Objective Thinking and Selective Perception

Often, the path towards value investing is fraught with doubt and uncertainty. To the uninitiated, I was once a person who did not have any value investing principles under my belt, and it cost me dearly; both in terms of losses and opportunity costs. Once I had established my circle of competence through analysis and research, I could step down the path of value investing proper.

The principle of objective thinking is perhaps the most difficult aspect of investing. Investing is essentially full of emotions, even without looking at a stock market. You will have feelings of doubt, uncertainty, hesitation, regret as well as moments of extreme sadness and happiness depending on how your investments perform. Remember that we, as investors, cannot be right all the time, but the trick is to make small losses and large gains so that in the long run, you earn a decent return on your investment. Objective thinking involves evaluating a potential investment as well as ongoing review for one in which you already partially own. Ultimately, this will involve lots of reading, research and fact-finding. If you own a company in the oil and gas industry, then follow up on the news for oil and gas, including the demand/supply for oil, oil prices and the like. Warren Buffett himself has a voracious appetite for knowledge, and remember that knowledge makes one wealthy, while money makes one rich. Being wealthy is much more important than simply being rich, because people remember you as a human being instead of just recalling "oh yes he was a RICH person".

How does one remain objective ? Most of the time, I use numbers in order to ground my thinking. As most readers will observe, when I analyze a company and its financials and/or any corporate announcement, I will usually provide some number-crunching. Numbers are in fact the most objective method of evaluating a company. Other ways include industry review, management review and company prospects, and these can be subjective depending on which commentary you read. People write articles in business papers, digests and newsletters about a myriad industries, and sometimes sifting through the pile of information to gather actual knowledge can be a tough call. Using Google or Yahoo to search does help somewhat, but the Internet is still voluminous enough to frustrate most users who wish to search for information.

For example, a simple search on the fishing industry (because I own Pacific Andes) turned up all sorts of hits, most of which were unrelated to the fishing industry. It's difficult to find a specific research report on, for example, the fishing resources in various continents and laws and regulations on over-fishing in these areas. Yet, this objective research can make a difference when one evaluates his investment in a company to see if the fundamentals have changed. So, my advice to value investors is: don't give up so easily, and try searching for information using different phrases or words.

Selective perception (and retention) is a marketing term used to describe consumers who unconsciously tune out advertisements which do not suit their personal preferences. For example, a person who is not into cars would mentally filter out information about car models, designs and prices while flipping through a newspaper. Conversely, if he were interested in watches, he would pay particular attention to adverts on watches and be on an active lookout for good bargains and designs.

That said, when selective perception is applied to objective research, it can be very harmful indeed. This would imply that the investor effectively tunes out all news which is negative to his investment, and only chooses to acknowledge the positives. An example would be to filter out the information on an over-supply in AHTS for FY 2009 because it would force a re-evaluation of your decision criteria for selecting a company which builds AHTS. Instead, the reader would only concentrate on articles/news that validate his assumptions. This could result in errorneous decisions being made and in the worst case scenario, holding on to a company whose fundamentals have changed drastically.

To conclude, my advice would be to objectively analyze all pertinent information relating to the investments you own, as well as investments you wish to own. Absorb the good + the bad, and then make a decision based on the positives and negatives. As they say in this world, nothing is perfect; thus, people who see only a perfect world are inadvertently deluding themselves.