Investing Knowledge

You've probably heard the expression, "don't sweat the detail" or "don't sweat the small stuff". But when it comes to investing, the devil is very often in the detail. Despite this, it's also true that experts in certain areas and accountants with an eye for financial detail often make very poor investors.

If you're a serious investor, this is a bit of a dilemma. Sometimes, you get the feeling that a potential investment is a wise one, due to a gut instinct backed up by some preliminary research. Perhaps you post your ideas on a suitable discussion board to see what others think. Then someone who is clearly extremely knowledgeable about some technical aspects of the company's product, for example, or perhaps a financial expert, points out a few shortcomings and you leave the share alone -- only to see it rocket in value as others realise the potential you'd identified.

Listen to the experts?

This has happened to me many times. The trouble is, so has the opposite; I've posted on a company I've thought presented excellent potential, only to have the downsides laid out (often in great detail) and the share price has tanked over time.

The problem with the "don't sweat the detail" approach is that -- whilst it undoubtedly does have merit -- it seems to imply that those who do go into the minutiae are somehow small-minded pedants. This is unfair. But it's also true that those who are overly cautious -- albeit due to sound reasons -- often miss the boat.

As with most things in life, the truth lies somewhere between the two extremes. Details are simply the attributes and measures of something; the trick is in deciding which are essential.

Be wise on size

A lot can depend on the size of the company. For the monoliths, it's certainly not as fruitful to go into the details as it is with small caps. Had you "felt", two and a half years ago, for example, that the party couldn't go on and that the banks had gobbled up too many unsustainable "assets" via securitisation, you may have sold investments in them, or even gone short.

But many experts could no doubt have explained to you exactly where you were going "wrong", and why, in tremendous detail. Then, earlier this year, the complete opposite was true.

Peter Lynch tells us In "One Up on Wall Street": "Investing in stocks is an art not a science and people who've been trained to rigidly quantify everything have a big disadvantage. All the math you need in the stock market, you get in the fourth grade."

There's clearly a lot of truth in this -- but what about the company that is so small that it's hardly on anyone else's radar? You need all the information you can get in these cases.

Balance

I believe in trying to strike the right balance between what you feel is going on in the real world, what you think is likely to happen in the future, the number-crunching detail to make sure the figures stack up, and further detail about products, markets and prospects. The smaller the company, the more detail you need to try to glean and sift.

The larger the company, the more your instinct comes into play. If you can balance your broad brush instincts with a good eye for informational detail, you'll make an excellent ideal investor. I'll let you know when I've cracked it!