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But, investing is a far more complex subject. That isn’t to say it is necessarily a difficult subject. For some, it is relatively easy. But, it is never simple. An investor can not analyze relationships with the certitude and precision a physicist can. The investor is concerned with human phenomena, which are necessarily complex phenomena.

The complexity of the subject is what makes it appear so difficult. While you can develop a set of guiding principles, it is impossible to devise rules that will lead you to the best course of action in each and every case.

If you try to build an intellectual edifice based on principles such as high returns on equity, strong consumer franchises, low price-to-earnings ratios, low enterprise value-to-EBIT ratios, high free cash flow margins, and rock solid balance sheets – you will fail.

The entire structure will collapse, leaving the architect disillusioned. Why? Because the items listed above are desirable attributes – nothing more and nothing less. They are not true principles. Even as rules of thumb, they are badly flawed. Ultimately, investment decisions are not made about general classes; they are made about special cases.

Every investment decision requires good judgment and sound reasoning. You need to start with the correct principles. But, principles alone are not enough. You aren’t being asked what the law is, you’re being told to apply the law to the case before you.

• This is where a lot of people start to feel overwhelmed. Having learned that investing is not simply a matter of running down a checklist, they don’t know where to begin.
• The answer is to start with what you know best. Begin with your most strongly held beliefs. Subject them to honest scrutiny. Then, and only then, apply them to the case at hand.
• Do you believe the concept of intrinsic value is a valid one? Do you believe it is a useful model? If so, then begin there. What does the concept of intrinsic value really mean? What conclusions follow from this belief?

In the case of intrinsic value, the most difficult conclusion you’ll have to grapple with is the idea that you can pay too much for a great business. For some, this is a relatively simple conflict to resolve. For whatever reason, they prefer cheap merchandise to quality merchandise.

• For others, the conflict between intrinsic value and investing in great businesses is painfully difficult to resolve. But, if you are ever going to have confidence in your judgments, you have to be willing to submit your investment beliefs to honest scrutiny. You have to be your own prosecutor. You have to present the evidence against your thesis.

If you aren’t willing to do that, you’ll end up questioning the investment beliefs you do hold every time you underperform the market. Many proven investment techniques have lagged the market over short periods of time. Occasionally, the performance gap has been very wide. Regardless of whether you adopt a primarily qualitative or primarily quantitative approach to investing, this short-term underperformance is unavoidable.