Falsification

The enterprising and the conservative investor framework

Every year as the quarterly financial results starts rolling into the database…

I would be rushing to finish reading all the companies financial reports that I am vaguely interested in.

I wondered…

Does trying to upkeep with every single company financials on a quarterly basis make sense?

I further wondered…

If a company starts releasing live financial data, would I be following it on a daily/hourly basis?

So what type of data points should be an enterprising/conservative investor be looking for?

For some investment, the more “timely” the data the possibility of a better investing outcome.

For others, maybe a yearly data would have more than suffice.

For me, it means the single data point required to falsify an investment theory.


Falsification:

For the above, we will look towards Philosopher Karl Popper for direction.

Popper contended that the central question in the philosophy of science was distinguishing science from non-science. Popper replaces the classical inductive reasoning with deductive reasoning.

Any theory should make prediction which could be tested and the theory is rejected if these predictions are shown not to be correct. It does not matter how many confirming instances there are for a theory, it only takes one counter observation to falsify it. Popper believes that one should continue to try to disprove one theory instead of trying to prove it. Through the process, we can get closer to the truth but can never be certain that we can have the full truth.

This mental framework have been highly useful for the investing practise.

By looking at every single financial results and trying to make sense of the world, we are using the inductive approach.

Maybe, we should be trying to use the deductive approach instead.


Inductive Approach:

Observation > Pattern > Hypothesis > Theory

Deductive Approach:

Theory > Hypothesis > Observation > Closer to the truth?


A deductive approach includes coming up with a theory first. That means that the theory comes from a first principle approach.

Through understanding an industry/company, a theory had been formed on how the industry/company makes money by

  • growing revenue

  • keeping cost low

  • pricing at a premium

  • creating a better product

  • keeping competitors at bay

Subsequently, we form the hypothesis which could be tested. The hypothesis could be a series of test/metrics which we could use to track the validity of the theory. If there is no appropriate public information which can be use to track then there is a need to gather private data.

Then we observe if our understanding had been correct.

It just take one falsification for to invalidate the theory.


After all these philosophising, let’s go back to the reading of the financial reports.

To sell:

For Dairy Farm, the theory is the turnaround of the grocery sector in Malaysia positively helping the financial results. Since the turnaround did not come through and more holes keep appearing on the ship, the decision is to sell.

For bluebird bio (bb), the theory is that the spin-off (2seventy) would be valuable as the current CEO of bb is leaving with that spin-off. Subsequent research showed that 2seventy is facing serious competition for its myeloma CAR-T therapy. J&J and AbbVie are all coming up with very similar products. The understanding on the competitive landscape change and the decision is to sell.

To buy or hold:

For China Mobile, the theory is the continued growth in mobile ARPU and the growth in cable customers will help to make customers more sticky. In addition, their 5G network will also be more cost effective than China Telecom and China Unicom 5G network.

The theory for the Automated Testing Equipment (ATE) industry is that the industry is in the midst of multi-years growth across multiple industries. I had bought Pentamaster International (PI) on the HKEX (as it is akin to buying Pentamaster Corporation on the Bursa) to express the theory.

For Kaspi.kz, the theory is that being a bank that is operating in the fintech/commerce space helps them to gain trust more easily and allow them to grow faster and further afield.

The "Forced" Scaled Economics Shared in the pharmaceutical industry are benefiting companies who are sharing economics with the Chinese Central Government. Dawnray Pharma may just be the beneficiary of that piece of regulation.

For Rex, the theory is that Rex would be highly profitable and cashflow positive from both their Oman field and their newly acquired Barge field on the assumption that oil price stays above USD50. The half year results had shown us the potential for the Oman field but has yet to shown the newly acquired Barge field.

For Jupiter Mines, the theory is that after getting the spinoff (Juno Resources), there will be a consistent 8 - 10% dividend from the Manganese mining - Tshipi Manganese Mine - one of the largest Manganese mine on earth. Currently, there is a boardroom tussle to gain control of this valuable asset. The tussle created some uncertainty on the future capital allocation within the company but overall it highlights the attractiveness of the mines.


Unlike analyst report which likes to put up a price target, there is no target price here.

  • If the theory is falsified, a sale is make irrespective of the price.

  • If observations show us that the theory is no closer to the truth, holding for more observations may be the key.

  • If observations show us that the theory is closer to the truth, more purchase could be in store if the price is right.

Forming the theory and expressing that theory through an investment is the hallmark of an enterprising investor.

Finding the disconfirming evidence to debunk the theory is the conservative investor seeking to keep the portfolio out of harm.


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