Editor's note: In the market, narratives often drive stocks up or down. But as our colleague Gabe Marshank explains, investing is about much more than an exciting story. In this piece, last published in DailyWealth in May, Gabe describes a trip he took to the American Heartland... and the lessons he learned 1,600 miles from Wall Street.
What a Plane Ride Over North Dakota Taught Me About Wall StreetBy Gabe Marshank, editor, Market Maven
In the investment world, it's easy to fall for a good story. The glossy investor decks... the well-rehearsed management calls... the perfectly timed CNBC appearances... They create an illusion of clarity and control. I saw that firsthand in 2014. I was working for David Einhorn as an analyst at Greenlight Capital, trying to crack the code of U.S. shale-oil companies. They looked great on paper. But their spending assumptions were aggressive... and their production estimates even more so. They were supposed to be fantastic businesses. But they couldn't seem to generate cash and grow simultaneously. For a good business, achieving both should be like walking and chewing gum. Something didn't add up... But every sell-side report I read bought into the bullish narrative. So I got on a plane and flew to Bismarck, North Dakota... Not for a slick investment bank conference, but a humdrum oil industry gathering in a regional hotel ballroom. That's how you see through the hype. Because, as I'll explain, real investing – the kind that helps you generate market-beating returns – often doesn't begin with a PowerPoint...
The Value of Due DiligenceMy colleague Josh and I headed to a nearby bar and put our ears to the ground. We got to chatting with a local named Tony, who became our pal for the night. He worked in the oilfields. But his real love was flying his restored, 1960s-era single-engine Mooney airplane, which looked like this... 
After gushing about his plane, he promised to take us for a ride. The next morning, true to his word, he showed up at a rural airstrip ready to fly us over the giant Bakken Formation of the Williston Basin. As I squinted through the cockpit glass at pumpjacks and pipelines, the inconsistencies between expectations and reality were impossible to ignore. The geography was brutal... the infrastructure was patchy... and the challenges of operating in subzero winters meant operators were flat-out spending too much on growth. None of that fit into the narrative Wall Street was peddling in its spreadsheets. Tony laughed. "Those analysts are trying to drill wells in Excel," he told us. "It's a lot easier in a spreadsheet than it is in the real world." That trip sealed it for me: Shale was not the next great American growth story... Analysts were only accounting for the cost of drilling a well, not the infrastructure required to get supplies to (and energy from) the site. Capital expenditures were blowing past expectations. The whole business was spiraling into a financial black hole. At Greenlight, we shorted shale stocks and made our firm a fortune as the story unraveled. Eventually, just about every CEO in the shale industry was replaced. And all the new ones came in singing a tune about "capital discipline." In other words, they admitted they were spending too much... just as we had already figured out. That's the power of "numbers over narrative." Wall Street Doesn't Always Tell the TruthBy design, Wall Street sells narratives. But narratives are smooth. Reality isn't. To uncover great investments, you have to find where the two diverge. Sometimes, the narrative is sheer panic... In August 2003, a widespread power outage hit a large swath of the U.S. and parts of central Canada just after markets had closed. Panic spread... and futures plummeted. People thought it could be a terrorist attack. But my utilities analyst pulled up grid-level metrics and said it was simply a cascading failure. At the time, I was working for Steve Cohen at SAC Capital. When we told Steve what we'd found, he bought index futures while the rest of Wall Street stood frozen. The market snapped back once everyone else caught on to what we already knew. We booked millions in profits. Again, it was a case of numbers over narrative. A management team might promise discipline. A news anchor might call a company a "once-in-a-lifetime opportunity." But reality has a way of humbling the headline-makers. The numbers don't care about your story... And eventually, the market follows the numbers. So the next time you hear a "perfect pitch," ask the hard questions... read the footnotes... check the balance sheet... and consider what could go wrong. Or, better yet, take a flight over the oilfields yourself. Remember, the real work starts where the PowerPoint ends. Good investing, Gabe Marshank
Editor's note: Research is always important. It's even more important when looking at companies that are new to the market. Gabe has identified a specific class of newly public stocks – which he calls "ISOs" – that have historically beaten the market by 8X. Legendary investor Peter Lynch calls this approach "astoundingly lucrative." Learn how to get into the timeliest trades on the market here.
|
No comments:
Post a Comment