The “thud factor” is a rhetorical device used to obscure weakness with the weight of authority.
Back in my college days, I found that when debating Marxists, they would often throw down Das Kapital as the ultimate answer to almost any argument. The combined volumes make for a massive book that hits the table with a solid thud.
The funny thing is: few of them had actually read all three volumes of Das Kapital cover to cover. They had ideas about what was in it, given to them by their professors. But actually reading dense, 19th-century economic prose is like getting dental treatment every day for weeks—with no anesthesia.
This didn’t stop them from employing Das Kapital’s thud factor. Their aggressive confidence in the rightness of their cause, if not their facts, was enough to silence most of their opponents.
I was not like most of their opponents, of course. I knew that Marx literally didn’t know what he was talking about; the first volume of Das Kapital was published in 1867, just after the US Civil War ended and before the Industrial Revolution really got going. The last volume, published in 1894, came before Oldsmobile patented the assembly line in 1901.
But I’m not here to reminisce about college days. I bring this up because the thud factor is one of the most common PR tactics public companies and stock promoters use to snow investors.
Today’s financial thud factors range from press releases and corporate presentations so jammed full of technical jargon no ordinary person could understand them, to complex mathematical models and “quant” studies that would hit your desk like a stack of phone books.
The bigger the thud, the more likely investors are to back down and assume their questions have been answered.
The experts who produce such massive tomes must be right… right?
I call bulshytt.
Price Targets: Only a Model
Let me drive this home with one important, widely used example: price targets.
I’m not going to make any friends in the big brokerage houses saying this, but price targets are bulshytt. The massive reports behind them are no more valuable or relevant than Das Kapital is to a modern economy.
Let me be clear. When a sell-side analyst issues a 100-page report full of charts, equations, and other arcana in support of a Buy recommendation with a price target, it’s not that the math is wrong. Usually, the given facts are true, or at least sourced with documentation. The math is sound. The charts are accurate, given the data.
I’m not accusing anyone of fraud.
The problem is that the whole structure that generates the price target is, in the immortal words of Monty Python, only a model.
What’s wrong with that?
Models are not inherently evil—or fraudulent. A well conceived and built model can be a very useful thing. But at the end of the day, it is only a model. Its results are not facts; they are guesses. Perhaps educated guesses, but still guesses.
Let me put it another way. It’s like what programmers call the GIGO problem. You can write a program to, say, calculate the distance a ballistic missile will travel. You can get the parabolic equations right, write the code perfectly—and the output can still be garbage if the input is wrong. Garbage in, garbage out. GIGO.
But the case of price targets is worse than this, because it’s not just a matter of input. Yes, the input to a financial model can be full of guesses, industry averages, unsupported numbers reported by management, hearsay, or anything else you care to imagine. But even if the input were 100% correct, the models themselves are full of assumptions, guesses, industry averages, and so forth. It’s not like a missile following a parabolic course. There is no equation that gets you the right answer, as long as the input is correct.
The probability of error in the model itself compounds the probability of error in the input data.
The results are bulshytt squared.
Think about it… No one can reliably and accurately predict what the price of gold, copper, oil, or any of the vast array of inputs to modern industry will be tomorrow—let alone a quarter or a year from now. If the inputs are so hard to get right, how could an output such as a share price, ever be predicted reliably and accurately?
One might counter that the analysts producing equity reports with price targets are not claiming certainty. They present their findings as a sort of best guess, given the best data available, the best math, the best intentions, etc.
It’s a price target, not a guaranteed future price. I get that.
But when they slap that thick report down on the investor’s desk, it hits with an impressive thud. The electronic version is so full of charts and data, most people don’t even scroll all the way down, let alone read the entire thing. The sheer size of the report achieves its rhetorical purpose—just as Das Kapital did for socialists for 100 years.
Simply put, the thud factor is a form of intimidation.
Don’t buy it. And if management can’t explain their value proposition to you in terms you can understand, don’t buy the stock.
Tuesday, August 21, 12:15pm, EST, 2018