The most popular request for specific topics include more posts on investments and investing.

I have been very reluctant to do so and there is a good reason I’m not doing this. The reason is that I simply do not have a good theory of investing (but neither do very many others). Investing science is still in the “collect data and make up a few ratios to rank a list”-stage.

If you look at books the best they/their authors can offer is a list of 10–20 things to keep in mind. (I have actually seen the same in many books on sail trim which is another complicated subject.) What this usually means is that the author does not have a coherent theory but is instead guided by tacit knowledge collected during a lifetime. It would be very hard or even counterproductive to offer such a list and expect people to learn from it and become good investors. Such lists are helpful if one already has a body of knowledge that an be fine-tuned.

There is no coherent principle one can use to derive these investment tips that I am aware off. Probably the closest one can get is the idea of treating stocks as buying a business. This is not a very rich theory though—it is too vague.

Consider the equivalent of blogging. Each day many new blogs are started. How do you find the good ones? One way is to use simple metrics like alexa, compete, or feedburner counts. This would be akin to sorting companies by revenue. The usefulness of this only go so far. A blog, for instance, may not be particularly valuable just because it is popular. Maybe it got mentioned in a newspaper or a magazine early on and gained a lot of readers that way. To compare blogs of different sizes, ratios are more useful. For instance, you can compare average time on site for different blogs to see how interesting they are to readers. This should only be done for blogs describing the same topic. You would not compare, say, get out of debt blogs to investing blogs much like comparing Return on Assets between powerplants, which have low values, and tech companies which tend to have high values merely due to the structure of their business.

Note that if you pay attention, you are getting some investment advice here. 1) Use ratios to compare similar companies. 2) Different ratios are useful for different types of companies. However, this is about as far as it goes, at least as far as I understand.

Since principles and theories are what I write about, I can not write about investing. Doing stock analysis which to me is to using fancy words to describe the ratios can be found in very many other places. So this is why there are practically no posts on it.

Maybe in 20 years, I’ll “get it”.

Note, that I installed a tweetmeme plugin, which makes it possible for you to rapidly annoy your followers by tweeting my posts by clicking on the button in the top right corner of the posts.

Originally posted 2010-02-22 12:28:54.