Mistakes, Mistakes, Mistakes: The Source Of Our Edge

We are not interested in presenting case studies of our past successes, as anyone can give these examples. In fact, the truth about investment management is that there are many mistakes. Baseball is a perfect metaphor for this. In baseball, a highly impressive batting average is 0.400, but that still means the batter missed the ball 6 out of 10 times. We admit we have made many mistakes in the past, but we can honestly claim that we have learned valuable lessons from all our mistakes. This is how our investment approach is built.

Four Seasons: What’s in a name

A key concept of our investment philosophy is to recognize CHANGE as a source of return. We are certain that the only constant in financial markets is CHANGE. Any investment strategy will be wrong from time to time, just as different sectors will go from boom to bust and back again. No company remains the same in terms of its fundamentals. The ‘FOUR SEASONS’ in our name represents our acknowledgement of the constantly changing environment that we work in. Those are the CHANGES we try to capture as a source of return.

“At the peak of summer, keep in mind that winter always follows. In the middle of a severe winter, never forget that spring comes next.”

Our job is not to avoid risk, but to identify and take right risk. Investment managers should always be un-comfortable.

We define risk as losing clients’ money.

No one can challenge the fundamental principle of risk and return. Without risk, there is no return.

One problem is that nature of human being blocks sound risk taking activities (therefore, return becomes mediocre). Emotional factors driven by fear or greed, jeopardizes risk taking activities.

Risk must be taken in smart way and must be controlled. However, in a lot of cases, risks are handled by human beings who are dominated by emotion. It would be emotionally comfortable if you follow the herd with others or if you linearly extrapolate current assumption.

This is the 1st step to avoid risk (and less return). Investment managers can be comfortable, but their clients will be uncomfortable on their return.

Our job therefore is to take calculated risks in the financial market on behalf of our clients under the defined risk budget.

There are two major sources of risk (=losing money) related to stock investment. One is valuation. The other is business fundamentals. Risk related to valuation is mitigated by playing in a less crowded field. Risk related to business fundamental is where our bottom-up research efforts plays out. During the research process we look at the fundamental logic rather than the stock price actions. People may be less fearful when they follow crowds. But, herding and risk taking is totally different. Emotion and price action dominates herding but calculated risk taking is dominated by logic. After all, “treasure can be found among themes that other people throw away” (quote from Nobel Prize winner Dr. S.Yamanaka, cell system research). Good investment case is always searched by animal spirits and is refined by intelligence, NOT coming from emotional comfortable-ness.