The Thought Process Is What Counts

The Thought Process Is What Counts

In value investing, it really is the thought that counts. The thought process is important. This is how you think about your investments and investment decisions. Analysis doesn't decide for you; it only serves to support the thinking behind the choices you make.

There are many analytical blocks and approaches to appraising company value and many ways to decide whether the price paid for that value is right. These are evident in the postings in this blog. However, it is repeatedly obvious that no single method works all the time, and if one did, everyone would make the same findings and buy the same companies and values would no longer be values. Every article, every book, every value investor has a unique application of the vlaue investing thought process.

The thought process is the intellectual process - the philosophy - that the value investor internalizes. The tools are there to help, and different tools will help more at different times. If you strive to understand the business value underlying the price before you buy, investing history will be on your side. As you get good at understanding value and price, your investment decisions and performance will only improve.

In the real, practical world of value investing, value comes in many forms. There is so much detail on any given company (much of which you can't know) that it often isn't realistic to become a walking encyclopedia on a company or its fundamentals. And formulas and ratios, although they work and can help, hardly can deliver absolute answers. Usually, taking a few shortcuts makes sense, reserving the deepest analysis to the most critical, difficult and largest investing decisions.

As a practical matter, the so-called Pareto principle, also called the 80-20 rule, applies to investing as it does in much of business: 80 percent of the picture comes from 20 percent of the questions you may ask or facts you may collect about a business. If you focus on most critical aspects of a given business, you'll get most of the picture, without digging up 100 percent of everything about it. If this weren't the case, you'd spend six months analyzing each investment.

You can't spend days on each company and you can't analyze all companies in the investing universe. A simplified, practical approach will help the new value investor get started, and will also help experienced value investors improve their game. You'll undoubtedly find yourself adding plays to your value investing playbook as you gain experience. And you'll also get better at finding that 20 percent that's really important.


Famed fund manager Peter Lynch, in his famous book, One Up on Wall Street, shared this wisdom: "Once you're able to tell the story of a stock to your family, your friends or the dog, and so that even a child could understand it, then you have a proper grasp of the situation."

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Summary

The Core of Value Investing is Your Thought Process

The central argument is that in value investing, your thought process and philosophy are more critical than any specific analytical tool or formula.

• Analysis Supports, Doesn't Decide: Analytical methods are useful, but they serve to support your thinking, not make decisions for you. No single method works all the time, which is why every investor has a unique application of the value investing philosophy.

• The 80-20 Rule Applies: In practice, the Pareto Principle is key: 80% of the understanding comes from 20% of the available information. It's neither practical nor necessary to know everything about a company. Focus on the most critical aspects to get the essential picture.

• Simplify for Success: A simplified, practical approach helps both new and experienced investors. A key test, endorsed by Peter Lynch, is whether you can clearly explain the investment thesis in simple terms that anyone (even a child) can understand. If you can, you truly grasp the situation.

In short, the goal is to internalize a philosophy of understanding business value and price, using tools and a focused approach to support that thinking, rather than getting lost in endless data.