When the ‘fan club’ wins, due diligence loses
May 22, 2008
Friends,
My wife is the strong intuitive type. She 'feels' things, and it works well for her. On the other hand, I’m almost entirely binary. I need facts, and lots of ‘em. As I endeavour to make decisions, be they personal, business, or investment decisions, I want as many valuable pieces of information at my disposal as can be reasonably acquired. Two key words here are 'valuable' and 'reasonably'. In any study of decision making, the quotient relationship between the value of a data point and the cost to acquire that data point must be considered. Another key concept to successful decision making is timeliness. Yet another is reliability of information. Finally, when you’ve done the work to create a framework within which to assess and make decisions, you can sleep a whole lot better at night.
To this end, I am compelled to learn everything I can about investing, about companies I invest in, and about the business of companies in which I invest. While there are many who have long forgotten more about mining and geology than I'll ever know, I know a great deal more now than I did before, and am better off as a result.
The genesis of this web site is, in part, found in my own frustration with a general lack of fingertip access to valuable information. Due diligence is a pain in the best of times. In the worst of times, it’s beyond the propriety of my public tongue to describe. Having gathered a few sources and created a few tools on my own, I was encouraged to make these available to others. Hence, grahamanalytics.com.
So much is dependent on having access to information, and on knowing what to do with that information when it comes your way. With the Internet, there’s no shortage of information on just about any subject under the Sun, and a few beyond. Truckloads of information, however, can be worse than very little information, if you have no means by which to filter it.
When we read newsletter pieces on a particular company, we’re always asking (or should be), “Is this real? How much of this is just the opinion of one person? Is his/her opinion credible? Does s/he know what s/he is talking about? Can I trust him/her? Is s/he being paid by the Company to write this piece? Does s/he have access to private placement shares and warrants that make it work for him/her, but are out of my reach? Is s/he just pumping his/her own holding?” These are all excellent, and necessary questions to ask. On whom can we depend the most for comfort in our investment decisions? Bottom line is ourselves, alone. We must, however, first identify what information we need in support of these decisions, then find ways to collect all that data.
Appealing to Edward de Bono lateral thinking, I said to myself, “I know, generally, what I want to learn about hundreds of companies. How can I gather this mass of information in a fashion that makes it timely, reliable, cost-effective, and malleable in a relational database?” Well, as luck would have it, I was having a good soak in the tub (which is where most, if not all, of my best ideas are found) one Saturday morning, and there it was.
Over the past two decades, I’ve conducted more than 200 comprehensive surveys as means by which to gather huge masses of data, the study of which leads to clearer strategy and better decision making. My business is to identify and understand what's good information, and to build processes by which to gather, organize, interpret, analyze and report that information in a meaningful way in aid of improved decision making. Duhhh… eureka.
It’s this soaking binary side of me that, two days ago, launched a survey of mineral mining and exploration companies on the Venture Exchange. I sent to 655 companies the link for an online questionnaire, by which these companies can each tell their stories in a standardized form. Time alone will judge how many companies will accept the challenge. For them, it’s an opportunity to share. For you and me, it’s an opportunity to make some semblance of an apples-for-apples comparison across potential investments. It’s not the end of our investigation, but perhaps just the beginning. We may, as a result, find ourselves better able to focus on those companies meeting a threshold of select parameters. With up to 200 data points in hand for each company, there’s no shortage of parameters from which to choose.
The strength of this framework of thinking is that it reduces to known facts what are otherwise difficult, and often emotional, choices we make in our investments. It’s not everything, but it’s something, and it’s a start. You can never replace the value of face-to-face opportunities by which to study people and answer some of the ‘trust’ questions. At the same time, there are just too many companies out there to visit them all, or even to call them all.
Okay, so here’s the thing. I’ve described one way of approaching due diligence as an introduction to another of an entirely different variety. It gets juicy, so please read on.
I’ve recently been witness to a good friend’s bothersome experience on an Internet investment chat board. A few words about him first. His name is Don Bosch. He’s just 49, but retired, owing to good business acumen and good investments. Self-made in every sense of the word. No silver spoon here. Already, though, and this is perhaps a contributing factor to his current position, Don is a ‘grumpy old man’. He’s well proud of it, too, and from my perspective, has every right to be. He approaches his investments as if someone is out there trying to steal his money. In many cases, this attitude is well founded. As a result, he’s developed and honed some pretty admirable tools in the due diligence department. We regularly share, and mutually benefit from the exchange.
I’ve pushed Don in recent months to be more open and sharing of his talents with others. He has a lot to offer, but is very reserved. As he puts it, he lives on a small island, and likes it very much, away from the maddening crowds. He’s responded quite nicely, though, and I should say, to the benefit of many, myself included. When you package all this with an Internet chat board, however, the potential for flare-ups is not small. Don’s sceptical stance, along with his constant digging for facts, found him at odds with a small group of people on this particular board.
As I see it, a small group of people who themselves were convinced to buy large volumes of this stock on an Internet forum elsewhere decided to come to this site and ‘promote’ it to others. Could be the ‘greater fool theory’ at work, I don’t know. I’ll leave time to judge that. In any event, they freely admitted that their purpose was to promote the stock, have others buy it, and as a result, gain in the value of their own investments. Brutal honesty, and terribly useful in knowing what to take with a large grain of salt.
