Adding value as a consumer analyst
I was discussing with a friend who's considering a transition to a consumer sector focused role (mid/large cap, mostly US). My PMs prefer to avoid names whose value is principally driven by the consumer taste or trend, as he thinks we are not smart enough to predict where the consumer demand is heading, and the conversation with the friend made me think. When there are hundreds of analysts looking into consumer companies (as they are easier to understand), how do you add value? What becomes your edge? How do you provide differentiated views? Do they come from more data (e.g., alt data)? Just a better developed sense of understanding the market? I'd appreciate any insights.
On a train so will take a stab - I’m not sure the competitive field in consumer is substantially different vs most sectors. Obviously in places like biotech value can be added from people who understand the science in clinical trials better to assign probabilities, but at the end of the day, you have enough players in most sectors who are expert enough that I’m not sure just being an expert is the difference between good and bad outcomes. The market at its core is a simple poker game - which is why it’s so difficult to master. We are all assigning probabilities to outcomes on single names and betting that we have collected the best collection of potential outcomes at any given time to extract alpha out of the game. Being an expert on a name may help you to weigh the key drivers more appropriately than others, but when you strip away all the company/industry specific minutiae, a lot of investments at their core have the same characteristics, and I think it comes down to the efficiency and completeness of the investment process + wise decision making more than anything else. Being a master of one domain provides efficiency and completeness to not miss key trends and hone in on the important from the noise. Now there are definitely sectors where being a tourist will trip you up in that aspect, and you can misconstrue the secular vs cyclical, or lack a nuance of understanding for what different innovations and trends mean (semis, oil, healthcare, etc.). But I still fall back on the process being the bigger driver.
So how do you add value? Being efficient with time, having the scale from a resources point of view to get thoroughly under the covers on enough names, and having a deeply vetted process that minimizes the chances large mistakes are made - sector experience helps here for sure but is not the determinant imo. For maybe as simple as I made it sound here, it is incredibly difficult to do this consistently. But more players in consumer doesn’t always mean more efficiency in pricing at any given time - dislocations happen for the same reason in consumer as they do in other sectors - people start to overly discount positive or negative outcomes based on today’s news impacting tomorrow perception, and ideally you can exploit that when risk/rewards become unbalanced.
Definitely open to hearing other thoughts I just kind of formed this opinion while typing so I am keeping the option open to changing my mind here for sure lol.
I think what you're saying - that having expertise in deep minutia is cool and all, but once you strip all that away, lots of investments have the same characteristics - is completely consistent with the CAPM view that the market factor is the most important determinant of security returns. Expected residual return on all stocks are zero. What do you think?
Completely not what he’s saying at all.
more that the process is the value rather than the sector itself; thinking analogues across stocks (what’s priced in where), skew, etc. obviously process varies slightly from sector to sector.
ah yea cool
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