Investigate Later

The Legendary George Soros famously describes his approach to the market as “Invest first, Investigate later” (Soros, 2003). Many investors are not unable to understand this quote. Is it not much logical to do a thorough research about a company first and only then decide to invest in it or not? Why does Soros say something which completely reverses the process?

To understand the reasoning behind Soros’ famous quote, it is useful to consider a little anecdote by another famous investor, Nicholas Darvas (1960).

One day, when Darvas was studying the stock market, he came across an unknown company called M&M Woodworking. He had never heard of the company before. None of the financial information services could tell him anything much about it. His broker had even never heard of it. Yet he remained very much interested in the company because the daily action of its share price reminded him of another big winner he had in the past.

At the end of 1955, the share price of M&M rose more than fifty percent for a reason which nobody knows. After about a month of consolidation, the advancing volume picked up again, and Darvas decided to enter the market. It continued to rise and its volume of trading was consistently high. In no time, the price rose more than forty percent, and he took a handsome profit.

Remember, Darvas still knew nothing about the company at this point. He bought it simply because of the price action on the chart. It was only after the whole operation was completed he found out the reason of its advance:

“After I had sold it, I found out from the newspaper that the steady rise had been due to a merger, which was being secretly negotiated. It was eventually revealed that another company planned to take over M&M Woodworking for $35 a share, and this offer was accepted. This also meant that although I was in complete ignorance about the behind-the-scene deal, I had only sold out 2 points under the high. I was fascinated to realise that my buying, based purely on the stock's behaviour, enabled me to profit from a proposed merger without knowing anything about it. I was an insider without actually being one.”

So here it is. In a world of perfect information, in which every bit of knowledge in the market is equally accessible to every participant, it would be wise to investigate completely first and invest later. However, it is obvious that the real world is not like that. In practice, it is a foolish idea to insist upon knowing the reason of a move before getting into it, because by the time the reason becomes public, it may well be over. This is why it is a much better to invest first and investigate later.

REFERENCE:
Darvas, N. (1960). How I Made Two Million Dollars in the Stock Market. Secaucus, NJ: Lyle Stuart.
Soros, G. (2003, 3rd Ed). The Alchemy of Finance. Hoboken, NJ: John Wiley & Sons.