How much information is too much to process? How big can an organization get before it would be impossible for a CEO to understand the intricacies and domino effects of each decision? My take is that it doesn't have to get that big. I define configural processing as the process of evaluating, weighing, and understanding interwoven effects of the parts of a whole. A complicated definition for sure so let's take a look at three examples that are relatable:
Example 1: Citigroup. Citigroup is the classic definition of too big to fail. Their business units that number in the hundreds are so interwoven in the global economic picture that unwinding them could prove fatal to the whole system. How could one person (CEO) or even a group of people (Board or Office of the CEO/Chair) possibly understand the relationship and intricacies of all of those units? If you are evaluating 100 units that compromise of a total of $1T in assets, how can you make an expert decision in all of them? It's impossible. Further, it would be impossible for a securities analyst to possibly try to value the company, the 10K isn't required to go into enough detail to intimately understand each unit. I proposed that Citi is a case of the parts being worth more than the whole - if it were broken up, each autonomous business would be better off. Case in point being the sub-prime crisis where some divisions were continuing to underwrite subprime mortgage while the trading desks couldn't unload them fast enough.
Example 2: Coca-Cola. On the exact flip side of the equation I propose KO. Produce, bottle, and distribute a proprietary liquid. Now this seems like a business that a human being could wrap their head around. Is it that simple? No. A CEO would still have to be experienced in bottling, distributing, exchange rates, branding etc. but all along one product line. Reading through a KO 10k, its written in real english, terms and values that an average human being and certainly an analyst can understand. Evaluating and making an investment decision with some degree of certainty, I propose is much easier with KO.
Example 3: Berkshire Hathaway. The king of kings for all things investing. Not only do Charlie and Warren only invest in businesses they understand such as KO (the author has no comment on WFC common), they leave the management in place of the companies they acquire fully. They expect each business to operate with autonomy, holding each accountable for their performance, not allowing businesses to become intertwined or share resources. They've created possibly the greatest business in the world by acquiring Example 2 type businesses and not allowing management to destroy themselves by getting too large.
So what can be taken away from this analysis? Its naive to assume with any degree of certainty that you can place a reasonable value on a business as complex as an investment bank. I suspect that many analysts that cover such companies as C (whose earnings forecasts are perpetually wrong anyhow) have so many variables to consider that they can't possibly make a reasonable prediction aside from looking at previous results and guessing macro climates. Even if they are correct, are the theorems that made them correct proven out or is it by chance? Stick to your circle of competence. Be humble on what you understand. Ignore popular opinion.
