One of TSE’s clients asked me if I would present to their team on the topic of “what makes great research?”. I do not have any delusions of grandeur on this front. But I did enjoy pulling some thoughts together. And the result is a nice video, for anyone interested in TSE’s research philosophy, or for anyone building a career in research and investing.
What makes great research?
One of my clients asked me this year if I would present to their team on the topic of “what makes great research?”. I do not have any delusions of grandeur on this front. But I did enjoy pulling some thoughts together. And it makes a nice video, for anyone interested in TSE’s research philosophy, or for anyone starting a career in research.
Really I only came up with one key point. Great research is not about the researcher but the reader. A researcher has one job. It is to help the reader save time and make good decisions. That’s it.
I am just going to pause on this point, because it’s the opposite of everything I learned in the first 20-years of my life. Many moons ago, I did a degree at Oxford University.
At the time, my intellectual hero was the Austrian philosopher Ludwig Wittgenstein, an amazing thinker. So amazing, in fact, that half-a-century later, professional academics and lowly undergraduates are still debating what he was on about.
It is tempting to put revered thinkers on a pedestal. “I want to be like that, but with earnings forecasts”. I would suggest there are three things that a researcher might do differently.
Point #1: Ask Simple Questions?
Years ago, I had an investor client, who told me something. He said: “I never get anywhere, asking complicated questions, when I meet the CEOs of Fortune 500 companies. I am never going to impress them with a question about machine learning. No. I like to ask dumb questions. And I make money when they answer with something unexpected”. This has stuck with me.
These days, I like to spend my weekends walking in the beautiful forests of Estonia, and thinking about my clients. What are the questions they are likely to be worrying about? Sometimes, and this really helps, they write in with a “gift”, which is directly telling you what they are worrying about. And I just think, how can I break that question down, as simply as possible, into something I can research, to see if I’m going to find something unexpected.
Research has a ‘look over here’ aspect. It is like looking under a rock to see if there is buried treasure beneath. Sometimes you are going to look and find something really exciting. And sometimes not. But you have to look. And you have to be clear about what looking involves, and what you are looking for. So that is Point (1). Ask simple questions.
Point #2: Make Complex Things Into Simple Things.
Something that happens all the time, at least to me, is that I set out to answer a simple research question. And then it grows fangs.
Things are as complicated as they are. You cannot paint the ceiling of the Sistine Chapel before you have built the walls.
My usual answer is Lego blocks. If you are going to tackle complicated questions, then break them down. Build an economic model. A CO2 calculation. A company screen. A supply-demand balance. A few other industry data-files. Do all of these separately. Then put the pieces together.
There’s another story I like in ‘Shoe Dog: Memoir by the Creator of Nike”. The story is that Nike hired a researcher in the 1970s, who went wildly off spec, and wrote a 1000-page tome entitled “On American Selling Prices, Volume 1”. As the former Nike CEO highlights, “What really scared us was the Volume 1”.
It’s like the old Mark Twain quote “I’m sorry I wrote you such a long letter, I didn’t have time to write a short one”.
These days, I try never to write more than 20 pages in a Thunder Said Energy research note. By definition, the goal is to help a busy person, get smart on a specific question, in a way that helps them and saves time.
I do not need to waste 50-pages of your time re-describing each cell of an Excel model in a Word Document. The underlying Excel is always linked in every TSE chart and exhibit.
Likewise, research should made as simple as possible. Use short words. In short sentences. Explain terms. Avoid jargon. Make it all killer, no filler.
The key is to distil away the noise. If I read 100 patents, 99 are going to be boring, and 1 is going to be phenomenally interesting. My job is to filter out the 99 and find you the 1.
If a researcher does 20 hours of work, and condenses it into a key conclusion that can be read in 5 minutes, then the researcher has saved the reader 19 hours and 55 minutes. Just think about the value of that time saving.
Point #3: Earn Trust
It turns out that a 5-minute summary is only useful if people can trust it. No bad mistakes. No biases. All of the workings should be clear and transparent.
A long time ago, in a former life, I knew an analyst that launched coverage of a new stock, rated BUY, with 20% upside to their valuation. After the report had been published, they discovered that the Euro-Dollar FX conversion was wired up the wrong way around in their model. In fact, there was 20% downside to the correct valuation. That is quite bad.
But what is really bad, is that the analyst decided to “solve” the problem by upgrading all of their revenues and margin forecasts, to get back to 20% upside, and then re-publish the model, as though nothing had happened. For me, that’s the end. Do not pass go. Do not collect $200. If your goal is to earn trust, then there’s no way back from there.
So my strong advice is to check your workings so thoroughly that you can rule out big numerical mistakes. I am sure I am not the only analyst who has woken up in a cold sweat at 3am, and told my wife “I just have to go double-check one number in an Excel”.
But putting aside career-destroying Excel boo-boos, you do actually have to be wrong from time to time. It comes with the territory of making actionable and time-bound predictions.
I once hired a lawyer to make 100% sure TSE was paying the correct mix of taxes — as a US company, employing me in Europe, another employee in the UK. He charged me a few thousand dollars. And two weeks later, he came back with “the law here is kind of a grey area”. That is not entirely helpful.
On the other end of the spectrum, I once had a hedge fund client. “You need to upgrade ABC — only a moron could have ABC on sell”. “What about the risk of X?”. “What’s X?”.
The right answer is a balance. We are all fallible decision makers, trying to navigate an uncertain world. The facts and numbers currently make me think X. If there is good reason to re-visit the numbers, then I am open to re-visiting X. Or in the words of Ludwig Wittgenstein, “don’t think, but look”.
So thank you for exploring so many different aspects of the energy transition with me this year. I’m signing off now, and here’s looking forward to sticking by this philosophy in 2023…