View From a Height

My first year in college, I was introduced to Bill James. He practically invented modern baseball statistical analysis, making up new statistics like Runs Created and Win Shares to measure performance. He created the baseball Pythagorean Theorem relating runs scored/allowed and wins. He quantified mean reversion for teams that showed unusual improvement, and showed how stolen bases are overrated, and explained park effects.

He did this by doing what any good analyst does - asking the right questions, collecting as much data as possible, and then putting it together in inventive and original ways.

Which is also what any good financial analyst should do. Any competent analyst can look up the numbers, harmonize financial statements across competing companies, and compare the existing ratios. Anyone with a decent background can create fairly good spreadsheet models. (This isn't to say it's easy; nothing's easy; only to say that it's part of an analyst's basic skill set.)

But a really good analyst, a creative guy who's trying to push back the frontiers a little, will invent his own stats, invent his own ratios, his own ways of looking at the numbers. Maybe there are ways of describing how a company manages its debt, or what it's raising it's debt to do, that are different from simple debt ratios or capital structures. Maybe there are ways of including other long-term liabilities (read: pensions) into the model. Cash flow statements are still relatively new, but the main ratios to come from them use the overall cash flow number, and Quality of Earnings (how much income is from operating cash flow). There must be other ways of using all those line items.

The great revelation for me, as a programmer who had never really thought much about the nuts and bolts of the system that I earned my living in, was that the line items on the financial statements represented ideas and concepts, not just bookkeeping entries. I'm just starting out, so for me, it's largely a matter of mastering the existing tools. But the fun part, and the part that more analysts ought to be focusing on, is putting those numbers together in new ways, to tease out new information, and to describe businesses - and even whole industries - in new ways.

Otherwise, we're just a batting-average outfit in a OPS world.