In this interview with Good Investing, value investor Cliff Sosin discusses his process for finding new opportunities. Here’s an excerpt from the interview:
Sosin: What I’m describing is maybe a process where you start, almost start randomly at the top of the funnel, and then you become more regimented as he tries to apply these mental models.
Then you work your way down into, once you have a hypothesis, it really becomes more a process of attempting to invalidate your hypothesis, analogous to the scientific method or whatnot.
So that would be a process where you think you understand the dynamics that are at play, that allow a company to succeed. And then you are thinking about what you should be able to observe in the world, in the ecosystem that would be consistent with that hypothesis.
You then go into the world or the ecosystem, you do due diligence and you try to figure out whether or not what you’re seeing is actually consistent or inconsistent with your hypothesis. And if it’s inconsistent, then you would change your hypothesis or throw it all together.
If it’s consistent, then you aren’t sure, right, but you’re incrementally more confident in being right. And if you can develop a theory for why a company is successful based on mental models that are well-founded and reasonably reliable, and then you can make a lot of predictions based on that, you start to develop a pretty reasonable chance at correctly forecasting the future of a business within a narrow enough margin that you can then make a good bet.
And so then, the last piece really is that you sort of compare what you think might happen based on your understanding with what’s implied by the price or what you need to have happened to have an investment be profitable. Then that’s it. I mean, it sounds so simple, but just that’s what we do.
You can watch the entire discussion here:
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