An investor has four hammers in their tool box when investing. These four hammers can transpire across many types of investments. The four hammers of investing are time, information, analytics, and diversification.
When an investor understands the four hammers within investing it can make it much easier to decipher if the investor does have a good investment opportunity. If two or more of the edges are to the advantage prior to the investment the odds of the investment working in the investor’s favor are much better. Each of the hammers offers a different perception towards the investment, so let’s work on.
Time, the first of the hammers is the easiest to understand. Time is simply the amount of time needed to insure the investment will play out to the favor of the investor. Time in equity investing is one of the most important components, since it can be used with something like a major index and it’s long term performance history to estimate the potential success of the outcome over a long number of years. History often repeats itself in investing, since human nature hasn’t changed much over history, so time can play into that strategy.
The second hammer is information. Information is simply knowing something about the investment that may be new or different, or that will make the investment worth more than it is in the future. Perhaps a business has developed a new product, or it has a new service, or it purchased a complimentary business, or it could be expanding its footprint. Years ago when Chipotle first started expanding it built restaurants in new locations, and the people who were exposed to the new restaurant concept in the beginning had information that others not aware of Chipotle didn’t. Information combined with time is a great tool when investing in businesses.
The third hammer, analytics, is the most difficult for most. Analytics is the assessment of the investment’s statistics such as financial statements, production data, or any type of data to determine if there is viability in the investment’s value. Analytics is where the current or potential future value of an investment is realized and considered. It is the most difficult part for most investors as it requires learning of what to look for and how to do. Yes, it does require some math skills and accounting acumen also.
The fourth hammer is allocation. Allocation is the investor’s control, and usually is determined by the results of the other three hammers. Allocation determines how much of an investor’s funds will be committed to each particular investment. Proper allocation strategies can have a profound impact on results. Buffett and Munger have built their success on keeping their allocations to a few good investments. As Munger once said, “proper allocation of capital is an investors number one job.”
When working to make an investment ask yourself how many of the hammers you have in your tool box for a particular investment, and then allocate based upon your risk. If your hammers are good then you wait. As Munger also says, “the big money is not in the buying and selling, but in the waiting.”
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