ALM’s Research in Action process has three key research parts. Each of these three points, while not perfect, has increased the probability of success for us in the past.
ALM focuses on the credit risk of individual securities
We prefer to look at all securities as a banker would do for a loan prospect. We prefer to own individual stocks and bonds; exchange-traded funds (ETF’s) or mutual funds are only used if a client’s portfolio is too modest in size for cost-effective diversification. There are also clear cost advantages to the use of individual securities.
ALM looks for anomalies
We look for small changes, pieces of information that raise questions and allow us to focus on potential shifts in investors’ preferences. Sometimes it is the absence of something, such as the dog that didn’t bark in the Sherlock Holmes story, Silver Blaze. We apply a deductive process to turn these anomalies into actionable investment ideas.
ALM is not in the forgiveness business
We have found within investing and life, that once individuals show dishonesty in any form they cannot be trusted. This may be harsh but it the way to handle the probability of recurrence. Part of our process is to avoid management we deem questionable from prior experience. It is difficult to know who will be the best corporate officers in the future. We respond by removing the questionable and mediocre. If one wants to avoid fleas, don’t hang out with dogs or cats.