Facts and Numbers

• The Bottom Line: In investing, facts and numbers are the objective language of business, providing the bedrock for rational decisions and separating durable value from fleeting market stories.
• Key Takeaways:
• What they are: The verifiable, quantitative data found in a company's financial reports that describe its performance and health.
• Why they matter: They are the essential tools for calculating a company's intrinsic_value, establishing a margin_of_safety, and protecting you from emotional decision-making.
• How to use them: By systematically analyzing a company's financial statements over many years, you can understand its true earning power and competitive position.

Imagine you're hiring a detective to investigate a case. Two candidates apply. The first, “Story-Stock Steve,” is incredibly charismatic. He tells you a thrilling tale of hunches, gut feelings, and chasing dramatic leads. He doesn't have much evidence, but his narrative is so compelling you can almost see the culprit. The second candidate is “Value-Investor Veronica.” She's less flashy. She opens her briefcase and lays out a file filled with fingerprint reports, financial records, timelines, and verified alibis. It's not a dramatic story, but it's a collection of cold, hard facts. Who do you hire? In the world of investing, you are the detective, and every potential investment is a case. The “facts and numbers” are your evidence. They are the objective, quantifiable data about a business: its sales, profits, debts, and the cash it generates. They are the contents of Veronica's briefcase. The exciting narratives, the “this stock will change the world” hype, and the breathless analyst reports? That's Story-Stock Steve. Facts and numbers are the language of business reality. A story can claim a company is a “hyper-growth machine,” but the numbers on the cash_flow_statement will tell you if it's actually generating any cash or just burning through it. A CEO can talk about a “fortress balance sheet,” but the debt_to_equity_ratio will give you the objective truth. Essentially, facts and numbers are the tools we use to anchor our investment decisions in reality, not in emotion or speculation.

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” - Benjamin Graham
¹⁾

For a value investor, an unwavering focus on facts and numbers isn't just a good habit; it's the entire foundation of the philosophy. It's the disciplined practice that separates investing from gambling. 1. The Antidote to Mr. Market's Mood Swings: The stock market is famously manic-depressive. One day it's euphoric, pricing companies for perfection, and the next it's panicked, selling everything in sight. This emotional rollercoaster is what Benjamin Graham called mr_market. If your decisions are based on stories or market sentiment, you'll be swept away by his moods, buying high and selling low. Facts and numbers are your anchor. When Mr. Market is panicking and selling a great company for 50% off, the numbers (strong profits, low debt) give you the courage to buy. When he is euphoric about a profitless tech company, the numbers (massive cash burn, staggering debt) provide the discipline to walk away. 2. The Foundation for Calculating Intrinsic Value: The central task of a value investor is to determine what a business is fundamentally worth—its intrinsic_value. This isn't a guess or a feeling; it's an estimate derived from facts. You cannot calculate the value of a business without knowing its earnings, its cash flows, the assets it owns, and the debts it owes. Stories are qualitative, but value is ultimately a quantitative estimate. Without reliable numbers, any attempt to value a company is pure fiction. 3. The Prerequisite for a Margin of Safety: The cornerstone of value investing is the margin_of_safety—buying a security for significantly less than its intrinsic value. This “discount” is your protection against bad luck, errors in judgment, and the uncertainties of the future. This concept is, by definition, numerical. It is the mathematical gap between price (a number) and value (a number you calculate from other numbers). You can only know if a margin of safety exists by first doing the numerical work to estimate value. 4. Adopting a Business Owner's Mentality: Warren Buffett advises us to buy a stock as if we were buying the entire company. How would a business owner evaluate a potential acquisition? They wouldn't listen to market gossip. They would demand the books. They would scrutinize the revenue trends, profit margins, return on capital, and debt levels. They would live and breathe the facts and numbers. By focusing on the same data, you shift your mindset from that of a “stock renter” to a “business owner,” which is crucial for long-term success.

Treating “facts and numbers” as your primary tool doesn't mean you need a Ph.D. in mathematics. It means you need a methodical process for finding and understanding the data that matters.

Here is a simplified, four-step process for a value investor to use facts and numbers to analyze a company.

1. Step 1: Go to the Source - The “Big Three” Financial Statements

Your investigation always begins with the company's official reports (like the Annual Report or 10-K). This is where the raw data lives. Focus on the three key documents:

• The income_statement: This tells you about the company's profitability over a period (like a quarter or a year). It shows Revenues, subtracts Costs, and leaves you with the famous “bottom line”: Net Income or Profit.
• The balance_sheet: This is a snapshot of the company's financial health at a single point in time. It shows what the company Owns (Assets) and what it Owes (Liabilities). The difference is the Shareholders' Equity.
• The cash_flow_statement: Perhaps the most important for a detective. It shows how cash actually moved in and out of the company. It can't be as easily manipulated with accounting tricks as the income statement, so it often tells a more truthful story.

