Your Stock Picking May Need a Little Medicine

Joel Litman

Let me tell you about a doctor I greatly admire...

I am four years into being a dedicated intermittent faster. A giant part of that is thanks to Dr. Jason Fung's research on the amazing health benefits of intermittent fasting.

A nephrologist by trade, Dr. Fung focuses on helping patients with kidney disease. His work originally catered to patients with Type 2 diabetes. But his findings extend to general health, which is how I discovered his coaching on intermittent fasting. This type of fasting has a phenomenal impact on the human body's hormonal balance.

His book, The Obesity Code: Unlocking the Secrets of Weight Loss, has received thousands of positive reviews on Amazon (AMZN). And his brand-new book, The Cancer Code: A Revolutionary New Understanding of a Medical Mystery, has been published with strong reviews already.

His framework for human health aims to help patients with ailments ranging from kidney failure to diabetes and obesity to cancer. It's so incredibly well-researched that I feel obliged to share it with my investor audience.

I also find strong parallels between his research in medical diets and our research in stock markets and valuation. Many of the long-accepted practices in each of our respected fields are simply not useful and often counterproductive.

Hidden health and hidden alpha... it's the same idea...

Dr. Fung unearths hidden potential in human health as a result of the detailed study and meta-study of the existing body of research… and his own research with his patients.

This is similar to our efforts to find alpha for our readers. The potential for fantastic returns is out there. And, luckily for us investors, there are plenty of signals about where to find these returns. But it takes work, diligence, and a professional understanding of the fundamentals and financial statements.

When I read Dr. Fung's work, it's so easy to draw a parallel between his and ours.

For example, I'm sure this quote from his book The Obesity Code will resonate with many of you who are familiar with how we at Altimetry see the financial industry:

The art of medicine is quite peculiar. Once in a while, medical treatments become established that don't really work. Through sheer inertia, these treatments get handed down from one generation of doctors to the next and survive for a surprisingly long time, despite their lack of effectiveness.

In other words, sometimes, even the most intelligent and dedicated practitioners in their fields will go down a particular path of thinking, and it's very hard to move them off, and onto another that may be more effective.

In this vein, Dr. Fung refers to the medicinal use of leeches for bleeding, as well as the more contemporary practice of tonsillectomies.

Rather unfortunately, the treatment of obesity is also fraught with examples of engrained falsehoods even among professionals. For those interested in this specific branch of Dr. Fung's work, be sure to tune in next Friday.

The same adherence to falsehoods is true for several areas of accounting and finance...

Certain practices are hammered into MBA curriculums, mainstream financial media, and professional "gut feelings" over decades. These are astronomically difficult to remove once in place.

For instance, let's look at the most fundamental benchmark in calculating valuation. It's a crucial variable in determining the valuation of any company: the cost of capital. Somehow, it is still taught that a stock's beta is the most important individual firm determinant of the calculation. That's despite research from 30 years ago proving that it's an almost irrelevant factor.

Accountants are taught to follow the matching principle. "Match your expenses incurred to the period when related revenues are earned."

And yet, GAAP – the generally accepted accounting principles that we rely on in the U.S. to define how companies report their performance – forces companies to book research and development ("R&D") costs well before the related revenues are earned. Despite this, most professionals still use as-reported earnings per share as the de-facto grade of corporate performance.

Dr. Fung has a healthy sense of humor and empathy – incredibly important when handling heavy topics...

A healthy, steady, and positive mindset is important for exceling in any field.

If the titles of Dr. Fung's books speak to you, I'd highly encourage you to read them. His latest, The Cancer Code, can be found here.

He offers a fantastic new paradigm through which to understand cancer, and just as we do for the financial markets, he tackles myths and misunderstandings about disease.

Here at Altimetry, we are looking for hidden financial health...

Using the power of Uniform Accounting – which removes the distortions in as-reported financial metrics – we grade stocks based on their real financials.

After we clean up the GAAP numbers, we can see whether a company is thriving.

In fact, earlier this month, we recommended shares of a leading innovator in the plastics market. This company is a global powerhouse, but Wall Street completely misunderstands it. While traditional GAAP accounting would suggest this company has been treading water for the past three years, our numbers show that its earnings per share have nearly tripled in that time. It's just a matter of time until the market catches on.

To learn more about Hidden Alpha – and how to gain instant access to our July issue – click here.

Regards,

Joel Litman
Jul 23, 2021