Strategy

Traditionally, active managers and the analysts that work for them operate in a serial fashion. That is, they find new stocks by performing a sequence of actions, and then repeating that sequence for each and every new stock. Typically a candidate is brought to the PM or analyst via a news story, or having seen a management presentation at a conference, or having had a Sell-Side analyst “pitch” an idea during a face-to-face meeting or phone call.

Then the company is analyzed in various ways and other opinions are sought about the viability of the stock pick and its suitability for a particular portfolio. The PM or analyst might have a set of “hurdles” that the prospective stock must meet, including certain financial parameters like a “low P:E ratio” or “a 20% growth rate” or “a management that works with the Street.” (i.e., management will telegraph unspoken information to a trusted coterie of Street analysts).

Ultimately, a decision is made, often via an investment committee meeting and the stock is either approved for purchase or not. If the latter choice is made, sometimes further work will be done to answer questions or concerns arising during the entire process.

But there are several problems with the “serial selection” process.