We employ scenario analysis to establish a range of fundamental outcomes likely to be realized by a company and then work to understand the degree to which these outcomes may or may not be factored into the current stock price.
If the market is always anticipating future events, then spotting opportunity in the stock market requires thinking about how the future might unfold. While most investors understand that there are more things that can happen than will happen, most still insist on believing in their ability to forecast what will happen. While dampening this instinct is hard, we believe that focusing on what can happen pays large dividends when thinking about stock prices.
The idea of the stock market as a handicapping machine is a powerful one and scenario analysis is a critical tool to assist in successfully calibrating the odds in our funds. It helps to understand when good companies have the potential to be great stocks.
