Friday, September 21, 2018

Five Reasons to Build Your Own Investment Models

Would you choose a prefabricated house or something you designed yourself?  
Take pride in what you build.

There isn't a correct answer, it's situational.  Sometimes you need shelter quickly.  Sometimes you want to see your vision turned into reality.
Generally when you are first starting out, working with what's readily available makes perfect sense.  Why would you put a lot of time and effort into building something when you don't know what you want?
But as you grow in knowledge, you start to develop insight and preferences.  You see what materials you like, you know how a certain layout would be not only beautiful but highly functional and you know the neighbourhood where it would fit in perfectly.
I think something similar applies with investment analysis.  
When you start out, you work with ratios and statistics that were built by someone else.  The cost is low and they do the job, hopefully.
But as you work at it and are exposed to new ideas you realize there's a whole world beyond PE ratios and dividend yields. You see how different variations of a familiar ratio would give you more insight.  You learn about calculations you cannot find for free.  You develop your own vision and something else:
You want confidence in what you are working with.  Is the information you base your investment decisions put together correctly?  If you build it yourself you’ll know it’s right.
You want to know how it's built.  There are variations in even the simplest ratio.  Sometimes the quick and dirty option is OK, but sometimes subtly matters.
You want information no one else has.  You realize that if you rely on the same statics as everyone else you are condemned to wander forever in the world of the efficient market hypothesis.
It’s fun and rewarding to build and work with your own creations.
Creativity begets creativity.  The more you work your own concepts, the more fuel you have.  It unleashes further ideas.
You know where you are in your investment life cycle.  If it's time to start turning your vision into reality, there's only one place to do it: INVRS.

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