Thomas E. Finser
Sourcing Ideas
Investment ideas are many years in the making, products of accumulated learning and persistent curiosity. Through reading, experience, conversations, and tactical mindfulness, one can observe long-term economic, cultural, and political shifts; demographic trends; geopolitical developments; and technological breakthroughs. Stock screening is of little use for this purpose.
I build this high-level awareness on a micro, bottom-up consciousness of market deviations—stocks hitting new 52-week lows, massive sell-offs, market dislocations, and other infrequent shifts. Often, abandoned stocks left for dead provide good material for a deep inquiry.
However, unlike other value strategies which begin with cheap stocks, I frequently draw inspiration from a top-down inquiry: I note macro- and secular-level changes, their implications, and which stocks might be cheap relative to these changes. Often, amid these dynamics, an investment idea lies at the intersection of contrarian value on an absolute basis and considerable unrecognized NAV per share growth optionality.
My research process is grounded in a four-step, systems view of market dynamics.
My edge pertains to insight and thought process, rather than an informational advantage (e.g. obtaining information ahead of the crowd)— ascertaining the emerging narrative, acquiring the asset at a price justified by the old paradigm, and patiently waiting for the gradual dissemination of the new. Dollar-weighted consensus shareholders do not necessarily need to revise their views and agree with me; instead, the recently converted marginal (swing-vote) investor might be sufficient to create a new balance of narrative power, triggering value realization.
Research Process
My research often begins with public filings, company presentations, and recent headlines. Every company has a story to tell, and I uncover this narrative through a preliminary scan of publicly accessible information. In many cases, a stock is relatively cheap or unloved for good reason. My aim is to figure out why and if the current market appraisal is warranted.
Drilling into Securities and Exchange Commission (SEC) filings and other public documents reveals important clues to a company narrative. This information then can be compared and contrasted with the industry peer group’s documents, taking special note of executive compensation policies, accounting procedures, and risk factors. First-level, financial cross-comparisons of margins, capital structure, and basic valuation metrics are evaluated. Often, the important qualitative measures of a company’s leadership, direction, and thought process are buried in the mundane—footnotes that few analysts bother to read. P&L statements and cash generation earnings models are assessed, not as forecasting tools, but as means to gain deeper understanding of operating leverage and key drivers within the industry.
On the competitive analysis front, the market is often myopically focused on variables that are easy to count, instead of those that matter. There is an innate tendency to box a company into the standard linear industry framework and to consider the obvious competitors while ignoring environmental shifts—counting sharks in the ocean without conducting a broader eco-system analysis. Therefore, I first distill the essence of what a business is doing, the niche it serves, and the critical variables underpinning NAV and, second, build a basis for understanding which competitive forces have the most impact on NAV. The companies scrutinized are seldom in the business they appear to be in at first glance.
I generally hold management or investor relations (IR) meetings later in the research process, once a functional understanding of the business has been established. Compared to other fundamental bottom-up strategies, my view of management is more deterministic and even cynical. Although outstanding leadership undoubtedly influences overall shareholder returns, the methodology for identifying this outlier is deeply flawed by hindsight bias. Resources are best allocated to situations in which an average or good manager performs well amidst exceptionally low expectations.
Investment ideas are many years in the making, products of accumulated learning and persistent curiosity. Through reading, experience, conversations, and tactical mindfulness, one can observe long-term economic, cultural, and political shifts; demographic trends; geopolitical developments; and technological breakthroughs. Stock screening is of little use for this purpose.
I build this high-level awareness on a micro, bottom-up consciousness of market deviations—stocks hitting new 52-week lows, massive sell-offs, market dislocations, and other infrequent shifts. Often, abandoned stocks left for dead provide good material for a deep inquiry.
However, unlike other value strategies which begin with cheap stocks, I frequently draw inspiration from a top-down inquiry: I note macro- and secular-level changes, their implications, and which stocks might be cheap relative to these changes. Often, amid these dynamics, an investment idea lies at the intersection of contrarian value on an absolute basis and considerable unrecognized NAV per share growth optionality.
My research process is grounded in a four-step, systems view of market dynamics.
- The present market valuation of a company correlates with its consensus (mean) narrative. Narratives are the stories we create to make sense of the world, enabling us to weave a cohesive tapestry of reality. They frame our worldview, unconsciously affecting our behavior.
- A consensus narrative is supported by a payoff system that rewards its adherents. We retell stories and believe them when it benefits us. In the case of common stocks, the payoff could be a mental shortcut that reduces complexity or a predictive system that recently yielded a monetary payoff. So long as we benefit from re-telling a narrative, we have little motivation to question it. Importantly, this payoff system automatically accumulates narrative support to further its continued existence, often evidenced through the use of descriptive language.
- All market narratives, however, are vulnerable to disruption. Rigorous fundamental analysis can expose the fault lines in a consensus view. When the fragility of the narrative becomes overwhelmingly obvious, the stock might become of interest. This usually occurs at the nexus of micro and macro inflection points or during times of fear and panic or, most commonly, prolonged periods of apathy.
- When the payoff for telling a new story is greater than the payoff for retelling the old story, stock prices and valuations change accordingly. Even the smallest penetration of a credible alternative story can be enough to disrupt the balance of power among competing narratives.
My edge pertains to insight and thought process, rather than an informational advantage (e.g. obtaining information ahead of the crowd)— ascertaining the emerging narrative, acquiring the asset at a price justified by the old paradigm, and patiently waiting for the gradual dissemination of the new. Dollar-weighted consensus shareholders do not necessarily need to revise their views and agree with me; instead, the recently converted marginal (swing-vote) investor might be sufficient to create a new balance of narrative power, triggering value realization.
Research Process
My research often begins with public filings, company presentations, and recent headlines. Every company has a story to tell, and I uncover this narrative through a preliminary scan of publicly accessible information. In many cases, a stock is relatively cheap or unloved for good reason. My aim is to figure out why and if the current market appraisal is warranted.
Drilling into Securities and Exchange Commission (SEC) filings and other public documents reveals important clues to a company narrative. This information then can be compared and contrasted with the industry peer group’s documents, taking special note of executive compensation policies, accounting procedures, and risk factors. First-level, financial cross-comparisons of margins, capital structure, and basic valuation metrics are evaluated. Often, the important qualitative measures of a company’s leadership, direction, and thought process are buried in the mundane—footnotes that few analysts bother to read. P&L statements and cash generation earnings models are assessed, not as forecasting tools, but as means to gain deeper understanding of operating leverage and key drivers within the industry.
On the competitive analysis front, the market is often myopically focused on variables that are easy to count, instead of those that matter. There is an innate tendency to box a company into the standard linear industry framework and to consider the obvious competitors while ignoring environmental shifts—counting sharks in the ocean without conducting a broader eco-system analysis. Therefore, I first distill the essence of what a business is doing, the niche it serves, and the critical variables underpinning NAV and, second, build a basis for understanding which competitive forces have the most impact on NAV. The companies scrutinized are seldom in the business they appear to be in at first glance.
I generally hold management or investor relations (IR) meetings later in the research process, once a functional understanding of the business has been established. Compared to other fundamental bottom-up strategies, my view of management is more deterministic and even cynical. Although outstanding leadership undoubtedly influences overall shareholder returns, the methodology for identifying this outlier is deeply flawed by hindsight bias. Resources are best allocated to situations in which an average or good manager performs well amidst exceptionally low expectations.