Rationale behind the purchasing decision
- Loss aversion leading to overreaction to negative news
- Diagnosis of problem
security breach leading to loss of customer data
- missing security patch of open source Apache software
- root cause of problem
failure in data management process in company
- Inputs collected on company's position in market
there are 3 competitors in this space in total
- significant barrier to entry for new entrants
- main value it provides is credit scores for consumers who need to get loans from Banks in US
- company has a suitably well entrenched position in the market
- Comparative analysis
Prior of Equifax occurred in 2013 when President Obama and wife's personal information were stolen:
- Occurrence levels of security breaches: 9 billion since 2013
- Worst case scenario analysis:
Maximum fine ever sustained by company for similar scenarios:
Company name: AT&T
- Fine amount: USD32 million
- Market Cap: USD241 Billion
- Fine / Market Cap: 0.13%
- General average market statistics
5% drop in average stock price the day the breach is announced
- 7% loss of customer
- 31% consumers discontinue relationships
- Other worst case scenarios
Bank of America
Fine amount: USD17 Billion
- Current market Cap: USD271.84 Billion
- Fine / Market Cap: 6%
- Calculation for purchasing decision
Share price drop from USD146 to USD93
- Total market Cap losses: USD5Billion
- Total market Cap before drop: USD17 billion
- Drop / Market Cap = 29%
- Max Potential Fine = USD32 million
- Revenue from 2017Q4: USD832.2 million
- Market Cap versus Max Fine:
USD5 billion versus USD32 million
- Revenue versus Max Fine:
USD832.2 million versus USD32 million
My psychology/emotions during the 2 weeks process
- Day 0
Heard about the incident from a colleague
- Figured out what caused the problem
- Gave a 5 second thought to how rationale the pricing is
- concluded the pricing did not make sense given the root cause of the problem
- Checked with friend his concern
worried about law suit and potential fine
- Day 1 - September 22, 2017
Checked the price - USD96
- Bought 10 shares
- Just felt like testing it with throw away money
- Day 2
Checked the price - USD99
- Bought 100 shares
- Felt more confident my assessment was correct
- Checked fundamentals
PE ration seem reasonable - 20
for a well entrenched tech company as opposed to other tech companies
- Return on Equity was healthy - 20.17%
- EPS was up 17% in 2016
- Classified company in the growth category
- Day 3
Checked the price - USD 103
- Bought 110 shares
- Didn't want to miss this opportunity to ride a price correction
- Day 4
Checked the price - USD 105
- Bought 150 shares
- Doubled down
- Day 5
Checked the price - USD 104.75
- Saw the drop in price, felt some hesitation
- check my gut feeling to figure if I still felt confident of my assessment
- Still felt sure
- Bought 150 shares
- Day 8
Checked with chiropractor his thoughts about the company in general
mainly worried about the data loss
- mentioned many breaches has been occurring
- Day 12- 20171007
Checked with friend his concerns
worried about law suit and potential fine
- said they already got sued
- mentioned he researched into other similar companies that wanted to do credit rating. Said it was hard to get into space
- Day 12
Check general statistics in market
- Day 13
Further researched into details of the breach
gut feeling assessment:
they knew about the issue since May
- has been preparing to handle the legal issues for the past 2 months
- announced the breach after the all prepared
- Checked the price before hearing - USD 108.75
- took a quick glimpse of the Congressional hearing
gut feeling assessment:
Ex-CEO took the flake in front of the hearing - a strategic move by the board.
- write blog
Document thought processes leading up to day 15
- Checked the price during hearing - USD 109.83
- Day 17- 20171007
Checked with friend again his concerns
Still similar
- Worried about the extent of the litigation
- Firing of CEO, CFO and CIO was a huge negative signal
- Proposed to wait a year before buying into the position
- Day 20 - 20171009
Saw share price rose above USD110
- Experienced dopamine rush
- Day 21 - 20171010
Saw class action lawsuit
- experienced Sinking feeling in the gut
- verified that max penalty was USD660K. Was reassured
- Day 22 - 20171011
Saw announcement that UK data was leaked. Saw potential of company losing license to in market
- experienced Sinking feeling in the gut. Concern that fundamentals might get negatively impacted
- Day 23 - 20171012
Saw announcement their customer support site was hacked
- not sure about their internal processes and expertise in managing software systems
- on the other hand, glad that they caught the malware
- saw share price dropped below
- experienced Sinking feeling in the gut, loss aversion bias
External References:
- 2013 Equifax security breach:
http://abcnews.go.com/Politics/equifax-confirms-hackers-stole-financial-data-launches-investigation/story?id=18715884
- Occurrence levels of security breaches:
http://breachlevelindex.com/
- AT&T fines:
https://www.esecurityplanet.com/network-security/att-hit-with-record-breaking-25-million-data-breach-fine.html
- General statistics associated with situation:
https://www.centrify.com/lp/ponemon-data-breach-brand-impact/?&ls=930-044-sem&utm_source=google&utm_term=%2Bsecurity%20%2Bbreach&utm_campaign=NA-NB-Agnostic-Breach-Search-BMM&utm_medium=cpc&utm_content=mkwid_suzcd36D3-dc_pcrid_216937838552_pkw_%2Bsecurity%20%2Bbreach_pmt_b_Security-General&gclid=CjwKEAjw6szOBRCF2sPTjfrJuXASJADDOLEFwJQcFMn54AS1DzOnNiuvSs-xCtibleht7lwEqEoTUxoCuJvw_wcB
- Equifax Earnings 2016:
https://investor.equifax.com/news-and-events/news/2017/04-26-2017
- Equifax hearing:
https://www.youtube.com/watch?v=4pgg2LCY8iE
- Book: *Principles, Ray Dalio*
inspired me to start documenting my decision making process
- First person accounts reference
CloudFlare memory leak driven data leak
- Current company's data breach