Investing Simply. IN LEMONS.

Research Trends

Over the next several months, I will be exploring the premise behind the Ockham Research methodology, and more broadly, investing in general.  The goal at Ockham Research is to provide readers and clients with a perspective that we have gained over the years through multiple cycles and countless observations.

So what do we mean when we talk about investing simply?  In the most direct way possible, we are examining investments in the same way any logical person would review the purchase of any business.  We will talk later about the difference between a company and a stock in later posts.  For now, I just want to focus upon the basics.

So let’s start with the most basic of businesses to analyze, the proverbial lemonade stand.  Sure, its a bit beneath your investing prowess, but stick with me for a minute.  Suppose you are offered by a neighbor to purchase their burgeoning lemonade business and they present a purchase price of $10.  Let’s further suppose that you have always had an interest in lemonade, its production costs, its health benefits, and anything else that will keep you with me through this discussion.

What are the logical questions to ask?  Your neighbor stands before you with an offer to sell a business.  You now have the ability to ask him anything to help you assess whether or not the lofty $10 price tag is appropriate.  Do you ask:

     (a) What’s your trailing P/E?

     (b) Do you incorporate LIFO or FIFO in your lemon inventory?

     (c) Has the 10 week moving average broken a key resistance?

     (d) How much money does it make?

If you asked a, b, or c, you really need to take stock of your life, rather than living your life through stocks.  For all you logical people who question their neighbor about how much juice can be made from lemonade sales, you’re on the right path.

In the end, investing in companies, stocks, bonds, or lemonade facilities all have similarities that need to be understood at the basic and fundamental level.  Does the business make money?  Does it generate cash?  Does it make you, the owner, any money after paying off your lemon suppliers, squeezers, plastic cup dispensers, and advertising agents?

These are the questions that ultimately determine the value of an investment.  All other questions may present you with additional details to support or detract from your sentiment.  However, one could spend an entire career researching just one company only to unfortunately realize that the initial decision, answered by just three simple questions, would have led you to the same conclusion every time.

The bottom line is that if you are going to invest, you need to remember the basics.  Don’t get too caught up in the marketing magic of investment advice.  The greatest investors are those who can see the inherent value of an investment quickly and easily.  They do not require an army of analysts to decide an opportunity is worth their time.  They make that call in a matter of minutes.  Then they take the time to try to tear down that call using all available information.

Read up on Ockham’s Razor (also sometimes spelled Occam’s Razor) for a better understanding of how simple is superior in the decision making process. 

In our next post, we’ll examine the lemonade stand further, to extract more juicy insights.

Ockham Research Staff @ August 28, 2008