Asking the Right Questions

I am a continuous learner. One reason I gravitated towards the stock market was because it gave me a platform to use the learning that I continuously absorbed from all around me a productive and remunerative outcome. It has also helped me in being humble because I keep making mistakes. This is a big difference from academic learning where people tend to learn to get a degree and prove their competence.

Unfortunately, the world is probabilistic and most often than not, we have to face up to the fact that we may not know as much as we thought we did. The markets keep reminding us that our knowledge is never complete and we need to question our learning and inferences all the time.

When we start to learn, most follow a standard process progressive elaboration - of understanding the basics and then going deeper into individual facets. That is what I used to do for the most part of my life. That is how we have been taught in school. But I am following a system that has started working much better for me.

When I start to learn something new, I jot down the questions I want to answer once I go through the topic. I typically take notes in OneNote. I have a box marked “Questions” on the top of the topic page. As I go through the learning process, I keep adding more questions that keep cropping up. Below the “Questions” box, I have my “Notes” box where I keep running notes, usually in bullet points. When I think I have understood the topic, I will revisit my questions and see if I can answer all of them. If not, go back to the learning process. Depending on the topic, it takes weeks or months to go through a topic.

After having followed this process for some time, **I have now come to realize that the learning is not dependent on the notes that I am taking from the material I study.** It is more from the questions I seek the answers to. Because subconsciously I am directing my learning to answer those questions. And therein lies the answer to a better system. **Trying to constantly improve the questions. Asking the more difficult questions. Questioning the questions.**

Just to give an example of a mini-project I am doing now (more on them later) on valuations.

Questions related to business valuation

* What are the most common ways to value businesses beyond DCF and Earnings multiples?

* Can one method be used to value or are multiple methods necessary to be used at the same time?

* Can businesses be valued accurately (even within a range)?

* Why does Buffett not use a spreadsheet? Does he do a DCF in his head? Or is DCF not that important as long as you have a good understanding of the business?

* How good are simple heuristics like PE, PEG, EV/EBIDTA in valuations?

* Can a multi-factor model work for valuations?

* What does history tell us about the correlation between valuations and stock price performance?

* What are the most common assumptions about valuations?

* How to know when my valuation is wrong?

* How are intangibles, corporate governance, management competence etc valued consistently?

* Is buying companies with low valuations better than buying companies with high valuations?

* Does market cycle determine valuation?

* Stan Druckenmiller says interest rate and currency influence valuations more than earnings. Is he right? Is it supported over time and across markets?

* Is narrative more powerful in the short run than valuation?

* Why is there such disconnect between private and public market valuations? Startups with no discernible earnings are being valued astronomically.

* Is there a model to accommodate systemic liquidity into valuation models

* Can valuation be disregarded altogether? How does a coffee-can portfolio generate above-average returns over time? Or a momentum portfolio for that matter.

Standard Disclaimer: Abhishek Basumallick is the Head of the equity advisory www.intelsense.in for long term wealth creation and a pure quant focused newsletter at www.quantamental.in. Nothing in the article should be construed as investment advice. Please do your own due diligence before investing.