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Friday, December 18, 2009

What is the Goal of Investment Research?

Someone recently asked us to discuss the goal of investment research - what is it? Clearly, there is a wide range of answers to this question, but here's our view:

To see the forest through the trees. A sound investment research process should: (1) diligently put the pieces of puzzle* together to consistently find 50 cent dollars which (2) have a high probability of returning to one dollar within a reasonable time horizon. Coupled with portfolio management, disciplined investment research should mitigate risk and preserve capital by (3) recommending a group of holdings that, together, generate favorable absolute and relative performance per unit of risk. Over time, expected asset returns should be realized as temporarily irrational market prices move toward a reasonable range of expected fair values for each of the portfolio holdings.

*Pieces of the puzzle: to learn everything possible about a potential investment.

We believe this approach, along with an emphasis on high quality, cash generating businesses, should lead to attractive returns over a full market cycle. That is, a sound research process leads to a sound investment outcome.

Happy investing,

Jeffrey Walkenhorst

Disclosure: n/a.

© 2009 Jeffrey Walkenhorst
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