We have been studying CHANGE for the last 12 years in an organized and intentional fashion. We have written volumes on the topic and still have plenty left to learn about the conditions under which a company can add value to its operations by changing.
But, why do we care so much about change?
Because we believe that if we understand CHANGE better than the market and identify CHANGE consistently faster and more clearly than the market, we will be able to take advantage of moves in the market associated with changes in inherent value of stocks we place in either long or short portfolios.
We aim to identify CHANGE that will take company XYZ’s 2006 EPS estimates from $1.00 to $1.30 … or to $0.70.
We aim to identify CHANGE that will take company ABC’s PE from 20x to 30x … or to 15x.
These changes can come from new management teams, new product cycles, missed product cycles, inflection points in demand, maturing markets, investor psychology.
We look for inflection points … not “incremental” newsflow.
I have long said that my goal in studying change in the technology world would be to look at the 100 fresh data points crossing in front of me each morning and inside five minutes definitively know the 95 that I could store in my memory but largely ignore for practical purposes while picking out the five we really want to follow up on.
Our underlying goal is the following with regard to change:
We want to identify changes important enough to change valuation. So we are looking for changes that affect a sector or a specific stock such that the relationship of money heading into the “box” relative to money coming out of the “box” is significantly altered. Either the change causes the relationship of money into the “box” to money coming out of the “box” to improve or worsen.
If a company beats a quarter by a penny, we are interested to know if something significant is in the works. If there is not, then we will let the traders do what they choose. That situation won’t match our philosophy unless we see an interesting and substantive fundamental change we suspect is lasting.
Do we think our way of making money is the only one?
No! There are many ways. Our way is the one we know thru and thru.
Very few people spend significant time attempting to deeply understand change. Very few people have been trained to understand change, and we know very few people who can quickly and effectively screen stocks by “change”.
We are including our fairly extensive reading list from the past ten years. A tremendous amount of our reading focuses on Change. Again, ask questions as you see fit. We can also make available our own mental models for Change that we have developed thru our study and observation over the past ten years in assessing change in technology specifically.