Make Fewer Decisions By thinking About Businesses Instead of Stocks

Are you good at decisions?  Experience teaches that all people think they are above average at making good decisions.  That is unlikely, but perhaps the rules of arithmetic have changed.

Truth is that the best decision makers and the worst are not far apart on initial decisions.  About a third of decisions work right out of the box.  What then separates good decision makers from weak ones if it is not the quality of their decision?

What they do next matters.  Good decision makers let the good ones run and quit the others.  Weak decision makers try to fix the poor decisions or let them drift with the idea that they will work out. Fix and drift are not a viable tactics.

To be a good decision maker you must do certain things:

  1. Make every decision with the knowledge that success is uncertain.
  2. Know how you will tell if it is working.
  3. Understand what you see.  If it is working understand what is working and see if it translates to other decisions.  If it is not, decide if you can amend the part you misunderstood early for the right price in the right time, then do it or quit.
  4. Report the result in 3) to a mentor, coach, or check person and get advice or moral support
  5. Pay attention to objective information.  Be wary of opinion.  Most opinion is part of the role the person is playing.

When it comes to investing, notice it involves the decision to participate in the market, followed by a decision to buy something, then followed by a decisions to sell it or keep it.

Three decisions.

Assuming you have decided to be in the market and know why, and that is not necessarily easy, what should you do in the face of opinions like this list I found on Twitter. All said, “The easy money has been made.” notice pervasive that idea is.

  • Barron’s Nov. 2009,
  • Morningstar Dec 2010,
  • Marketwatch Nov 2011,
  • The Street, May 2012,
  • Morningstar Dec 2013,
  • Barron’s Oct 2014,
  • CNBC March 2015

That advice is really of no value and it will not inform your trading tactics. Sometimes people just need something to say. Meaning is harder than that.

To buy effectively you need skill in knowing how much a security is worth and skill in knowing how the market values things.  If the market-offered price is less than value, you buy.  If you own it and the market price is higher than value, you sell.  People who think the stock market values securities tend to make mistakes.  The stock market prices securities and says little about value.

Prices are the result of the interactions and emotions of people.  Value is about the future cash flow from a business.

You can minimze the decision problem by investing in businesses that have a strong future.  The ideal is to buy something you can own forever.  Or at least until someone makes an irrational offer.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.


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