Reaching Investing Enlightenment

Analyst Brendan Mathews shares his Zen koan for unlocking your innate common sense, developing a business owner's mindset, and becoming a significantly better investor suddenly.

May 4, 2014 at 12:00PM

The following article is exclusive content from The Motley Fool. While this is typically paid content, we are bringing it to you free because we think it is especially pertinent to your ability to invest wisely. 

Zen

Source: Flickr user Roberto Zingales.

During my final semester of college, I took a course in Zen Buddhism. I didn't know much about Zen or Buddhism at the time, and I don't know much now. But a few of the ideas stuck with me, such as the practice of studying koans. A koan is a short story, dialogue or phrase, often enigmatic or paradoxical, that is meant to produce doubt, followed by greater understanding and insight. I like the idea of koans, and I have one that applies to selecting stocks. It's simple, but I find it unlocks my personal common sense.

So here's my koan for investing enlightenment:

If a friend or neighbor approached you with the opportunity to purchase a minority interest in a local business -- say, a car dealership, restaurant, factory, or Web start-up -- what would you need to know? Now what if your friend ran a publicly traded company?

I find that this line of thought naturally brings me to all the right questions about a stock. Instead of thinking of it as a large, unrelatable entity that trades electronically every second, I think of it as a local business. And, by using that mind-set, I'm able to ask everything I need to know:

  1. Do you understand what the business does?
  2. Are the people running the business honest and talented?
  3. Does the business serve a useful purpose, generate a good profit, and please customers?
  4. Is the business sustainable? Can it grow? Does it have a competitive advantage?
  5. Is the price of the business reasonable relative to the potential profits you expect it to achieve?

Those are just common-sense questions that almost anyone could come up with, even without any investing training. But to ask them, you need to have a business owner's mind-set, which is hopefully what my investing koan helps you develop -- it has certainly helped me.

And, of course, if you bought a share in a local business, would you try to flip your ownership after a few months or quarters? Not likely; you'd be committed to holding for years or even decades.

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