Most people's beliefs about investing are very tenuous. You will discover, of course, people that are quite passionate about investing. They don't view investing as some esoteric subject, but rather as a field well connected to the human behavior they see in their everyday lives.
For everyone else, on the other hand, beliefs about investing come in the form of passive understanding. The tendency is basically to accumulate an inventory of common dictums. Investing beliefs are formed much in the way a student prepares for a test. If the subject of investing had been as basic as a third grade spelling bee, this wouldn't be a problem.
But, investing is actually a far more complex topic. That is not to say it's necessarily a difficult subject. For some, it is fairly simple. But, it is never ever simple. An investor can't analyze relationships using the certitude and precision a physicist can. The investor is involved with human phenomena, which are necessarily complex phenomena.
The complexity of the subject is what makes it seem so complicated. While it is possible to develop a set of guiding principles, it can be impossible to devise rules that may lead you towards the best course of action in each and every case.
When you attempt to build an intellectual edifice based on principles like high returns on equity, strong consumer companies, low price-to-earnings ratios, low business value-to-EBIT ratios, high free cash flow margins, as well as rock solid balance sheets - you will fail.
The entire structure will collapse, leaving the builder disillusioned. Why? For the reason that the items listed above are desirable attributes - nothing more and nothing less. They're not true principles. Even as rules of thumb, they're badly flawed. Ultimately, investment choices aren't made about general classes; they are made about special cases.
Just about every investment selection requires excellent judgment and sound reasoning. You need to start off using the appropriate principles. But, principles alone are not enough. You are not getting asked what the law is, you're being told to apply the law towards the case before you.
This is where a great deal of people today begin to feel overwhelmed. Having learned that investing is not just a matter of running down a checklist, they do not know where to begin.
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