Most of us do not easily part with our money. We like to think of ourselves as shrewd. We want good, reliable information before making a purchase. Yet, something interesting often happens when we decide we want something – we change from a dispassionate rational shopper to falling in love with the object we desire – particularly when there is a real or perceived scarcity factor involved. Our rationality can quickly give way to anxiety, greed and impetuousness. It is as if the brain short circuits and goes directly for the kill, as other more balanced considerations fade into the background.
It was against the backdrop of this reality that Ben Graham formulated his wise and proven approach to investing, he himself having been almost wiped out by the 1929 crash. At its heart, Graham’s approach to investing is very simple and rests on a relatively small number of timeless principles. Buffett has traditionally singled out two: The Mr. Market parable which crystallizes the proper way to think about market prices and the Margin of Safety which both minimizes the possibility of permanent loss of capital and provides a hedge against human error and ignorance.
I would argue that an equally important principle is encapsulated in Grahams definition of investing itself as found in The Intelligent Investor, to wit, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” [Emphasis added]
Now, it is said that the road to hell is paved with good intentions. No value investor worth his salt would not agree that he should do his homework before pulling the trigger on a new investment. The problem comes when that dispassionate analysis gives way to the greedy impulsiveness described above.
“This one is going to get away.” “Its about to run up in price.” “So and so has already established a large position.” “I’ll initiate with a starter position.” Man’s capacity to rationalize is limitless, and his good intentions provide flimsy guardrails. None of these reasons even remotely equates to “thorough analysis”.
Thorough analysis is part of the margin of safety. It reduces mistakes. It squeezes out luck and injects skill into the equation. It fosters conviction – the kind that really counts when prices inevitably move against you in the short or medium term.
Do not skip thorough analysis. If you got away with it in the past, consider yourself lucky and resolve never to do it again. (The funny things about markets is that they can sometimes teach the wrong lessons.) Chances are you can look back over your investing career and identify several investments where you skipped this step and lost money. In investing, just playing good defense and not having periodic material losses will go a long way to improving your long-term compounding.
Think of thorough analysis as an intergal part of investing. Resolve to not commit capital if you do not do this. Consider selling positions where you skipped the thorough analysis, or at least roll up your sleeves now and do it for all your holdings. Most skip this at their own peril and, if you do it religiously, it will go a long way towards identifying market-beating investments.