What is Good Research? Our Interview With Tom Brakke, CFA

We were privileged to have Tom Brakke, CFA, stop by our offices in New York City a few weeks ago. After a multi-hour meeting where many of us talked about all sorts of things, I managed to wrangle Tom into a quick interview.

Before posting the interview, I’ll say that if you don’t already follow Tom on Twitter or on his excellent blog, The Research Puzzle, then you are probably missing out. He is a regular font of provocative thoughts, and that can be one of the most useful things in the world. He has also written a number of excellent posts for Inside Investing, including a thoughtful look at how you should consider cash and a post about the most important question to ask about a projected rate of return.

CFA Institute: Tom, one of the things that we’ve been talking with colleagues here about is all of the barriers that exist and keep people from getting to the truth. How do you tell if research is good in this climate? How do you piece through that?

Tom Brakke, CFA: That’s a very difficult question in terms of trying to ascertain whether research is good. I think the first place I would start is that research is not necessarily good in terms of if it’s formulaic. I would start there. Let’s just put it in the broader brush of due diligence, for example, which is what somebody, a research analyst for example, would be doing in terms of preparing a research report is in essence doing due diligence of one kind or another, and they’re trying to come to a conclusion.

If you’re doing due diligence, you can run through a checklist and feel like you’ve done due diligence. But that’s a check list. It’s a pre defined way of thinking about the world. When you think about a research report or the responsibilities of an analyst to do certain kinds of research, lots of times it takes that same “check the box” approach.

I think good research, good due diligence in general, means looking for differential information and approaching the problem in different ways. When I think about good research, I want to see that somebody’s giving me insight into the situation that I couldn’t have otherwise gotten.

Let’s just take written research, which we see most commonly from sell side firms, for example. It’s remarkably similar in almost all respects from firm to firm. You will see some differences. I would say focus on the differences. Focus on the different theses that somebody might use, a different approach they might take, the identification of the specific things that are unique to their study.

When you pull out everything say in a research report or in a communication from an analyst verbally or from a portfolio manager or anybody that’s doing things, if you take out all of the stuff that’s the same and just focus on what’s different, it’s a remarkably small amount of information. That’s where you ought to start is with the differential information.

A lot of times, it’s very difficult to find that, to comb through, to piece it. Because that’s not what, say a research report again. I don’t want to focus just on reports in general. But that’s not what they lead with, necessarily. You have to dig for it. You have to know what’s different.

The person communicating their research ideas, that’s the lead. To get all of the extraneous material away and to get that differential information requires doing things different than other people, just by definition. I think that’s the major failing of doing research or a due diligence process in general is basically following well worn steps is not a path to enlightenment, if you will.

In talking about the differential information, you’ve hit on something else, which is the mechanics of information transmission. You’re notable in that you have several different pieces of media through which you transmit your thoughts.

Does the substance change at all? How do you think about the way that you communicate yourself in social media in the context of…Do you change the substance to fit the medium at all? Or does the medium devalue the substance in any way?

Does the medium devalue the substance? In the eyes of some viewers, perhaps it does. Perhaps they don’t think that if it’s available online it can be value added. Obviously as somebody who produces information online, I disagree with that.

But I know that that’s a fairly common perception. In terms of what’s the right forum for a particular idea, I’ve probably gone too far in the sense that I have three different blogs that kind of do things. The original one, “The Research Puzzle” is about mostly investment process, how the industry works. Second one, which is called “Pix,” features charts, so there’s a visual aspect to it.

A pet project of mine is to convey investment information more creatively in a visual fashion than the industry typically does, which is the goal of that one. Then I’ve got a third one that’s called “Pieces” that’s kind of a scrapbook of different kinds of ideas. I also do a newsletter for institutional investors that pass on information to them from others.

It’s a digest format that I think is of interest. Each of those has a specific purpose so that the readers of those know what they’re getting and selecting. Like I said, I probably went too far in putting things in too many different places so that it might be harder for the reader trying to find the body of my work to identify with it. To locate it, I should say.

I think that when I first started on Twitter, for example, a few years ago, somebody recommended following me, “Because I had great, original material, and excellent links,” was what he said.

I go, “That’s pretty good. That’s exactly what I’ve been trying to do.” It’s the originality. It’s the differentiation, as we just talked about, that I focus on most in trying to convey information. That if people read me, I want it to always be presented in a quality fashion of the communication as good as it can possibly be because I think that matters. I think that’s important.

