What We Do
Our investment approach seeks to capitalize on our understanding of global capital markets. This understanding is based on four core principles. By applying and reapplying these principles, we aim to deliver sustainable, long-term value for our investors. What we don’t do: At LAM, we don’t use Artificial Intelligence, Algorithmic Trading, Big Data, Machine Learning, Distributed Computing, Blockchain, Internet of Things or any other buzzwords in managing our investors’ money. We do, however, invest in companies that specialize in these emerging technologies.
Macroeconomics: We rely on sound economic theory and analysis to help us deliver long-term, repeatable results. We use a methodical, top-down approach to investing – trying to connect the dots. This means understanding what is occurring geopolitically and economically. While complex, this is necessary because markets are interconnected. The price of oil, for example, doesn’t react solely to supply and demand but a host of factors including monetary policies. At any one time, a particular factor may be deemed more important than the others.
While we rely on established economic theory, we place a heavy emphasis on Self-feedback loops (aka Reflexivity) which was popularized by Karl Popper (London School of Economics) and his student, George Soros. Reflexivity asserts that prices influence fundamentals and that these newly influenced set of fundamentals then proceed to change expectations, thus influencing prices; the process continues in a self-reinforcing pattern. Because the pattern is self-reinforcing, markets tend towards disequilibrium and Boom-Bust cycles. Bank lending is an example of the above in that banks are more apt to lend (and ease lending standards) to companies as they grow more valuable (and vice versa), thus reinforcing the boom-bust cycle. Note that most of the time, markets are not affected by reflexivity; thus conventional economic theory would apply.
Thematic Investing: LAM takes a top-down approach to equity investing, focusing on those industries that will benefit from changes in competitive structure or entirely new industry-segments. Once an industry or sector is identified, we map its industry structure using the Five Forces framework popularized by Michael Porter (Harvard University).
We place particular emphasis on those industries benefitting from the Network Effect, which can increase a company’s enterprise value and economic moat. The Network Effect is the positive effect that an additional user of a good or service has on the value of that product to others. When the Network Effect is present, the value of a product or service increases according to the numbers of others using it. The classic example of this is the telephone system. Other examples include financial and other exchanges (such as the CBOE and Alibaba/Amazon), business software (MS Office) smartphone ecosystems and websites. Amazon’s Alexa is a recent example of a network that benefits as user penetration increases. We believe that artificial intelligence (AI) and machine learning will be complimentary to the Network Effect and perhaps make it reach tipping points quicker than historically.
Systematically Applied: A disciplined methodology underlies everything we do. Our investment process, built over 20 years, is based on a continuous process of design, refine, test, repeat. We use a proprietary model that measures risk compensation (aka the risk premium). LAM also utilizes a proprietary model that measures equity broad market participation, of which determines market momentum. We pay particular attention to Behavioral Economics including the works (e.g., Prospect Theory) of Kahneman and Tversky (Hebrew University) and Robert J. Shiller (Yale University). In essence, Behavior Economic theory helps explain inefficiencies such as under or overreactions to information that can create bubbles and crashes.
Risk Management: We believe the most important factor in investment management is enterprise risk management – a concept that is more commonly used in commercial banking. We examine all aspects of Risk, both financial and non-financial risks, including Market, Liquidity, Counterparty and Technology Risk. We aim to ensure that portfolios are manageable through sudden and severely adverse stress events. Consequently, most of our assets are in liquid products that can be easily traded. All Investments are subject to industry, product and other concentration limits.