The Art of Streetplay

Saturday, September 03, 2005

Thoughts on the Nature of Good Analysis

Sorry for the lack of posts; I've been a little busy. I've been doing a lot of thinking about the nature of good analysis, and the pros and cons of being systematic relative to a more unstructured analysis. I've reached a few tentative conclusions.

  • As I've said before, I believe the rational paradigm is to be systematic when it's applicable to be systematic. Emphasis on applicability. Just because I have a certain skillset doesn't mean that that skillset will actually be useful in all contexts! That is most definitely true with value investing.
  • As Charlie Munger famously said, it really helps to have a lattice to structure the information that you take in. The information "sticks" better as a result and it opens the door wide open to levels of analysis that are inconceivable under another approach. For example, lets say you're looking at some company's balance sheet and you see that they have x square feet in land on their books. How do you process that data point? Well, it'd probably be more useful to consider that in the "breakup value" paradigm and not really a DCF standpoint. Or when I'm looking at stock prices, what information is there to be gained from that? Maybe it might be helpful to see how correlated your stock is to other stocks and to the overall market. The whole point is that it really does help to have those paradigms-- that latticework-- in your head so that you can turn that data into real usable information. It's very helpful to build the proper paradigms for thought.
  • There are indeed benefits to wading through information in an unstructured way. Even if at this point in time, we have a pretty good general idea of how we should be processing information, things change. What was important yesterday may not be quite as important today. Or entirely new paradigms may form. All this implies that it might be a good idea to always keep an ear to the ground and scour through bucketloads of information that may or may not be all that helpful, just to make sure that you haven't overlooked something which may be of the utmost importance.

IMHO, thinking about how exactly we should be processing data is extremely useful. Have you ever had that feeling after reading every article in a magazine or newspaper that it all simply went in one ear and out the other, and none of the information really stuck? I sure have. Useful paradigms are the solution.


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