Systematic Investing: The Basic Thought Process

Posted on January 4, 2007

In the book "Innovation and
Entrepreneurship", famed management guru, Peter Drucker, provides
a two-line description of the entrepreneurial process that we think can
be modified somewhat to provide an excellent summary of the investment process we, and many others, advocate.

Drucker states:
"Systematic innovation therefore consists in the purposeful and organized search for changes, and in the systematic analysis of the opportunities such changes might offer for economic innovation."

And now our re-working of this description for the investment process:
"Systematic investing therefore consists in the purposeful and
organized search for changes, and in the systematic analysis of the
opportunities such changes might offer for corporate profitability, and security valuation."

Key questions to ask when utilizing a corporate change approach to investing include:

What changes are important to focus on, and which are immaterial?

In what contexts are these changes relevant?

Are these changes that are already in motion or are they predicted to occur only via shareholder activism?

How might these changes effect the valuation of or perception of a particular security?

How do these changes effect the business risk profile and long-term growth of the company?

Has the "crowd" already spotted these changes so as to eliminate any profit potential?

We hope to provide additional thoughts on change investing in later posts.

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