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

The analysis of corporate governance

The term “corporate governance” came into vogue in the 1990s and now dominates discussion of ethics and morality in investment markets.

For five essays on “corporate governance” on this site, go here.

	Stakeholders have different interests

Often, the pretense of “good corporate governance” has served to shield ethically-challenged management from critical scrutiny by ordinary investors — an exercise in hypocrisy.

However, the corporate governance movement has come up with one important concept: stakeholders. The view that a corporation has many different “stakeholders”, with different interests, is essential to Post-Modern Security Analysis.

Management still talk about “looking out for shareholder interests”, but the influence of other stakeholders can hardly be ignored, especially the stakes of various governments, labor unions, franchise owners, administrators of off-balance sheet assets, license holders, creditors, employees, trading counter-parties, out-sourced suppliers, down-stream customers, banks, and, last but not least, management itself.

The analysis of corporate governance and of the relative importance of various stakeholders should be the first step in Post Modern Security Analysis.

Determining the relative importance of various stakeholders

Investment securities are a combination of contractual agreements and legal requirements merged with expectations of customary behavior. Normal and reasonable expectations of the benefits and risks of a specific investment opportunity vary among the stakeholders in each case.

	Corporate governance is a "can of worms"

For example, fifty years ago, common stockholders expected that most profits would be distributed to them in the form of dividends and that hired management would be content to provide faithful service for a fixed salary and occasional modest bonus.

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