My ignorance wasn't really surprising, since nothing in my earlier life had required such knowledge. Like most college teachers, I had just shipped my monthly pittance off to TIAA-CREF and forgotten about it. (When TIAA-CREF used to advertise themselves as serving people "with better things to think about," I thought it was funny, but I also didn't think about it.)
In short, I was at the mercy of the last person I talked to.
When I talked to value managers, their strategy made perfect sense to me. I'd hear "find strong companies whose stocks are trading at a substantial discount to their intrinsic worth and look for catalysts for change that will improve investors' perceptions." It's the classic "cheapness and change" mantra, and it made sense to me.
Then I'd talk to technical analysts, and their mastery of reading stock charts made sense to me. They'd talk about support and resistance and volume and cups-with-handles and it sounded like they had the keys to the city. Perfect.
Then the fundamental analysts would get their hooks into me, and that made sense to me too. After all, they'd say, it all comes down to the bottom line, and they'd show me revenue and earnings trends and projections based on market analysis and demographics and analysts' estimates. It's all about the numbers, and numbers don't lie.
I also took a long walk in the world of fixed income securities, but I can't really write about that or I'll have a flashback and have to stop. Bonds are a world unto themselves.
It wasn't until I came to Cabot that the truth finally dawned on me. It wasn't the case that any of those approaches to stock investing was right and the others were wrong. You could make money using any of them.
What was really at issue in the big debate was whether any of the methods of stock analysis could get closer to The Truth than the others.
And The Truth was confidence or certainty or conviction or whatever you want to call it. The real question was whether one method of stock analysis could approach certainty.
But none could.
About the best any analyst could come to predicting whether a particular stock (or industry or sector or country or index) would beat the Wilshire 5000 Index (the Index that represents the entire U.S. equity market) was around 50%.
In fact, we used to say that if any equity manager could pick 51% winners consistently, he (or she) could rule the investment world!
The only truth I've been able to find is that the factors that move growth stock prices up or down are too various and unpredictable to be reduced to a set of written-in-stone rules. And in the final analysis, a 50-page analysis of every fact in the know universe about a particular company and its stock isn't much better as a guide than a page or two of good solid analysis. If longer were better, stock recommendations would reach book length in no time.
Any stock analysis that gets to 60% validity has done its job. Then it's your turn.
You have to buy well, cut losses short in the ones that don't work and let your winners run. And you need to have the general trend of the market on your side.
Ultimately that's what we preach at Cabot. And if it's more applicable to growth stock investing than other styles, well, that's where I came down anyway. I'm no thrill seeker, but I get more juice out of the growth style than any other.