By Norman F. Klopp, Jr., CFA, Partner

The Securities and Exchange Commission recently released regulations detailing its new policies regarding how companies deal with disclosure of information to individual analysts, or to groups of analysts. Essentially, these regulations require public disclosure of any comments about the earnings outlook. But, more importantly, they also cover other information that had previously been considered immaterial.

Nothing of value?

Some companies, reporters for the financial press, and many analysts and portfolio managers, have decided that this negates any advantage that independent investment research has. They say it has “leveled the playing field” such that there is nothing of value to be gleaned from calling on a company management.

Over the last 35 years in the investment management business, I have heard this many times over – most recently relative to the Internet eliminating the advantage of research. My partners and I believe differently.

Let’s define “research”

Perhaps the issue here is the meaning of “research.” If “research” means meeting with the investor relations person at a company to review an earnings model and discuss the current quarter and year’s estimate, then we say “yes” – these moves by the SEC “level the playing field” for “normal” research and increase the advantages of “creative” research.

But, if firms such as Midwest Investment Management develop good industry trend sources, know a company’s competitors, customers, suppliers and other factors that influence the company’s future, then we believe we can add even more investment value than in the past!

“Real” discussions pay dividends

Also, if we can spend our time talking with the company’s senior managers about their long term strategy, their product development, their productivity improvement programs, their competitive advantage, their incentive compensation system and what wakes them up at 4 a.m. in a cold sweat – we can add significantly more investment value than discussing what the company might earn in the third quarter of 2000.

In our opinion, research is not dying. It is constantly evolving, as it has always evolved. It is the true “art” of the investment management business. As one of our partners once said – “it is the process of connecting the dots.” And as research evolves, some of the dots become less clear and others clearer.

If you have questions or comments about this new SEC regulation, you may contact Norm Klopp at (216) 830-1135 or e-mail: nfk@mimllc.com .

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Perspective is published quarterly by Midwest Investment Management LLC, Cleveland, Ohio for its clients, friends and members of the business community. All information contained herein reflects the opinions of the authors and does not necessarily constitute investment advice. Past results are no guarantee of future performance. ©2000, Midwest Investment Management LLC. All rights reserved.