Secondly, that the thoughts that I convey are different than they find at other places. That’s certainly the feedback that I get. Whether it’s something that I write myself, the original material, or whether it’s something I find and pass on, whether it’s via Twitter or via newsletter or in one of my blogs. That I’m really trying to put into the discussion and the communication, that I’m providing interesting things that aren’t found elsewhere.
If I can be successful at that, I can add value and it doesn’t really matter whether it’s online and available for free or whether I’m providing things directly to clients of mine that don’t otherwise appear. It doesn’t really matter.

My purpose is to bring that information forth, to bring that context, and to be creative about it and say, “Here’s something different that people haven’t really been focusing on.” If I can do that in a quality fashion, then I’m going to find readers that gain benefit from it, then I can hopefully gain consulting clients, too.

It sounds like to you the information has value regardless of the transmission mechanism.

Well, you can’t just send out information and say it has value. There’s a curation aspect to it. That hopefully if I’m disseminating something, no matter the forum, that people expect that I have…it’s not that I approve of everything I send out, because sometimes I send out things that I think, for example, are well written and interesting that I don’t agree with. I think that’s part of it, too.

It’s not just I’m sending things out by people that agree with me on something or other. The important thing is sending out good material and getting people to think about important issues, whether I happen to agree with them or not.

Now, if I’m writing an original piece, they’re going to know where I’m coming from. But hopefully, you get the range of ideas that you’re providing to people. That if you do that, they’re going to respect and understand that and respond to the information that you give them.

In closing, we’ve been here at CFA Institute offices for a couple of hours now talking about a wide range of events.

Yeah, all different sorts of things.

One of the things that comes out is there are a wide variety of different sorts of investment management firms. A piece that you wrote on your blog, the letters to a young analyst, you talk about the notion of a special place where an analyst can build a career. Similarly, those would ostensibly be places where a client can build some wealth.

Exactly. I think they go together, by the way. That the kind of place that can truly be a home for a young analyst or portfolio manager or any other role within an investment organization goes with the kind of place that a client can hopefully build up wealth. I think there’s a connection there.

What are some of the qualities, besides client alignment? Do they have certain typefaces on their website?

[laughs] No. I think it’s a perspective on the long term goals of what this business ought to be about. That you are delivering value over time, and that you create value by building an organization, by building a team, by thinking thoroughly about process. If you’ve read me, I write lots and lots about investment process and investment decision making.

I’m kind of an evangelist for process, if you will. That doing that well is very hard work, and it takes a long time. There’s a cumulative effect of that. If you’re starting off a new firm, you’re not going to have that instantaneously. But if you do it in the right way, you’ll have it probably sooner than you think. People will recognize that both, prospective employers and prospective clients.

For an established firm, it’s a little bit different. Because the culture is the culture and it’s hard to change. It’s a lot easier to destroy a culture than it is to create one. I’ve seen it happen. I think it’s very much about the culture of understanding that it is a cooperative venture in the sense that you’re there for a particular purpose.

The purpose is the client. What you’re trying to help the client do. That is to build wealth over time.
We get into this culture of, it’s all other people’s money and we’re just slinging it around and we’re extracting our free and our mission is to grow assets and grow fees and that’s always defined ourselves.

As we discussed earlier, that’s why there’s a gulf between what clients expect and what a lot of investment organizations are delivering. As an industry and as a profession, we need to close that gulf. It is really about managing that money as if it was our own, to make the right kinds of decisions, to be willing and able to buck the pressures of the industry, which is perhaps the hardest thing.

We talked about a number of these things earlier, about the misaligned incentives a lot of times, the pressures in the industry, the relative performance derbies and all the things that end up keeping us from meeting the client’s objectives instead of helping us meet the client objectives.

If you’re an investment professional and you land in a place where all of that is in the right perspective, not that you won’t have difficult choices and hard issues to deal with and conflicts that you have to deal with. But if you’re in a place where that’s being addressed in the right way as opposed to just, let’s build this business and make a lot of money and fend for ourselves instead of our clients, then that’s probably the core of it.

But there is a culture aspect to it that is, it’s soft, it’s hard to get at. A lot of times, you’ll know it when you feel it, if you will. It’s hard to see that prospectively as a young person entering the business, for example. It’s really hard to see that. But if you see it and you feel it and you get to be a part of it, one of the things I tried to reflect on and mention in that last letter to the young analyst is that you might not realize how special that is.

Somebody’s going to come and jangle some money in front of you and try to entice you to leave. Sometimes you need to do that. Sometimes it’s the right thing to do that. But if you don’t really appreciate for the uniqueness of the situation that you might be in, you might not think as well about that decision as you could.

That was really the point I was trying to make there. That if you find a home in this business that’s a right kind of home, that’s really worth a lot and you ought to value that opportunity appropriately.

Got you. Well, thank you very much, Tom.

Thank you.

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