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Sozzi: In Defense of Old-School Research

On Wednesday, The Street put out a very thought-provoking piece from Dana Blankenhorn on whether old-school research is a valid tool for investors. It's a topic that obviously hit home because, honestly -- between you, me and those unique viewers out there -- I have built an entire career on living in a mysterious world that exists underneath the numbers that many dissect each trading season.

With that in mind, I have a couple of secrets to divulge. The first is that I appeared in my first financial-media video with The Street around 2007, when I explained why then-public teen retailer Hot Topic was a must-own stock going into Halloween -- an idea that worked out, despite my horrifically dry delivery. Secret number two is that, since I was an itty-bitty investing baby, I have watched Jim Cramer connect the dots on stocks with the masterful precision of a highly trained ninja warrior. I remember thinking, roughly six months into an associate analyst job in 2004, with a "coverage universe" of 15 companies: Man, I wish I could do that.

The message here is that, in order to gain a competitive advantage in anything, you must go above and beyond what every other person is likely doing. Intense, on-the-ground intelligence-gathering on a particular company or sector takes a serious amount of time, but it offers up a set of intangibles that no ridiculous spreadsheet is able to produce. I could whip up a 5,000-stage multi-factor model and still miss the fact that excess inventory is piling up at 10 Sears (SHLD - Get Report) locations -- a situation that could reflect that of 40 other stores, and which may therefore equate to weak underlying sales and profit-margin death.

Why go to such an extreme? Why run up and down the aisles of a Sears to look for things nobody else sees? The answer is, that's how you outperform an index ETF. That's how you outperform the newbie fresh from college, equipped with quantitative models and a burning hunger to prove him or herself. That's how you outperform your own expectations -- which is the only way to truly outperform -- and build wealth through the years.

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