The Freenoting Technique: How to Generate Powerful Insights While Analyzing Company’s Annual Reports

Understanding a company from scratch is hard. Understanding a industry from scratch may be even harder. There are no shortcuts to accelerate that type of understanding, or are they? What if there were a technique to generate valuable insights of the companies you analyze that no other analyst or investor came up with? What if you could generate genuine insights about the risks and competitive advantages of different companies? That for sure would give you an edge against the market, an analytical edge. 

In the 70s and 80s Win Wenger Ph.D. developed some of the best research related to the use of the subconscious mind to increase creativity and intelligence. Still not very widely known these insights and procedures appear now and then in the top “how the brain works” book of the year. 

One of the techniques he developed has a particulate use case for the fundamental investor or the equity analys, the Freenoting Technique. 

The bottle neck of the brain

For the individual investor, at the end of the day everything comes down to having a really good grasp and understanding of the business he is investing in. Besides the data and the teams of specialized analyst, the individual investors, given he is well prepared, will have the same kind of insight about a business that the portfolio manager in a long equity fund for example. 

The bottle neck is the brain, the capacity to generate insight given a set of public information. That’s why many of the great investors have only a handful of people to help them in the administrative stuff, but they don’t build great teams of analyst who’s job is to provide new ideas and so. This great investors focus on one thing and one thing only, the quality of their insights. 

So the questions that arise is of course: How can we increase the quantity of this type of quality insight?

Well, according to different research in the the field a good starting point is paying attention all the time to the internal perceptions that you have during the day. When you recognize that you had an idea don’t let it go away! Write it down, record and share those observations. The mere act of doing this will start reinforcing the behaviour of you being perceptive. 

You are brighter than you think

Wenger argues that we all start with the same equipment, and that a few of us got lucky and stumbled into different knacks or ways of doing things, ways of throwing a baseball, ways of imagining riding in a beam of light as a mental experiment, you get the idea. 

This initial small differences compounded themselves into big differences. Creating what we later called a genius. You get more of what you reinforce, that’s one of the most important laws of psychology. This initial behaviours or knacks where then rewarded and kept compounding to create a big difference in the end. 

This same principle applies to the behaviour of noticing things in you own peripheral awareness. 

Hot many times do you have ideas or a truly original insight but you let it go away without telling anyone or without even writing it down? 

That’s the reason Wenger insist in carrying around a “portable memory bank” where you can jot down your ideas and work on them later. The equivalent of fleeting notes to those familiar with the Zettelkasten and with Luhmann work.

So the first principle that we are going to use here is: you get more of what you reinforce. 

The second principle that is also used in the freenoting method is: what you describe aloud to an external focus WHILE you are examining it, with your own perceptions, you will discover more and more of it. 

This is basically the Socratic Method in action. Socrates would structure his sessions with students in way such as they have to describe a problem out loud to a crowd of listeners so they can get more insight on the problem at hand. The mere act of describing the perceptions to an external focus reinforces the behaviour of perceiving the object of study so you get more perceptions of it. 

“Most men stumble over great discoveries. – But most, then pick themselves up and walk away!”

Winston Churchill

Freenoting step by step

The typical phrase when you are trying to learn something si “If I could just get a handle on it…” And really, what we mean is “If I could increase the neurological contact to what with are trying to learn…”.

This is a very “Feynman” type of notion where you are really trying to imagine or build a scaffold help with the acquiring of knowledge. 

The third principle that we are going to use then is: increase the neurological contact with what you are tying to learn. 

Wenger (1992) provides a clear example related to this principle: 

Pick one chair with the little finger of one hand. It can be done but it will be very difficult. Pick the same chair using your whole hand and both of your arms. Much easier right? Same principle.
You have been learning how they told you to learn, by direction and example. You were using a tiny part of your brain instead of using it all. 

Imagine the smell for each item you are trying to remember, imagine the feelings of the person involve in that epic episode that is being mentioned in history class. This are ways of increasing the neurological contact to what you are tying to learn. 

Imagine being the CEO of the company that you are tying to analyze and think how does he feel, which are the incentives that he is maximizing for? There are thousands of ways to strengthen the neurological contact to what you are tying to learn. Of course the method of Zettelkasten is one of those too. 

So far then, we mentioned three key psychological principles in which the freenoting technique for analyzing annual reports and any kind of reading material is based upon: 

  1. You get more of what you reinforce. 
  2. What you describe aloud to an external focus WHILE you are examining it, with your own perceptions, you will discover more and more of it. 
  3. Increase the neurological contact with what you are tying to learn. 
  4. The freenoting technique is leverages all of them. So, how do you freenote? 
  5. Freenoting technique

To start freenoting while reading an annual report or a non fiction book that interest you do the following: 

  1. Start reading and every page or 2 stop and have a notepad or a laptop where you can start writing. 
  2. Write furiously all your perceptions and ideas, everything counts. Objections and counter objections. Random thoughts. The key here is to not stop to consider is something is worth writing or not. You need to clear the pipe for good ideas to come. More a less like this idea of the creativity explained by Julian Shapiro here and shared by Ed Sheeran here
  3. Try to start writing your perceptions of the topic at hand but don’t worry if you have perceptions and ideas that go off topic. Keep writing. Each idea recorded is a solid handle with which you can grasp and hold what you are trying to learn. 
  4. Keep writing for a few minutes and then review on the experience. Did you discover ideas and concepts that were mentioned later in the book or lecture?

As you can see the idea is to bypass the editor of your conscious thoughts and gain access to your unconscirous creativity.  

Have you had this experience of being in a meeting wanting to say something and having a really hard time to pay attention because you want to say something at the same time? Same principle here. 

The important thing is that you write all you perceptions about the topic in as much sensory detail you can. This way you are using the 3 main principles stated above, you get more of what you reinforce, you perceive more about the topic and you get more neurological contact with what you are trying to learn. 

The main idea is don’t stop to ever consider if something is worth to write, if it occurred to you then it is ok to write. 

It’s like that famous Feynman anecdote where he was visited by a journalist in his office and the visitor was amazed of all the notebooks that were archived there. He commented casually that it was really fortunate to have a record of all of Feynman’s thoughts. Feynmann rapidly responded that those weren’t records of his thoughts, those WERE his thoughts. 

Of course now you know that Feynman is using the written media to think. He was thinking in the writing. Pretty much as the freenoting technique demands. 

For most of the ideas, you a re not going to know if they are good or bad until you finish to write them. So, if an idea pops into your mind it is better to jot it down. 

All learning is the creative act of the learners, without creation there is no learning and what makes good creating makes good learning. All the information has to be done thing to, before it can become useful information in the learners wetware. In fact there is no such a thing as teaching: all learning is a creating by the learner just as this lines that you are reading right now. 

To nourish the mind, information has to be transformed and re-re-re-re transformed. All learning is created by the learner with the presented data only as part of the context from where he is creating. 

This doing something with the information could be to relate ideas being read with other ideas (like in the Zettelkasten method) or to write something new about it without much thinking (like in the freenoting technique). 

So remember, next time you trying to understand something difficult or complicated just start jotting down your thoughts on the matter without stopping to think if what you are writing is correct. You will be reinforcing your creative self, you will be discovering more of what you are analyzing and you will be increasing the neurological contact to that which you are trying to learn.