The Mystery of Intangibles
Brad Holmes, ACSI, and valuing what we can't measure
It’s hard to explain what the Detroit Lions renaissance has meant for the people who live in Michigan. I’ve written and re-written this intro five times now and I still can’t find the words to say it that doesn’t sound cheesy or corny or over-the-top.
You think it’s just football. It is just football, on the field, I guess. But it’s also a lot more. It is the grit mentality proof-of-concept. It signals a changing of the guard. A new day, a new vibe. A point of pride for the city of Detroit.
And while Dan Campbell is the heart of the whole thing, Brad Holmes is the brain.
It's been a full 40 years since Bill James published his first edition of the Baseball Abstract. It’s been 22 years since Michael Lewis popularized it all in his book Moneyball. Sports analytics as an industry is fully mature - everything that can be captured is being captured, analyzed and quantified. There really isn't a whole lot more juice left to squeeze out of that lemon.
If you are looking for edge you’ll find more opportunity on the other side now. On the intangible side. You’ll find edge being better than anyone else at understanding human factors. Understanding what makes some people self-motivated and striving for perfection long after others peak early and then fade away.
This is where Brad Holmes excels. Brad Holmes is cool and calculating, and Brad Holmes is a master at quantifying intangibles.
Same dynamic is happening in finance. Quantifiable alpha derived from traditional factors and fundamental analysis has been analyzed and understood and mined and picked clean.
Not to say it is never coming back, but I have no crystal ball to tell me when the pendulum swings that way.
Whatever those forces are that swing the pendulum from momentum to value, from fear to greed, from prudence to recklessness, those are forces we do not yet understand.
And that is where we are in the cycle. Math and quantitative analysis will always be true. It will always be the purest way to look for alpha.
But it ain't where the opportunity is. Not anymore. And it ain't where the mystery is.
The most interesting part of any pricing model is now the epsilon. The residual. The remainder. The error term. That’s where the good stuff is.
It’s in the noise. The unexplained.
It’s in the things we can't fully quantify. It’s in the things we don’t yet really understand.
That’s where the mystery is. In the intangibles. That’s the stuff that is worth exploring.
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A decade ago I had a list of things to buy before the kids went to summer camp. Sunscreen, bug spray, a water bottle, that type of thing. So I was driving to Target to go get them when I stopped at a red light. I look to my right and there is a K-Mart right there. Target is another 10-15 minutes away.
It is basically the same store, how much worse could it possibly be? I pull in to K-Mart. Saved myself a few minutes.
And it was that much worse. The store was filthy. Items were missing, or they were on the shelf but missing a price tag. I go to check out and there are a dozen counters, but only one is open.
So I am waiting in line at the one open K-Mart counter and I’m really annoyed and I’m thinking that I’ll never make this mistake again. I’ll never shop at K-Mart again.
And I’m still waiting in line and now I’m thinking that I can’t be the only one. How many K-Marts are there, and how many of their customers will never return? That might not show up in this quarter’s earnings, but it will eventually. It’ll show up and it will compound.
So I get back to my desk and I start looking for data. How do I quantify this feeling? How do I quantify this intangible?
That’s when I found Dr. Claes Fornell and the American Customer Satisfaction Index. That is what led to the creation of the ACSI ETF, and to the creation of Exponential ETFs. That’s how it all began.
Oh, and that K-Mart closed soon after my trip there. Followed by the rest of them.
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My friend Kai Wu wrote a wonderful paper on investing in intangibles a couple years ago. He talks about how the best companies are now built on code, brand, and network effects - all intangibles - and how traditional accounting is blind to these assets. Blind to the most valuable assets.
The value investor who ignores intangibles is short innovation by default. Ignoring intangibles is like navigating a galaxy without acknowledging dark matter. The whole paper is fantastic and worth a read, and it all ties back to his ITAN ETF.
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I recorded a podcast with Hunter Hopcroft the other day and we had an interesting discussion about economics and REITs and writing and entrepreneurship. We had so much to talk about that we didn’t get to intangibles.
Hunter also wrote about the limits of traditional investment models, and how economics ignores what it can’t measure. Noise, not neat models, drives markets. The real signal is in the messiness.
“Since you can not possibly measure the things that matter, the things you can measure begin to matter” - Hunter Hopcroft
We can measure just about everything that happens on a football field. The reasons that some players and some teams exceed expectations are extremely hard to quantify, and it’s in that space where Brad Holmes excels. It’s in the intangible spaces that he was able to turn around the Lions.
And it is in that intangible space where there is infinitely more room to explore and question and test and measure and look for edge in markets.