- to help beginning investors in their first few years of investing to know the principles of investing that will help them to grow their expertise
- to share the mental models that will help, and the practical strategies that help.
I’m not Warren Buffett.
Here’s the caveat before we start… I’m not Warren. I’m not managing billions of dollars. Nor am I even managing millions of dollars.
I’m only managing my personal portfolio that’s about $53,000. Over the past 3.5 years of investing, I’ve lost approximately $3000, which is about 5.6% of my portfolio.
So what gives me the right to talk to you? Well, I’m talking to you as someone who has made many mistakes.
Some background. I got a university degree in social work. Partly because of the pay in social work, I got interested in investing. Since September 2016, I’ve been investing in stocks.
In my previous video, I talked about how it almost seems a rule that investors never talk about their mistakes. Why?
Because it’s not cool. Investing is big on ego. You will hear your friends talking about the multi baggers they have made in investing, but you will not hear them talk about their mistakes.
So today, I want to use my mistakes to help you learn. Because if anyone says they have made lots of money investing without talking about the money they have lost… they are lying.
Every single investor makes mistakes.
Here’s the first principle that made me a better investor.
1. Learn to lose.
No one likes losing. And when you’re looking at a losing position, the impetus to do nothing, is very big. You might not even want to look at it.
You tell yourself,
It’s going to recover in due course.
It’s painful to admit that you may have made a mistake.
But it’s not what you do before the losss, but what you do after the loss.
In Lee Freeman-Shor’s great book, The Art of Execution, he studied 1866 investments, made by 45 of the world’s top investors.
Here’s what he writes.
Personally, I was shocked to discover that only 49% (920 investments) of the very best investment ideas made money.
Even more shocking was that some of these legendary investors were only successful 30% of the time.
However, he found that the best investors were able to materially adapt to their losing position. When there was a 20-33% loss, they chose to do one of two things.
- Either they cut their losses.
- Or they chose to add to their positions.
Here’s a genuine example from my own experience.
I first bought Sino Grandness at $0.198, thinking that this was cheap on many accounts. The price to earnings ratio was 3! But then it fell to 2 cents! 2 cents! I kept telling myself that it would improve, that this was a temporary blip. But what I didn’t realise was that there were underlying fundamental problems that were resulting in management personnel quitting left, right and centre.
Then I saw this graph and the accompanying question.
Knowing what I do now, would I still buy this?
The answer was no.
As a beginning investor, it’s tempting to hold onto the courage of your conviction. you can keep telling yourself that this is the right stock.
There’s nothing wrong with that. But if you’re so convicted, if the price drops, that should make it more attractive, and you should be buying more!
Not doing nothing!
Learning to lose is the most important thing as an investor. You don’t have to prove anyone right. You live to survive another day… not live to prove yourself right.
One practical thing that will help is reframing your loss as a lesson. As you realise your loss, ask yourself these questions. These are adapted from Guy Winch’s book, Emotional First Aid:
- What should I do differently next time?
- What opportunities might my failure possibly present?
- In what ways might my failure make me stronger?
- What ways are my failures a success?
- How much more will success mean to you now that you’ve encountered failure?
- Can you identify ways you derived meaning and satisfaction as you pursued your goal?
2. Learn to learn.
Learning to be a better investor, is about learning to be a better person. The principles for investing apply to life.
The 3 most important lessons I’ve learnt to learn is how to think.
The first one is trying to prove yourself wrong. Thinking about why your thesis might be wrong isn’t the
3. Learn to do nothing.
There’s an action bias in investing.
When you first start, you might think: the more I do, the more I gain.
Over the 4 years I’ve been investing, I like talking to people about their own investments. Almost always, they are working very hard. They are able to tell me the real-time prices of stocks. They have stock apps on their phones. They are monitoring and tracking prices daily.
They work really hard. But knowing the short term churn of the stock market does not equate to understanding the long term change of the business.
Investing is a long game.
If you’re starting out in investing, you might be unused to the sit-on-your-ass investing method espoused by Charlie Munger and Warren Buffett.
Warren Buffett says,
Our favourite holding time…
Whenever you’re tempted to do something about your portfolio, take the time to read instead. Learn new things. Read about the business that you own.
That pays off far more than studying every stock quote and every news item that comes out.
One misconception when you start as an investor is to mistake price for valuation. It’s tempting to see the stock quote and the stock price without looking at the business.
- How great is the business?
- How good are the people managing the business?
Books that have been most helpful to me
The Art of Execution, Lee Freeman-Shor
The Outsiders, William Thorndike