“Davidson” submits:
Enhanced analysis occurs whenever one has identified an information-quality difference between data sources which lets one allocate higher reliance to one data set over another. This occurs whenever one can successfully relate data series the rest of the investment community does not. Insider activity which is coupled to the financial performance histories of the respective management teams is a correlation which enhances the any decision incorporating both. Through the addition of a correlating price history provides a third element which greatly enhances one’s judgement. Taking this to the next level of adding the commentary and outlook of a management with which one has developed confidence, gives one insight to their views to the broad economic context which complements one’s own perspective. Correlating this information as one tracks 100 management teams, one gains a fairly complete picture of the entire investment space at any point in time.
1) Successful financial performance identifies a skilled management team
2) Insider buying identifies relatively good period of time to buy in management’s perspective
3) Price chart affirmation provides sense of market thinking on valuation
4) Management’s commentary in earnings calls and interviews, provides trusted insight to broader economic context.
5) Monitoring 100 skilled management teams is similar to having a personal staff of 100 analysts providing hands-on experience at any point in time.
Steps 1-5 taken in entirety form the basis of “The 3% Solution”. The 3% comes from the top 100 companies which one can identify through the screening process of the Russell 3000. Rephrased, one develops a sound Top Down perspective though one’s Bottom Up analysis on individual security analysis in conjunction with economic data. Analysis and investing is a continuous process of relating one’s individual corporate information to one’s economic and market context. One is reaffirming one’s investment decisions multiple times every day as information becomes available.
Enhanced analysis relies on identifying that information available always carries differing levels of reliability in relation to adding to the quality and confidence of one’s judgement. One must identify those information streams which are most useful. Then, one combines those which together expands one’s confidence to provide guidance in judging potential investment outcomes. With investing many split the perspective into qualitative vs. quantitative. “The Method” assumes that all information derives from qualitative sources. There is nothing mathematical or quantitative about management responding business conditions as they find them. Mathematical analysis is used sparingly and only to measure trends once identified visually in data. CVS qualified as one example with all the right attributes.
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