The market has certain expectations about the value of a stock based on an assessment of management's past performance, future outlook and its place within the universe of stocks. Based upon these expectations, whether they are rational or not, the market prices the stock of the company.

The Transparent Value investment philosophy is not based on trying to second-guess the market by making subjective assumptions aimed at trying to determine a company's "correct" price.

We prefer to try and understand what the stock price means. How many iPods does Apple have to sell, auctions eBay have to list, or packages FedEx have to ship to support their stock prices?

In other words, what is the required business performance (RBP) to support the price of the stock and what is the likelihood management can deliver this performance?

The cornerstone of our investment philosophy is the RBP probability, which measures the likelihood that the management of a company will deliver what the market expects of them. This approach mitigates investment risk by biasing the portfolio towards the management teams that have the greatest chance of delivering the required business performance.

Future performance is often priced into a stock by investors, however, which makes it more difficult for management to live up to the market's expectations. As a result, we often find that the likelihood management will deliver the performance to support the price of their stock is low. When we build an investment portfolio with the RBP probability methodology, we investigate the likelihood that management will perform over each of the next three years.