Moving Beyond the "What" and "Why"
The "so what?" is the most important question in financial analysis. It's what separates a good analyst from a great one. A great analyst doesn't just tell you what happened and why. They tell you why it matters and what you should do about it.
Case Studies
Case Study 1: Peloton
The What: Peloton's stock price has fallen by more than 90% from its all-time high.
The Why: This is due to a variety of factors, including the reopening of gyms, a series of safety recalls, and a general slowdown in the demand for at-home fitness equipment.
The So What?: Peloton is a cautionary tale for investors who get caught up in the hype of a hot stock. It's a reminder that even the most popular companies can fall on hard times. For existing investors, the "so what" is that they need to decide whether to cut their losses or double down on the stock. For potential investors, the "so what" is that they need to do their own due diligence and not just follow the herd.
Case Study 2: The Housing Market
The What: The housing market has been on a tear in recent years, with prices reaching all-time highs.
The Why: This is due to a combination of low interest rates, a shortage of homes for sale, and strong demand from millennials.
The So What?: The hot housing market has created a lot of wealth for homeowners. However, it has also made it more difficult for first-time buyers to enter the market. The "so what" for policymakers is that they need to find a way to address the housing affordability crisis. The "so what" for potential homebuyers is that they need to be patient and not get caught up in a bidding war.
The "So What?" Checklist
- Why does this matter?
- What are the implications of this?
- What should we do about this?
- Who is affected by this?
- What are the potential risks and opportunities?
- What is the long-term outlook?
How to Communicate the "So What?"
The way you communicate the "so what" will depend on your audience. Here are some tips for tailoring your message to different audiences:
- CEO: Focus on the big picture. What are the strategic implications of your analysis?
- Portfolio Manager: Focus on the investment implications. Should we buy, sell, or hold?
- Retail Investor: Focus on the personal finance implications. How will this affect my a-zA-Z0-9's?
Case Study: Tesla
The What: Tesla's stock price has been on a rollercoaster ride in recent years.
The Why: This is due to a variety of factors, including the company's innovative products, its charismatic CEO, and the growing demand for electric vehicles.
The So What?: The volatility of Tesla's stock price presents both opportunities and risks for investors. A risk-averse investor might want to stay away, while a more aggressive investor might see it as a buying opportunity. The "so what" depends on the investor's individual circumstances and risk tolerance.
Example: A Company's Declining Margins
The What: A company's profit margins have been declining for the past three quarters.
The Why: This is due to rising input costs and increased competition.
The So What?: The declining margins are a threat to the company's long-term profitability. Management needs to take action to address this, either by raising prices, cutting costs, or finding new ways to differentiate its products.