Cialdini’s Law of Data Smog

In the classic book Influence, Robert Cialdini outlines six principles(reciprocation, liking, social proof, authority, scarcity and consistency) that represent psychological universals in persuasion. In general, all these persuasive techniques exploit people’s heuristics. The proliferation of information in this digital age means people need to rely more on heuristics than ever before. This has broad and deep consequences.

Because technology can evolve much faster than we can, our natural capacity to process information is likely to be increasingly inadequate to handle the surfeit of change, choice, and challenge that is characteristic of modern life. More and more frequently we will find ourselves in the position of the lower animals, – with a mental apparatus that is unequipped to deal thoroughly with the intricacy and richness of the outside environment. “ ­ Influence

One of the thirteen laws of Data Smog outlined by David Shena is Cialdini’s Law: Though culture moves much more swiftly than evolution, it cannot change the pace of evolution. This of course leads to a dangerous situation, where the unwary can be tricked into making dumb decisions. Worse yet are the broader societal consequences.

In the electronic age, a good lie well-told can zip around th world and back in a matter of seconds while the truth is trapped, buried under a filing cabinet full of statistics.”Data Smog

Cialdini’s follow up book, Pre-Suasion discusses how persuasiveness can be enhanced by carefully crafting what is done and said before making a request. Information overload also makes people more susceptible to the “presuasive“ techniques:

“…(1)what is more accessible in the mind becomes more probable in action, and (2)accessibility is influenced by the informational cues around us, and our raw associations to them….

In addition to its time-challenged character, other aspects of modern life undermine our ability (and motivation) to think in a fully reasoned way about even important decisions. The sheer amount of information today can be overwhelming- its complexity befuddling, its relentlessness depleting, its range distracting, and its prospects agitating. Couple those culprits with with the concentration-disrupting alerts of devices nearly everyone now carries to deliver that input, and careful assessments role as a ready decision-making corrective becomes sorely diminished. Thus a communicator who channels attention to a particular concept in order to heighten audience receptivity to a forthcoming message- via the focus-based, automatic, crudely associative mechanisms of pre-suasion- won’t have to worry much about the tactics being defeated by deliberation. The calvary of deep analysis will rarely arrive to reverse the outcome because it will rarely be summoned.”Pre-Suasion

Summon the calvalry of deep analysis

What can one do about this?” Hueristics are necessary to function in the modern world, but they must be examined from time to time. The calvary of deep analysis must be summoned for big decisions. Cialdini also recommends forceful counters assault. Recognize the tricks being employed are often enough to blunt their force, but in other cases it may be necessary to aggressively fight against the tricks. These books are a great place to start.

 

Why are receivables up more than sales?

 

“Always take a company seriously, even if its financials are knee-slapping, hoot-promoting drivel”

Kathryn Staley

I’m about halfway through The Art of Short Selling. It has some incredible short selling case studies. One accounting issue that comes up is where accounts receivables spikes without a proportionate increase in actual cash sales. Tracking the ratio between accounts receivable and sales is a way to track a pretty simple trick that company accountants can pull. The example used is that of the a corporate/government training company with a famous politician on the board. It ended badly for shareholders. This happens a lot in questionable companies getting “out over their skis.”

Anyways…

“Receivables can be up by more than sales for several reasons:
1. The company acquired a company, and the acquisition is not yet under control-collections do not have the same billing cycle or terms for sales, for example. If the acquisition was a large one relative to sales, the relationship of year versus year in receivables is not comparable.

2. The company is booking revenues too aggressively-for example, a three-year contract recognized at the front end, so that receivables stay high because the rate of payment is slow.

3. The company changed its credit policy to easier terms or is giving incentives for sales, thereby jeopardizing future sales.

4. The company is having trouble collecting from customers. Building accounts receivables is a cost to the company because investing in business already booked hurts cash flow. Timely collections are sensible in a growing business because growth eats money by definition.”

How companies book revenues is a particularly quarrelsome issue for analysts: There are many ways to fool around, and technology and training companies are two categories of regular abusers. Revenues booked should have a consistent relationship with collection-if a company ships now and collects in 60 days, the accounts receivable schedule should consistently mirror that policy. So rising receivables versus sales or a lengthening number of days in receivables should always trigger a question: Something has changed, it says.

 

If your screener sets of an alarm due to a spike in receivables relative to sales, running through this list might help you find the answer. Understanding this question gets back to the basic question: how does this company make(or fail to make) money?

One more quote to top it off:

“For the last week I’ve been carrying “The Art of Short Selling” around with me just about everywhere. Every time I get a break, I just open to a chapter. Doesn’t matter if I’ve already read it. I just read it again.”

Michael Burry(1999)

15 Signs of a Great Growth Stock


I recently reread Common Stocks and Uncommon Profits by Phil Fisher, while I was flaneuring in Morocco. Fisher held stocks for years and even decades, and focused on situations where he could get a several hundred percent gain over his holding period. His process focused on “Fifteen Points” to look for in a common stock. Not every investment was positive on every point, but good long term investments would need to exhibit many of them.

