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."