Patterns, Investment Decisions & Noise!

There is a lot of discussion happening about the companies and investment processes with Investors & people from our industry since I started my job in June.

Thinking Patterns MoneyMonk

Till date, I could figure out the following which(I feel) is required to find a great investment. I also call it my investment philosophy. (I know! You may say, It’s very simple!) But the simplest are the hardest to execute!

Great so far!

But when I discuss the this thing with fellow people, they always come up with an example to kill this hypothesis, where the Business was poor but share doubled, where Management was CHOR but share became multi-bagger and where Valuations were very expensive still stock produced great CAGR.

I fairly understand that a person who is taking decision shall take a role of Devil’ Advocate once in a while and he/she shall analyse it from different angels. Because it enables him to know whether he is making any thinking error or not!

But I found this pattern happening regularly with me so I had to think about it.

So, I thought about the same and checked whether Am I limiting myself by defining these 3 parameters and loosing out any opportunity?

The answer came, NO! Why no?

The reason being, Exceptions cannot be an Example.

The examples they were giving to me were the exceptions in the market.

There will be many inefficiencies & irrationality in a market which we can’t predict. This inefficiencies & irrationality will produce these kind of exceptions once in a while  which do not possess any specific patterns but they are reality. They might be zero someday but they are having expensive valuations at this point in time. There are no way we can find any kind of patterns or logic in them which could have enabled us to track them early on.

This reminded me a quote from Munger.

People are trying to be smart – all I am trying to do is not to be idiotic, but it’s harder than most people think. – Charlie Munger

What I am trying to do over here is not to be idiotic.

There are few areas which we can lookup to in present and which leaves us with greater probability of turning out our investments into a great one. I call them Patterns! I believe, If we want to be sensible & successful investors then we have to look at these patterns which are occurring every-time and producing deterministic results.

When we say, always look at a stock with Terrific Business, Honest Management & Attractive Valuations, we are trying to recognize a pattern which have higher probability of turning your Investment in to a great one!

It doesn’t mean that a stock with all of 3 characteristics will not be traded at lousy price after 5-7 years. It also doesn’t mean that a stock without any of these 3 will not become multi bagger.

But probability of catching a multi-bagger early on is substantially higher & better when you try to judge a stock on 3 parameters!

So, I just want to share with you only one thing. Don’t indulge into a discussion of what is good or what is bad. What has worked and what not! These are complete Noise!

Try to go to the fundamental truths of why company shall be called a great company. What are it’s characteristics? What makes it great one? Question these things often! Correlate the same with past 10 years multibaggers.

Try to find a pattern which you think will be better in finding out hidden gems.

Simulate the same thinking process in the past in such point of time and validate your thinking process yourself.

It’s your journey and you only holds the key to success.

Feel free to share your views in Comments. I would love to know what you think about them.

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