This is the fifth article in a series about Post-Modern Security Analysis.

The challenge of complexity

In part three of this series, I wrote:

… the first step of Post-Modern Security Analysis is simply to identify issuers or instruments that are too complex to analyze and move on to more worthy objects of analysis.

	At one time, securities were relatively simple ...

This raises the questions, “How do you know when a subject is too complex to analyze?” and “What is the nature of complexity in modern capital markets?”

These questions go to the heart of Post-Modern Security Analysis: that of recognizing the problem of complexity and seeing the analyst’s task as a process of first gathering, weeding out, and documenting relevant facts about an issue and only then, with the information carefully recorded, analyzing the points that have been selected and verified.

Under classic investment analysis, as described in Graham & Dodd’s 1934 edition of “Security Analysis”, scant attention was given to the first step: the gathering and documenting of relevant facts. Almost the entire book was focused on the analysis of facts, presumably easily extracted from published sources such as Standard Statistics.

In those years, the analyst’s complaint was more likely to be lack of information, rather than too much information.

In Post Modern Security Analysis we cannot assume simplicity or insufficient information. Instead, we must start with the expectation that the major challenge will be to wade through and manage a vast swamp of information, with the factual mixed in with the fanciful and irrelevant.

Note: In some developing markets with weak regulation and relatively simple, family- or group-owned companies, the assumptions of Graham & Dodd may still be useful.

Once we have dug out and recorded the relevant facts, there are an abundance of textbooks that can help in analyzing a specific type of security or aspect of the market.

For example: See: Investment analysis

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