Geoff Gannon June 29, 2010

What are the 4 Most Important Numbers to Know About a Stock?

A lot of investors think they have to be scientists. They have to be rational. They have to be objective. And they have to weigh all the facts equally.

Some of those are good ideas. Others aren’t. Yes – You need to be rational when judging a stock. But I’m not sure you need to be objective. Let’s talk a bit about that.

I’ve said before that if you want to become a better investor, you should think less about stocks and think more about thinking.

Thinking about how you think is not objective. But it is rational.

Being objective means focusing on the stock instead of the investor. Scientists write papers from an objective view. They describe their experiments in a way others can copy. They don’t make science personal.

So why should you make investing personal?

Because it’s safer that way.

There’s a great book called

The Checklist Manifesto: How to Get Things Rightir?t=gannononinves-20&l=as2&o=1&a=0805091742

. It talks about how checklists can be used to break complex tasks into simple steps that prevent mistakes. Not just for amateurs. But for professionals. For experts.

People like doctors, pilots, – and yes – even investors make fewer mistakes when they use checklists.

I’ve talked about checklists in the past. In “Investor Questions Podcast #11: Why Does Evergreen Energy’s Stock Always Go Down?”, I said you should focus on stocks with Z-Scores of 3 or more, F-Scores of 3 or more, and 10 straight years of positive free cash flow.

I still think that’s a good idea. Investors who stick to those rules will make fewer mistakes than investors who don’t.

But that checklist isn’t good enough. There are other mistakes you can make. The checklist I gave you in podcast #11 won’t protect you against all of them. The most important rule I left off was price. Investors who don’t add a price rule to their checklist can still lose a lot of money.

I’ll give you a fuller checklist later. For now let’s talk about why you need a checklist in the first place.

I want you to take off your lab coat and put on a fedora. Stop thinking of yourself as a scientist and start thinking of yourself as a detective.

You walk into a hotel room. There’s a dead man in a business suit lying face down on the carpet.

The hotel room is full of clues. Dozens of them. But how do you know what’s a clue? How do you make sense of the data?

There are two ways to tackle this problem. One way is to start in gatherer mode. You walk around the room looking at stuff, taking pictures, and writing things down.

The other way is to start in hunter mode. Instead of starting with the data you start with a theory. Or a question. Or a hunch. You follow that thread as far as it takes you.

Which way is best?

I don’t like either of them. The gatherer mode …

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