This is Colonel John Boyd. He was not normal. He did not give a damn what anybody else thought. Which is why he never made general. Nickname(s) – Forty Second Boyd, Genghis John (my favorite), The Mad Major, The Ghetto Colonel.
It is also why....
As an instructor at Fighter Weapons School (FWSS) at Nellis Air Force Base in the 1950’s his standing offer was $40 to anyone who could beat him in an aerial duel. He never had to pay.
He is a legend to the United States Marine Corps for developing and articulating the concept of the “OODA” loop which stands for “Observe, Orient, Decide, Act”).
- Saved the F-16 program by leveraging the “OODA” loop which is the process by which an individual or organization reacts to an event.
- Designed the Desert Storm “Left Hook” strategy (the armored “Hail Mary” that won the land war within hours).
Observation: Collect data by means of the senses which includes not just numbers but the “senses” – sight, sound, and perception.
Orientation: Analysis and synthesis of data to form one’s current mental perspective.
Decision: Determine what do do based upon current mental perspective.
Action: Playing out of the decision.
Boyd theorized that organizations have hierarchies of OODA loops at tactical (individual), grand-tactical (operational), and strategic levels that will never be fully aligned.
John Boyd was right. Traditional model disadvantages:
No collection plan. Sun Tzu’s quote relates directly to the corporate, sell and buy side feed back loops. Managements seek to “shape” the conversation and often succeed. A new slide deck, the new “unanswered question” in the market and everyone reacts to change. No organized collection plan means the “news cycle” is in control, not you. ($)
Sub-optimal organization of information. Garbage in, garbage out. Failure to collect properly compromises organization of information and thus analysis, and 75% is corporate regurgitation by research associates with 0-3 years experience. ($)
Agency costs. Most investment organizations are run by asset gatherers not fund managers. All brokerage firms are seeking to maximize commissions and banking fees. We respect our strong “big firm” competitors but also know:
1. Firm to firm relationships (not analyst to investor) drive their revenue streams, creating filters....
2. Traders must a) protect their balance sheet, b) maintain surveillance on you, c) not piss you off.
3. Salespeople must a) protect their account package, b) keep their job and c) not piss you off. (#)
4. Analysts are a) deal with the above, b) working harder for less money, c) farm out 75% of writing to juniors or offshore and d) must seek not to piss off their traders, their salespeople and you. (#)
5. Meaning all your thoughts are brilliant, your jokes are funny and they are your best friend. (#)
6. If you believe #5 and consistently beat your indexes great!
OODA Loop within brokerage firms and (possibly) your organization is too slow to support success!
($) Could others replicate this? Yes, if they had the time and their organization would allow it. With buy side commissions down 55% since 2007 we doubt it. If they try it will be an associate against my a) Naval Intelligence training and 60,000 plus hours of experience following the sector. Up to you.
(#, #, #) We like you too, but we will tell you a) exactly what we think, to include b) when we think you are completely wrong – directly, but respectfully (and we expect the same) because c) even the best of us is wrong at least 40% of the time. We don’t have to dance around our salespeople, traders or management’s rice bowl. We seek clients who understand and value this philosophy and generally find they are more successful investors. In my “big firm” life, and on more than one occasion, a salesperson has said “wait until you hear what they (the PM) like” before giving your opinion.
INTELLIGENCE COLLECTION PROCESS
COLLECTION PLAN (1)
- Indications & Warnings (I&W) work is critical.
- Decide in advance what is important.
- Collect against the factors affecting future price movement.
- IGNORE minutiae lacking signal value.
- Organize by likely influence on future stock price.
- Corporate presentation preferences should have zero impact. (2)
- Eliminate clutter.
- Determine largest potential driver / risk, probability, magnitude and monitor closely (collection plan, organization). (3)
- Repeat for #2, #3. More if significant.
- Valuation = intrinsic value (strategic, cash generation, earnings power), multi-scenario. (4)
- Timing = observes valuation but geared to 6-12 month horizon.
- Perfect information after the battle is useless.
- Properly executed analysis with 70% relevant information wins (performance) battles. (5)
(1) There is more. But having given away three research innovations into the market for free we will keep to ourselves.
(2) Corporations present information in the order they wish, particularly in slide decks and presentations, to shape the story and the conversation. Thus they often control, and always influence, the information “battlefield” in the public domain and in the majority of analyst/investor heads and particularly if an analyst or investor has spent less than two years in the sector. If you are skeptical ask me about the “Technical Products & Services” era at GE. Laugh, but everyone followed their lead except Langenberg & Company.
(3) Analysis is compromised when collection plans are improperly built and information is not well organized.
(4) We are the only industrial research provider with a) 20+ years of un-restated ROIC, RONA, economic profitability analysis by segment on key U.S. industrial companies.
(5) Examples (in appendixes I – VII).