1. Step 2: Calculate Key Ratios to Find Clues

Raw numbers are overwhelming. Ratios help you turn them into useful clues about the company's health, profitability, and valuation. You don't need to be a wizard, but you should be familiar with a few key categories:

• Profitability Ratios: How good is the company at turning sales into profits? (e.g., net_profit_margin, Return on Equity (ROE))
• Solvency Ratios: Can the company pay its bills? How risky is its debt load? (e.g., debt_to_equity_ratio, Current Ratio)
• Valuation Ratios: How does the current stock price compare to the company's performance? (e.g., P/E Ratio, P/B Ratio, Price-to-Sales Ratio)

1. Step 3: Watch the Movie, Don't Just Look at the Snapshot

A single number or ratio is almost useless. Is a 15% profit margin good? You don't know without context. A value investor's real insight comes from analyzing trends over a long period, typically 5-10 years.

• Is revenue consistently growing, or is it erratic?
• Are profit margins stable and high, or are they shrinking under competitive pressure?
• Is the company taking on more and more debt each year?

Looking at a decade of data turns a confusing snapshot into a clear movie of the company's history.

1. Step 4: Compare with the Neighbors (Competitors)

A company doesn't operate in a vacuum. To understand if its numbers are truly impressive, you must compare them to its direct competitors. If “Steady Brew Coffee Co.” has a 10% profit margin, that might sound average. But if every other coffee company in the industry only has a 5% margin, you've just discovered a clue that Steady Brew might have a significant competitive advantage.

This is the most critical part. The numbers tell you what happened. Your job, as an investor, is to figure out why. This is where quantitative_analysis (the numbers) meets qualitative_analysis (understanding the business). If profits are up, dig deeper. Is it because the company sold more of its great products to happy customers? Or is it because they sold off a valuable factory, a one-time event that won't be repeated? If a company has zero debt, is it because it's a wonderfully self-funding business, or because no bank is willing to lend it money? The numbers provide the questions. A deep understanding of the business, its industry, and its management—your circle_of_competence—provides the answers.

Let's return to our two fictional companies, “Steady Brew Coffee Co.” and the exciting “Flashy Tech Inc.”

The Analysis: A story-driven investor is immediately drawn to Flashy Tech. The narrative of “revolutionizing the future” and the explosive revenue growth are intoxicating. They see the stock price on the news and feel the “fear of missing out.” A value investor, grounded in facts and numbers, sees a completely different picture. The numbers for Flashy Tech scream DANGER. A company that loses more money the more it “sells” is not a business; it's a speculation. It's burning through borrowed money with no clear path to ever making a profit. It's a story stock propped up by hope. Steady Brew, on the other hand, is a value investor's dream. The story is boring, which is often a good sign as it keeps speculators away. But the numbers tell a beautiful story: consistent, profitable growth, a rock-solid balance sheet with almost no debt, and a business model that reliably generates cash year after year. The choice for the value investor is obvious. They ignore the exciting narrative and follow the compelling evidence provided by the numbers. They choose the predictable, profitable, and durable business.

• Objectivity: Numbers don't have feelings. They are the best defense against emotional biases, hype, and the persuasive charm of a charismatic CEO or a hot market trend.
• Comparability: Ratios and financial data provide a standardized yardstick to compare different companies, even in different industries, and to evaluate a single company's performance over time.
• Verifiability: The numbers in audited financial statements are, for the most part, verifiable facts. A company's claim to be “the best” is an opinion; its reported revenue is a fact.
• Foundation for Valuation: They provide the indispensable raw material for any rational attempt to estimate a company's intrinsic_value.

• They are Backward-Looking: Financial statements tell you what happened in the past. They don't, by themselves, predict the future. A great 10-year track record for a newspaper company didn't prevent its future decline due to the internet. The numbers must be combined with a forward-looking analysis of the company's moat.
• Susceptible to Manipulation: While numbers don't lie, they can be presented in a misleading way. “Aggressive accounting” can make a company look more profitable than it really is. This is why focusing on the cash_flow_statement is often a good way to check the quality of reported earnings.
• Context is Everything: A single number in isolation is useless. A P/E ratio of 40 is outrageously expensive for a slow-growing utility company but might be cheap for a dominant software company growing at 30% per year. The numbers must be interpreted within the context of the industry, the company's growth prospects, and its competitive position.
• They Ignore the Qualitative: Over-reliance on numbers can cause you to miss the bigger picture. Crucial factors like the quality and integrity of management, the strength of a company's brand, its culture, and its ability to innovate are not found on the balance sheet. As Charlie Munger says, “Not everything that can be counted counts, and not everything that counts can be counted.”

• financial_statements
• intrinsic_value
• margin_of_safety
• quantitative_analysis
• qualitative_analysis
• circle_of_competence
• mr_market