[eddythompson80]

It’s a KPI just like any KPI and it’s gamed. A lot of random financial metrics are like that. They were invented or coined as a short hand for something.

Different investors use different ratios and numbers (ARR, P/E, EV/EBITDA, etc) as a quick initial smoke screen. They mean different things in different industries during different times of a business’ lifecycle. BUT they are supposed to help you get a starting point to reduce noise. Not as a the 1 metric you base your investing strategy on.

[jdiff]

I understand the importance of having data, and that any measurement can be gamed, but this one seems so tailored for tailoring that I struggle to understand how it was ever a good metric.

Even being generous it seems like it'd be too noisy to even assist in informing a good decision. Don't the overwhelmingly vast majority of businesses see periodic ebbs and flows over the course of a year?

[eddythompson80]

(sorry I kept writing and didn't realize how long it got and don't have the time to summarize it better)

Here is how it sort of happens sometimes:

- You are an analyst at some hedge fund.

- You study the agriculture industry overall and understand the general macro view of the market segment and its parameters etc.

- You pick few random agriculture company (e.g: WeGrowPotatos Corp.) that did really really solid returns between 2001 and 2007 and analyze their performance.

- You try to see how you could have predicted the company's performance in 2001 based on all the random bits of data you have. You are not looking for something that makes sense per se. Investing based on metrics that make intuitive sense is extremely hard if not impossible because everyone is doing that which makes the results very unpredictable.

- You figure out that for whatever reason, if you sum the total sales for a company, subtract reserved cash, and divide that by the global inflation rate minus the current interest rate in the US; this company has a value that's an anomaly among all the other agriculture companies.

- You call that bullshit The SAGI™ ratio (Sales Adjusted for Global Inflation ratio)

- You calculate the SAGI™ ratio for other agriculture companies in different points in time and determine its actual historical performance and parameters compared to WeGrowPotatoes in 2001.

- You then calculate that SAGI™ ratio for all companies today and study the ones that match your desired number then invest in them. You might even start applying SAGI™ analysis to non-agriculture companies.

- (If you're successful) In few years you will have built a reputation. Everyone wants to learn from you how you value a company. You share your method with the world. You still investigate the business to see how much it diverges from your "WeGrowPotatoes" model you developed the SAGI ratio based on.

- People look at your returns, look at your (1) step of calculating SAGI, and proclaim that the SAGI ratio paramount. Everyone is talking about nothing but SAGI ratio. Someone creates a SAGIHeads.com and /r/SAGInation and now Google lists it under every stock for some reason.

It's all about that (sales - cash / inflation - interest). A formula that makes no sense; but people are gonna start working it backwards by trying to understand what does "sales - cash" actually mean for a company?

Like that SAGI is bullshit I just made up, but EV is an actual metric and it's generally calculated as (equity + debt - cash). What do you think that tells you about a company? and why do people look at it? How does it make any sense for a company to sum its assets and debt? what is that? According to financial folks it tells you the actual market operation size of the company. The cash a company holds is not in the market so it doesn't count. the assets are obviously important to count, but debt for a company can be positive if it's on path to convert into asset on a reasonable timeline.

I don't know why investors in the tech space focus too much on ARR. It's possible that it was a useful metric with traditional internet startups model like Google, Facebook, Twitter, Instagram, Reddit, etc where the general wisdom was it's impossible to expect people to pay a lot for online services. So generating any sort of revenue almost always correlated with how many contracts do you get to signup with advertisers or enterprises and those are usually pretty stable and lucrative.

I highly recommend listening to Warren Buffets investing Q&As or lectures. He got me to view companies and the entire economy differently.

[jdiff]

No worries about the length, I appreciate you taking the time and appreciate the insight! That does help start to work ARR into a mental model that, while still not sane, is at least as understandably insane as everything else in the financial space.