It’s still com­mon  to run into pro­fes­sion­als who can’t quite see the value of research.  My con­vic­tion on it is quite deep because it comes from apply­ing it directly to stock mar­ket invest­ments since the late 1980’s.  Yet not a week goes by where we don’t fine very smart, invest­ment savvy peo­ple who find it hard to grasp the value.  Of course the real issue is that they haven’t tried real research.  The bulk of what passes for “research” today is mostly com­men­tary which belongs in a news­pa­per, not a pre­tend research report. Bet­ting on horse rac­ing gives us another anal­ogy to try and con­vey the mes­sage.  [For a full account of this and great read­ing see this speech by Steven Crist, pub­lisher and colum­nist of The Daily Rac­ing Form.]  To the unini­ti­ated the key to bet­ting on a horse race is about pick­ing the win­ner.  That’s absolutely not the case.  Mak­ing money at the race track is about mak­ing bets where there is a dif­fer­ence between the odds offered on a bet and the likely out­come.  It may seem sub­tle but this real­iza­tion is crit­i­cal to under­stand­ing how to make money in the stock mar­ket using research. Like a bet at a horse race a hold­ing in a stock (long or short) will have a strong return if and only if future events trans­late into results that are not already expected and fully priced into the shares.  The research task is bro­ken down into two parts, the first is to fore­cast a stream of future events based on a fair amount of indus­try knowl­edge and under­stand­ing cur­rent prod­uct cycles, mar­ket and com­pe­ti­tion.  The sec­ond part is dis­till­ing this into what we call an intrin­sic value (IV) that rep­re­sents a point esti­mate for the future value of the com­pany based on this sce­nario. Both steps can reveal mean­ing­ful oppor­tu­ni­ties to make money.  In the first case we some­times dis­cover that the mar­ket holds an incor­rect, unin­formed or at least unlikely view of what the future holds.  Most describe this sim­ply as “know­ing some­thing other peo­ple don’t know” based on a new prod­uct, encroach­ing com­pe­ti­tion, key cus­tomer win (or loss) and so on.  There is some active research pub­lished in this area but unfor­tu­nately it is often very short-term in nature thus much harder or impos­si­ble to exploit. The sec­ond oppor­tu­nity comes from IV.  Even if the first analy­sis of future events agrees with the con­sen­sus view, it’s pos­si­ble that our analy­sis of how it will trans­late into com­pany value may dif­fer mate­ri­ally from the cur­rent stock price.  For most this area is harder to grasp and get excited about than the first one because it’s more abstract.  How­ever it is just as effec­tive and requires much less work.  In some cases wide dif­fer­ences occur and with lit­tle or no indus­try exper­tise or analy­sis these dif­fer­ences can be exploited.  A fairly broad and cor­rect appli­ca­tion of IV would be like “shoot­ing fish in a bar­rel” in terms of buy­ing under­val­ued stocks and sell­ing over­val­ued ones. Of course the best of all sit­u­a­tions is where the fun­da­men­tal analy­sis leads to a dif­fer­ent future sce­nario for a com­pany and there is also a large mate­r­ial dif­fer­ence in IV and the cur­rent stock mar­ket value.  As many investors would say this pro­vides both a “story” and a poten­tial “cat­a­lyst” for the gap between the two to be closed and allow the invest­ment gain to be real­ized.  In the absence of a clear cat­a­lyst the dif­fer­ence between the mar­ket value and the IV for a com­pany can per­sist or even widen for quite some time. Going back to the horse race bet­ting anal­ogy the power of research is in pro­ject­ing likely future out­comes with embed­ded exper­tise and then apply­ing a val­u­a­tion method that illu­mi­nates which bets are most and least attrac­tive.  The trans­la­tion to port­fo­lio con­struc­tion is straight­for­ward using a stan­dard range of posi­tion sizes, both long and short.