Investment Process

How does Symons® Capital go about its intellectually independent research work, as we look for the best risk-adjusted opportunities in order to build durable wealth?

We read, think and build considered judgments about future economic, market and individual stock probabilities. We use discipline and patience as we follow our developed path to the goal of building durable wealth through differentiated risk management. This means our portfolios are different from the market, and so they can both underperform and outperform the market at times. We steer portfolios away from risks we see on the horizon, even if we are not expecting those risks to come tomorrow.

Much of our risk management judgments are based on a basic knowledge of human nature – investors are most confident after a long stretch of smooth sailing, and that is when the odds of something going wrong are highest. As long as human beings are involved in financial markets, notable differences between rational prices and herd-like behavior will occur. It is our job to steer portfolios through the resulting risks and opportunities.

The value of a stock is independent of its price; its value is intrinsic to its enterprise. But it is evident that many people disagree with that view. Rather, they believe that price does represent a stock’s value. The price of Tesla will keep going up, and no one should care why. Rather, investors have confidence in a quantitative investment factor – say six months price momentum – regardless of whether it makes sense. This view of investing is inherent in institutional asset flows in the form of passive index investing. Passive investing can build wealth; it’s just not some magic answer. It has a tendency to overinvest in what is popular, and thus generate runs of good and bad performance with lots of volatility. With this approach, what comes at supposedly low cost also comes at great expense in the long run because they have purchased an illusion of value.

To get more specific about Symons Capital’s investment process, it involves both top-down macro research and bottom-up equity research.

We are pretty unique in that we do both. We gauge the economic environment, the market environment and then pick stocks using that macro lens. That is how we build an equity portfolio in the safest way that is reasonably possible.

Overview: Our Investment Process Involves Macro and Equity Research

Our iterative and continuous process involves 2 parts: 1) forecasting the future economic environment and 2) conducting fundamental equity research through that macro lens.

Macro is important.

It helps us a lot. We look at the economy much like we look at stocks – going forward, is the economy likely to get better or worse? We consider a wide range of data to decide if the economy is more likely to get better or worse.


Our Macro Research:
Where to Point the Ship

We tend to classify macro data as GIP data – Growth, Inflation, and Policy. Growth data is the big one. We look at items such as GDP, forward-looking economic survey data such as PMI (Purchasing Managers’ Index) and other ISM (Institute for Supply Management) data, as well as hard backward-looking data like employment, industrial production and final sales, housing starts, yield curve, etc. Commodity prices can be a helpful leading indicator – such as oil and copper prices. Inflation data looks at foreign exchange – dollar strength or weakness, CPI, commodities prices and the like. Policy looks at Fed monetary and Congressional fiscal policies.

Hard macro data is factual, reliable data, but it is trailing data. Industrial data such as production output and order backlogs can be interesting.  Soft data is the survey data from sources such as ISM. PMI is forward looking, asking enterprises what do they expect? Consumer confidence data is relevant. Overall, if the soft data rolls over, it can be a bad sign. In sum, we look at all of the macro data and then triangulate to our best forward looking judgment of where the economy is likely headed.

For example, it is often the case that recent employment data is good, but not as good as it has been. That is hard, trailing data. Is it an inflection point? We might combine that with slowing soft data, perhaps something like slowing international GDP data. Base effects, which is comparing against earlier data, is relevant here. We tend to compare current data against data for the last year or two. Quarter by quarter data is too volatile; it has too much noise. Suppose we have had fairly good GDP growth in the last year or two – but looking at base effects those comps are hard to match going forward, especially with the worldwide debt buildup. Debt-based growth is non-organic growth – that is important because it is difficult to change debt burdens on economies and businesses, which makes it harder for an economy to vary a weakening GDP trend. Finally, for inflation we may look at the 10-year yield, to see which way it is trending. Fed monetary policy may be getting easier or tougher in terms of both interest rate policy and Fed balance sheet policy. For more than the past decade, Congressional fiscal policy continues to show unprecedented debt and deficits.

All of this macro research tells us what sectors we principally should look at based on the expected general direction of the economy. But, regardless of the general macro direction, we are always looking for sectors and stocks that are currently unpopular, have low consensus expectations, and so their stock prices are sad – the stocks are cheap.

Our Equity Research:
Keeping the Ship on Course

Every stock is priced on certain assumptions or expectations about whether the stock will get better (e.g., tech) or worse (e.g., retail). There are four basic levers that can change those consensus expectations. Revenue; Margins; Asset Efficiency and Cost of Capital. We want to determine whether we have a different judgment than does market consensus on a company. The first two levers are the big ones. They are the easiest for a company to change. Have sales revenues been poor and can they rebound? Revenue can change if a new product is coming to market. Have profit margins been poor and can they rebound? Margins can change if a big expense, such as a marketing campaign, is ending. The third is harder to change and the fourth is hardest to change. Asset efficiency can change if a company improves inventory systems or distribution methods. Cost of capital is finding cheaper funding. Finally, we are always looking for red flags in any stock before we buy it.

What we are doing is that we keep finding sad stocks to purchase, let them get better, and then do it again. When “market consensus” looks at sectors and stocks, what is popular is largely determined by looking in the rearview mirror. Our forward-looking investment process is hard to do, but critically important. We are looking for the next turn in the road ahead where currently unpopular stocks will become popular stocks. This is being contrarian for a reason. This is how we are able to buy low and sell high.

Stock picking, just like macro research, involves triangulation work – start with all possibilities and narrow to a specific decision, one stock at a time.

For additional details on our overall Investment Philosophy and Investment Process,