Making Decisions Without All The Facts

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Recently, as I continue to analyze my investing habits, I’ve noticed a couple of things I was and was not doing. One aspect that I had always adhered to was to “always invest in businesses that you understand”. Somewhere along my investing journey, I slowly started to morph the philosophy to a new meaning; “don’t invest in anything unless you know everything”.

Here is why I am wrong.

Before I continue, please click on the image below to download a PDF version of this article that you can take with you on the go.

Art Vs Science

I’m sure you have all heard that investing is more of an art than science. Since we are valuing the future prospects of a business, where the future is always misty, murky and mystical, there is always a point in our research where we know that no amount of study and diligence will uncover all the facts.

The 80/20 Rule

The 80/20 is a nice ratio to remember. It may even be more helpful than the infamous PE.

“By the numbers it means that 80 percent of your outcomes come from 20 percent of your inputs.” – Yaro

Tying it in, it means that the first 80% of the information comes from the first 20% of research.

Investing Without All The Information

This brings me to my main point. How many of us have missed many no brainer opportunities because we were spending the remaining 80% of our time to gather the last 20% of information?

When Buffett is asked about his worst investment ideas, his response usually refers to the missed opportunities, and boy am I feeling that these days.

“High uncertainty is frequently accompanied by low prices. By the time uncertainty is resolved, prices are likely to have risen.” – Seth Klarman

Quick Decisions Aren’t Always Bad

Spending time on research is a good habit, but sometimes, we can make good quick decisions by quickly visiting the latest annual report and the research done by others. As with all things, I’m realizing that being fluid is important.

One example is my experience with Dolby. I’ve missed my margin of safety price for Dolby twice because I was trying to wring out every piece of information in the midst of many other to do actions. I spent an hour or so every couple of days trying to listen, re-listen, read and re-read the conference calls, reports, past reports and discussions. I was basically determined to stick to my discipline of researching everything before investing.

When Dolby came within my margin of safety again, I again spent more time trying to catch up on what was different, what could happen and so on. Needless to say, I wasted too much time.

If Buffett can purchase an entire company within a couple of hours on a napkin, I think I should learn how to do something similar with a thousand dollars.

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8 responses to “Making Decisions Without All The Facts”

  1. Jae,

    You make some good points, especially related to the 80/20 rule.

    I would caution against taking this thinking too far, however. You are much better off having missed an opportunity than researched it a bit much. If you’re going to adopt a more “fluid” style, make sure that you have some sort of check on yourself to keep you from making hasty decisions. You can often miss a crucial bit of information if you try to act quickly.

    I think the best way, and this is how Buffett operates, is to be constantly studying businesses whether the price is “there” or not. That way, when the company comes down to a better price, you’re ready to act. If you study something in depth once, Dolby for example, make sure you take good notes and get a good solid thesis together, so if you need to revisit what you’ve already done, you can review the material and merely take a day or two to get up to speed (obviously depends on the length of time between the firs and second part).

  2. Jae Jun says:

    Good points Jeff. Everything you say is spot on and obviously it has to be applied to certain situations rather than taking it mainstream.

    It’s those times when a company suddenly falls from the sky and you don’t have days to look through it, you’ve got to make the decision of whether to buy or not. I believe it’s all about being able to apply specific thinking processes to the correct situation.

    But as you mentioned, it is still DEFINITELY better to not lose money.
    Although I kick myself for missing out on opportunities, Rule #1 is still Rule #1.

    I should seriously stop being lazy and write down notes on paper… 😉

  3. Jae,

    I tackle that in a couple of ways. One, I try to write about my investments on the blog. Most of what I own I’ve written about. It gets it all down, at the very least.

    Second, I try to have some things down in a basic spreadsheet, at least my valuations. They aren’t complex in any way, but I get them down.

    Lastly, when I read annual reports or Q’s, what have you, I’m always highlighting, underlining, writing in the margins, etc. When you need to look at it again, you can do so easily.

  4. Investor says:

    Looking back at my past mistakes, 2 areas have repeated. The stocks are cheap and leveraged. So over time I have avoided my temptation to look at only real cheap stocks that in many cases were a value trap. Look closely at the business and the business model.
    Picking up cigarette butts is a short term strategy so one needs to trade these if one desires. One that comes to mind right now is dds.

    How about develop a list of stocks with good prices now (hopefully cheap) that have good business models?

  5. andar909 says:

    hi, andar here, i just read your post. i like very much. agree to you, sir.

  6. Jae Jun says:

    Hi andar909

    Glad you enjoy it, and you don’t have to agree with me. LOL.

  7. Jae Jun says:

    I hold DLB now 🙂

  8. dgforvalue says:

    Very good and important point Jae.

    Going the extra mile does not always give you an advantage, given that 99% of market participants will never know some of the facts. In some cases it might even hurt you to know too much, a good example of this is some fact which occurred 5 to 10 years ago.

    Filtering out the important from the ‘not-so-important’/complete noise, is one of the most crucial qualities for an investor to have in my view. Not saying it is easy though. 🙂

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