Empirics and Analytics

Data, reason and logic: the lodestars of at least one Silicon Valley CEO. So it should be with a responsible valuation practitioner.

I’ll stop and mention for the record that we at Arcstone have no illusions about our place in the world. Cypress Semiconductor builds things that do stuff, which is magnificently more valuable to the world at large than we simple financial service providers. But still we can draw a comparison to the way TJ Rodgers looks at his universe and the way Arcstone analysts look at our own idiosyncratic universe of financial valuation. Data, reason and logic reign in both.

Data: Quantitative data. In writing this, it seems just too obvious to mention, but the art of valuation is indeed constructed by quantitative measures. But perhaps it’s not too obvious: one recent client was surprised that his company’s common stock valuation had taken a jump, despite the fact that qualitatively not much seemed to have changed in the past year. I suppose this sentiment can be caused by not seeing the forest for the trees. At any rate, it was surprising to us that we had to point out that changes in quantitative data weighed heavily in our analysis. Their projections had jumped several-fold. Projections, we explained, are the kind of quantitative data upon which valuation analyses depend quite significantly.

Reason: Well there’s reason and there’s reasonable, and we must employ both. We’re not tackling problems of physics, so our reasoning does not have to be stretched by PhDs in mathematics. And thank God for that. However, ask any practiced valuation analyst and they’ll tell you there’s a great deal of art that balances out the science of valuation. So reason is key. And reasonableness as well, which leads us to…

Logic: How does it all hang together? That’s a critical question that the valuation analyst must ask. An unsophisticated analyst may derive some wacky numbers, figures that just don’t make sense given the nature and maturity of a given company. The sophisticated analyst will balance quantitative methodologies with a qualitative sensibility to answer the question, “does it all hang together logically?”

We don’t pretend to be solving the world’s mysteries or pushing the limits of physics. Would that we could! We do, however, hope to solve a small but nagging mystery for you, the client: what’s this thing worth? It turns out that adhering to the sensibilities of TJ Rodgers is as beneficial to his art as it is to ours.

Tip of the hat to Joseph Rago writing in the WSJ on 02 September, 2007.