“Hear and say” sounds like the kids’ toy “Speak and Spell“, but the kids get a better chance of learning something. The adults are more likely to merely parrot an increasingly inaccurate message. The problem is that “hear and say” is the basis of communal communication, and we all know that it eventually spawns hearsay. Sometimes we have to rely on heard inaccuracies because they are the best news source. “She likes you! She really does!” As if any of us know our true emotions. Sometimes we must filter heavily and categorize the news as rumor, or even fiction. The trick is knowing what to believe and use.
I doubt that anyone is unscathed from, nor totally innocent of, unpleasant miscommunications. Anyone living in a small town knows that life is a fish bowl of a swirl of local “news” of who was seen with whom, which might have little to do with anything more than coincidence. People care. People notice, and they make their best guess at the stories without checking for facts, because the facts would be too hard to uncover. Besides, dig too deep into someone’s life and they may dig back into yours.
The investment world should be clearer and cleaner. Publicly traded companies are required to release financial every quarter. They are also required to make global public announcements of information whenever it significantly affects the company’s operations. The CEO has cancer? That’s news. They changed the color of the building? Probably not. The system is designed to give everyone the opportunity to get the same news at the same time. It is called “leveling the playing field”, but everyone knows that the playing field has potholes and that sometimes the wind blows the ball one way or that the sun will be in the eyes of those at the other end of the field.
There is too much money and power involved for people to patiently wait for press releases. The more money that’s involved, the more likely that researchers, analysts, and investors will be sorting through every scrap of data and information that can be collected from sources outside the company. If enough greed is involved, the search may go inside; which is an unfair advantage, which is one reason insider trading is illegal.
Inevitably, the early information is incomplete and intelligent extrapolations, i.e. guessing, must be made to complete the picture. Supposedly the professional money managers are better at that than the crowd of individual investors, but I have yet to see data to prove that. We’ve seen so many financial implosions lately that the dust hasn’t cleared enough for us to really see the scope of the craters. Many of us were covered by dust. Too many were hit by shrapnel. There were even individuals that shared in the implosions because they mimicked the wrong professionals.
Many of the professionals heard tidbits about new financial strategies and followed them without digging into the details like assumptions and restrictions. The story sounded good so they drove on assuming the rest of the story was as good as the first tidbit. It sounds silly, and the results were catastrophic, but it is a very human tendency.
It is hard to find the time to totally understand a company. Management rarely knows everything, and they supposedly have the best access and the best data. Uncertainty is inevitable. But that’s a poor reason to fill in the blanks with a rumor. That’s why I use more than one.
I handle the uncertainties by considering scenarios. I pay attention to rumors, but I don’t expect any of them to be accurate. With each rumor though I consider the possible scenario in terms of how it would play out for the company and the stock. At a minimum that means I always have at least two scenarios to consider. One is the simplest, based only on the company’s possibly sporadic news. The other is based on the rumor. And there is always more than one rumor. After a few rumors have drifted by it becomes possible to get a feel for the scope of possibilities. What’s the worst? What’s the best? Are the most likely ones clustered around a similar story? Or is everything scattered?
Microvision (MVIS) has a potentially disruptive display technology. Their device is cheap, small, light, scalable, and uses very little power. The terrible scenarios include being too disruptive to be accepted, or too hard to made profitably, or maybe the competition is too fierce. The great scenarios include having a reach as pervasive as Intel because Intel’s chips move electrons and Microvision’s chips move photons. Even the average of the two extremes would make for a profitable company and investment, but most scenarios cluster at the extremes. There are very few in the middle, even though the middle ground would still embody a profitable company.
Dendreon (DNDN) has a disruptive technology in the form of cancer vaccines that challenge the traditional chemo and radiation treatments. Dendreon’s technology is FDA approved and the data suggests that it has minimal side effects. Data also suggests that, even at $93,000 per treatment, Dendreon’s approach is cheaper than the traditional treatments. The downside scenarios are minimal, and usually involve speculations about unexpected and previously unobserved side effects. The upside scenarios involve treating patients earlier, treating other cancers besides prostate, and expanding into other regions like Europe and Asia. The scenarios suggest a bright future, partly backed by data, and partly backed by the wealth of numerous positive possibilities. They won’t all come true, but any one is enough.
MVIS is trading at under $2. DNDN is trading at over $36. Granted that Dendreon got a headstart on their technology (Microvision is waiting on better green lasers) but some of their five year revenue projections are similar. Or at least were. Two years ago both companies were both trading under $5.
Prior to that, their stories were nothing but hearsay. Yet I invested anyway. So far, one has worked well. One has not. The playing field isn’t level. The researchers and analysts seem to have good info on Microvision’s supply problems. But they seemed to have dismissed Dendreon’s potential, possibly because they listened to rumors based on the side effects familiar to old technologies. They are fallible.
That’s why I am not deterred from investing. I may not have access to the best data, and may have to listen to rumors and speculations, but just like in a small town, it pays to know what to listen to, and to know to throw out most of the rest. The financial powerhouses have the resources, but I have advantages too. I know that trusting my judgement, experience, and skills can direct me to overlooked investments. Knowledge of my goals helps me sort out scenarios that can feed my life. By making it personal I make it internal, where there is very little hearsay.
As I post this, DNDN is up by more than the total value of a share of MVIS (DNDN up $1.66 > MVIS trading at $1.38). Maybe someday I’ll post about how that numbers game plays out.