Informants in the investment process - rating and ranking

Separating good leads from bad is crucial in assessing investing leads. Avner Mandelman of Giraffe Capital has a method to do so.

Essentially, it's from a page stolen from spy agencies. In order to be able reliably assess information coming from a variety of informants, some sort of ranking system had to be devised.

These agencies rate their information from informants in two ways:

1. Based on the past track record of the informant, and,
2. Based on the informant's confidence in this particular piece of information.

Similarly, in assessing investing leads, whether they come from brokers, analysts, industry sources, customers, etc. we can assign a letter grade rank to each of the above. For instance, an industry source who has proved highly reliable in the past might be assigned a letter grade of "A", under point 1 above. Secondarily, they provide you with a particular piece of information that they claim they are highly certain is accurate (another "A", but under point 2, above).

This can provide you with a certain level of confidence in using this information as part of your investment process. For instance, an "A" ranked informant with an "A" piece of information would play higher in your investment process than a "B" informant, with "C" level information.

Mr. Mandelman even suggests that those so poor at any type of accuracy, can eventually become "A" level informants, by being contra-indicators. In other words, you studiously avoid their recommendations.

Of course, all of the above pre-supposes that you start tracking and rating your own informants, and keep those in your investment scrapbook. A worthwhile idea, in my view. By the way, I rate Mr. Mandelman as an "A" source.



JW

The Confused Capitalist

Distill Your Investment Choices

A recent story from the excellent Avner Mandelman of Giraffe Capital reminded me, once again, of one of the reasons I became a "focus" investor.

Mr. Mandelman relates a story of a old classmate asking for Giraffe's top ten stocks in 2003. Although Giraffe already ran a focussed portfolio of just 25 stocks, Mr. Mandelman agreed. One year later, the former classmate sent back the results of just those 10 stocks: those ten stocks actually doubled the overall performance of the already focussed portfolio (see link for overall 2003 performance).

Mr. Mandelmans point is to dive into your own stocks to both cull the weaker positions, and to add to those positions holding the best promise.

In fact, I also had a virtually identical experience when I ran the Global Walkers Investment Newsletter in the mid-to-late 1990s. I had two model portfolios, one of which ("The Top Ten"), which was a subset of a moderately larger (typically 20-25 stocks) portfolio. While both portfolios trashed the TSX index (its benchmark) over the two year period I ran them, the Top Ten, like Mr. Mandelmans experience, also doubled the broader model portfolio.

So I concur with Mr. Mandelman: don't be afraid to look in your own backyard for some of the best stock ideas out there. After all, there's already been considerable distilling (hopefully) of your ideas to arrive at those. Just a little further distillation can yield fabulous results!

A foolish diversification is the hobgoblin of little minds, adored by mutual fund managers, brokers and fitful investors alike.

(With all due apologies to Ralph Waldo Emerson)

JW

The Confused Capitalist