Stratum Alpha
Flow through a network is set by its narrowest point.
Innovation raises the flow demanded along one path. Capacity at one point on that path limits the whole chain, and the company that controls the point keeps the economics. The constraint is addressed as capacity is built, so the rent closes.
Physics
A constraint is a wasting asset.
Constraint
Demand presses against the capacity of one point, so the flow through the whole chain is set by that point.
ScarcityCapture
The economics accrue to the company that controls the point, not to every participant in the chain.
RentDecay
Capacity is built in response to scarcity, so the rent closes. A holding lasts as long as the constraint binds.
ExpiryEvidence
A claim is held only as far as dated evidence supports it.
A constraint must be shown to bind
Lead times, order backlogs, prices that hold, margins at the constraint and customer spending that names it. Forecasts, vision and share-price performance do not show that a constraint binds.
ProofCapture must be shown
A company is held only if it keeps the economics of the constraint, not merely if it takes part in the chain.
CaptureDemand must end outside the cycle
The money is traced from the company through its customers to the final payer. Demand that substantially funds itself within the same investment cycle is rejected.
PayerUnknown is recorded as unknown
Where evidence is missing, the answer is recorded as missing and the position is reduced or removed. Price charts and momentum are not evidence of a constraint.
GapDiscipline
A position leaves on evidence, never on price.
Thesis break
The company no longer controls the constraint, the constraint moved or resolved, a competitor took the control point, or demand became circular.
SaleCorporate action
Acquisition, delisting or spinoff.
SaleNot a reason to trade
A price move, a profit or loss, an analyst rating or target, a sector call, or weight drift from price alone.
NeverRisk
Alpha owns equities and can lose value.
How does Alpha differ from an index fund?
An index fund owns a market. Alpha owns the companies that control a binding constraint, with weights set by the method.
Can Alpha lose capital?
Yes. Alpha is concentrated, and weights are not capped by volatility, so one business can have a large effect. Alpha can decline more than a diversified portfolio and can lose some or all of the capital invested.
Does the method involve judgment?
Yes. The evidence standards and sell rules are fixed in advance, but each company’s thesis, scores and demand verdict are written judgments, recorded with their sources.
Can a holding fall without being sold?
Yes. Price alone never triggers a sale, so a holding can fall until the evidence changes.
Does the annual rebuild have tax effects?
Yes. Alpha is liquidated and rebuilt each year, which realizes gains and losses in taxable accounts.
Where does Alpha sit in the portfolio?
Alpha is 70% of the Stratum Capital portfolio. It is not offered on its own.
Read the firm brochure.
The brochure sets out the portfolio, its risks and its conflicts.