Does The Options Market Signal Information Advantages?
Real-time analysis of clustered sweep orders is one way we isolate abnormal market activity among “highly-informed” liquidity seekers before market-moving news hits the tape. If the executed print log shows an unusual amount of auto-correlated millisecond-speed split orders, there’s likely a reason. For anyone interested in learning more about sweep orders and signaling theory, we recommend this 2010 whitepaper from Purdue University, as well as Chapter 4 of Larry McMillan's really interesting book.
Management Quality
We want to know as much as possible about the management team and board of directors, encompassing everything from previous operating experience and track records at other companies to the strike prices of their granted options at the companies they lead today. Reading proxies is just a starting point - our technology stack sifts through hundreds of SEC Form 4 filings every day, aiding our understanding of how insiders are being compensated, rebalancing their stock exposure, and aligning themselves with shareholders. Learn more about our experience vetting management teams here.
Portfolio Adjustments
“Heads we win, tails we don't lose much” scenarios are ideal, but economic castles (“moats”) are easier to observe than predict and giant guesses on low visibility are par for the course. Even when one’s earnings or cash flow projections are near-perfect, multiple compression can be swift and violent. If the capital markets hypothetically shut down for five years, what companies would we still feel comfortable owning? Sticking to a quality mandate means we may miss big winners among companies that are temporarily popular and often at risk of needing external financing. Reasonable extrapolations and reverse-engineering help us make quick portfolio adjustments, when needed, as noted here.
Mental Models
Charlie Munger said “you’ve got to have models in your head and array your experience on that latticework of models” and we think three particular mental models work quite well in investing: Occam's razor, inversion, and 2nd order thinking. We avoid overly complex businesses or those with too many moving parts. Where possible, we spend less time thinking about what 3-4 things need to happen for a business to be successful and more thinking about what actions it needs to avoid. Lastly, tertiary effects and consideration of items beyond immediate outcomes: for instance, an acquisition or disintermediation in one vertical may have an outsized effect on parallel or tangential areas and this change may not be intuitive to the market, at first. Learn more about our process here.