investment analysis than the other?
This is like arguing over whether eating or drinking is a more effective means of survival – both are a necessary part of the process. What matters more is that the nature of the information most important to investment strategy has changed.
Recent years have seen three significant developments:
1: The widespread availability of computer-based programs designed to work with financial and economic data.
2: Increasingly tight regula-tory constraints on the release and use of price-sensitive information.
3: Increasingly powerful global political, economic and social issues.
Twenty years ago, the identification of apparent pricing anomalies required many hours of painstaking sifting, sorting and calculation. Now this can be done so quickly and easily that it is barely worth the minuscule effort involved.
There are tight regulatory constraints on the disclosure of price-sensitive information by companies. Essentially, it must be in the public domain before it may be discussed with analysts. This does not mean that meetings and discussions with directors and management are valueless, rather that the nature of the information that an effective analyst should be seeking has changed.
There is little to be gained in using the meeting simply to review the numbers. They are already in the public domain and have long since been analysed and incorporated in any share price valuation. More valuable is the opportunity to assess the C factors – calibre, credibility, competence and corporate culture – and to identify how the directors see the world in which they do business.
What objectives and strat-egies are they formulating in response? How do they see the company, which they manage on behalf of its shareholders, evolving? Equally important, if the directors' view of the world is different to ours, does it make sense?
This information may be difficult, if not impossible, to quantify but is increasingly important in helping to identify which companies are likely to flourish – or suffer.
As for global issues affecting investment strategy, let us consider just three – China and its pegged exchange rate with the US dollar, the export of investment and employment from high-cost to low-cost regions of the world and the rise of the knowledge economy.
None of these has an outcome that is either known or quantifiable, yet they are hugely powerful forces and of enormous importance to any long-term investment strategy.
Will China revalue the yuan? Since the spring of 2002, a combination of political signals and massive monetisation has driven the US dollar down against all other major currencies but the peg between the dollar and Chinese yuan has remained stubbornly in place, and with that has stayed the huge and politically charged disparity in manufacturing costs between the US and China.
Most commentators have argued that China's obstinacy over its currency stems from its need to nurture and protect the rapid development of its manufacturing industry. How else is it to have any hope of satisfying the aspirations of its people? However, might there be another, possibly much more powerful, factor?
Improving health and life expectancy are fuelling rapid population growth, and this, coupled with China's relatively unsophisticated agricultural economy and chronic shortage of water mean that the nation is facing a growing food shortage. The doors are opening to imports from the highly mechanised and highly subsidised agricultural industries of the US and Europe, against which China's 200 million tiny, primitive, labour-intensive smallholdings will find it increasingly difficult to compete.
Allowing the Chinese currency to appreciate would make imported grain, rice and meat even cheaper. Indeed, there would seem to be a real risk that a revaluation of the currency might do very great harm to China's rural economy, creating impoverishment and suffering on a scale almost unimaginable in the West.The damage to China's political and social stability would be intolerable.
If this scenario has any validity, what might be the implications? US rhetoric over the issue has fallen noticeably silent of late. What might it mean for US foreign trade and monetary policy? Might China be granted special dispensation under WTO rules to allow it to impose protective tariffs on imported agricultural produce in return for an upward revaluation of the yuan?
There is not space here to argue the multitude of imponderables, save to say that the implications are profound. Reading the runes right is hugely important to long-term investment strategy but they are runes with no numbers.
We have all read and heard much on the topic of globalisation and the export of employment to lower-cost areas of the world.
The US and UK governments appear to have the same objective of creating alternative employment for those whose jobs have been exported but are pursuing different strategies.
The US is trying to create demand-led employment by giving its citizens large amounts of money via tax cuts while also allowing them to borrow even bigger amounts very cheaply to spend as they please.
The UK has opted for command-led employment, creating myriad new government posts while also creating private sector jobs by borrowing (or, rather, underwriting borrowing by others on its behalf) to fund the construction and/or improvement of schools, hospitals, roads, railways and other infrastructure projects.
One may debate endlessly the relative social and economic merits of the two approaches but they have very different implications for taxation, inflation and bond markets and no one knows for how long or how aggressively these policies will be pursued.
The knowledge economy is about to blossom. For the first time in human history, intellects around the world are being instantly and contin-uously linked.
Electronic communication today is harnessing the production of knowledge, just as mechanisation two centuries ago harnessed the production of things, And, just as the mechanisation lowered the cost of things, so electronicisation seems likely to lower the cost of knowledge. As a global community, we should all benefit but the investment implications are not all positive.
For it will mean that the window of opportunity for commercial exploitation of new inventions and ideas will be greatly compressed and the power of patent protection greatly diminished. After all,what value would a patent on gunpowder have been if someone else had invented dynamite the next week?
The implications are enormously significant to longterm investment strategy and, although not precisely quantifiable, suggest strongly that the values that equity markets currently attach to certain intellectual property may be over-optimistic.
In summary, the argument over the relative merits of top-down and bottom-up investment analysis is a red herring. Of much greater significance is the changing nature of the information needed to formulate long-term investment strategy.
It is ironic that investment analysis, a process that, above all else, has sought to attach numerical values to its findings, should now find itself in a situation where the greatest investment advantage can be derived from the identification and interpretation of political, economic, social and corporate factors that are largely incapable of quantification.