Friday, March 7, 2008

Accountability: Does Yours Add Up?

This past weekend, I walked into my upper west side laundromat to let them know that the wash-and-fold laundry they had returned to me was missing 5 garments. Upon the discovery of my missing items, I thought “Hmm. This must happen from time to time. They must have a lost and found for lost/dropped items, or a way to contact other patrons to track down misplaced pieces. I’m certain this can be resolved.”

To my dismay, not only did the store not have a lost and found, or a system to track down my (favorite) lost items, but the owner adamantly demanded that I “go home and check again” and assured me that her laundromat (and I quote):

“Does Not Make Mistakes.”

This statement infuriated me. I assured her that her business should certainly win an award, because if they in fact had never once made a mistake, as she claimed, then they were the first business in the history of all business to do so. I stormed out steaming, and short $600 worth of my favorite garments, with no one to hold accountable for my loss.

Once cooled off, I started to think more about accountability, and more importantly - lack thereof.

“Your First Loss Is Your Best Loss.” (‘Ace’ Greenberg)

Katherine Burton, hedge fund reporter at Bloomberg News and writer of the book Hedge Hunters, noted at a recent conference that the main thing that sets a great hedge fund manager apart from a mediocre one is their ability to reverse a position – or more specifically, ability to say “I was wrong” and get out of the water before the damages become too great to overcome. This, I thought, is what it means to be accountable. This, is what 'Ace' Greenberg (and the many others who have used this line) meant when he said “Your First Loss is Your Best Loss.” Mistakes will be made in any business (even at my delusional, former UWS Laundromat), but having strategies and processes in place to mitigate risk will help contain damages.

It seems many bulge bracket firms haven’t quite nailed this delicate risk/reward balance either, and instead, the research provided by these firms often sticks with any calls or positions it takes - despite prudent cause to adjust their recommendations.

Perhaps you’re thinking this is responsible, for analysts to not waver greatly in their positions, so as not to upset the overall flow of the markets. But if that is your contention, I would counter with one simple term, which quite succinctly embodies the type of thing that occurs when analysts are 'locked in' to positions:


We agree that there is a balance that must be achieved, but we also think that analysts should have the freedom to weigh in the factors they believe are most pertinent. That is, by way of their title, what ‘analysts’ are suppose to do, isn’t it? Analyze the facts at hand, and make recommendations accordingly?

Fortunately, the independent research world has created a safe-haven for analysts to properly utilize their abilities. If they change their mind about a position, they are well within their rights to say so. On the contrary, if they adamantly stand by a call, despite absolute upheaval in the markets, they’re welcome to hold true to that as well – but the point is, they make calls based on all of the factors they feel are relevant to take into account, not the set of factors that are afforded them. Particularly in a volatile market, the ability to be nimble is a critical element for responsible, accountable analysis.