As the story developed, Don challenged the weak case as they presented it, and was promptly jumped on as a basher, which he is not. His only aim was the truth, and he was prepared to take weak arguments to task. Out of principle, and in the service of keeping up his own skills in DD, he put many hours of time into studying this particular investment opportunity, deciding in the end that it was not an investment opportunity. He said so on the board, and backed up his position, asking those in the ‘fan club’, as we call them, to support their own claims that this was the ‘opportunity of a lifetime’. No answers were forthcoming. Instead, he was personally attacked, and targeted as an ‘unfriendly’. Casual onlookers who read only the headlines of others screaming, ‘basher’ could be forgiven for not seeing the full picture. Standing safely on the sidelines, I watched Don being repeatedly attacked as his reward for suggesting caution, and for promoting due diligence.
In the end, I could no longer stand idly by and watch this happen, so I plugged my nose, and jumped in. I joined the fray, only to support Don’s noble effort, and the response was the same. At every turn, like Don, I was accused of bashing the company and the posters promoting it. Truth be told, it never happened. I really don’t know if this company is a scam (in fact, I doubt that it is), but my impression is very strong that the weak case presented by this small group has been taking a few inexperienced people for a ride. Maybe this group knows the truth. Maybe they don’t. That’s not for me to say. I like to stick to the facts.
Assorted claims emitted from beyond our solar system, without any basis in fact. “Management and Directors hold 30% of shares.” Hmmm…. let’s just check that out on www.sedi.ca … interesting. That looks more like 11.5%. Red flag immediately rising on the horizon. Lots of rumbling about the highly esteemed lead geologist, newly on board. When I asked if he owned any shares (since sedi didn’t show him as an insider), the answer was, “It is not allowed for the head geologist to own the company’s shares, under BC law.” Huh? Double huh? These red flags are really becoming somewhat alarming. Next, we learn that the ‘overburden is economic’. Much debate ensued on the mutual exclusivity of these two terms. Chalked up to semantics… wishful thinking is my guess. Calculations that simply add together the gold and copper grades to achieve the copper equivalent… with no reference to relative prices… let’s not even go there.
Claims that certain things were factual, but that we would just have to trust them, since they were not at liberty to share the sources of these facts. I can see the regulatory bodies warming up the engine now. Over and over, our questions were left unanswered. The very asking of these questions was wrong, and Don got several private messages telling him so. And what were we doing posing such annoying questions in the first place, when we didn’t even own shares in the company? Good question. It’s called a mission in support of due diligence. Both Don and I were raised to stand up and cry foul when we saw foul. I don’t have much patience, I confess, for those who make loose statements without even a faint effort to check their veracity. “Trust me” just doesn’t cut it in this business. Some may take this the wrong way. That’s life. This is serious business, and other people’s money is at stake. It’s worth the time to check before posting. I will fight to my last breath any efforts to pull the wool over the eyes of people who don’t know what’s happening. There are too many scams out there, and too many people being taken for a ride. I should say that we are not (emphatically, not) saying that this company is a scam. I expect it is not. What we object to is blatant unverified claims by anonymous posters. You already know how I feel about anonymous posters. This mission, by the way, was a primary motivator in the creation of grahamanalytics.com.
Oh, did I forget to say, these fellows estimated their collective shares (along with those of their friends from the prior website forum) as comprising some 20% of outstanding shares. Given the inaccuracy of their insider holdings estimates, I don’t place too much on this claim. This said, if it were true, we’re talking about some 10 million shares, for a company that’s only traded 4.4 million shares in all of the past three months. Are you starting to get the picture? Ouch, indeed!
Well, Don and I took a few hits on that forum. The fan club labelled us as snide and cynical, and our posts as innuendo. We were accused of attacking the company and its supporters. Didn’t happen. What we did attack, and enthusiastically so, were wild, unsubstantiated claims, not from the company, but from these few posters. I imagine that the company officials must be spinning in circles trying to figure out what damage is being done by these unsupported statements. Gee, all we did was point out a few inconsistencies and ask some simple but compelling questions. They effectively circled the wagons and urinated (sounds so clinical, doesn’t it?) on anyone who came near their prize. One even went so far as to visit grahamanalytics.com, and go back to the forum describing my survey project as, “doomed to failure.” Huh? What on Earth has that got to do with anything? I think it’s called redirecting. Best defence is an offence. Offensive, indeed! Oh well. All was not lost. We got a few ‘thank you’ notes on the side from those who would otherwise not have seen it coming.
Took some good hits, made some good points. Hopefully protected at least one innocent. All in all, not a bad exchange. Maybe I’m too naïve, but that’s just the way I am. Tilting at windmills is a way of life for me.
These forums (or is that fora?) have such great potential, and would have even more if we didn’t have to face masks behind which so many things hide. As they are now structured, online forums are rarely of any value to anybody conducting serious due diligence. Not effective. Certainly not reliable. As for efficient use of time, let’s not fool ourselves. There’s surely no robust framework there for investment decisions. A good idea or fact comes up here or there. Friends are made and lost. Steps toward due diligence can be found and taken… but those who start and stop there and make decisions alone based on what they read on these forums are ripe for the picking. Better informed is better armed. Do your own due diligence.
Cheers,
Kevin