“…Triage is a system used by medical or emergency personnel to ration limited medical resources when the number of injured needing care exceeds the resources available to perform care – to treat those patients most in need of treatment first.”
Triage?…Now you might be wondering what any of this might have to do with investing – but with an open mind my hope is that a few of my fundamental practices when analyzing stocks might appear for people to apply to their own methods.
As a nurse in the ER, I apply the same philosophy regarding my investing style that I do at my job. Frequently when I describe this format to newbie investors, I get puzzled looks or a sense of confusion to how treating a sick patient is anything similar to investing in the stock market. I’ll use the example to help illustrate:
A fifty-year-old man presents to me at triage in the ER with severe chest pain. I immediately take into consideration what symptoms he is describing (subjective data), but I am also acutely aware of what symptoms I can test/detect during my assessment (objective data). I look for any and all risk factors that I know put his life in immediate danger – is he short of breath, can he describe his pain as sharp, dull, sudden, persistent, pulsating, localized, etc. What I am essentially doing is assessing all of the objective (what I can measure) and subjective (what he says) information I can. I must also remember to stay objective in my assessment. I never have the luxury of simply comparing his symptoms with someone else’s that I’ve seen before. Although our bodies act similar in processes when healthy, each person will have important differences when unwell that may make a huge impact on their immediate health outcome.
So maybe you’re asking “what does any of that have to do with investing?” For me, I analyze stocks in the very same fashion as I do with any patient.
So let’s go through the same process using a company instead:
Let’s assume company ABC is sick – poor economic environment, lawsuit, strike, poor earnings/decreasing margins, basically hammered down by the market for any variety of reasons. I first look at what I can detect objectively – I look through financial statements, at product quality, production capacity, any competitive advantage, anything or everything that can give me an idea of their business health at that given moment or in the short-term future. I then look at what I can detect subjectively – what does the company say, do, how do they act before any bad news, missed earnings, management changes, what are their plans to improve? What I’m looking for is the company’s general health using my value rules & approach, but also looking for the things that may make a huge difference moving forward on whether they can remain competitive in their market.
Two people, just as two companies, can be suffering from the same type of symptoms and yet be suffering from completely different ailments. It’s important to recognize what differentiates either from each other and to recognize any underlying value or fundamentals that give the company a strong recovery once they overcome the hurdle.
Yet, it is always important to never assume without knowing as much as you can. All of that research may seem overwhelming or tedious, but after repetitive practice both your speed & efficiency will improve so that you get a very good feeling of what actions you should take with your investment opportunities – I call this “Business Instincts.” This thinking process enables you to take the emotion out of the situation to make better informed decisions because sadly in my field of work when you make assumptions, people can die.