Overview

Our Mission

Revelation Investment Research, Inc. is an independent boutique provider of specialized equity research to institutional investor clients.  Our sole mission is to discover ways to anticipate weak market performance for individual stocks and to package our research insights into useful tools for equity managers.

Revelation – the making known of something that was previously secret or unknown.
– Oxford Dictionary

 

Our Motivation

Avoiding losers is just as important to equity portfolio performance as holding winners, yet “underperformance forecasting” doesn’t seem to receive the attention it deserves.  Why?

1. Stock analysts focus on upside potential
   • Most analysts focus their research on finding stocks to buy, so a downside risk perspective is often lacking.
   • Brokerage firm analysts rarely issue ‘sell’ recommendations for well-known reasons, and unfortunately, those few sell-rated stocks have historically outperformed the market.

2. Stock-specific risk has no singular definition
   • Stock-specific risk is often defined as price volatility, but most volatility measures defy common sense in treating upward and downward price movements as equally risky.
   • The old textbook definition of a stock’s risk – beta – is crude, prompting academic researchers to add more risk factors to their explanatory models.
   • Portfolio risk management systems typically attribute risk in terms of a stock’s benchmark relative ‘exposures’ to several fundamental factors, leaving it up to the user to deal with the stock-specific risk that the risk model cannot explain.
   • Some well-known investors argue that ‘permanent loss of capital’ is the most important risk to be avoided in equity investing. We agree with this mindset, but a mindset is not a methodology.

Revelation Investment Research believes that providing reliable predictions of which stocks are most likely to lag market averages would be an inherently valuable equity risk management tool.  RIR was founded to make this belief become a reality, and Downside Risk Alert is that tool.

 

Our Philosophy

Revelation Investment Research is guided by a strong belief system rooted in years of investment research and industry experience.

1. We believe that a risk-first perspective can provide an edge.
   Investing is all about evaluating the prospective return/risk trade-off, yet most equity research focuses far more on upside potential than downside risk.  This neglect provides opportunity, as RIR believes that risk perception errors are the most common cause of individual stock mispricing.  Explicitly considering “what could go wrong” can provide new perspective into the decision making process, especially since the criteria best used to assess a stock’s downside risk are different than those used to evaluate upside potential.  Furthermore, avoiding big losses on individual stocks can also improve client peace of mind and retention.

2. We believe that investors are often their own worst enemy.
   Market-beating portfolio results stem from disciplined processes for research – making the right decisions – and portfolio management – executing decisions with discipline.  Unfortunately, easier said than done, as investor psychology often hinders both processes.  Behavioral finance researchers have documented that investors tend to be attracted to great stories, overly optimistic, and prone to excessive trend extrapolation.  Historically, these preferences have led to overvaluation of stocks with high growth prospects and stocks with strong growth track records.  Investors also tend to be overly confident in their decisions, and as a result, reluctant to embrace change and conflicting viewpoints.  Investors are extremely loss averse, creating the tendency to sell winners too soon (i.e., so they can’t become losses) and to hold on to losers too long (i.e., in hope they recover and become winners).

   To avoid letting emotions influence decisions and retain objectivity, behavioral finance experts recommend employing independent third party reviews, designating someone to play the devil’s advocate role, utilizing checklists, requiring decisions to be data driven, predefining sell rules, and ignoring your cost basis.  We suggest that Downside Risk Alert can function in any and all of those ways!

3. We believe a long-term focus encourages success.
   Our research has overwhelmingly convinced us that it’s easier to predict long-term relative stock returns than short-term returns.  Long-term returns are primarily driven by fundamentals and valuation, which tend to be somewhat stable, whereas short-term returns are often driven by supply and demand effects, which often change direction quickly.  Long-term stock selection strategies benefit not only from higher signal-to-noise ratios, lower turnover portfolios are also is easier to implement.  Most institutional investors can’t consistently compete with hedge funds and other traders for short-term informational and trading advantages.  Over the years, we’ve seen many active equity investors shorten their time horizons in response to quarterly performance pressures.  But this evolution has not helped most managers, and in the process, has arbitraged away the former effectiveness of many short-term indicators such as earnings surprise.  Armed with an objective stock selection process, long-term investors can take advantage of occasional excessive short-term price swings.

