Seeking invariants from chaos...
Given that we focus on companies under uncertainties, how do we assess the risk/reward of a stock? We believe that the usual notion of equaling price volatility to risk is entirely misleading, and the only correct way to assess risks is evaluating the margin of safety using the valuation band and its associated probability distribution. In this regard, we
Assess its stock price in relation to its valuation band;
Evaluate the probabilities of the possible scenarios that span the valuation band;
Finally, such evaluations are updated to incorporate new information constantly in a Bayesian-like manner.
Proprietary Risk / Reward Quotient (RRQ)
Thus, we have developed a proprietary Risk/Reward Quotient (RRQ) to capture the risk/reward profile of each position, based on the valuation band and its associated probability distribution. The RRQs are updated constantly and are used to rank the merits of different opportunities, and help optimize the portfolio.