In my last article on investing using scientific research I talked about how I use scientific research to find companies I believe are undervalued. I’ve been thinking about this concept in general and realized that it’s far more expansive than just me using scientific research to invest. Anyone can apply their own knowledge and skillset to investing in the market, finding companies they believe are undervalued.
To start understanding why this works we first need to look at how financial professionals assess companies. I’ve had exchanges with ARK and Scorpion Capital, they have opposite positions in Ginkgo Bioworks. Neither group reads Ginkgo’s patents or critically evaluates their R&D. Strange, since Ginkgo is a new growth company without historical financial metrics to analyze. Yet both groups diligently plug numbers into their little models and watch more numbers get spat out. This is all they know how to do.
When I was in grad school I decided I wanted to go through the process of studying and writing the CFA level 1 exam. In doing so I learned that financial modeling is at the heart of what analysts rely on to provide them with insight into companies. The glaring issue is that growth industries can’t be assessed using the same metrics as industries with tons of historical data like banking. Yet ARK and Scorpion Capital only understand and know how to use financial modeling, this is how we can exploit the difference. They’re not questioning or attempting additional validation on their financial models, because they can’t operate outside of them.
When I was working on my undergrad I did a research project for 1 semester with a bioinformatician (uses computational tools to study life). We were looking at the evolutionary lineage of a variety of plant species. One of the first things he told me was that I should do my own research and draw out what I believe the evolutionary lineage between these plants should look like. He said that if I input the data into the computer program and it shows me something very different from what I’ve drawn, the computer program is probably wrong. This is because there are so many unknown factors, the modeling can’t account for all of them and we can’t predict how the program will try to interpret the data. Someone with good conceptual understanding of growth companies can gain an advantage over the market because they’re not using flawed modeling to try and understand these companies. I showed how I do this using science. I can’t forecast revenue, but I can’t conceptually evaluate the comparative economic viability of companies using different production methods.
I encourage our readers to try and do something similar with whatever background they have. Stick to what you know, try to apply what you know in different ways and find opportunities in the market others have overlooked because they don’t have the knowledge base.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author has no position in Ginkgo Bioworks or ARK.