Investment Philosophy

The Failure of Active Stock Selection


Active stock pickers have always attempted to guess market winners by forecasting the future, but such an approach is archaic, unsystematic, and unpredictable.

We believe alpha comes from systematically avoiding the losers.

Inside every stock price is the market’s expectations for the company’s growth. Human behavior affects these expectations and is source from which all traditional risk metrics are born. Metrics such as beta or PE ratio are merely proxies for risk. They do not actually measure the risk of loss from excessive market expectations. They do not measure the Expectation Risk Factor. If an investor hopes to avoid this risk, he or she must look at risk in an entirely new way.

Manage risk like an actuary, not like a portfolio manager.


Expectation Risk FactorTM

Know the Number

Investors impound vague and ambiguous information into their expectations for a stock’s growth, decoupling stock prices from their underlying fundamentals. This leads to loss.

Applying an actuarial-based approach, we developed a proprietary risk metric to avoid this behavior, the Expectation Risk FactorTM. This measure calculates the probability the company will fail to deliver the growth implied by its stock price.

Using the Expectation Risk FactorTM as the foundation of our investment methodology, we can apply these probabilities to any portfolio or investment universe. We build portfolio solutions that aim to provide a dramatically differentiated and uncorrelated source of outperformance by simply avoiding the losers – overpriced stocks caused by human behavior.