A Simple Qualitative Tool to Add to Your Investing Tool Kit

A few weeks ago I watched an interview of Howard Lindzon, CEO StockTwits, on one of the financial channels. I have been using StockTwits for a couple of years, so I know the product fairly well.  At the end of the interview, I said  – Wow, Howard really nailed the elevator pitch. An elevator pitch is a quick summary that is used to define a product or company and its value proposition.  The name “elevator pitch” comes from the idea that it should be possible to deliver the summary in the time span of an elevator ride, or approximately thirty seconds to two minutes.  Lindzon said that StockTwits is an idea generator (the product) and that many of the smartest minds in financial markets are using it. Users can leverage these ideas and become a better informed investor (value proposition).

I realize that buy and hold investing is scorned in many circles, and rightfully so considering that eleven years later the NASDAQ is still nowhere near its 2000 highs.  That being said, I am still both an investor and a trader.  There are a few stocks that I hold for multiple quarters.  Apple is currently my only one.  There are many quantitative criteria that I look for in such stocks. However, over the past few months I have been thinking about adding a qualitative criteria centered around the CEO’s ability to simply explain their business (elevator pitch).

Carol Bartz the former CEO of Yahoo was once asked, What is Yahoo?  Her response was: “Yahoo is a great company that is very, very strong in content for its users.  It uses amazing technology to serve up what we increasingly think is going to be the Web of One.”  I consider myself fairly tech savvy, but that explanation means absolutely nothing to me. If a CEO has trouble communicating externally – I believe the problem is magnified internally. I don’t think it’s a stretch to say that Yahoo is a mess. Is it due to communication problems?  I have no idea.  However, without clear vision from the top – how can priorities be set?  Managers aren’t sure where to marshall resources.  Workers aren’t sure how to best allocate their time.

Research in Motion is another prime example. I remember the first time I listened to one of their earnings call.  Their CEO, Jim Balsallie, might as well have been speaking Chinese – I had no idea what he was talking about.  I was pleased afterwards when the blogosphere lit up with bloggers saying the same thing.  Over time I have learned that Balsallie babbles incoherently to reduce the amount of time available for analysts to ask questions. RIM recently released 5 new phones.  Why so many models? Maybe Balsallie’s babbles were misinterpreted by product marketing.

On the positive side, I have been digging into this concept called Big Data.  As social media explodes, there is a tremendous amount of data available. Every time someone on Facebook writes on their wall or someone using Four Square checks in, or a person on Linkedin updates their resume an event is created that can be stored and analyzed.  Business Intelligence companies have existed for many years to help manage and analyze data, but the data created by social media dwarfs previous data sets.

Just thinking about data is enough to put me to sleep and possibly miss the trend.  However, a few months ago, I saw Vivek Ranadive ,CEO of Tibco Systems, on Bloomberg (Where Social Media and the Cloud Meet). He so clearly and simply explained what his company does that I had to dig in.  His elevator pitch was “a little bit of the right information ahead of time is more valuable than piles of information too late.”  If you have a little understanding of mobile computing and social media you immediately see the power in that statement.  If Best Buy knows that I am interested in buying a gadget from my discussions on Twitter and can send me a coupon before I buy it somewhere else that’s valuable.

Ranadive has taken the elevator pitch to the next level by creating a very catchy phrase call the “2 second advantage.”  I am currently in the process of reading a book that he has written called The Two-Second Advantage: How We Succeed by Anticipating the Future–Just Enough.  Just think about how easy it is to communicate that message internally as well as externally.  Based on their earnings release last week, the message is resonating and is hitting their bottom line.

Based on the ineffectiveness of a buy and hold strategy – I choose to invest (hold over multiple quarters)  only in a few select stocks.  Adding a management communication criteria along with the quantitative ones may improve probability of success for investments.

 

Disclosure: The current status of stocks discussed in this article are as follows.  Positions may change at any time.  Investment Portfolio: Long Apple.  Swing Portfolio: Long TIBCO.  Bought on Friday after their earnings announcement.  Speculative portfolio: Long Yahoo and “long dated” RIM calls both are purely buyout plays.

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  • Anonymous

    I’m just curious, what time did you post this? I wonder if TIBX  first bounced after you posted, and then ramped up after TRB posted.  Or is it just a break out with extra buying after it breaks the 50 day.

  • I have no juice to move a stock. I posted this at 7:50am this morning.

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  • Anonymous

    i know, it’s just kind of funny how the action on the stock unfolded today.  it was a good post and nice trade. thx.

  • Bruce

    What about your 4/15/11 buy of tibco? Are you averaging down or did you sell out at a loss? At the time, based on my metrics, I thought it was an expensive stock.

  • 4/15 – that was eons ago. I dumped that trade at a loss. I have tried it a few times since with no luck. The Macro is trumping everything, but maybe this time will be the charm…

  • Bruce

    I agree about the Macro but I also think your investing approach should incorporate a bit more balance along a value approach with a bit less risk, expecially in this environment. When the macro is negative your way of investing is a setup for tremendous downside which would be hard for even the most steadfast believer to maintain. You seem to pay little mind to price to sales ratios, i.e. armh, sina, arun rvbd. Profitability also seems a second class citizen, as does cash and free cash flow. Your concepts are great, your writing terrific, and how can one not admire you for putting your stocks out there for public review. But at the end of the day its about making money.

  • There are many ways to skin a cat. I am a momentum / trend investor.  Valuation is not important to me. I’m more concerned with revenue & earnings growth and if there is an underlying catalyst that’s likely to drive stock movement (like adoption of mobile computing). 

    This has been one of the most difficult markets I have experienced including 2008, but believe me I understand what this is all about.  This is the way I eat.  This is not a hobby…