Lesson 7 of 8
What a broken rail does not mean
One email, once, when a figure stops being true. What that establishes, the four things readers conclude from it anyway, and why the second email never comes.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- A breach means one filed figure stopped satisfying a condition you wrote. That is all it means.
- The email fires once. While the condition stays broken nothing further is sent, and a recovery is recorded in the inbox without an email.
- The four wrong readings are that it is a sell signal, that it is new information, that it is about the company rather than about your reason, and that silence means nothing has happened.
The product exists to send this email and sends very few of them. It is worth being exact about what one means, because a reader meeting their first breach will supply a meaning if nobody has supplied one.
What one breach establishes, and what readers add to it
What it establishes
- One filed figure crossed a level you set.
- The reason you attached to that figure needs re-reading.
- New evidence exists, on a date you can name.
What it does not
Four wrong readings
- That anything should be sold.
- That the information is new to the market.
- That something is wrong with the company.
- That silence, in other months, means nothing happened.
The left column is what the email says. The right column is what readers conclude, and none of it follows.
One email, once
The state machine is deliberately dull. A rail that was holding and stops holding sets a breach, writes an inbox item and sends one notification. While it stays broken, nothing further is sent and only the current value is refreshed. If it recovers, the breach clears and a recovery item is written to the inbox with no email, and the rail is re-armed for next time.
So a reader gets at most one email per condition per episode. That is the whole promise: silence when nothing breaks, one message when something does, and never a second one nagging about the same fact.
Wrong reading one: it is a sell signal
It is not, and the product has no view on whether anything should be sold. What it is is a prompt to re-read the reason you attached to that figure and decide whether it still holds. Sometimes the answer is that the reason has failed; sometimes it is that the level was wrong; sometimes it is that the figure moved for an accounting reason.
Wrong reading two: it is new information
The credit conditions course measured the lag: an annual figure describes a twelve-month period whose midpoint is roughly a year before the filing is readable. Anything a breach reports has been public since the filing date and was in the accounts before that.
The value of the email is not that it is early. It is that it reaches you at all, about a condition you wrote and would otherwise have forgotten.
Wrong reading three: it is about the company
A condition is a statement about your reason for holding, expressed in a figure. When it breaks, the thing that has changed is the standing of your reason.
At a company where the figure moved for an accounting cause, nothing about the business changed at all. The balance-sheet course gave the case: a debt-to-equity condition can break in a year when the company borrowed nothing, because equity moved.
Wrong reading four: silence means nothing happened
The most expensive of the four. A rail that is holding and a rail that can never fire produce the same silence, which is why the third lesson of this course exists and why the reader is told once when a rail is unevaluated.
And a maturity four years out breaks nothing at all until it arrives. Silence is evidence that these conditions did not break. It is not evidence that nothing changed.
Check yourself
A condition breaks and stays broken for four months. How many emails are sent?
- One a month
- One, at the moment it breaks; nothing further while it stays broken
- One at the breach and one at each quarterly filing
Show the answer
Answer: B.
A recovery is written to the inbox without an email, and the rail is then re-armed for the next episode.Why is a breach not new information?
- Because the product publishes it openly
- Because a filed figure describes a period that closed months earlier and has been public since the filing date
- Because the market reacts to filings immediately
Show the answer
Answer: B.
The value of the email is that it reaches you at all, about a condition you wrote and would otherwise have forgotten.What is the most expensive of the four wrong readings?
- Treating it as a sell signal
- Treating silence as evidence that nothing changed
- Treating it as news
Show the answer
Answer: B.
A holding rail and a rail that can never fire sound identical, and a maturity four years out breaks nothing until it arrives.Sources
- The product's own methodology page, for the state machine described above and for the states a rail can be in.
- Form 10-K, General Instruction A(2), and Form 10-Q, General Instruction A(1), for the filing deadlines that set the lag.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The four-rail table is illustrative of the states rather than a report about any company's monitored conditions.
- The behaviour described is the behaviour at the time of writing. A reader should treat the product's own methodology page as the current statement of it.
- Nothing here is advice about any security.