Quantify the Downside
We begin each investment analysis by making the case for why we shouldn’t invest. We strive to quantify the downside stock price if our thesis is wrong or in the event of a major market sell-off. If we cannot quantify the downside, we do not invest regardless of the upside potential.
Estimate Upside Potential
We use our own independent research to explicitly define a fundamental investment thesis linked to key return drivers, with incremental upside optionality resulting from restructuring, new products, margin improvement and industry dynamics. Our goal is to find intrinsic value that the market has overlooked.
Assess Reward-to-Risk Ratio
We combine the scenario stock valuations quantified in the first two steps into a Reward-to-Risk ratio. Rather than invest based solely on our opinion of the likely outcome, we seek a ratio of 3:1 between our upside target and downside target. We believe this mitigates overconfidence and confirmation bias, acknowledges uncertainty, and ensures the risks we bear are far smaller than the potential rewards.