Our investment process summarized
Proprietary search algorithm deployed to identify potential behavioral mispricing
We utilize a quantitative approach—an effort that we have internally developed over the past three years—to identify mispriced securities among the 4,000+ U.S. publicly traded equity securities.
Quantitative and qualitative methods used to distinguish actual mispricing from market efficiency
This step of our investment process is an act of removal. We identify and effectively separate true behavioral mispricing from ideas that are more likely the result of market efficiency. This part of our process creates a feedback loop that allows us to continually monitor and improve our algorithm.
Fundamental research conducted on individual investment candidates to determine critical factors
We do fundamental research and valuation and accounting analysis to determine the factors critical to our investment thesis. Our valuation models help us determine the market-implied probabilities surrounding the critical factors. We utilize a Bayesian approach to assess the market’s views on the critical factors and we evaluate the size of the mispricing.
Deep research process
Market’s beliefs about critical factors and behavioral mistakes identified
After we have identified the critical factors and the most attractive ideas with asymmetric risk/reward characteristics, we do extensive research on them to understand the market’s current view. Our research, which ranges from scuttlebutt research to interviewing industry experts, helps us understand the reality surrounding the critical factors and assess the most accurate probabilities for each possible scenario.
Portfolio and risk management
Rigorous buy and sell discipline based on prospect theory and the endowment effect applied
This is the last step of our process, where we select the stocks for the portfolio and we size our positions accordingly to maximize the risk-adjusted returns.