Here are my notes on the Fifteen Points.

  1. Does the company have products or services with sufficient market potential to make a possible sizable increase in sales for at least several years?

Fisher didn’t spend time on “cigar butts”- he wasn’t interested in squeezing cash out of a dying business, even though it could be lucrative for certain investors. Likewise, he acknowledges that its possible to make a quick profit from one time cost cuts in an inefficient business, although that wasn’t his niche. Notably Buffett described himself as 85% Graham and 15% Fisher, and the Fisher component arguably made him more money over the long term.

It’s important to consider what the limits of growth might be- once every potential customer has purchased once, then what? During Fisher’s time he focused on a lot of high-tech product companies. In modern times, there are a lot more service focused companies which can potentially generate recurring revenue streams.

A company with massive long term growth potential may have lumpy sales growth. Annual comparisons generally don’t mean that much, instead investors should compare multiple years.

If management is decent and lucky they might find themselves with a long run growth opportunity. If their truly good and lucky, they’ll find a way to creat it.

If a Company’s management is outstanding and the industry is subject to technological change and development research, the shrewd investor should stay alert to the possibility that management might handle company affairs to produce in the future exactly the type of sales curve that is the first step to consider in choosing an outstanding investment.

One of the key examples is Motorola.

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Short Western Union

I wrote on Seeking Alpha about the short thesis on Western Union(WU).   The company is paying $586 million settlement in which it admitted to aiding and abetting wire fraud. However  competitive decline is an even larger long term threat.  Not mentioned in the article, I was actually long the stock from 2012-2015, having bought because I thought the market overreacted to its decision to cut prices on remittances. I ultimately sold because I was disappointed with the company’s response to the technological disruption in the global remittance market.   I didn’t go short till late 2016. Its a relatively small position(about 2%), but I generally avoid shorting in size.  As this chart shows, the incumbents are losing pricing power in the remittance market:

 

remittances

For more details, see the full writeup.

 

6 Reasons Companies Fail

Dead Companies Walking, by Scott Fearon is one of the most fascinating business books I’ve ever read. The author is a talented hedge fund manager with a great track record on both the long and the short side. His ability to spot “Dead Companies Walking” is a key part of his edge.  Even for long only investors, the tales of what to avoid are valuable. The book describes 6 main reasons why companies fail:

1) Historical myopia: learning from only the recent past.

This seems to be most prevalent in cyclical industries, such as energy. The author’s formative experience was starting at a Texas bank right before the oil bust of the 1980s. People looked at charts going back only a couple decades, and assumed that prices would drop only to a certain level. Equally absurd assumptions can be applied to all sorts of metrics that people use in the investment decision making process.

2) Relying too heavily on a formula.

If a company follows a strict formula or metric, such as adding a certain number of stores annually, they can quickly find themselves making illogical decisions. Value Merchants, a retailer is an example used in this chapter.

Investors that rely too much on formulas can end up investing in zombie companies on the cusp of obsolescence. Various yellow page companies, for example, looked extremely cheap on an EBITDA basis in the early 2000s.

Relying too much on formulas an result in errors of omission. For example, investors may that relied on a strict valuation formula would have turned down Starbucks and Costco in their early days.

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Using Old Books to Exploit New Media


Trust Me, I’m Lying: Confessions of a Media Manipulator exposes the twisted incentive system that makes the media susceptible to manipulation, and the boiler room environment in which much of the “news” is manufactured. The book outlines tricks used to steal people’s time and attention. while serving some other agenda.  By understanding the logic behind business choices that the media makes, readers can better predict and anticipate actions(some might even be able to use the book to redirect, accelerate and control stories). It was written back in 2012,  but after reading, it makes sense that clickbait could help swing an election.

In the the book Ryan Holiday also hints at what gives him an intellectual edge:

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Sam the Banana Man


The Fish That Ate the Whale: The Life and Times of America’s Banana King is the biography of Sam Zemurray, known in the early days as Sam the Banana Man.  He was an Russian Immigrant turned American Banana Tycoon.

Sam’s philosophy was ” get up first, work harder, get your hands in the dirt and the blood in your eyes.”  He had an exceptional ability ability to think abstractly and to translate ideas into actions.

Here are a few highlights from his bio:

1)He built his empire by starting with bananas that were too ripe, and therefore discarded by his larger competitors:

Sam grew fixated on ripes, recognizing a product where others had seen only trash. It was the worldview of the immigrant: understanding how so-called garbage might be valued under a different name, seeing nutrition where others saw only waste. He was the son of a Russian farmer, for whom food had once been scarce enough to make even a freckled banana seem precious”

He later expanded beyond this strategy, which resembled deep value “cigar butt” investing, to build a massive fruit empire. This is one of several reasons that the Investor Field Guide compared him to Warren Buffett.

2) He was resourceful and tenacious.  He once built a long dock when he couldn’t get permit for a bridge:

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