“Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.”

Peter Lynch

Peter Lynch is one of the best investors of all time, he ran the Magellan fund, which earned an annual return of 29.2% from 1977 until 1990. In other words, if you invest like Lynch, with a starting capital of 20’000 USD, you end the 13 years  with 560’000 USD. 

If you are like me, you would be excited about this massive return. Anyway, if we analyze the quote, we can understand a fundamental concept about investing: it is not all about numbers.

Numbers.

If we think about finance, we are maybe forced to believe that it was a mere question of puzzling numbers, greek letters, or mathematics formulas.

“Read Ben Graham and Phil Fisher read annual reports, but don’t do equations with Greek letters in them.”

Warren Buffett

Numbers are an essential fact in the investment world, numbers tell us many things about the cash inflow and outflow of the money, but we don’t need complicated formulas. We only need basic concepts of accounting.
In the finance world, this part of the analysis is called “Quantitative”.

For quantitative analysis, we need the financial statements numbers, readable in the quarterly issue form produced by the company. It’s unnecessary to read the results of every quarter, but suffice to read the statements at the end of the fiscal year. We are looking for increasing revenue, a strong balance sheet and high margins, and we are looking for a management that is able to reinvest our money in the best way possible.

Remember: we want to invest in a small number of businesses in the long run, then we have to understand how those businesses work.

Stories

Numbers aren’t enough. I’ve to confess to you that I don’t like math, I prefer stories. Indeed, this is my favorite part of investing. The main goal of qualitative analysis (stories) is to understand the business’s side that it can’t be quantified in numbers terms. For example, understand how the persons behind the decision are, make an inquiry about the CEO. Who is? From where s/he came from? What did s/he do in the past? Did s/he grow in the firm culture or s/he is external to the company? Moreover, we want to know the goal of the firms and the culture inside the firms. Culture defines the value within the company. Consequently, the value and the attachment of the employers to the firm, happy and determined employers give a strong background to the firm, attract new and qualified people who want to work in the company. But even more important is the satisfaction of the customers who can be our friends, our parents or maybe ourselves. We don’t have to go far to find some answers.
But what we want to know above all is: what is the competitive advantage of the company? This part will be subject to future articles, because the competitive advantage is a crucial point, and it lies in the most part in the narrative side of the analysis. 
A competitive advantage allows the firm to survive and become stronger over time. Warren Buffett defined the competitive advantage of a company as the moat of a castle, a series of intrinsic attributes of a business that defend it by the outside attacks from other businesses that want to gain our customers and our market share, for example, Pepsi Vs. Coca Cola, Apple Vs. Samsung, and so on.

Investing is a craft.

Only if we can mix those two parts together, then we will come up with a complete thesis that will compel us to invest in a specific business for the years to come. To do that there isn’t a mathematics formula that gives certainty to our decision.

Academics tried hard to find a mathematical solution to harness investing, but precisely because investing is an art, this is an impossible task.
It would be far simpler to reduce investing in mathematical formulas and tell those formulas to the students in academia.

“Everything should be made as simple as possible, but not simpler”

Albert Einstein

Why is it impossible to reduce the investing world only in a series of formulas? Simply because finance is a complex adaptive system dominated by the human component that it is always uncertain. In this field, because of the human component, there is a lot of psychology and philosophy. This, will be part of my blog.
In the next article I will write about the interpretation of financial statements.

Stay tuned!

Following chapter 12. Starting point

Feel free to comment, share my article with friends and subscribe to my newsletter if you like my content and you want to follow me towards financial freedom.

You will obtain free access to my newsletter:

• Financial education
• A open minded and value oriented mindset
• Business and sector analysis
• A stoic and calm attitude towards the market ups and downs

No noise, only signal and high valuable contents

“Everything should be made as simple as possible, but not simpler.”

Albert Einstein