Transparent Value believes the key to making a successful investment decision is
to base that decision on knowable factual information, and avoiding investment decisions
that require guesses and conjecture about future events. Because the subjectivity
involved in forecasting is inevitably affected by systematic behavioral biases on
the part of investors, we believe that the best system of stock analysis determines
the market’s implicit forecasts and then benchmarks them against management’s historical
ability to deliver.
Our system, the Required Business Performance®
(RBP® ) Methodology, determines
the revenue growth required to support each stock at its current price, then calculates
the probability, called RBP® Probability,
based on historical revenue growth that this required revenue growth will be delivered.
Similarly, we believe our Behavioral Risk Indicator shows us the likelihood that
behavioral biases have pushed the stock price to a level that makes it difficult
for management to deliver the Required Business Performance to support the stock
price. We believe this enables us to avoid the subjectivity and bias when trying
to forecast the unknowable future.
The methodology is not based on the traditional notion of value, what we think a
company is “really” worth, or whether or not a particular stock is a good long-term
investment. Our methodology is designed around the answer to a simple question "Can
management deliver the required business performance to support the price of its
stock?" If management is likely to deliver, we feel the company is worth the investment.
Our methodology provides no assurance that it can identify companies that will either
deliver the required revenue growth or outperform the performance of other indexes,
but we feel the system of analysis puts us in a position of advantage by minimizing
the behavioral risk often associated with traditional stock analysis.