For each position we define a downside price at which the stock would trade if everything about our thesis turned out to be wrong. In deciding whether to put something into the portfolio, we'll assign probabilities and look at the expected value, but the downside is particularly important in sizing the position. We don't want [...]

We tag every stock in our portfolio for more than 40 possible spread-risk factors on which stock prices can diverge dramatically. The factors include common ones like sector exposure, market cap, liquidity, leverage, and dividend rates, and maybe less obvious ones like exposure to China or the constitution of the shareholder base. At any given [...]

Long/short funds typically don't blow up because they made a bunch of wrong fundamental stock picks. They blow up because they're overexposed to correlated sectors, or they own too many leveraged companies, or they have too many illiquid positions. These are explanations you see all the time in funds' letters to investors. That's exactly what [...]

Basically we have to answer three questions: Is the stock mispriced, why is it mispriced, and what's going to make the mispricing go away? If we can't adequately answer those questions, we either haven't done enough work or it's probably not a great idea. To answer the first question, we arrive at a fundamental value [...]

We're generally of the school that “a bargain that stays a bargain is not a bargain.” We may buy something just because it's cheap, but it's very unlikely to be a core position without a data point or two like earnings exceeding expectations or an asset sale that we think should move the stock.

Financial complexity is one reason companies get mispriced. People talk about investing only in easy-to-understand businesses, but we’re not afraid of tackling complicated financial analysis. If we think we can get a handle on what’s going on, the fact that others tend to shy away from these situations can provide an opportunity for us.