The Merlon process is simple: we invest in undervalued companies where we believe market participants have become too pessimistic.

If a stock appears “cheap” relative to an unbiased and consistent measure of value, then there is some chance that other investors have become too concerned about risks or too pessimistic about future growth prospects.

Our attention then shifts to understanding why other market participants are concerned or pessimistic. To be a good investment, we need evidence that these concerns are either priced in or invalid. The expected return on the investment also needs to be acceptable relative to the risk of permanent capital loss. We incorporate these aspects with a “conviction score”.

Our valuation signals and conviction scores are combined to create a model portfolio. The model portfolio is constantly mapped against the live portfolio to generate trade ideas subject to a formal peer review process.