How Did They Do That?

Neither Pete Butler nor Keith Pinkerton would have thought they would end up in Boise, Idaho.  But they have. Working together at Hooper Cornell, they have unlocked a mystery and given the appraisal profession a new tool.

We button-holed them at the recent ASA Advanced BV Conference and talked about what this experience has been like.

What is the Cliff’s Notes version of what you guys have come up with?

BUTLER: We’ve developed a way to quantify company-specific risk for publicly traded stock.  That creates a benchmark that appraisers can use for their privately-held clients.  Before this, company-specific risk was more a matter of guesswork.  We’ve quantified something that’s never been quantified.

How long was this idea in incubation?

PINKERTON: I remember posing a question to Pete that had been in my mind for about three years.

BUTLER: Keith was curious about issues related to public stocks and risk.  I started to research it and stumbled upon Professor Damodaran’s previously published concepts about total beta, which captures total risk.  It was an aha! moment when it occurred to me that I could start with this and get to company-specific risk.  In that sense, the incubation period might have been a matter of seconds.

PINKERTON: About a year into the development process, Pete walked in one day and began to talk about commercializing what we had come up with.  That was a second idea that went into incubation.  Now, we have an online calculator tool that has been co-ventured with Business Valuation Resources.  With appropriate inputs, the Calculator, known as the Butler Pinkerton Model, will examine both total risk, and risk allocated down to the company-specific level.

I know you had to expect that folks were going to take issue with your ideas.  Was that tougher than you expected?  Did it feel more personal to you because this was your work?

BUTLER: We weren’t completely sure what to expect.  We knew that it was a novel approach that was going to attract attention.  And, we knew we had our work cut out for us to get the word out.  We did a teleconference, produced some writing, and have spoken at national and regional conferences.  We want to continue those appearances and, at some point in the future, develop a CAVS course with ASA.  We think we’ve provided an empirical, market-derived framework that previously had no such structure.  We are confident that, over time, this will become the standard for analyzing company-specific risk.

PINKERTON: It’s interesting to me that we’ve had very little comment on the underlying academic articles, themselves.  Maybe people aren’t reading them.  We’ve defended the technique in some lively discussions, and had a good time doing it.  But, no one seems to question the foundation we built on.

Nobody knows where another great idea like this might come from.  What advice do you have for other professionals who are walking around with one in their heads?

BUTLER: Don’t be afraid to step up to the plate and subject your ideas to peer review and/or potential criticism.  You can’t be afraid of that.  You have to be a leader to step forward with your idea.  Bounce your ideas off your co-workers and friends in the industry.  When Keith did that with me, we ended up going in an entirely new direction that provided some great intellectual stimulation for both of us.

PINKERTON: Challenge the conventional wisdom.  This is an industry where you are selling an opinion.  And if that’s based only in ‘art’, you’ve got a problem.  If you, as a young professional, can find a way to remove subjectivity from that opinion, you are doing everyone in this industry a service.  Even if the idea does nothing but elevate the debate and make all of us sharper, you’ve done a service to the profession.  Have at it!