Scientific Approach
The stock market may seem chaotic, but beneath the price fluctuations lies a fundamental truth—stocks represent real businesses. By adopting an evidence-based mindset, we move away from speculation and focus on data, research, and logical decision-making. This approach helps us identify opportunities, minimize risks, and increase our chances of long-term success. Investing isn’t about chasing trends; it’s about understanding the underlying value and making informed choices that stand the test of time.
Stocks Mean Business Ownership
The chaotic price movements in the stock market reflect shifts in supply and demand over time. When demand for a stock rises, its price increases; when demand falls, so does the price. But what truly drives these fluctuations? At its core, it’s the desirability of the business itself. Investors aren’t just trading numbers on a screen—they’re assessing real companies, their earnings potential, growth prospects, and overall value. Understanding this principle shifts the focus from short-term price swings to long-term business fundamentals, making investing a more strategic and rational endeavor.
- Stocks Represent Businesses
- When a business thrives, its stock becomes more desirable, increasing demand and driving the price higher
- When a business struggles, its stock becomes less desirable, reducing demand and driving the price lower
Selecting Stocks That Will Stand the Test of Time
The reason why Warren Buffett has been able to predict which stocks will perform well is because he focuses on investing in highly predictable stocks.
- Simple businesses with easy-to-understand models and highly predictable customer habits
- Businesses with a durable competitive advantage, ensuring they remain unbeatable by other companies
- Businesses that are resistant to disruption by technology, with models that will remain stable and unchanged for years, or even decades
- Companies led by management with high integrity
Painting the Future with Evidence-Based Fundamentals
By combining the high-quality, intangible qualities of a company, as discussed earlier, with historical fundamental data and a deep understanding of the business and customer behavior, we can paint a highly probable future of where the company is headed in the years to come.
Looking at at least 5 to 10 years of historical fundamental data provides valuable insights into the business trends. Analyzing past performance reveals the company’s stability, growth trajectory, and how it has responded to market shifts. This long-term perspective helps anticipate where the business is going, increasing confidence in its future potential. Consistent patterns in the data offer a clearer view of the company’s future direction and how its competitive advantage will unfold over time.
- Strong brand and high-quality products that consumers will continue to support
- Leadership with integrity and a long-term vision for sustainable growth
- A well-established customer base with predictable buying behavior
- Proven track record of innovation while staying true to the company's strengths
- Consistent financial performance, showing stability and reliable growth over time
