Secrets of the Masters 19observation and creativity—show up in investing. When I ask in-
vestors, “What do you like in the market?” they typically reveal
their preference in their answers. The detail-oriented, linear think-
ers tend to give a response like this: “I like Merck right now. The
company’s earnings per share have been growing at 13 percent over
the past five years. Return on equity is 44 percent for the past year.
The current P/E multiple is 28.7x, which compares favorably with
the market average. They have three new products coming on the
market that look promising, and their debt-to-equity ratio is under
10 percent. Earnings per share next year are expected to increase
to $2.80 from $2.45.”
Contrast that response with this one from a creative, big-pic-
ture type: “I like the play on the graying of America. The baby
boomers are aging and will require more prescription drugs. So, a
natural play is the pharmaceutical companies.”
Notice the language in each response. The first is literal and
factual: “13 percent,” “44 percent,” “28.7 multiple.” The second
response is figurative and conceptual: “graying of America,” ”baby
boomers are aging.” In traditional investment dialect, the former
is known as a “bottom-up” approach: Start specific and work to
the general. The latter is known as a “top-down” approach: Start
with the overview and work down to specifics.
To revisit our sports analogies, Michael Jordan had to develop
complexity in his basketball game. He was born with a preference
for one hand over the other (in his case, right-handedness). It would
have been easier for him simply to become a right-handed dribbler
and shooter, but he knew that he would never dominate the NBA
with only “half” his weapons. Therefore, he worked tirelessly on
developing his “weaker” side.
Likewise, master investors must become equally skilled from
both sides of the brain. They must fire on all eight cylinders, which
is another way of saying that they must master complexity. Many
of us have well-developed preferences for one or the other poles,
but not equal facility with both—and that is why we fail to achieve03 ware 19 1/19/01, 1:00 PM