Years ago, one of our institutional clients had a massive investment in a huge nickel mining company.
At the time, the Indonesian government was trying to keep nickel-related manufacturing within the country. It enacted a series of regulations that effectively banned exports.
This was great for nickel miners located outside of Indonesia. The lack of supply drove prices way up. However, rumors were circulating that the Indonesian government would soon reverse its export ban. That was a big risk for the company that our client was invested in.
We thought it was wise to actually meet with management before making any decisions. We wanted to hear what company executives thought about Indonesia potentially reining in nickel exports and flooding the market.
We met with the chief financial officer ("CFO") of this company. He was congenial and forthright. He seemed more than happy to answer all of our questions.
That is, until we got to our real reason for being there.
We asked the CFO how management would handle a potential flood of metal into the market. We wondered how much it would impact the company's earnings.
Management had addressed this with a canned response in its public analyst calls. So we already knew the answer... sort of.
Here's the thing – the CFO's entire demeanor changed when he answered. He literally looked past us as if speaking to the wall far behind us. He then repeated the exact same canned assurances that the company had provided during the earnings call.
This very kind and personable man seemed to go into a trance as he read from an invisible teleprompter.
It was a sign that something was very wrong. There was something management wanted to say... and couldn't. We saw it all firsthand.
Today, we'll explain why reading words on a page isn't enough to make you a successful investor. If you want to get into the minds of management, you have to take your analysis a step further...
If you're not familiar with the phrase, it refers to the blank look that can often be seen in traumatized soldiers.
One of the most famous examples of this gaze comes from a painting commissioned by Life magazine during World War II. The painting is called "The 2000 Yard Stare" and depicts an American soldier during the Battle of Peleliu in the Pacific. (You can see the picture by clicking here.)
The soldier is staring, seemingly blank, past the eyes of an audience thousands of yards away. In the meantime, the battle is unfolding around him. That's exactly how the CFO of this nickel company looked when we started asking about metal prices.
Most nice people are really bad at lying. And when they're forced to state something that they know isn't true, they behave differently.
It would have been impossible to gain this insight by reading from a transcript. In fact, if you simply read the transcript, you wouldn't have thought management was particularly concerned about a nickel glut in the market.
Transcripts lack tone and nonverbal cues. Research from a number of psychological studies show that less than 10% of our communication is through words. The other 90%-plus is through tone of voice and visual cues.
So if you can get into a room with – or at least listen to – management, you dramatically increase your ability to learn new, accurate information.
These folks are busy... and they rarely take those kinds of meetings unless you're a major shareholder or client.
However, most public companies offer live audio or recordings of management discussions. Everyday investors have the opportunity to listen to management's tone and even watch the team speak. While it might not be as telling as an in-person meeting, it can still give you a significant advantage.
Too bad so many people stop at just reviewing the transcript.
Longtime subscribers know this is why we employ something called an Earnings Call Forensics ("ECF") analysis for every company we recommend. It uses voice-stress analysis tools to analyze management's speech during earnings calls and presentations.
We've been refining this tool for 15 years. It lets us actually match management's words against their feelings... and the actual numbers and forecasts. When they don't line up, something about the company is in serious need of deeper investigation.
ECFs are a valuable way to monitor how management sentiment changes over time – especially pinpointing when the team gets excited about something. It's a way for us to interpret many of those valuable nonverbal cues without having to sit in the room with management.
In the case of our institutional client, we recommended he pull his money out of the nickel company. Lo and behold, the stock had collapsed by 60% within a year. Because we asked more questions and went the extra mile to get answers, we were able to dodge a major bullet.
As we mentioned, we run every recommendation in our monthly advisories through our ECF tool. You can apply the same principles to your own investing research at home... by listening to (not reading) earnings calls.
You'd be surprised how easy it is to sense changes in tone... and how much you can learn from what often goes unsaid.
Wishing you love, joy, and peace,
March 17, 2023