The L/S Event Path: How Top PMs Monetize Ideas
Distribution of Outcomes, Decision Trees, Balancing Short and Long Term (SPOT example)
Investors often talk about the countless “ingredients” you need for a great long/short idea, but framing the bull/bear case and defining a clear event path often gets you further than anything else.
The core points we outlined last week on the short-term bull case ahead of Spotify’s Investor Day were hit on Thursday. The stock was up +18% at its peak and finished +13% for the day. It was up another +5-8% on Friday, making it roughly +18-22% over the two days following Investor Day.
How do you reconcile this with our longer-term bull/bear case and thesis?
Today, we explain what it means to define an event path and why you should think about it as a decision tree. We also cover how the probability distribution of outcomes shifts with each event/node and how to balance the short term and the long term.
Event path has somewhat of a negative short-term connotation as it’s widely used at the large multi-managers (Citadel, Millennium, Balyasny), but it’s incredibly important and widely misunderstood. A well-defined event path should balance the full duration cycle of a stock thesis: The short-term, medium-term and long-term.
The setup
Remember that in How to Build a Scalable L/S Idea Generation Process last week, we defined guardrails/parameters for what would make Spotify a long or a short going into Investor Day, both for a shorter-term idea (0-3 months) and a longer-term one (18-24 months).