Our strategy is based on the insights gleaned from our fund manager’s massive data analysis project and the validation derived from his application of these insights in his previous fund and research business. The strategy is executed by using deep research and quantitative analysis to identify stocks that are priced based on fundamentally flawed expectations.

Our approach is commonly regarded as a contrarian investing style as we invest directly against the consensus. These contrarian stocks are highly idiosyncratic, which means their price is largely determined by company specific factors (microeconomics). This significantly reduces the effects of changes in the broader stock market, which is driven by macroeconomic factors.

We use this approach to construct a portfolio of 12-15 uncorrelated contrarian stocks that each exhibit the pattern that we have found high return investments possess. We only invest in stocks that have overwhelming evidence supporting price movement in excess of 75% within a 12-18 month time period.

Risk management to most managers simply means investing in several dozen stocks to mitigate the impact of losses; however, this approach also reduces the impact of gains from investments. Importantly, this approach to risk management leads to managers placing greater emphasis on the quantity of their holdings rather than the quality of their holdings.

At Pragmatic Capital, we integrate risk management throughout our entire investment process- we focus on playing great offense and defense. In addition to conducting deep research to ensure we have an information advantage, we also employ a highly effective hedging strategy using derivatives to materially reduce risk. Our portfolio is fully hedged, which gives investors a high degree of confidence of the maximum risk facing their capital.

Our hedging strategy restricts maximum losses to -15% of invested capital, which is done using derivatives that are negatively correlated with our investments. Given our expected return threshold of 75% and our hedges that restrict losses to -15%, we are able to structure investments to have asymmetric risk/reward payoffs (5:1) in the most conservative scenarios.

Structuring investments this way provides an immense margin of safety- we have to have an accuracy rate below 17% to lose money! Importantly, our hedges cap losses at -15%, even in the absolute worst case scenario of a 0% accuracy rate. Given that our rigorous research process has led to a 93% level of accuracy, investors should have immense confidence that we will easily beat this threshold.

LEVEL I- SOPHISTICATED AND EFFICIENT ALGORITHMIC SCREENING

Given the broad universe of potential stocks, we are agile and intentional as we hunt for high-quality investments. This level is centered upon high level analysis to flag interesting companies. This enables us to spend quality time conducting deep research on promising candidates.

  • Algorithm is Initiated to Identify Potential Candidates

  • Financial Statement Analysis is Conducted to Ascertain Trends

  • Stock Chart is Analyzed to Identify Price Drivers


LEVEL II- EXHAUSTIVE DATA GATHERING AND REVIEW

Potential candidates identified in Level I are further vetted in Level II. The focus of this level is to gain an understanding of the potential candidate's economic ecosystem. This helps identify the current key drivers of stock price movement.

  • Company Filings and Presentations are Reviewed

  • Competitor Filings and Presentations are Reviewed

  • Industry Reports and Presentations are Reviewed


LEVEL III- INVESTIGATIVE RESEARCH TECHNIQUES

Potential candidates that advance to Level III are those that we have found a clear divergence between economic/fundamental data and stock price behavior. This is the level in which deep research and analysis is conducted. We strive to go deep into the story and use rigorous tools to construct objective views. 

  • Industry Data and Information is Gathered and Analyzed to Identify Trends

  • Interviews are Conducted with Informed Industry Participants

  • Rigorous Quantitative Analysis is Performed on Operational Data


LEVEL IV- METICULOUSLY QUANTIFIED RESEARCH

This level is crucial as it is the point in which we forecast operations and predict stock price movement within a specified time period. We scrutinize each assumption to forecast operations as well as identify potential catalysts. We understand that in some cases being too early can equate to being completely wrong.

  • Financials are Projected Based on Informed Assumptions

  • Valuation Analysis is Conducted to Identify Reasonable Valuation Levels

  • Catalysts are Identified Based on Understanding Drivers of Price Movement