Photo by  John O'Nolan  on  Unsplash

Photo by John O'Nolan on Unsplash

Investment Strategy

Past performance is not indicative of future performance.

It’s not often that a company can say that the mandatory compliance disclaimer also doubles as the guiding mantra for an investment strategy. But, in our case at Three Body Capital, it does.

History is replete with examples of failure caused by those assuming the future will be like the past. People have spent thousands of years being shown how the past does not reflect the future.

At Three Body Capital, we like to think that we can learn from the mistakes of others.

Our strategy starts from the notion of investing in Transformation.

Transformative investing has been central to our process for over a decade. This means making investments on the long and short side, often in companies that don’t tick conventional boxes.

Where most investors look for mean reversion, we look for permanent changes in earnings. What interests us in any potential investment is optionality in earnings.

Rather than equilibrating in a cocoon, we prefer caterpillars that turn into butterflies, Caterpillar + wings = butterfly.

It’s the story that counts. It’s all about the narrative.

We believe that fundamental analysis is critical. But it’s not the be all and end all. It’s only the start.

We are investing in publicly traded stocks, rather than underlying companies. Hence, fundamentals are one step removed from the actual price, which is what we mark fund NAVs and P&L on.

Between fundamentals and price sits the multiple. Fundamental analysis treats the multiple as an output: P/E ratios are derived by dividing the market price by an EPS estimate. Great in theory but of limited use. Rather, having derived an EPS estimate, investors must also work out the P/E ratio.

Of late, stable multiples have spoiled investors. But typically these numbers are the mean from the trailing years. This reveals the underlying (and dangerous) assumption: mean reversion.

Remember: past performance is not indicative of future performance.

In reality, multiples represent the subjective assessment of a company’s prospects, determined by the next marginal buyer or seller. But if multiples aren’t from a textbook, what makes them tick?

It’s the story. The narrative. And only by monitoring the narrative around a company, topic or theme do we get a gauge of investor sentiment.

Which came first: the script or the cast?

All the world's a stage, with all men and women merely players, with their exits and entrances.

We agree, choosing to identify narratives that will occupy centre stage for years to come, and then work out which characters will be loved (or reviled) by the audience. As with each character, each company’s fundamentals determines plot line. But whether a character emerges a hero or villain, all is determined by the broader story.

Our research and investment process marries analysis of the narrative, fundamentals and market technicals in a robust yet flexible process that holds true to that core mantra:

Past performance is not indicative of future performance.

Read about our investment themes here.

Read about our investment process here.

Read about our mandate and risk policies here.