Editor's note: Don't let narratives drive your decision-making...
In the investment world, it's easy to become enamored with a company based on positive headlines, well-executed earnings calls, and encouraging metrics.
But according to our colleague Gabe Marshank, real investing – the kind that helps you generate market-beating returns – often begins outside of a good story.
In today's Masters Series, Gabe details how he learned to look past the "perfect pitch" to uncover the numbers that tell you the truth about any potential investment...
What a Tiny Plane Ride Over North Dakota Taught Me About Wall Street
In the investment world, it's easy to fall for a good story.
The glossy investor decks... the well-rehearsed management calls... the perfectly timed CNBC appearances. They create an illusion of clarity and control. But real investing – the kind that helps you generate market-beating returns – often begins outside of a PowerPoint deck.
I learned that one morning flying over the Williston Basin in a 1960s-era Mooney airplane, squinting through the cockpit glass at an endless patchwork of shale rigs.
It was 2014, and I was working for David Einhorn as an analyst at Greenlight Capital... trying to crack the code of U.S. shale-oil companies.
They looked great on paper. But the spending assumptions were aggressive, and the production estimates were even more so. They were supposed to be fantastic businesses... and yet, they couldn't seem to simultaneously generate cash and grow.
For a good business model, this should be like walking and chewing bubble gum. In short, something didn't add up... But every sell-side report I read echoed the same bullish narrative.
So I got on a plane and flew to Bismarck, North Dakota...
Not for a slick investment bank conference, but a humdrum industry gathering in a regional hotel ballroom.
My colleague, Josh, and I headed to a bar near the conference to see who we could meet. We got to chatting with a local guy, Tony, who became our pal for the night.
He worked a day job in the oilfields. But his real love was flying his restored, single-engine Mooney airplane, which looked like this:
The next morning, true to his word, he showed up at a rural airstrip ready to fly us over the giant Bakken oil basin.
As we banked over pumpjacks and pipelines, the inconsistencies were impossible to ignore.
The geography was brutal... the infrastructure was patchy... and with the seasonal challenges of operating in sub-zero winters, the operators were flat-out spending too much in order to grow.
None of that fit into the spreadsheet narrative Wall Street was peddling.
Our pilot Tony laughed. "Those analysts are trying to drill wells in Excel," he told us. "It's a lot easier in a spreadsheet than it is in the real world."
That trip sealed it for me: These shale players weren't the next great American growth story...
Analysts were only accounting for the cost of drilling a well, not the infrastructure required to get the supplies to (and energy from) the wells. Capital expenditures were blowing past expectations. The whole business was spiraling into a financial black hole.
We shorted the stocks and made our firm a fortune as the story unraveled.
Eventually, just about every CEO in the industry was replaced. And all the new ones came in singing a song of "capital discipline." In other words, they admitted they were spending too much... just as we had already figured out.
That's the power of "numbers over narrative."
By design, Wall Street sells narratives. But narratives are smooth. Reality isn't. To uncover great investments, you have to find where those two diverge.
Sometimes, the narrative is sheer panic...
In August 2003, much of the Northeast and Midwest U.S. and parts of central Canada suffered a widespread power outage just after the stock markets closed.
Panic spread and futures plummeted. People thought it could be a terrorist attack. But my utilities analyst pulled up grid-level data and told me it was simply a cascading failure. We told Steve Cohen, who bought index futures while the rest of Wall Street froze.
The market snapped back once everyone else caught on to what we already knew. We booked millions in profits. Again, it was a case of numbers over narrative.
Even when the numbers aren't obvious, the truth is out there... if you're willing to work for it.
In 2015, I took 15 trips to China – all so I could study iron-ore demand. And I wasn't visiting Beijing or Shanghai.
I was going to second- and third-tier cities, where construction dust hung in the air and cranes dominated the skyline. I wanted to see the real levers of Chinese real estate finance for myself... to figure out what they meant for global commodities.
That's not standard practice in finance, but it works. Because sometimes, the story sounds good, but the numbers tell you the truth.
A management team might promise discipline. A news anchor might call something a "once-in-a-lifetime opportunity." But reality has a way of humbling the headlines. The numbers don't care about your story... And eventually, the market follows the numbers.
So next time you hear a "perfect pitch," ask a harder question... look for the footnotes... check the balance sheet... and consider what could go wrong.
Or better yet, take a flight over the oilfields yourself. Remember, real investing starts where the PowerPoint ends.
Regards,
Gabe Marshank
Editor's note: After two decades of managing hundreds of millions of dollars for some of Wall Street's most respected investors, Gabe is finally laying out his highest-conviction idea... one he believes could lead the next wave of technological disruption.
For those paying attention, this could be the kind of opportunity that leads to 25-fold returns. Get the full details here...