On filtering out the noise when investing

It’s an art, with no clear formula. You have to have a strong base, your belief system. But also have flexibility inside of you to adjust. And not only to adjust but seek out opposing views.

When reviewing a company for buying equities I no doubt focus on positives. What is going well for this company? What is working, what does its past look like, and what are the future projections. But then right away I turn around and ask, how can this company fail? What is not working? Tell me what the bad news looks like.

Sounds easy, right? Well, here is a little gotcha. Building a “bear case” is easy and it seems much more realistic in your mind than a bull case. Morgan Housel has a great chapter in his book Psychology of Money why the optimist sounds like he is selling you something, and the pessimist sounds like he is trying to save you. Loss aversion is what has kept us afloat for thousands of years and it’s entrenched in our minds.

You have to have a strong mind to seek for failure scenarios but not get entangled in them. They should become your danger signals. Unless you discover a clear red flag, a negative scenario does not mean that you drop the investment altogether. Instead, it becomes a signal for you to listen for during the lifetime of the investment and if you see it materialize, you might want to act.

But even that is not as simple as it sounds. Because shorts know this. When they attack, they look for the same weak spots you looked and then report on them as a 100% certainty, pure truth. That’s when your conviction truly gets tested. If you find the flaws first and still proceed with the investments, you might have a better chance of surviving the short attacks, negative media, etc.

As an investor, I love short reports. I used to despise them but it was a misguided reaction based on how media had trained me to look at short-sellers. I now treat them as equity analysts that put in time in their research and provide me with all that information for free. It’s up to me to decide what’s real and what is not real, what matters, and what does not matter. I manage the risk.

Information is everywhere and it’s growing. Separating gold from noise is the art, and is the key. If you can do that, you can profit handsomely.

When I look at an average person I encounter in forums, Twitter, subscription services, etc. I see a person that seeks certainty and not information for reasoning about an uncertain world. It’s the questions of price targets, inquiries of guarantees the price rising a very specific percentage, seeking multi-baggers (insert heavy eye roll from me), without putting in the effort to collect the information about what they are seeking.

Don’t get me wrong, I do like to think of potential upside, but it’s usually in ranges and directional movement. I don’t seek an answer to a question if a $45 stock can reach $60. Of course, it can! it can reach $600. That does not matter to me as much as its potential of moving up vs moving down, and potential of entering ranges of $60 vs $600. It’s a subtle difference on paper, but it flips your reaction to numbers. I am more interested in the movement of price AND volume, in strategic moves the company takes, that sort of thing.

So then that means we can throw out any kind of technical analysis and charts and just focus on fundamentals, right? Nope. Equally important, but again, the distinction is not worrying about certain numbers being hit and more of observing how the price behaves over time.