Non-Material Information

Publicly filed documents can only take an investment analyst so far — Other information is generally deemed “non-material” — Discovering unpublished information leads to a variant viewpoint.

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NON-MATERIAL INFORMATION

Most information required to understand a business is not written down. As regulatory requirements regarding public filings have grown, annual reports have become legal exercises as opposed to informative documents. Today, publicly filed documents can only take an investment analyst so far.

A reliance on public filings creates a gap many investors fail to bridge. Passive investors ignore individual businesses, taking the good with the bad. Quantitative investors limit their analysis to financial statements and alternative data sources, ignoring a business’s operating model, strategy, and leadership. AI-based investment research can only access information that has been digitized.

Non-material, non-public, non-published information is, legally, deemed non-essential. But this hidden information is often the key to stock selection and outperformance.

Understanding A Business

At a high level, understanding a business is easy. A business produces a product, a sales force sells the product, and employees ensure this product is delivered and working as advertised to customers. But this understanding does not allow an investor to predict how a business will perform in the future.

To look into the crystal ball, we must follow the incentives. Every decision made, by every employee, will be influenced by the incentive structures within the business.

Will a salesperson cut price to hit a revenue target or walk away from low margin sales due to a gross margin target? Will factory workers sabotage efforts to automate, fearing for their jobs, or embrace robotics, seeing higher pay in exchange for developing their skills and productivity? Will a customer support representative stay late to satisfy a customer, or leave the customer on hold indefinitely?

These daily decisions are the difference between growing profitably, operating efficiently, and satisfying customers…or not. These decisions either create or destroy shareholder value. Yet the incentive structures that determine these decisions are deemed non-material to investors.

Understanding An Industry

Pricing power may be the most distinguishing attribute of exceptional businesses. But few businesses can unilaterally charge their customers more on an annual basis without competitors taking share.

Industry dynamics are rarely discussed in public filings as disclosing details could risk violating antitrust regulations due to potential collusion concerns.

The “Competition” section of annual reports has become so standardized and watered down that few businesses even bother to list the names of their competitors, much less the level of competitive intensity in the industry. Today, all businesses operate in “extremely competitive environments,” yet investors know competition varies across industries and geographies.

Discussing these dynamics with industry participants reveals valuable insights into pricing power and sustainability of earnings.

 Understanding Management

Leadership is difficult to assess, and therefore deemed non-material. Public documents typically offer only brief, fact-based biographical information on management teams. Occasionally a CEO will share an annual letter, providing a glimpse into their leadership style and strategy.

But many of the world’s greatest investments have been the result of leadership alone. Steve Jobs rescuing Apple and delivering the iPhone, a product that was unimaginable to most investment analysts at the time. Jeff Bezos and his unique, anti-bureaucracy management style, building Amazon into a retail behemoth. Elon Musk’s indefatigable pursuit of results, sleeping on floors with his teams until roadblocks are removed.

Individuals can feel when they are in the midst of a genius. The fortunate investors who met these leaders were often in awe of their presence. This undefinable feeling has led to outstanding investment returns and is not accessible through SEC filings.

The Value of Non-Material Information

Over the long-term, non-material factors determine a business’s fate. As long as regulations permit investors to dive into incentive structures, competitive dynamics, and leadership capabilities, active investors have the opportunity to add value.

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AI Sidenote

AI can only analyze information that has been recorded, digitized, and, allegedly, made available in the public domain. As the world has seen in the past 18 months, AI can do incredible things with this information, but there are obvious gaps where information is not accessible. These are the gaps that active investors must exploit to remain relevant.

In a fully AI-enabled future, AI investors could query a company’s AI chatbot to ask for the non-material information stored in the business’s operating policies, compensation schemes, etc. However, businesses are unlikely to share such sensitive data, as complete disclosure risks competitive harm.  

AI’s data limitations are often discussed and will be a critical challenge to public market investors. These limitations will persist unless all interactions between a business and investors are recorded, digitized, and made accessible.