Objective and Philosophy
Objective
The Evolution Fund I, LP's investment objective is to seek maximum capital growth, subject to investment restrictions, in favorable market conditions and preservation of capital in uncertain market conditions.
Philosophy
One reason Evolution is different is the way we approach the financial markets.
We believe there are plenty of investment managers and analysts trying to predict next quarter's earnings-per-share figure. That is a challenging goal to be sure (particularly given the ease with which management teams can game their accounting and share counts), but we think we have a better way.
An asset's value is really just the sum of its future cash flows discounted to the present. Discounted cash flow (DCF) analysis is not perfect, but when done correctly, it is the best way to value equities. However, as we mentioned before, we like to take a different angle than the crowd. We turn the DCF model upside-down.
How do we do that? Perhaps a better question is why.
There is an underappreciated and underused source of information available for every stock: its price. If you believe (as we do) that it is better to ignore what people say, and watch what they do, the price individuals are willing to trade at is pure honesty. The market price is an unambiguous sign that captures the expectations investors have for the underlying business. This is crucial, because changing expectations are what really move stock prices.
How can this work, if most buyers and sellers do not consciously think this way? They do not need to. The price they agree to is a statement with implicit expectations built in. Furthermore, the fact most investors do not think about it this way creates opportunities for those of us that do.
This brings us back to our inverted DCF model. We take this valuable signal (the stock price) and calculate what it tells us the market is expecting for the primary driver. (The driver may be sales growth, operating margin, capital investment, or something else.) Next, based on detailed research on the business, the competitive environment, and relevant trends, we estimate the likely upper and lower boundaries for the key drivers. Then we calculate what impact each would have on the share price, should the market revise its expectations.
In the final step, we use our familiarity with the company and its business environment to decide how likely the market will recalibrate its expectations. If the market is offering attractive odds, we take our position (long or short) accordingly.