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Investing with Confidence (Page 1 of 2) |
Most peoples beliefs about investing are very
tenuous. There are, of course, people who are very passionate about
investing. They don't view investing as some esoteric subject, but
rather as a field intimately connected to the human behavior they
observe in their everyday lives.
For everyone else,
however, beliefs about investing come in the form of passive
knowledge. The tendency is simply to accumulate an inventory of
conventional dictums. Investing beliefs are formed much the way a
student prepares for a test. If the subject of investing were as
simple as a third grade spelling bee, this wouldn't be a problem.
But, investing is a far more complex subject. That isn't to say it
is necessarily a difficult subject. For some, it is relatively easy.
But, it is never simple. An investor can not analyze relationships
with the certitude and precision a physicist can. The investor is
concerned with human phenomena, which are necessarily complex
phenomena.
The complexity of the subject is what makes it
appear so difficult. While you can develop a set of guiding
principles, it is impossible to devise rules that will lead you to
the best course of action in each and every case.
If you
try to build an intellectual edifice based on principles such as
high returns on equity, strong consumer franchises, low
price-to-earnings ratios, low enterprise value-to-EBIT ratios, high
free cash flow margins, and rock solid balance sheets ?you will
fail.
The entire structure will collapse, leaving the
architect disillusioned. Why? Because the items listed above are
desirable attributes ?nothing more and nothing less. They are not
true principles. Even as rules of thumb, they are badly flawed.
Ultimately, investment decisions are not made about general classes;
they are made about special cases.
Every investment
decision requires good judgment and sound reasoning. You need to
start with the correct principles. But, principles alone are not
enough. You aren't being asked what the law is, you're being told to
apply the law to the case before you.
This is where a lot
of people start to feel overwhelmed. Having learned that investing
is not simply a matter of running down a checklist, they don't know
where to begin.
The answer is to start with what you know
best. Begin with your most strongly held beliefs. Subject them to
honest scrutiny. Then, and only then, apply them to the case at
hand.
Do you believe the concept of intrinsic value is a
valid one? Do you believe it is a useful model? If so, then begin
there. What does the concept of intrinsic value really mean? What
conclusions follow from this belief?
In the case of
intrinsic value, the most difficult conclusion you'll have to
grapple with is the idea that you can pay too much for a great
business. For some, this is a relatively simple conflict to resolve.
For whatever reason, they prefer cheap merchandise to quality
merchandise.
For others, the conflict between intrinsic
value and investing in great businesses is painfully difficult to
resolve. But, if you are ever going to have confidence in your
judgments, you have to be willing to submit your investment beliefs
to honest scrutiny. You have to be your own prosecutor. You have to
present the evidence against your thesis.
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