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What do you do when you try to pick a stock in the stock market? Not knowing too much about it, you probably look around for information about the company. What does it do? How much revenue does it make? What does it make money from? What is its p/e ratio? Hours later, you have looked at all the “important” variables – P/E, ROE, ROI, etc. and realize one of the following:

1) “Man, I don’t have a damn clue what this business does, but the numbers look okay!”
2) “Hmmm, can’t buy this stock because its [insert appropriate variable here] is too high!”

Now let me ask you, why are you buying / not buying this stock? Because the various financial variables indicate it’s under-priced? “It’s under-priced in a market that is expanding”, you proudly say, after analyzing about 43 different variables. Except over the next 6 months, the stock keeps getting more “under-priced” until you can’t stand it any longer and sell it at an even lower price!

What just went wrong here? Well, how do you know a stock is under-priced? In both of the scenarios above, the most important statement is I don’t have a damn clue what this business does! If you don’t know precisely how the business works, who their customers are, what value they are creating, and what the plans for it are, how do you know it’s under-priced?! Maybe it’s a company with a lot of potential; maybe it’s seasonal; maybe it’s being sued and about to go bankrupt. All of these and a million other things can create a stock with an “under-priced” or “ridiculously high” P/E.

The truth of the matter is, as an average person who hasn’t run that exact business before, you really don’t have much of a clue how it works! Let’s take a look at a best case example. Say you are a software engineer looking into investing in Google. Maybe you have a PhD in computer science and even know most of the search engine algorithms. Yet, even knowing all that, it’s still hard to grasp what Google is up to. You may know how some of the projects work, but isn’t the whole point to come up with new algorithms for things? How will you keep up with that? If you don’t, how can you know what the potential of those innovations are worth?

There are so many departments and so many projects. There are so many customers that are constantly changing. There are so many innovative new ideas floating around. You, as an outsider, can only really know the small 1 millionth of the information that the company broadcasts to you!

Can you find out about the enthusiasm of the people reporting to the CEOs?
Often times, the enthusiasm and drive of the people on the top are a big determining factor of how the culture of the company operates. What you see of the CEOs are the rare glimpses where they put on a mask for a public performance. How do they actually feel about their prospects? How do they really see the potential of the company?

Can you know what new plans for expansion are hatching in their minds?
As a business owner myself, my plans for the direction of the company isn’t always crystal clear. Sometimes, I just know the year is going to be good, based on my intuition and feelings which isn’t easy to logically express. There is no simple way to see things the way CEOs do, without being around them a large portion of the time.

Can you really know what the risks are without completely understanding what is being done?
Not knowing what the leaders of the company are really planning and thinking, nor the value of the innovations they make, can you really understand what is happening? It’s a common occurrence that something that makes no sense one way can suddenly make sense with extra information available. Maybe they redeployed certain resources to aim at a certain market they haven’t disclosed yet. Maybe they see that their potential customers aren’t trustworthy and that’s why they decided to pull out. Without being in the driving seat, most of the important information is simply missing! How do you calculate the risks of something with less than say 1% of the important information?

“Hey!” you might say, “I have all these ways I can get this information, etc., etc.” That is definately true! With sufficient time and resources, you might actually be able to gather most of that information… except in that case, you would (or at least could) be the person in charge! In order to truly understand another person, you have to be able to think the way he thinks. If you can do that, then you would have the skills to run the company! So unless you believe you have the capabilities of doing just that, your study of the numbers and risk factors really means next to nothing.

Therefore, if you are going to invest in companies (stocks are just a way of representing them) that you can run, then wouldn’t it make sense for you to just run them? It cuts out all the legal mumbo jumbo in the middle and extra expenses associated with a public image. Sure, you might get so good at it eventually that you can get someone else to run them (like Warren Buffet), but you can only gain that experience through actually having run a business and succeed in it!

So if you really want to become a good investor, start your own business and invest in yourself! See things as the CEOs see them. Only then can you truly understand what those financial “variables” really mean!

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