To my thinking, all investing is a story you tell yourself about what you think will happen in the future.  For example, let’s pretend you’ve just had your first taste of coffee from a brand new, up and coming coffee company.  Let’s call it Brown Sludge Coffee.  You absolutely love Brown Sludge Coffee:  You love the drink you had, you love the atmosphere of their retail location, and their branding really, truly, speaks to you.  In fact, you think this place is so great, you can’t possibly understand how anyone wouldn’t love it if they tried it, and with their absolutely stellar branding, you think people will be flocking to the retail locations in their millions to try the same great coffee you had.  After that, they’ll be customers for life, you think.  You then rush home to see whether and how you can invest in this company in order to get yourself a piece of their inevitable future success.   

Implied in the story above is the belief you have about the future prospects of the company, or a story you’ve told yourself about why Brown Sludge Coffee will be a wild success.  You reason that the company today is doing everything right, and that they will either attract an increasing amount of world coffee demand in the future, or they will grow the coffee market by reaching non-coffee drinkers with their branding and marketing, or they will do both.  Whichever happens, you think Brown Sludge stands to sell more coffee in the future and increase their profits.  Therefore, you reason that if you invest today, your initial investment will appreciate over time or you will receive dividends for having a position in Brown Sludge, or both to some degree.  Thus, this made-up investment decision is based on a story about future profitability. 

My thought is that all investing is the same in this regard.  You see an opportunity, and you have reasons for thinking that taking a position today is a profitable proposition.  In our story above, the profitability story is based mostly on qualitative factors:  The product quality, the branding, and the customer experience.  You could also have more quantifiable reasons for thinking a position will be profitable.  In any case, regardless of the nature of the information, you ultimately are telling yourself a story based on that information about why a certain investment will be profitable in the future.  The goal for investors is to make sure the story they’re telling themselves is realistic.  This would involve doing some kind of due diligence to try to lend credibility to the investment story, which would increase confidence in the investment. 

The takeaway here is to think about the story you’re telling yourself when you’re about to take a new position.  Is the story realistic?  Upon what sorts of information is the story based?  Does it rely on lots of things going a certain way, or is it robust to different possible ways future events could unfold?  Is your story about why a particular company is going to become huge, or is it about a sector or industry that’s going to get huge?  Once you understand the story you’re telling yourself about an investment, your confidence in the investment will increase, or weaknesses in the story will be exposed, and you’ll see it’s not a good investment after all.