What I have learned during 10+ years of investing
Ten years of learnings from a stockpicker's perspective
This post is inspired by a post at Investacus.com, my old blog.
I have now invested for more than ten years, and it is suitable to reflect on what I have learned during these years; remember to take this from a perspective of a stock picker, as that is my investment strategy.
Don’t listen to others. You can’t borrow conviction. We have all been there; we want to take the easy ride and piggyback on someone, well, it can work for some cases, but in the end, it usually ends up in a mess. We rely on the case giver and are always the last to react when something happens.
With a lack of focus on the relevant in a case, 90% of investors focus too much on white noise. You, investors, analysts, and everyone in the investing community do include noise in our analysis and asset management. We watch the news, interviews, and so on, and 90% of it is noise and irrelevant signals, often because we don’t know what to look for. Essential to put up 3-5 things to closely monitor.
Focus on process as the outcome is diluted by randomness. Process + Randomness = Outcome. We can only handle one part of the equation, so focus on the process and evaluate your process to increase your probability of a favorable outcome.
Don’t invest in companies that have been claimed to be a fraud by reputable sources. Lex Wirecard. It should be an easy one. Well, with management doubling down and buying shares for millions. “Positive” indications from a not done yet report. It can be a powerful temptation to take a bet when it is so cheap and you think everyone is wrong. But it is not worth it, even if you are right.
It’s more important to be right on the big picture than the exact number. Sometimes we get stuck on the details, while the big picture is what truly matters. Some details need to be checked out because they can be devastating, see the above point, whatever if the margins come in around your estimate with a complicated or simple method. It doesn’t matter. Get the big picture.
Always invest in a thesis and follow it up continuously. To invest without a thesis is like being without a map; you don’t know where you started or where you are going. Start with a thesis, “what’s the investment case?” and the “sucker is going up” is not a thesis; it is the strategy of buying and hoping. With a thesis, we can know when to sell a lot easier than without one, and you need to know when a company becomes a weed in your portfolio so you can take it out and let your roses grow.
Don’t connect the share price with the progression of the company. In the short run is, the share price reflected by the flow of demand and supply of shares, not the underlying value creation. But in the long run, the value creation is 1:1 with the share price; focus on the company’s performance and not the stock.
Always listen to the bear side of the case, but don’t listen to general bear points. It’s great to listen to someone with a negative view of your case; if your investment case or thesis doesn’t stand to be asked those questions, then it is not a good case. However, when their argument is general: “What if the housing market goes down? What if the stock market goes down? What if the interest increases or goes down? what if a meteor falls on your head?” What if questions are impossible to answer and the asker wants to look smart? They are not smart; they just took the verbal high ground. The best defense is not to engage with them. Instead, ask them to say when the “what if is going to happen?” The usual answer is “I don’t know,” and that ends.
University studies in finance and other business admin subjects are not a waste of time to become an investor; it is the people who waste the information by not applying it in the real world. Most people who attended university say business and finance studies don’t help them at all. They either fail to acknowledge the value it gives them or are too bad at applying the knowledge in the real world. Business studies are the study of companies and the interaction between them; in understanding a company, the models, perspectives, and knowledge that is learned in university, from marketing, management, and accounting, to micro and macroeconomics, should be an edge to understand companies and it’s quality as of a business.
The effort is linear; profits are stochastic. Similar to the process and outcome relationship, it is the same with profits and effort. It would be best if you had continuous efforts to find cases, research them, and evolve as an investor. You should know when to run and when to rest. Of course, no one can run a marathon at a 100-meter sprint pace. With the effort there, the profits will come, but usually, they come in chunks and not in a linear straight line. Put in the effort first, and the profits will come.
In general, does a stock picker only need to focus on 1-5 things in a case, 1-3 risks, and a ballpark view of what the company should be worth (do what valuation method suits you). Everything else is just research for the investors to satisfy their control needs.
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