4. We believe that quantitative tools can help effective investors be more efficient.
   RIR’s research process is fundamentally driven, but quantitatively executed.  For us, quantitative tools are simply a means to an end.  We employ backtesting to discover which fundamental measures have historically been most correlated to future return and risk measures.  We use statistical analysis to learn how to best combine the investment perspective of many diverse indicators.  We run a multifactor model to gather up-to-date values for dozens of data inputs, combine those indicators into downside risk assessments on thousands of stocks, and to present transparent scores that facilitate screening and apples-to-apples comparisons between stocks.  Quantitative methods allow us to provide greater breadth, timeliness, transparency, and comparability than traditional research approaches – at a lower cost.

5. We believe being an independent specialist has its advantages.
   Conflicts of interest are way too prevalent in the financial world.  As an independent research boutique, RIR answers only to its clients.  We don’t have to create a broad product line or pursue growth to satisfy parent company shareholders.  We don’t have to issue biased recommendations to retain access to corporate managers or facilitate investment banking relationships.  We refuse to manage money and compete with our clients.

   As a specialist in downside risk research, we can focus on developing unique expertise and digging deeper than others.  In today’s highly competitive world, excellence in almost any field requires specialization.  Overinvestment and strategy creep are common causes of poor stock performance, so we avoid it running our own business.  Our stated specialty in underperformance forecasting gives RIR license to voice a strong devil’s advocate perspective on particular stocks without being perceived as obnoxious or an attention-seeking naysayer.

6. We believe in simplicity as a guiding principle.
   Investors often believe that more information is always better, but information overload can lead to decision paralysis or decisions based on inconsistent or irrelevant factors.  Complex systems are prone to failure, whereas simple systems are easier to build, maintain, and use.  But to paraphrase Einstein, the challenge is to be as simple as possible, but no simpler.

   The excellent book, Simple, argues that optimal simplicity is achieved when an organization commits to empathizing with clients’ needs and expectations, distilling product offerings down to the essential qualities required to meet clients’ needs, and clarifying a product’s content and features to make it easy to understand and use.  We agree.  RIR is willing to embrace the investment world’s complexity in our research as necessary, but we strive to provide products that are effective, reliable, and easy to use.  Clients only use products they understand, and clients only benefit from products they use.  To quote Da Vinci, “Simplicity is the ultimate sophistication”.

 

Our leadership team

Revelation Investment Research was founded in 2014 by Greg Forsythe, President, and Ryan Forsythe, Director of Research.

Greg Forsythe started his investment career at Zacks Investment Research in 1986 where he immediately assumed a number of leadership roles.  In 1991, Greg co-founded Chicago Investment Analytics, a early pioneer in providing quantitative stock selection research to institutional investors.  In 2000, Charles Schwab purchased Chicago Investment Analytics to help jumpstart Schwab’s conversion from “America’s largest discount broker” to a full-service advice provider.  From 2000 – 2013, Greg served as Schwab’s Director of Global Equity Research.  His team created and supported the Schwab Equity Ratings used for buy/hold/sell advice by Schwab’s investment representatives, self-directed clients, and actively managed equity mutual funds.

Greg co-founded the Chicago Quantitative Alliance in 1993 (www.cqa.org).  CQA is a global association of investment practitioners and academics who share a common interest in applying quantitative methods to important investment problems and applications.  Greg also has been on the editorial board of the Journal of Behavioral Finance for many years.  Greg is a Chartered Financial Analyst with an M.B.A. in Finance from the University of Chicago and a B.S. in Industrial Engineering from Purdue University.

Ryan Forsythe started his investment career in 2010 at the Capital IQ division of Standard & Poor’s.  Ryan was a quantitative analyst in the Quantamental research team that provided decision-making software, data, and modeling tools for a global equity investor client base.  Ryan has an M.B.A. in Finance, with a Behavioral Finance concentration, from DePaul University and a B.S. in Industrial Engineering from Purdue University.