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

Researching comparables

Capital markets are made up of many securities. Most investment decisions, at some point, involve comparing the characteristics of one security with those of other securities.

One purpose of security analysis is to determine intrinsic value, but this generally involves making comparisons with a number of securities.

Intuitively, we feel more confident in a decision if we can say that security “A” has a greater or lesser intrinsic value than security “B”, than if we were to try to fix the intrinsic value of security “A” without knowing anything about other securities in the market.

For example, if we were to invest in Company ABC, a stock in the Russian Federation, we would usually like to know the dividend payout ratio of other stocks in that market.

However, in order to make value comparisons, we need to have research available about many comparable securities — often more than we can possibly research alone. Therefore, we come to depend upon not only our own research, but on research done by many others.

The need to reduce the cost of researching comparables is the reason for collaborative research.

Parallel sources

When researching comparables, useful facts are often uncovered relative to the primary target of a research project.

For example, if we are studying the common stock of “ABC”, a health-care REIT, a parellel study of other health-care REITs will probably reveal useful information about the health-care REIT business, not found in a direct study of sources about “ABC”.

If we follow the research techniques suggest in Part Five of this series — posting our findings to separate “folders”, by topic — from parallel research, we will develop a fact-rich folder on the topic of the health-care REIT line of business that will greatly facilitate our analysis of target “ABC”.

The type of useful information revealed by such “parallel research” might include:

• Operational procedures
• Relevant laws and regulations
• Business risks
• Competitive advantages
• Economic constraints
• Market size and growth

However, to get at this valuable “parallel information” requires much more time and effort than an individual analyst would normally be able to expend.

The help of other researchers is necessary.

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