ConocoPhillips (COP), Wells Fargo & Co (WFC): Investment Analysis is Overrated

Following a consistent set of principles sometimes leads to missed opportunities. For example, I took a look at another of Buffett’s favorites, Wells Fargo & Co (NYSE:WFC), during the early part of 2009 when the stock traded at just a fraction of what it sells for now. Although I could see that WFC was different from other large banks in many ways — especially culturally — I concluded that outside factors, such as interest rates and regulation, would ultimately determine how profitable Wells Fargo & Co (NYSE:WFC) would be in the future. I had no special insights into what level interest rates would be in the future, nor had I any idea how large the regulatory response might be in the wake of a populist uproar. As a result of not being able to understand the business, I had no basis on which to determine my margin of safety despite the appearance of an extremely cheap stock. I passed on WFC with no regrets.

Dun & Bradstreet Corp (NYSE:DNB) is an example of an investment that my principles allowed me to make with confidence. In May of last year, the stock traded in the mid-$60s per share. I knew the company had a wide moat due to its massive database of information on public and private businesses. I also knew how much money they had made from the database in the past and I had no reason to believe that the future would be any different. After verifying that I understood where the business was going, I determined that it traded at a double-digit normalized owner earnings yield — and I made the stock a 50% position in my portfolio. It now trades at $85 per share and I have since closed out my position.

Conclusion

There are many ways to make money in the stock market. I believe my philosophy offers the best risk-adjusted returns over a long period of time, but I am not closed to the idea that there may be other philosophies that better achieve that goal. However, I am certain that an investor without an investment philosophy is flying blind; how can she know which questions to ask? The important step for new investors to take is to develop a sound philosophy composed of a set of strong principles that guide all investment decisions.

The article Investment Analysis is Overrated originally appeared on Fool.com and is written by Ted Cooper.

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