Can you briefly explain what Nascent Trends is about

Our mission is to provide fundamental long-term equity investors with a competitive edge by analyzing a unique set of data that is not currently evaluated by others. Using our proprietary algorithm, we datamine technical publications to evaluate the innovations that companies are making to improve their competitive advantage. By identifying these emerging trends early, we aim to help investors make more informed investment decisions that can lead to outperformance in the stock market one or two years down the line. Our approach provides a forward-looking perspective on company performance, allowing investors to stay ahead of the curve and capitalize on emerging opportunities.

Why do you think datamining technical publications offers investors an edge

The financial markets represent one of the largest composite bodies of knowledge. Often, after conducting extensive analyses of financials and macroeconomic trends, we find that the markets have already priced in this information. This is because much of the data we are evaluating is already known to the wider public. However, we believe that there is a digital footprint that companies leave before launching new products or upgrades, such as design, manufacturing, or servicing innovations. While many of these innovations may not have a significant impact, some have the potential to be game changers. By assessing the cumulative quality and potential of these innovations, we can help investors get ahead of the curve and identify opportunities that are not yet reflected in market prices. Our approach allows us to provide unique insights into the potential impact of these emerging trends, helping investors to make more informed and profitable investment decisions.

Have you done any back testing of the methodology

As with anything related to the financial markets, there is no secret recipe that works all the time. However, we have found that companies that innovate at higher relative ratios, with regard to the number and quality of their innovations compared to historical patterns, tend to outperform their competitors more often than not. It can be difficult to make an apples-to-apples comparison since most businesses and products are a combination of various innovations. Nevertheless, we have run our algorithm in pure play areas like mobile phone lenses and found it to confirm our thesis.

To put our approach to the test, we have constructed small, mid, and large cap portfolios, each comprising twenty stocks selected solely based on the algorithm's analysis. We willfully avoided using traditional metrics for stock selection and portfolio construction, solely relying on the algorithm as the primary determinant of the portfolios' performance. We regularly publish the performance of these portfolios on Smartkarma. Despite avoiding other forms of analysis and limiting each portfolio to only twenty stocks, we have achieved relatively good performance, particularly for the small and mid cap portfolios. Therefore, we believe that a portfolio manager who combines our methodology with traditional metrics has an excellent chance of achieving outperformance.

Does the process help in analysis of all types of sectors and companies?

One common denominator across all industries is the need for continuous improvement to survive. As a result, we observe innovations happening across all sectors, though the nature and frequency of innovation may vary. Even in seemingly mundane products like packaged food or diapers, small changes in design can have a significant impact, such as a modified shape of a Pringles chip to reduce breakage during transportation or slight alterations to the grooves of a diaper to reduce the likelihood of leakage. However, some sectors may see innovation primarily in business processes that are not typically reported in technical publications. Sectors such as REITs, hotels, and malls may not lend themselves as readily to datamining, but most industries see technical improvements that we can use to generate insights.

How do you determine the quality and impact of the innovations

Determining the quality of innovations is a complex process, and we are constantly striving to improve our methodology based on what we see as effective or areas that we may be overlooking. Our current analysis incorporates several factors, such as the source of references, the timing of the innovation, the versatility of the innovation, and the number of similar innovations supporting or validating a particular innovation. By considering these factors, we aim to obtain a more comprehensive understanding of the potential impact and significance of each innovation. However, we are also open to refining and enhancing our methodology to ensure that we capture the most important factors and deliver valuable insights to our clients.