The hardest part of investing is having to make decisions with less than perfect information. Information is imperfect because important chunks are missing (sometimes legitimately, other times from poor disclosure) and also because it is being provided by a biased source: management. Both of these issues can lead investors to make mistakes.
One technique we use at Forager to guard against being misled involves a bit free thinking. With a basic understanding of what your company does, but before you take a look at management presentations and commentary, write down a dot-point list of everything you would need to know to make a fair valuation of the company.
That can include information you expect to be provided, but also things that might be published or in fact not actually known to anyone. For example for Freelancer, a website designed to facilitate the outsourcing of small projects, I came up with the following:
Size and growth in website user and freelancer base
Potential size of the global market
Customer stickiness – quality of user experience, switching costs and network effects
Market penetration and user engagement on competing services
Risk of obsolescence
Once this is done then go look at the management pack. The incompleteness and bias of management commentary should now stick out like a sore thumb. In Freelancer’s case management loves to talk up user growth and the potential size of the market, but the last three dot-points on my list are barely discussed at all.