What Can We Learn Through Debating the Bull & Bear Cases?

When it comes to a new idea for a portfolio, we often ask ourselves, “Could the market be missing something?"

That question can come from finding a company trading at a discount, an industry entering a new phase of its cycle, improving earnings, or a business that might have more value than the market has priced into it. To us, identifying something that looks interesting is only the beginning. The real work starts when we begin to challenge the idea.

When we bring a new investment to the team, we want to see both perspectives. What is the bull case? What is the bear case? What needs to happen for this to succeed, and what could go wrong? 

Our 10 Principles of Value Investing™ provide the framework for that discussion. They help us evaluate a company from different perspectives and, importantly, gives our team a common rubric for challenging an investment idea. An attractive valuation may get our attention, but we still need to understand what is driving it. 

Cold storage provides a good example of how this debate can play out. The bull case revolves around a highly concentrated industry, with two companies dominating the market. As demand in the industry normalizes, these two dominant players should benefit from their pricing power as we have traditionally seen in other industries where a small set of companies own a significant portion of the market share. But our team also sees a credible bear case for cold storage companies. During COVID, significant investments were made to create new capacity in cold storage to keep up with demand at the time. Additionally, the recent increase in the use of GLP-1 drugs and changing eating habits are reshaping the food industry. This creates a concern as to whether the demand for cold storage can keep up with the additional capacity that was created during COVID and whether a significant decrease in food consumption caused by these unusual trending factors could negatively impact pricing and potential improvement could take longer to progress.

So which side is right? Well, that is not necessarily the question we are trying to answer. Both can be right, but the more important question to ask is, “Does this meet our criteria to add to our portfolio?” We use our 10 Principles of Value Investing™ to help us make this decision.

Each of these principles give us another way to test the bull and bear cases. These metrics allow us to see both the quantitative and qualitative perspectives, which help us to make our portfolio allocations. Sometimes, this process strengthens the investment idea and sometimes it exposes a weakness we had not fully recognized. Additionally, we might find that a company lies somewhere in between, and we need to watch it further before it is added to our portfolio. Regardless, each of our team members use the same rubric for analyzing a business, which then allows for team discussion and healthy debate for each portfolio decision. 

Just because we discussed a business before, does not mean  that our team stops researching it.. The debate often continues after a decision is made. Our analysts and portfolio managers generally revisit these ideas as new information comes to light. We consider whether the reasons we originally liked the investment are still prevalent and whether the bear case has become more or less relevant. An assumption that once seemed reasonable may need to be reconsidered. A risk that was a major concern, may have only been temporary. This evolves as our understanding of the business evolves.

As value investors, we do not expect every investment to have a perfect story. In fact, the most interesting ideas often come with a debate on both sides. Our job is to determine where we can find undiscovered opportunities in these businesses. That is ultimately how we think about conviction. It does not come from everyone agreeing with the original idea. It comes from putting the company through a rigorous debate, understanding what could make it work and what could make it fail, and still believing the opportunity is attractive after careful consideration.

Our 10 Principles of Value Investing™ provide the framework. Fundamental research helps us to prove it. And the debate between the bull and bear cases helps us determine whether an interesting idea is actually worth owning. We believe this is the formula to help us achieve superior investment results. 
 

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