After investing for a while you learn things, both about the industry and yourself as an investor. There are five broad lessons that I have learnt that I wish I was privy to when I started, and here they are.
Know thy investing self
Why am I investing? That is a crucial question. There are good reasons and some not so good ones. As an example, if I needed some amount of money in six months time that I did not have, investing what I did have in the stock market now would not be a prudent way to get it. Stock markets do tend to go up over time, especially when dividends are included in returns, but the time is measured in years, perhaps decades. Six months is not long enough to have confidence of getting a gain. Investing for retirement in 25 years is a reasonable reason for investing.
Aside from goals, style is also important. A portfolio of small cap stocks are risky, volatile, but can bring big rewards. However, an investor that is not comfortable will large swings in portfolio value will have a tough time holding it. If they wake up every day itching to check the portfolio, and go to bed worrying about it, and look at it all day, then they should probably invest a little differently. Investors need to determine their tolerance and ability to bear risk and invest accordingly. That might mean not investing at all, or perhaps leaning into bonds, or large cap defensive dividend paying stocks. Whatever the choice, its important to invest money that if lost will not leave them destitute.
Playing to strengths
A stock picking investor needs an edge, otherwise they may as well passively track the market. If they happen to work in an industry or sector, then their knowledge of it can be brought to bear in picking stocks from it. A biochemist might find sorting the winning biotech stocks from the loser simpler than others. Someone that works in retail may be better prepared to decide if those new store openings are going to be a disaster or not.
If I were able to start over I would exclusively look at stocks that operated in business lines, industries or sectors, that I had worked in or had deep knowledge of. Those stocks are the ones that I am more likely to generate unique insights into.
But, if someone is worried that they do not have deep experience of anything that might help in the stock market, all is not lost. Stocks are shares of companies that operate in the realm world. Sometimes that seems to be forgotten. A walk down the high street can be revealing. Is the local branch of that retail stock busy? Are customers leaving with bulging bags. Is the place clean, ordered, and inviting: would I shop here?
Try out a companies products, see who they would appeal to or not, visit their places of businesses, ask friends what they think of them. A great deal of information scan be gathered that might be missed by an analyst or foreign investor that does not have hands on experience of their own.
A pinch of salt
Is that hot stock every one is talking about really so great? Can all the tipsters be wrong? Yes, they can. So, the thing to do before jumping on board with a meme stock or something similar is to get a bit of perspective. Simply taking that stock and comparing it to its peers can be revealing.
Is there really anything different about the hot stock compared to others in similar businesses, and if there are differences can they reasonably support the hype around it—that’s what I would be asking. Are sales per employee remarkable or margins fat compared to what others are doing. Have a read through the strategy section of the hot stock and some of its peers and ask if it is really doing anything different. A comparison with peers can be grounding, or at least serve as a reminder that the hyped stock is not the only game in town and might not be so unique after all.
But say a stock really does offer something remarkable? The trouble is the fans are usually quite loud. Seek out dissenting views and honestly appraise why these should be ignored in favour of the positive ones. Perhaps there is an industry expert who blogs about whatever the hot stock does. They usually can provide a realistic appraisal of the business and what’s possible.
The past rhymes rather than repeats
Every single trading platform or investment product will warn customers that past results do not necessarily reflect future ones. There is a distinction to be made between luck and skill. A lot of people can do well investing in a bull market, especially a prolonged one. However, many tend to struggle in a bear market. It’s only after investing through at least one market cycles that luck and skill can reliably be pulled apart.
Defensive stocks like healthcare and consumer defensive tend to do well in recessions and the bear markets that accompany them, but nt always. In investing the past is more like guidelines rather than rules.
The guidelines get weaker when you move from whole markets, to groups of stocks, like healthcare, to specific stocks. You have all of the idiosyncrasies of the market, and industry, and also company specific factors blurting the picture at this level. Consider a company’s gross margins, and revenue growth over the last ten years. Say they look good. What if the company has just made an enormous acquisition. That might make that track record of limited value as the business has fundamentally changed, hopefully for the better, but often, as tends (there’s that word again) to be the case with glamour purchases, for the worse. The lesson here is that the past is useful probably only in so far as it can help with the setting of expectations, but those expectations have to be forward looking in basis, as its the future that matters in investing, and there is going to be a lot of judgement involved in that.
How can an investor improve forecasts and judgement calls then? Well, journaling the reasons behind every single trade is useful. Why was a particular stock bought? Is the reason because the market is underpricing it. If so what is expected to happen to make it change its mind. What is the company expected to do in terms of growth, cost cutting, acquisitions going forward. Perhaps the stock was just bought for its dividend, simple right? Ok, why that stock, why was the yield attractive? Only by writing down reasons today, can we look back later and assess if they held up over time, and improve out judgment by recognising mistakes that were made in the past.
Other investors
There are a lot of ways for other investors to talk up their own books now. I try to ignore them, for the most part. Everyone loves to talk about their winners. Very few will discuss their mistakes and its those that are probably worth listening to.
Everyone says they are a value investor who buys when intrinsic value is below…yeah right. Why then do they have 55 growth stocks in their portfolio? And is it realistic that a one person operation has produced a detailed DCF model for at least these 55 stocks? I mean, if you are doing DCFs to find intrinsic values then you will have to do a lot before you get one that is below market price, so a 55 stock portfolio probably means what, 100, 200, 300 stocks were modelled, I am not buying that.
Unless an investor, or group of them, has documented their process, is open about their portfolio holdings and has a track record (a long one as well) of success and is open about mistakes they have made then I am not all that interested in what they have to say.
The Storied Investor 