Dana: Thanks Dan! I think that’s a great idea. If I don’t do that, I’ll probably just spread everything across what I already have right away.
Hi Dana, that’s also a very acceptable method IMO. After all, they were your favorites one would assume. If they still are (and it’s enough diversity to invest “everything” into) that’s completely legit. If you only have 3-5 stocks there, it wouldn’t allow for enough diversity, even for a “concentrated” investor. 
Denny: That’s one fantastic post!
Wow, rare praise, dude. Thanks, Denny.
I’ve gone a step further than Dan …
Not exactly, Denny, but understandable that you would think so, since I didn’t want to get bogged down in full descriptions since this isn’t the place for it. I also do many of the things you mentioned and more. The part I really agree with is this: I study the financial statements mostly to find reasons not to invest like too much debt, or too much goodwill, or stock option abuse, or excessive growth of GS&A.
Amen. Everything I do is looking for red flags, not confirmation pro or con. I tend to lean to the con (pessimistic) side in order to not miss too many of those red flags should they exist. I’m not always successful but often enough to come out ahead most of the time. I’ve never found a company yet for which I couldn’t find any detractions. For example, one of my favorite companies (not necessarily stocks) has been SHOP. The biggest red flag for me has always been price and I have tried to say so in every discussion to the point where people probably got sick of hearing it.
Duma: In my experience particularly watching the fundamental folks battle the technicians, each approach is subject to significant error rates and each uses a retrospective experience to justify a future prediction.
Heck yes, that’s my whole point. Unless your name is Merlin or Sara Soothsayer, trying for accuracy is a fool’s errand. But we must have somewhere to start, right?
Your advice obviously fits more into the fundamental analysis and there is a HUGE risk of “confirmation bias”…in this case, putting in some guestimate of future growth rate for which you have no certainty…and thus trying to justify the stock price.
You’re assuming a lot, but for most investors, I might agree. Believe it or not, I completely ignore price when I study a company, to the extent possible. The bias direction is crucial of course, and I would like to think that my bias is generally toward the “con” or “skeptical” side of any argument. This has often led me to miss out on good investments. But my reason for maintaining this method is “Better to miss a good company than “get in on” a bad one.”
It is VERY difficult for a tech company to sustain high growth rates year after year…very difficult.
I agree 100%. My example of 40% : 1) was taken from the poster’s narrative, 2) may be unrealistic, and 3) if felt to be realistic, should not be allowed to run unchecked for more than 1 year – or column – in a model of ANY company. This is part of the requirement to be realistic, which is of course very subjective. A typical newer, high-tech high-flyer I might estimate sales growth as follows, just for a theoretical example:
Y1 50%
Y2 47%
Y3 42%
Y4 37%
Y5 34%
… Y10 34%
FlyingCircus: The other side of the value in doing such a model (as Dan suggests) is then in taking the next step: backing into the sales growth & profitability assumptions that would have to be made to justify the current stock price.
Sure. If all questions aren’t answered, that would be a logical step. However < > I would point out that this exercise needs to be done with much caution, as it is the epitome of just begging the user to be guilty of Confirmation Bias. On the other hand, it could tell the researcher using it whether or not the scenario is even possible. Note: Once the exercise is set up (save it as a template to use over and over!) it is a simple thing to plug in real-time numbers to see where the calculations fall.
This stuff is really general in scope. Regarless, “my” methods aren’t for everybody. No one’s are. But for board members asking, “What should I buy and when should I buy them?”, and always followed by, “Why?”) I think it’s a great place to start. A couple of months of doing that and all of a sudden you might hear something like, “Huh. So that’s how increasing inventories affects the Balance Sheet and the Income Statement.” When you hear yourself telling yourself something similar, guess what. You’re learning a valuable lesson and understanding an important part of investing.
Now some are still wondering …
“What does He* Want Out of This?” *He being anyone sharing
Recognition? "Rec"s? Notoriety? Fame? Book Deal? Monetary Gain?
Answers: No, No, No, No, No, Probably.
• Personally rewarding
• Better fellow investors to discuss stocks with
• Become a better investor
• Discover erroneous thinking and practice
• Improve our research methods for better results
• New ideas re: methods and things to look for
• New Investing ideas/candidates
• Discover flaws in analysis
• Higher Returns
Sharing, teaching and learning are why we’re here. So in the bottom line, yes, it’s self-serving, but it could benefit numerous (all?) investors here and if done properly (using discussion vs. arguing, suggestions vs. accusations, generosity vs. greed—like we insist upon here) everyone wins. Just as importantly - more? - no one is hurt.
Just because the world isn’t perfect, does not mean we have to work in the center of a battlefield. And if anyone here is successful, does that mean his/her success detracts from someone else’s? Not in the least. But why should they want to help us? Because maybe we helped them. Maybe because we try (I, in particular, am not always successful) to check our egos at the door, and do that which helps everyone the most, ourselves included: Listen, Teach, Learn, Enjoy.
Listen, Teach, Learn, Enjoy.
How?
Step 1: Laugh at yourself.
Step 2: (nope … everyone must master step 1 first)
Why?
Life is simply too damn short for anything else.
Dan
Well, you asked.