Companies, mind your language 💬

Investors are turning to Natural Language Processing

This is edition 371 of Beyond The First Order, a premium daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia

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Good morning,

It’s all about having that edge. Facebook’s edge is Instagram. Australia’s edge is its migrants, and an investor’s? Turns out it’s all in the language.

What’s an investor’s edge?

When it comes to investing, every fund manager seeks out an edge. 

  1. It could be by trying to have a tete-a-tete with a company’s top official to glean some private information
  2. Maybe it’s by parsing financial statements with a fine comb to figure out if any accounting jugglery is taking place that could bring down the company
  3. Or it could be through superior research and diving deep into a select few companies so that you know everything about—things like succession planning

But it’s a lot of hard work. 

Regulators are mandating discussions in private meetings to be made public. Corporate statements have swollen in size—a report by  analytics company S&P Global says that in the US, the section dedicated to ‘risks’ in annual reports has tripled in length since 2006. And since accounting has not seen any real reform, it’s not optimised for the internet economy. Also, almost every fund manager worth their salt has pretty good access to company management, so everyone has the same information.

What happens is that once an investment strategy becomes popular, everyone jumps on the bandwagon and the advantage it once had disappears. Everyone’s on the constant look out for something new. Something better. Something that will bring back the edge. 

Here’s one that is heavily tech driven. 

According to Kai Wu, the founder of investment firm Sparkline Capital, that edge is by employing natural language processing (NLP) on the exponential jump in unstructured data that’s out there. This is not data on a spreadsheet, instead, it’s text, images, videos, and a bunch of other things. 

For example, company culture cannot really be gleaned from any accounting report but it could have a significant impact on productivity, and in turn, the bottom line of the company. Which further translates into superior stock price performance.

And no one person can go peruse all the data that’s out there on a company. All the management interviews, random conversations, Glassdoor reviews. And that’s where machines have to do the trick and compute things like semantic similarities that’ll help make investment decisions.  

Wu’s post about this “text-based” investing and platform companies from May is very interesting, so you may want to read it in its entirety here

Let’s turn to Joseph Mezrich of investment bank Nomura (who has also used NLP for ESG-related performance) for another solution. A simpler one.

Listen in to a company’s earnings conference calls when they discuss their earnings and provide guidance for the next quarter. And if you sense a lot of jargon and gibberish being thrown around, then you’re likely to have a stock that does poorly in the long-term 

As Jason Zweig, a columnist at Wall Street Journal put it:

Perhaps companies with something to hide try to bury it under a blizzard of blather. Maybe corporate executives who can't be concise suffer from muddled thinking that undermines their goals. Or the numbers could just be a coincidence.

Either way, while it sounds simple, you’re probably going to need NLP to parse through all the text in these transcripts too before you come to an investment decision. Things are definitely not getting simpler when it comes to finding that ‘edge’.

Unless you buy a meme stock, of course.

Australia needs India to jumpstart its economy

Countries are doing everything they can to restore their Covid-ravaged economies. After stimulus packages, moratoriums, subsidies, Australia wants to woo foreigners to contribute toward rebuilding its economy by creating a special class of visas to attract overseas workers

The visa will streamline entry requirements to allow the rapid relocation of workers critical to establishing a business in Australia. Fewer than 500 of the temporary Activity (subclass 408) “Post Covid-19 Economic Recovery Event” visas are expected to be granted during the next 10 months, before the program is designed to expire.

“These visa holders are bringing the skills, investment, and new ideas that employ Australians and keep us internationally competitive for years to come,” Home Affairs Minister Karen Andrews said in the statement. “They’re adding to our economy, generating new jobs, and contributing to our tax base so we can continue to provide the essential services all Australians rely on.”

As it is India is already the third largest migrant community in Australia, and this could only increase as more Indians are on the lookout for such opportunities. 

At least half-a-dozen visa and immigration service providers told ET they have seen a 20% surge in queries in the past two months and the number is expected to go up in the coming months as people recover from Covid. The increase in queries is a little more than 25% from the past year with the majority of them coming through referrals and word-of-mouth recommendations.

For qualified Indians, Australia’s open invitation is another bargaining chip in a market that is already facing a talent crunch. 

And it turns out the American alternative investment management company Blackstone couldn’t have picked a better moment to spend US$1 billion to buy VFS Global, the world’s largest visa outsourcing company. 

Facebook’s living a lie

“The research that we’ve seen is that using social apps to connect with other people can have positive mental-health benefits.” 

That was Facebook’s CEO Mark Zuckerberg at a congressional hearing in March 2021 when asked about children and mental health.

Either he thought that the people asking him questions were stupid, or he really got himself to believe in that. Because this is what a Wall Street Journal investigation of Facebook’s internal documents showed.

“Thirty-two percent of teen girls said that when they felt bad about their bodies, Instagram made them feel worse.”

“We make body image issues worse for one in three teen girls,” said one slide from 2019

“Teens blame Instagram for increases in the rate of anxiety and depression,” said another slide.

Among teens who reported suicidal thoughts, 13% of British users and 6% of American users traced the desire to kill themselves to Instagram, one presentation showed.

Instagram’s focus on body and lifestyle compared to other apps means that the core purpose of what the photo-sharing platform has become is the very problem. But as Facebook’s daily users drop, Instagram is really Facebook’s answer to TikTok, Snapchat, and other such similar social media platforms. With nearly 1 billion active monthly users, and 40% of its users being 22 years or younger, Facebook needs to keep its teen base hooked. Even though they know that that target audience is negatively impacted. 

Previously, researchers have said that there is correlation between social media use and depression, but many of them have refrained from pointing it out as the exact cause due to a lack of data. Facebook’s internal findings definitely change that. 

According to clinical child psychologist Mary Fristad, are developmentally more worried about peer status and approval during pre-teen and teenage years. Social media exaggerates that process, she says, because it's so public, available, and highly visual. It's like "taking what happens in typical adolescent development and putting it on steroids."

And at a time when schools are still battling with reopening dates as the pandemic rages on, what this means is that unless social media in its current form is killed, it could create a generational shift in mental health issues that has far-reaching consequences. 

PS: Facebook’s plan to launch an Instagram-like product for under-13s is still in the works. 

That’s it for today.

Don’t forget to write in with your thoughts and observations on the reshaping of businesses, societies, and economies. We will be back tomorrow.

Stay safe,

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