Understanding the mechanics of storytelling can make you a better investor. Human beings have a strong need to organize the seemingly random events of life into a coherent narrative. Doing so creates a sense of order and meaning. Knowing exactly what makes a great story will help you build a framework to determine which stocks to buy, when to buy them, and when to sell. Let's look at the basic building blocks of a story and then discuss strategies to leverage them to make better investment decisions.

The idea here is that corporate leaders can be viewed as the main characters of living stories that unfold daily on the public stage. There is a striking resemblance between a great film (or novel, play, etc.) and a great investment. I've researched the art of story heavily for the past few years and decided that there are roughly 50 core principles of traditional narratives. Here are three essential ones:

    1. The hero
    2. The object of desire
    3. The central dramatic question

The hero
Traditional stories begin with a hero, or Main Character. This is someone the audience may not like, but they must empathize with his quest. Heroes are decisive, willful and intelligent. We may not agree with the morality of Michael Corleone (The Godfather), but we respect his decisiveness and will. We understand, on a primal human level, his desire to protect his family.

Consider the differences between former Apple (AAPL -0.60%) CEO Steve Jobs and current CEO Tim Cook. Fair or not, many investors consider Cook to lack the decisiveness, determination, and charisma of Jobs and blame this alone for the recent decline in Apple's stock price. Although Cook is seemingly nicer, investors don't believe he can deliver the next big thing.

Questions for consideration: Is the CEO of the company you are investing in decisive and willful? Is he/she intelligent? Charismatic? (Be honest, Fool. Do you even know his or her name?)

The Object of Desire

The hero needs something. If this need is made explicitly clear and the audience is emotionally invested in his/her acquiring the Object of Desire, the story is more compelling. In The Hunger Games, Katniss Everdeen wants to survive the games. The property has generated hundreds of millions of dollars because of connection the audience made to Katniss and their desire to see her survive. 

Consider the premium currently given to Tesla (TSLA 0.38%), which is led by CEO Elon Musk. He has clearly stated his desire to reduce the harmful impact from climate change by creating clean transportation. He spelled out his business plan this simply:

  1. Build sports car
  2. Use that money to build an affordable car
  3. Use that money to build an even more affordable car.
  4. While doing above, also provide zero emission power generation options

The stock has seen a massive run-up because people understand his plan and believe he will execute. They can track his progress. They also find the quest to create clean transportation inspiring and valuable.

Questions for Consideration: Exactly what is the CEO of your investment attempting to do? (Be specific) Do you understand the goal? Can you measure the progress? Do you find the quest engaging or inspiring?

Central Dramatic Question

Traditional stories revolve around a simple, clear Central Dramatic Question. In True Detective, will Hart and Cohle catch the killer? In Finding Nemo, will Martin find his lost son? In Jaws, Will Chief Brody kill the shark?

Ever find your mind wandering during a movie because you don't know why the hero is doing something or think what he's doing is foolish (small f)? Once this happens the fun is over.

For example, when adapting Jaws, Steven Spielberg cut an affair between the Richard Dreyfus character and Chief Brody's wife. The story he wanted to tell was purely one of men trying to kill a shark.

A similar mistake often happens with companies. When companies inexplicably branch off into areas unrelated to their mission, legendary investor Peter Lynch called it "di-worsification."

Identifying a Central Dramatic Question (CDQ) for your investment thesis can reduce the stress associated with deciding when to sell. For example, the mission at Netflix (NFLX 2.72%) is to "Help content creators around the world find a global audience." An investor might create this CDQ, "Can Netflix acquire 150 million subscribers by distributing content from every major market in the world?"

By knowing the story you're tracking, you can decide which news items are relevant, assess their impact, and decide when the story ends.

The Wrap

In this article we've explored three core elements of well-told stories: The Hero, The Object of Desire, and The Central Dramatic Question. By relating them to the unfolding story of your investments, you're better able to track their progress and more likely to find the time spent rewarding.