Revelation Investment Research is guided by a strong belief system rooted in years of investment research and industry experience.
- We believe a risk-first perspective can provide an edge.
Investing is all about evaluating the prospective return/risk trade-off, yet most equity research focuses far more on upside potential than downside risk. This neglect provides opportunity, as RIR believes that risk perception errors are the most common cause of individual stock mispricing. Explicitly considering “what could go wrong” can provide new perspective into the decision making process, especially since the criteria best used to assess a stock’s downside risk are different than those used to evaluate upside potential.
- We believe a long-term focus encourages success.
Our research has convinced us that it’s far easier to predict long-term relative stock returns than short-term returns. Long-term returns are driven by fundamentals and valuation, which tend to be somewhat stable, whereas short-term returns are often driven by supply and demand effects, which often change direction quickly. Long-term stock selection strategies benefit not only from higher signal-to-noise ratios, lower turnover portfolios are also is easier to manage. Most institutional investors cannot consistently compete with hedge funds and other traders for short-term informational and trading advantages. Over the years, we’ve seen many active equity investors shorten their time horizons in response to quarterly performance pressures. But this evolution has not helped most managers, and in the process, has arbitraged away the former effectiveness of many short-term indicators such as earnings surprise.Armed with an objective stock selection process, long-term investors can take advantage of occasional excessive short-term price swings.
- We believe quantitative tools can help effective investors be more efficient.
RIR’s research process is fundamentally driven, but quantitatively executed. For us, quantitative tools are simply a means to an end. We employ backtesting to discover which fundamental measures have historically been most correlated to future return and risk measures. We use statistical analysis to learn how to best combine the investment perspective of many diverse indicators. We run a multifactor model to gather up-to-date values for dozens of data inputs, combine those indicators into downside risk assessments on thousands of stocks, and to present transparent scores that facilitate screening and apples-to-apples comparisons between stocks.Quantitative methods allow RIR to provide greater breadth, timeliness, transparency, and comparability than traditional research approaches – at a lower cost.
- We believe investors are often their own worst enemy.
Market-beating portfolio results stem from disciplined processes for research – making the right decisions – and portfolio management – executing decisions with discipline. Unfortunately, investor psychology often hinders both processes. For example, behavioral finance researchers have documented that investors tend to be attracted to great stories, overly optimistic, and prone to excessive trend extrapolation. Historically, these preferences have led to overvaluation of stocks with high growth prospects and stocks with strong growth track records. Investors also tend to be overly confident in their decisions, and as a result, reluctant to embrace change and conflicting viewpoints. Another finding is that investors are extremely loss averse, which creates a tendency to sell winners too soon (i.e., so they can’t become losses) and to hold on to losers too long (i.e., in hope they recover and become winners). To retain objectivity and avoid letting emotions influence decisions, behavioral finance experts recommend employing independent third party reviews, designating someone to play the devil’s advocate role, utilizing checklists, requiring decisions to be data driven, pre-defining sell rules, and ignoring a position’s cost basis. We suggest that Downside Risk Alert can function in any and all of those ways!
- We believe being an independent specialist has its advantages.
Conflicts of interest are way too prevalent in the financial world. As an independent research boutique, RIR answers only to its clients. We don’t have to pursue growth to satisfy parent company shareholders. We don’t have to issue biased recommendations to retain access to corporate managers or facilitate investment banking relationships. We don’t manage money and compete with our clients. As a specialist in downside risk research, RIR can focus on developing unique expertise and digging deeper than others. In today’s highly competitive world, excellence in almost any field requires specialization. Overinvestment and strategy creep are common causes of poor stock performance, so we avoid it running our own business. RIR’s downside risk specialty allows us to freely voice a strong devil’s advocate perspective on particular stocks without being perceived as obnoxious or an attention-seeking naysayer.
- We believe in simplicity as a guiding principle.
Investors often act as if more information is always better, but information overload can lead to decision paralysis or to decisions based on inconsistent or irrelevant factors. Complex systems are prone to failure, whereas simple systems are easier to build, maintain, and use. But to paraphrase Einstein, the challenge is to be as simple as possible, but no simpler. The excellent book, Simple, argues that optimal simplicity is achieved when an organization commits to empathizing with clients’ needs and expectations, distilling product offerings down to the essential qualities required to meet clients’ needs, and clarifying a product’s content and features to make it easy to understand and use. We agree. RIR is willing to embrace the investment world’s complexity in our research as necessary, but we strive to provide products that are effective, reliable, and easy to use. Clients only use products they understand, and clients only benefit from products they use. To quote Da Vinci, “Simplicity is the ultimate sophistication”.