Behind every methodology, there is a thought process involved, a deeper way of thinking that drives decisions. It's the great "why" behind the action. Tune in to the Rule Breaker Investing podcast, as Motley Fool co-founder David Gardner explores three of his favorite types of thinking.

Confucius once said, "Study the past if you would define the future." In this segment, David breaks down the second form of thought, pattern recognition, and explains how paying attention and recognizing the patterns in the stock market can help the investors make quick decisions with confidence.

Make sure to tune in to the other two parts of this series:

Beyond the Money #1: Play Things Forward by Thinking in Systems

Beyond the Money #2: Recognizing Patterns in Investing

Beyond the Money #3: How Associative Thinking Builds Confident Investors

A full transcript follows the video.

 

This podcast was recorded on Oct. 7, 2015.

David Gardner: I'll say right up front how you'll become more awesome with pattern recognition. That is you'll just make quicker and more confident decisions. That's my experience when you start recognizing patterns. Now we all do this all the time and there is some relationship between pattern recognition and systems thinking. To me systems thinking is more complex, it requires deeper knowledge, and you really have to get in and see all those cog wheels and understand which direction they're spinning, and what's going to happen.

But pattern recognition, well what's a good example of that? How about our stock pick of MercadoLibre where from the earliest right up I think we were saying things like, "It's the Amazon and eBay of Latin America." Or sometimes you'll hear people say, "He or she," he in this case, "is the Elvis of Mexico." Whenever you hear people, I think Americans do this more often. To relate the rest of the world to America, we tend to say that's the Elvis of Mexico.

Or I just read an article this week on Twitter about the Buffett of Canada. And apparently there's now three or four people that are regularly called the Buffett of Canada. So as investors maybe especially as those of us who are Americans, I'm happy to say I have a lot of people outside of America who listen to Rule Breaker Investing, but maybe it's a particularly American phenomenon that we tend to do that. But anyway pattern recognition, right? You've seen it before and you've seen it enough times before, that you now see again this thing happening and it helps you be quicker and make better decisions.

Let me give a quick additional example and we'll talk about it in another Rule Breaker Investing podcast. I haven't got this one yet, so in future we'll talk about the hype cycle. I know many of you will probably know, Gartner the consulting firm developed this framework to describe the five stages of hype. And usually these are around things like new technology or you could apply it to a stock or the stock market overall.

Anytime you see hype there's a cycle there. And once you've seen it enough times you know which of the five stages, if you agree with the framework, if you agree with the pattern being recognized, you can sort of see which of the five stages we find ourselves in whether it's with 3D printing as the technology, or with GoPro as a company or a stock.

So it's pattern recognition and this is something where you have to let enough time play out that you gain this recognition over time. I'm not one of those people who thinks that we always get wiser as we get older. I think there's a lot of merit to say that a lot of the real geniuses show up before the age of 25 and they're often starting the companies that end up being worth billions of dollars later. I think there's a lot to be said for youth, but I do think that especially with pattern recognition, this is something that probably comes better to us as time passes.

David Gardner owns shares of Amazon.com and MercadoLibre. The Motley Fool owns shares of and recommends Amazon.com, eBay, GoPro, MercadoLibre, and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.