Developing the Correct Mental Framework for Investing

Picture yourself as if you are Benoit Blanc – the world’s greatest detective. You have just stumbled across shares in a business that could be a once-in-a-lifetime opportunity! You comb through the company’s financial statements, assembling information piece by tiny piece. One financial statement is near-worthless without the others – they are interconnected. Only together do they begin to tell you the story of what has happened in the past; and what could potentially happen in the future. Slowly, a picture starts to form clearly in your mind. You take notes along the way; careful to document the facts, cognizant of the role that bias plays in the final conclusion that you will eventually reach. Based on your own logic and reasoning alone, a sound financial analysis of the facts allows you to calculate a fair value of the company in question. This, combined with a thorough evaluation of those appointed to run the business – and any other morsels of information you have been able to obtain along the way – form the basis for your eventual conclusion. As it turns out, this generational opportunity was nothing but a turd disguised as a diamond. Oh well! There is always next time.

This is investing in a nutshell. It is more important to say NO than it is to say YES. If you are doing it right, you should find yourself saying NO, 99 percent of the time! To be successful, you only have to be right a handful of times over the course of a lifetime, whereas one major mistake can sink you. Acknowledging this, it is best to make as few, well thought through decisions as possible. Conventional wisdom says that this is abhorrently risky. True wisdom is recognizing that as the quantity of decisions increases, the quality of decision-making decreases. This is especially true today, with the average human attention span being shorter than a goldfish; and everywhere we turn, something or someone is constantly vying for our attention – and a share of our wallet!

Success comes from making fewer decisions, wisely. Your investing strategy and portfolio should mirror this statement. Warren Buffet famously said, “You have a punch card with 20 punches on it. Every time you make an investment decision; you punch one of those slots. You only have 20 investment decisions for your entire lifetime – how hard would you think about each one of these investments? This is how you create wealth.”

When in doubt:

Try to buy shares in wonderful businesses;

That trade at a fraction of what they are truly worth in the long run.

Where the price you are being asked to pay today is so low,

That you do not risk losing money.