Conceptual Framework

First Principles

First-Principles Thinking in investing means reasoning from the most fundamental truths of finance and business economics, rather than relying on established conventions or analogies. Investors using first principles break a problem down to core drivers – cash flows, competitive advantages, growth fundamentals – and build conclusions from the ground up. This approach helps eliminate assumptions and biases by forcing an investor to ask: “What do we know to be true and immutable, and what can we logically infer from it?”

Employing first principles thinking as a standalone strategy offers several notable advantages. It allows investors to uncover overlooked opportunities by challenging prevailing industry norms and preconceived notions. This can lead to the development of more innovative and resilient investment strategies that are independent of prevailing market noise. Furthermore, it compels a profound understanding of the underlying business model and the mechanisms through which value is created. This approach can provide a significant competitive edge in identifying truly disruptive companies or grasping the long-term potential of nascent trends. By not being constrained by existing paradigms, investors might discern opportunities that others overlook,

Pattern Recognition

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Pattern recognition is the expression of all our biases, many of them unconscious, in evaluating things that are new or even looks familiar, but actually might be different. For example comparing Large Private Banks with Small Finance Banks in India.

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Pattern-Recognition Thinking, on the other hand, draws on experience, historical analogies, and heuristics. It’s the process of spotting familiar patterns, trends, or cues from the past to inform a current investment decision. In finance, this often means leveraging mental shortcuts:

Pattern recognition can encode hard-won experience into quick intuition. As one author noted, “Good pattern recognition is a superpower because it saves you time” (Bill Gurley – The Waiter's Pad) – an invaluable trait in fast-moving markets.

Both modes of thinking have clear benefits, and successful investors often blend the two. First-principles analysis brings rigor and original insight – it forces investors to justify each conclusion on solid logical grounds (e.g. “Is this business fundamentally sound and undervalued?”) without simply saying “It worked before.” Pattern recognition provides context and caution, reminding investors of historical precedent

Notably, even Warren Buffett, who preaches fundamental value, has built a “huge repertoire of base rates” (historical odds of outcomes) and a “well-developed pattern recognition system” from decades of studying businesses.

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But the problem with this students is they take the patterns which Warren relied on as “First Principles”

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In short, first-principles thinking and pattern matching are complementary tools: first principles yield fresh, unbiased analysis, while patterns offer practical lessons and heuristics. The best investors toggle between these modes – using fundamental reasoning to challenge faulty analogies or industry dogmas, and using experience-driven intuition to ground pure theory in real-world lessons.

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Blend both approaches

Why blend both? Pure first-principles thinking in a vacuum can become unmoored from reality – one might devise a brilliant-sounding thesis that ignores practical obstacles or historical evidence. Conversely, sole reliance on pattern recognition can devolve into bias and groupthink – blindly following conventional wisdom or chasing the last trend. (Pattern Recognition is good, but First Principles are Better | by Vijay Rajendran | Medium) Successful investors use first principles to generate contrarian ideas or validate assumptions, then use pattern recognition to check those ideas against reality (or vice versa). By combining the two, they achieve a balance: the courage to back original, non-consensus investments and the wisdom to avoid repeating known mistakes.

Step 1: Defining Each Approach Clearly

Step 2: How Each Approach Works Practically (Investment Process)