Idea Generation - The Catalyst

It's getting paid that matters and the catalyst defines when that happens.

Some investors have a very structured approach to idea generation - they have a set of criteria or a checklist that must be met for something to qualify as a good idea. Others have a more general “anything can be a good idea” approach.

In any case, however, the so-called catalyst is critical. Ultimately, all you care about is getting paid. You may have the best variant view out there, but if you don’t understand the catalyst or the event that leads to the realization of that variant view, you won’t do well.

Granted, the catalyst is usually talked about the most in the multi-manager long/short market-neutral world, where you are being evaluated annually, need to have a high velocity of ideas, and most ideas are realized weekly/monthly/quarterly. But remember: the long-term is a function of the short-term. Even the value-oriented long-term investors need to see some inflection or change for their perception to come to fruition. Perhaps they care less about the exact timing of the catalyst or defining it, but it is still of utmost importance.

We know that you need to have a view of the stock that is both different from buy-side consensus and meaningful enough, i.e. you can’t just have a different view about anything. It has to be something investors care about that drives differences in KPIs, margins, eps.

But for you to profit, at some point the market has to shift from the existing consensus view to your variant view. That’s where the catalyst comes in.